Tandy Leather Factory Annual Report 2009

FY2009 Annual Report · Tandy Leather Factory

Loading PDF…

annual report
2009

Tandy Leather Factory, Inc.

an report 2009.indd 1

3/24/10 2:14:12 PM

To our stockholders….

2009 overall was a good year for us. Compared to the year before, our sales increased, our gross profit margin
increased and our earnings increased. We opened two new retail stores in the US. Given the way we started
out, we are very pleased with our annual results. The last half of the year certainly made up for a weak first half.
Here are some of the highlights from 2009:

 We achieved a 4% sales gain in 2009, compared to 2008.
 2009 was our 13th consecutive year of operating profits, increasing 26% from last year.
 Our consolidated gross profit margin improved for the 13th year in a row.
 We were profitable for the 11th consecutive year, reporting a 30% increase in earnings compared to 2008.
 Our UK store is doing very well. It’s now 2 years old and continues to report sales gains month after month,

which confirms our belief of the potential for our company beyond the borders of North America.

 We set another record with our cash - ended the year with the most we’ve ever had – almost $13 million. And

that’s after spending almost $3 million in debt service, capital expenditures and stock repurchases.
 Our bank debt at the end of 2009 totaled $3.7 million – all related to the purchase of our corporate

headquarters. We would pay it off today if we could do so without incurring a prepayment penalty.

2010 has started off well with nice sales gains and we will do what we can to continue that trend. Financially, we
are well positioned to move ahead with our expansion plans. However, as we have discussed numerous times in
the recent past, we continue to wrestle with the hiring and development of successful store managers and until we
solve that issue, our growth, in terms of new stores, will be restrained. Our managers must be self-motivated and
self-disciplined. We think of our store managers as business partners and we do not set limits a store manager’s
annual compensation. However, that compensation is dependent on the manager’s ability to produce increased
profits at his store. Our manager trainees must be willing to relocate at the completion of their training and we
lessen the financial burden of moving with relocation pay. Even so, finding people who are willing to move is much
less common now than it was twenty or thirty years ago.

We are confident in our business strategy as we have proven over and over again that it works, not only in North
America, but beyond. We were fortunate as we embarked on the U.K. store opening in 2008 to have a highly
experienced manager move to the UK for a year to establish the store, develop the customer base, and hire and
train personnel. As we consider expansion into other counties, we have not had the good fortune of that type of
commitment from other managers due to the disruption that results when relocating to a foreign country. We
understand it is a difficult decision, even while being a tremendous opportunity.

We will continue to invest and develop our store manager base while we look for partners on the international front
in order to establish a local presence in countries where we have strong customer activity. It may be a slow
process. But I can assure you that taking the time to get the right management in place will pay off in the long run.

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

Jon Thompson
Chief Executive Officer and President

March 2010

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.

The cover of our 2009 Annual Report was designed and created by Charlie Davenport, our R&D
manager and a well-known artist. Charlie’s career with Tandy Leather Factory started in 2003. Since
then, he has managed three Tandy stores, taught classes to people of all ages and has contributed
numerous patterns and instructions for publication in our product mailings.

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, 2009

[ ] 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [ ] No [ ] (The registrant is not yet required to submit Interactive Data)

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] Smaller reporting
company [ ]

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 $17,145,950 at June 30, 2009 (the last business day of its
most recently completed second fiscal quarter). At March 10, 2010, there were 10,141,522 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 18, 2010, are incorporated by reference in Part III of

this report.

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

Page

1
8
10
11
11

11
13
13
21
22
43
43
43

44
44
44
44
44

Item

Part 1
1
1A
2
3
4

Part II

5
6
7
7A
8
9
9A
9B

Part III
10
11
12
13
14

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 some of our do-it-yourself kits. During 2009, our
consolidated sales totaled $54.5 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
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.", and 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 making 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 stores. 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. In 2009, we opened two retail stores in the U.S.

At December 31, 2009, 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 75
retail stores operating under the Tandy Leather name (69 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.

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 store count information for our Leather Factory wholesale stores and Tandy Leather retail stores in each
of our fiscal years from 1999 to 2009.

STORE COUNT
YEARS ENDED DECEMBER 31, 1999 through 2009

Leather Factory wholesale stores
Conversions(1)

Opened

Year Ended
Balance Fwd
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

4
2
2
1
0
0
0
0
1^
0
0

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

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

Opened (2)

Tandy Leather retail stores
Closed

1*
0
14
12
16
8
12
10
1
2

0
0
1*
0
0
0
0
0
0
0

Total
N/A
N/A
1
1
14
26
42
50
62
72
73
75

(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 2009. Sales to our five largest
customers combined to represent 6.3%, 6.2% and 8.3% of consolidated sales in 2009, 2008 and 2007, respectively.
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 three divisions. We identify those divisions based on
management responsibility, customer focus, and store location. The Wholesale Leathercraft division consists of 30
wholesale stores of which 27 are located in the United States and three are located in Canada. As of March 1, 2010,
the Retail Leathercraft division consists of 76 Tandy Leather retail stores of which 69 are located in the United
States and seven 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.

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 $25.1
million, $26.4 million and $29.6 million for 2009, 2008 and 2007, 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 stores range in size from
2,350 square feet to 15,000 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 focuses on 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 a single source. The size and layout
of the stores 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, internet 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 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, preferred pricing on many products, advance
notice of new products, and priority shipping and handling on all orders. Our wholesale stores service 132 ASC's:
81 located in the U.S., 43 located in Canada, and 8 located outside North America.

Merchandise Our products are generally organized into 13 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 analysis 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 2009 and 2008, 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

2009 Sales Mix

2008 Sales Mix

2%
2%
4%
4%
6%
0%
6%
13%
7%
8%
9%
35%
4%
100%

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

^A concho is a metal adornment attached to clothing, belts, saddles, etc., usually made into a pattern of some southwestern or geometric object.

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 2009 and 2008, 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 2009, our 10 largest vendors accounted for
approximately 75% 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. Because an occurrence of such an event 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 to 29. 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 store 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 $28.1 million, $25.2 million
and $24.7 million for 2009, 2008 and 2007, respectively.

General As of March 1, 2010, the Tandy Leather retail chain has 76 stores located in 36 states and six 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 approximately 65% of Tandy
Leather's 2009 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% of annual sales),
while the other three quarters remain fairly even at 23-25% of annual sales each quarter.

Merchandise Our products are generally organized into 13 categories. We carry a wide assortment of products
including leather, hand tools, kits, dyes & finishes and stamping tools. During 2009 and 2008, 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
Hardware
Kits
Lace
Leather
Stamping tools

2009 Sales Mix

5%
3%
4%
4%
4%
8%
16%
6%
10%
4%
31%
5%
100%

2008 Sales Mix
4%
3%
4%
4%
4%
8%
15%
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; one was opened in 2008, and two were opened in 2009. Of the 75 stores opened as of December
2009, 11 were independent leathercraft stores that we acquired. Separately, these acquisitions are not material. The
other 64 stores have been new stores opened by us. In 2010, we plan to open one to two retail stores.

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
$1.3 million and $836,000 in 2009 and 2008, respectively.

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 our website,
www.tandyleatherfactory.com. 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 we have no specific 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.

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, 2009, we employed 447 people, 351 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 15 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 our website through the "Corporate Governance" link.

[This space left blank intentionally]

Executive Officers of the Registrant

The following table sets forth information concerning our executive officers as of March 20, 2010:

Name and Age

Jon W. Thompson, 48

Position and Business Experience
During Past Five Years
Chief Executive Office since July 2009; President since June 2008;
Senior Vice President from June 1993 to June 2008

Served as Officer
Since
2008

Shannon L. Greene, 44

Chief Financial Officer since May 2000

Mark J. Angus, 49

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

William M. Warren, 66

Secretary and Corporate Counsel

2000

2008

1993

Jon W. Thompson has served as our Chief Executive Officer since July 2009. He has also served as President and
Chief Operating Officer since June 2008. 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, 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. He served as Vice President of
Merchandising since January 1993.

William M. Warren has served as Secretary and General Counsel since 1993. Since 1979, Mr. Warren has been
President and Director of Loe, Warren, Rosenfield, Kaitcer, Hibbs, Windsor & Lawrence, P.C., a law firm located
in Fort Worth, Texas.

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.

[This space left blank intentionally]

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 us are described
in Item 1 in the description of each of our three operating segments. 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, sales, advertising, administrative,
and executive offices. 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, 2009:

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
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
Wyoming
Canadian locations:
Alberta
British Columbia
Manitoba
Nova Scotia
Ontario
Quebec
International locations:
United Kingdom

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

1
-
1
-
1
-

Retail Leathercraft
1
1
3
1
7
3
1
3
1
1
1
2
-
-
1
-
1
1
1
2
2
-
1
2
2
1
2
1
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, 2009.

PART II

ITEM 5.
STOCKHOLDER MATTERS AND ISSUER PRUCHASES OF EQUITY SECURITIES

MARKET FOR REGISTRANT’S COMMON EQUITY, 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:

2009
4th quarter
3rd quarter
2nd quarter
1st quarter

High
$4.08
$3.30
$2.85
$2.42

Low
$3.00
$2.35
$1.90
$1.55

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

There were approximately 476 stockholders of record on March 1, 2010.

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, 2009 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, 2009:

ISSUER PURCHASES OF EQUITY SECURITIES

(a) Total
Number
of Shares
Purchase
d

(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

Period

October 1 through October 31

November 1 through
November 30

December 1 through December
31

35,700(1)

$3.69

35,700

Total

35,700

$3.69

35,700

974,773

964,300

(1) Represents shares purchased through a stock repurchase program permitting us to repurchase up to one million shares
of our common stock at prevailing market prices not to exceed $3.70 per share. We announced the program on
December 9, 2009, such program replacing our previous stock repurchase program which permitted us, on the date of
its termination, to repurchase up to 974,773 shares of our common stock at prevailing prices not to exceed $2.85 per
share. Purchases under the program commenced on December 9, 2009 and will terminate on December 10, 2010.

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, 2004 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 04
100
100
100

Dec 05
192.96
107.68
118.10

Dec 06 Dec 07 Dec 08
60.56
92.11
227.32
85.19
123.59
123.96
66.82
105.38
143.57

Dec 09
110.14
106.97
101.21

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

Other (income) expense
Income from continuing operations before
income taxes
Income tax provision (benefit)

2009

2008

2007

2006

$54,482,739

$52,491,538

$54,219,728

$53,458,649

2005
$49,069,483

21,873,365

21,441,179

23,039,396

22,435,222

20,774,584

32,609,374

31,050,359

31,180,332

31,023,427

28,294,899

27,514,273

27,025,017

26,859,301

24,129,115

22,806,049

5,095,101

4,025,342

4,321,031

6,894,312

133,699

67,072

(316,831)

(97,161)

5,488,850

(134,502)

4,961,402

3,958,270

4,635,942

6,991,473

5,623,352

1,700,259

1,446,423

1,740,420

2,362,725

1,867,820

Net income from continuing operations

3,261,143

$2,511,847

$2,895,522

$4,628,748

$3,755,532

Income from discontinued operations, net of
tax

56,914

92,336

192,609

148,318

(41,818)

Net income

$3,318,057

$2,604,183

$3,088,131

$4,777,066

$3,713,714

Net income per share from continuing operations
Basic
Diluted

$0.31
$0.31

$0.23
$0.23

$0.26
$0.26

$0.43
$0.42

Net income per share including discontinued operations
Basic

$0.32

Diluted

$0.31

$0.24

$0.28

$0.44

$0.43

$0.35
$0.34

$0.35

$0.34

Weighted average common shares outstanding for:

Basic EPS
Diluted EPS

10,471,103
10,535,736

10,931,306
11,015,657

10,951,481
11,157,775

10,807,316
11,113,855

10,643,004
10,975,178

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

2009

2008

$12,908,962
43,327,231

3,712,500
$33,359,655

$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
-

$26,323,243

2005
$3,215,727
25,680,473
245,789
-
$21,257,857

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, 2009 and 2008 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 three segments. First, Wholesale Leathercraft, consisting of our Leather Factory stores and our
national account group, is our oldest segment with sales of $25.1 million in 2009. Historically, in normal economic
conditions, this division generally offers steady but very modest increases in sales. Sales in 2009 declined 5.0%
compared to 2008. The wholesale stores’ sales declined 5.3% compared to 2008 and national account sales were
down 3.4%. Much of the sales decline at the stores and in national accounts is attributed to an overall weakness in
consumer spending as a result of the weak U.S. economy.

Since acquiring its assets in 2000, Tandy Leather has been re-established as the operator of retail leathercraft
stores. These retail stores comprise our second segment, Retail Leathercraft. This segment has experienced the
greatest increases in sales ($28.1 million in 2009, up from $25.2 million in 2008) and in 2009, surpassed our
Wholesale Leathercraft segment to become our largest source of revenues. Our business plan calls for opening
an average of 10-12 stores annually as we work toward a goal of 100+ stores from 75 stores at the end of 2009.
We have slowed down our new store openings in recent years due to the general economic conditions in the U.S.
and because of the lack of personnel qualified for store manager positions. We plan to open one to two new
stores in 2010, 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.

On a consolidated basis, a key indicator of costs, gross margin as a percent of total net sales, increased in 2008 and
in 2009. Operating expenses increased 2% between 2008 and 2009 and between 2007 and 2008.

We reported consolidated net income for 2009 of $3.3 million. Consolidated net income for 2008 and 2007 was
$2.6 million and $3.1 million, respectively. We use our cash flow to fund our operations, to fund the opening of
new Tandy Leather stores, to purchase necessary property and equipment and to 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 $33.3 million
from $31.3 million the previous year.

Comparing the December 31, 2009 balance sheet with the prior year’s balance sheet, we increased our investment in
inventory from $16.0 million to $16.9 million, while total cash (including certificates of deposit and other short-
term investments) increased from $10.8 million from $12.9 million.

Net Sales

Net sales for the three years ended December 31, 2009 were as follows:

Year
2009
2008
2007

Wholesale
Leathercraft

$25,095,392
$26,423,858
$29,555,978

Retail
Leathercraft
$28,079,862
$25,231,145
$24,663,750

International
Leathercraft
$1,307,485
$836,535
-

Total
Company
$54,482,739
$52,491,537
$54,219,728

Incr (Decr) from
Prior Year
3.8%
(3.2)%
1.4%

Our net sales increased by 3.8% in 2009 when compared with 2008 and fell by 3.2% in 2008 when compared with
2007. In 2009 and 2008, our Retail and International Leathercraft segments reported sales increases while our
Wholesale Leathercraft segment reported sales declines. The reduction in sales in our wholesale stores is the result
of the overall economic slowdown in the U.S. That economic slowdown has impacted our retail stores as well,
although not as significantly.

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 2009, our cost of sales decreased as a percentage of total net sales when compared to 2009, resulting in an
increase in consolidated gross profit margin from 59.2% to 59.9%. Our 2008 cost of sales as a percentage of our
total net sales decreased as a percentage of total net sales when compared to 2007, resulting in an increase in
consolidated gross profit margin from 57.5% to 59.2%. 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, 2009 were as follows:

Year
2009
2008
2007

Wholesale
Leathercraft
58.5%
56.5%
55.7%

Retail
Leathercraft
60.9%
61.6%
59.7%

International
Leathercraft
63.6%
68.4%
-

Total
Company
59.9%
59.2%
57.5%

Our operating expenses decreased 1.0% as a percentage of total net sales to 50.5% in 2009 when compared with
51.5% in 2008. This decrease indicates that our operating expenses grew more slowly than our sales during this
period. 2009 operating expenses were $490,000 higher than those of 2008. Significant expense fluctuations in
2009 compared to 2008 are as follows:

Expense

2009 amount

Incr (Decr) over 2008

Employee compensation & benefits
Rent & utilities
Depreciation and amortization
Loss on impairment and disposal of equipment
Professional fees and licenses
Freight out – shipping product to customers
Property taxes
Outside services

$14.5 million
3.3 million
1.1 million
365,000
700,000
1.3 million
340,000
102,000

$500,000
(90,000)
100,000
365,000
(62,000)
(160,000)
80,000
(157,000)

Our operating expenses increased 2.0% as a percentage of total net sales to 51.5% in 2008 when compared with
49.5% in 2007. This increase indicates that our operating expenses grew faster than our sales during this period.
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)

Other Income/Expense (net)

Other Income/Expense consists primarily of currency exchange fluctuations, interest income and interest expense.
In 2009, we had other expense (net) of $134,000 compared to other income (net) of $67,000 in 2008. We received
$32,000 in gas royalties. We earned $128,000 in interest income on our cash and paid $297,000 in interest expense
on our bank debt. We had a currency exchange loss of $98,000 in 2009 compared to $114,000 in 2008.

In 2008, we had other expense (net) of $67,000 compared to other income (net) of $315,000 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.

Net Income

During 2009, we earned net income of $3.3 million, a 27% increase over our net income of $2.6 million earned
during 2008. The increase in net income was the result of the increase in sales and gross profit, partially offset by
the reduction in other 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.

Wholesale Leathercraft

The increases (or decreases) 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,
2009 were as follows:

Net Sales
Incr (Decr)
from Prior Yr
(5.3)%
(10.6)%
(3.7)%

Operating
Income
$2,382,998
$1,842,526
$2,826,710

Operating Income
Incr (Decr)
from Prior Year
29.3%
(34.8)%
(41.3)%

Operating Income as
a Percentage
of Sales
9.5%
6.9%
9.6%

Year
2009
2008
2007

Wholesale Leathercraft, consisting of our 30 wholesale stores and our national account group, accounted for 45.6%
of our consolidated net sales in 2009, which compares to 49.6% in 2008 and 53.4% in 2007. 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 5.3% in 2009 compared to sales in 2008 while the sales decline in our
national account group was 3.4% from 2008 to 2009. By customer group, we increased sales to our retail
customers, but had sales declines in all other groups. The most significant decreases were in our wholesale and
manufacturer groups. The customers comprising 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

2009

2008

2007

29%
7%
42%
15%
7%
100%

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

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

The 2009 increase in operating income as a percentage of divisional sales resulted from a decrease in operating
expenses of $500,000. Significant operating expense decreases occurred in legal and professional fees ($57,000),

moving expenses ($114,000), advertising and marketing ($200,000), outside services ($158,000), rent and utilities
($95,000) and freight out ($143,000). These decreases were offset somewhat by a loss incurred on the impairment
of certain computer equipment totaling $365,000.

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 3.4% 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.

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, 2009 were as
follows:

Net Sales
Increase
from Prior Yr
11.3%
2.3%
9.5%

Operating
Income
$2,900,701
$2,188,282
$1,544,320

Operating Income
Incr (Decr)
from Prior Year
32.6%
41.7%
(33.2)%

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

Year
2009
2008
2007

Reflecting the growth previously discussed, Retail Leathercraft accounted for 51.1% of our total net sales in 2009,
up from 47.4% in 2008 and 44.6% in 2007.

Growth in net sales for our Retail Leathercraft division in 2009 resulted primarily from an increase in same store
sales.

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

Customer Group
Retail
Institution
Wholesale
National Accounts
Manufacturers

2009

2008

2007

65%
7%
27%
0%
1%
100%

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

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

Operating income as a percentage of sales increased to 10.3% for 2009 compared to 8.7% for 2008. Gross margin
decreased to 60.9% in 2009 from 61.6% in 2008. Operating expenses as a percent of sales in 2008 decreased by
2.3%, from 52.9% for 2008 to 50.6% for 2009 as operating expenses grew at a slower pace than that of sales.

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.

We intend to continue the expansion of Tandy Leather’s retail store chain in 2010 by opening one to two 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 2010 if we determine that the U.S. retail
sector can not support additional store openings at that time or if the feasibility of additional successful openings is
deemed likely.

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 2.4%
and 1.6% of our total sales in 2009 and 2008, respectively. Operating income was $176,000 and $54,000 in 2009
and 2008, respectively. We expect this segment to become a larger part of our total operations as our international
customer base continues to grow.

Financial Condition

At December 31, 2009, we held $12.9 million of cash and certificates of deposit, $16.9 million of inventory,
accounts receivable of $1.2 million, and $9.8 million of property and equipment. Goodwill and other intangibles
(net of amortization and depreciation) were $984,000 and $308,000, respectively. Net total assets were $43.3
million. Current liabilities were $5.8 million (including $203,000 of current maturities of long-term debt), while
long-term debt was $3.5 million. Total stockholders’ equity at the end of 2009 was $33.4 million.

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.

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

2009

2008

2007

2.44
5.55
0.17
0.34
0.30
0.29

37.22
3.35
0.79
2.09
0.02

0.06
0.08
0.10

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

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 191,000 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 2009,
2008 and 2007 required net cash of $2.4 million, $1.1 million, and $4,000, respectively.

Our primary source of liquidity and capital resources during 2009 was cash flow provided by operating activities.
Cash flow from operations for 2009 and 2008 was $5.3 million and $7.8 million, respectively. In 2009, cash flow
from operations was generated from income, partially offset by the increase in inventory. In 2008, cash flow from
operations was generated from net income and the decreases in accounts receivable and inventory. Cash flow from
operations in 2007 was $2.5 million.

Consolidated accounts receivable remained virtually unchanged at $1.2 million as of December 31, 2009 and 2008.
Average days to collect accounts improved from 54.9 days in 2008 to 40.0 days in 2009 on a consolidated basis.
We have tightened our credit policy and are aggressively monitoring our customer accounts to ensure collectability.
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 increased from $16.0 million at the end of 2008 to $16.9 million at December 31, 2009. We expect our
inventory to slowly trend upward as we continue our expansion of the Tandy Leather store chain. In 2010, we
expect to maintain a fairly steady inventory due to 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 2009 was at a very reasonable level given our expansion plans as it was within
2% of our internal targets of optimum inventory levels.

Consolidated inventory turned 3.34 times during 2009, improving over the 2008 turns at 3.18 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

Wholesale Leathercraft stores only

2009
2.18
6.13
3.95

6.82

2008
2.14
6.05
4.61

2007
2.37
5.87
n/a

7.14

6.87

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, totaling $1.1 million, remained virtually unchanged at the end of 2009 compared to the end of
2008.

As discussed above, the largest use of operating cash in 2009 was in the increase of inventory. Cash paid for capital
expenditures totaled $792,000 and $2.8 million for the years ended December 31, 2009 and 2008, respectively.
Total capital expenditures (both cash and non-cash) totaled $792,000 and $3.6 million for the years ended
December 31, 2009 and 2008, respectively. 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). In 2009, the primary capital expenditures were for computer equipment, software and
licenses totaling $472,000. Other capital expenditures were building improvements ($209,000), including parking
lot repaving and fence installation, and factory machines and dies ($56,000). Although we intend to continue
opening or acquiring new Tandy Leather retail stores and therefore expenditures related to this expansion should

continue into 2010, we do expect our 2010 capital expenditures to be less than that of 2009 as the expenditures
related to our building have been completed.

Cash applied toward stock repurchases totaled $1,624,264 and $802,898, in 2009 and 2008, respectively.

We believe that cash flow from operations will be adequate to fund our operations in 2010, 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 2009, 2008 and 2007, 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, 2009 (not including related interest expense):

Less than
1 Year

Payments Due by Periods
2 - 3
Years
$405,000
3,598,560
$4,003,560

4 -5
Years
$405,000
1,223,489
$1,628,489

$202,500
2,485,289
$2,687,789

More than
5 Years
$2,700,000
98,248
$2,798,248

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

Total
$3,712,500
7,405,586
$11,118,086

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 carrying value. As of December 31, 2009, we determined that the present value of the discounted estimated
future cash flows of the operating divisions associated with the goodwill is sufficient to support their respective
goodwill balances. If actual financial performance of these divisions differs 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
include 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 15 to the Consolidated Financial
Statements, Segment Information, for financial information concerning our foreign activities.

Interest Rate Risk

In the past, we have been 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, 2009 and 2008

CURRENT ASSETS:

ASSETS

Cash
Short-term investments, including certificates of deposit
Accounts receivable-trade, net of allowance for doubtful accounts
of $136,000 and $43,000 in 2009 and 2008, 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

$418,000 and $367,000 in 2009 and 2008, 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, 11,021,951 and 10,994,951 shares issued at 2009 and 2008,
10,130,628 and 10,664,555 outstanding at 2009 and 2008, respectively

Paid-in capital
Retained earnings
Treasury stock at cost (891,323 shares at 2009; 330,396 shares at 2008)
Accumulated other comprehensive income

Total stockholders' equity

December 31,
2009

December 31,
2008

$7,891,962
5,017,000

1,202,811
16,865,826
271,481
791,884
32,040,964

15,111,497
(5,431,776)
9,679,721

$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

983,823

966,655

307,802
314,921
$43,327,231

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

$1,185,032
3,988,144
399,536
-
202,500
5,775,212

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

682,364

600,309

-
3,510,000
-

328,838
3,712,500
-

26,453
5,491,736
29,959,910
(2,452,649)
334,205
33,359,655
$43,327,231

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

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, 2009, 2008 and 2007

NET SALES
COST OF SALES

Gross Profit

OPERATING EXPENSES
INCOME FROM OPERATIONS

OTHER (INCOME) EXPENSE:
Interest expense
Other, net

Total other expense

2009

2008

2007

$54,482,739
21,873,365
32,609,374

$52,491,538
21,441,179
31,050,359

$54,219,728
23,039,396
31,180,332

27,514,273
5,095,101

27,025,017
4,025,342

26,859,301
4,321,031

297,864
(164,165)
133,699

332,107
(265,035)
67,072

122,209
(437,120)
(314,911)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

4,961,402

3,958,270

4,635,942

PROVISION FOR INCOME TAXES

1,700,259

1,446,423

1,740,420

NET INCOME FROM CONTINUING OPERATIONS

3,261,143

2,511,847

$2,895,522

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX

56,914

92,334

192,609

NET INCOME

$3,318,057

$2,604,181

$3,088,131

NET INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
BASIC
DILUTED

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX PER COMMON
SHARE:
BASIC
DILUTED

NET INCOME PER COMMON SHARE:
BASIC
DILUTED

Weighted Average Number of Shares Outstanding:
Basic
Diluted

$0.31
$0.31

$0.01
$0.01

$0.32
$0.31

$0.23
$0.23

$0.01
$0.01

$0.24
$0.24

$0.26
$0.26

$0.02
$0.02

$0.28
$0.28

10,471,103
10,535,736

10,931,306
11,015,657

10,951,481
11,157,775

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, 2009, 2008 and 2007

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income
Income from discontinued operations

Adjustments to reconcile net income to net cash

provided by operating activities -
Depreciation and amortization
Loss on disposal or abandonment of assets
Impairment of equipment
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 continuing operating activities
Cash provided from discontinued operating activities
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 provided by continuing investing activities
Cash provided from discontinued investing activities
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 used in continuing financing activities
Cash provided from discontinued financing activities
Net cash used in financing activities

2009

2008

2007

$3,318,057
56,914
3,261,143

$2,604,181
92,334
2,511,847

$3,088,131
192,609
2,895,522

1,125,009
21,540
343,543
2,540
40,776
339,305

(99,994)
(900,466)
147,310
(14,334)
36,455
810,564
1,852,248
5,113,391
161,070
5,274,461

(791,565)
-
(8,671,000)
6,665,000
-
-
2,510
-
(1,847)
(2,796,902)
-
(2,796,902)

(202,500)
(593,949)
(1,624,264)
24,818
(2,395,895)
-
(2,395,895)

975,903
13,385
-
30,495
477,490
(373,139)

1,327,899
1,469,762
204,858
325,286
(348,987)
1,115,586
5,218,538
7,730,385
119,681
7,850,066

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

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

628,622
52,034
-
19,340
(56,980)
241,182

29,633
147,731
12,492
(27,946)
(327,726)
(1,349,961)
(631,579)
2,263,943
281,284
2,545,227

(1,692,491)
(771,417)
-
-
(500,000)
-
6,942
-
(26,276)
(2,983,242)
12,463
(2,970,779)

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

NET INCREASE IN CASH

CASH, beginning of period

CASH, end of period

81,664

1,499,902

(429,495)

7,810,298

6,310,396

6,739,891

$7,891,962

$7,810,298

$6,310,396

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

NON-CASH INVESTING ACTIVITIES:

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

$297,864
1,622,273

$332,107
878,110

$122,209
1,830,688

-
-

$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, 2009, 2008 and 2007

BALANCE, December 31, 2006
Shares issued - stock options and
warrants exercised
Stock-based compensation
Net income
Translation adjustment
BALANCE, December 31, 2007

Number of
Shares

Par Value

Paid-in
Capital

Treasury
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total

Comprehensive
Income (Loss)

10,879,209

$26,124

$5,292,591

$(25,487)

$20,949,541

$80,475 $26,323,243

97,883
-
-
-
10,977,092

235

-
-
-

$26,359

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

-
-
-
-

$(25,487)

-
-

3,088,131

-
$24,037,672

-
-
-

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

277,009

Comprehensive income for the year ended December 31, 2007

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

-
-
-
-

24,818
2,540
(1,624,264)
3,318,057
373,742
$334,205 $33,359,655

373,742

Comprehensive income for the year ended December 31, 2008

Shares issued - stock options exercised
Stock-based compensation
Purchase of treasury stock
Net income
Translation adjustment
BALANCE, December 31, 2009

27,000
-
(560,927)
-
-
10,130,628

-
-
-
-

$26,453

24,753
2,540
-
-
-
$5,491,736

-
-
(1,624,264)
-
-
$(2,452,649)

-
-
-

3,318,057

-
$29,959,910

Comprehensive income for the year ended December 31, 2009

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

$3,088,131
277,009

$3,365,140

$2,604,181
(397,021)

$2,207,160

$3,318,057
373,742

$3,691,799

TANDY LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008, and 2007

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 foreign currency translation losses of $98,000 and $114,000 in 2009 and 2008,
respectively, and a transaction gain of $9,000 in 2007.

 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 is shipped to the customer. Shipping terms are normally FOB shipping point. Sales tax is excluded
from revenue.

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 machinery and 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. 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)

2009

$3,318,057

2008
$2,604,181

2007
$3,088,131

Weighted average common shares outstanding

10,471,103

10,931,306

10,951,481

Earnings per share – basic

$0.32

$0.24

$0.28

DILUTED
Net income (loss)

$3,318,057

$2,604,181

$3,088,131

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

10,471,103
64,633
10,535,736

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

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

Earnings per share - diluted

Outstanding options and warrants excluded as anti-dilutive

$0.31

61,000

$0.24

$ 0.28

80,500

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 197,700, 232,200 and 275,200 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, 2009, 2008 and 2007, respectively.

 Goodwill and other intangibles

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business
combination. Goodwill is required to be tested for impairment on an annual basis, absent indicators of impairment
during the interim. Application of the goodwill impairment test requires exercise of judgment, including the estimation
of future cash flows, determination of appropriate discount rates and other important assumptions. Changes in these
estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each
reporting unit. A two-step process is used to test for goodwill 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, 2009, we determined that the present value of
the discounted estimated future cash flows of the operating divisions associated with the goodwill is sufficient to
support their respective goodwill balances. Goodwill impairment is deemed to exist if the carrying value of the
goodwill exceeds its implied fair value. Our reporting units are generally the same as the operating segments
identified in Note 15 – Segment Information.

A summary of changes in our goodwill for the years ended December 31, 2009 and 2008 is as follows:

Balance, December 31, 2007
Acquisitions and adjustments
Foreign exchange gain/loss
Impairments
Balance, December 31, 2008
Acquisitions and adjustments
Foreign exchange gain/loss
Impairments
Balance, December 31, 2009

Leather Factory

Tandy Leather

$607,130
-
(23,881)
-
$583,249
-
17,168
-
600,417

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

Total
$990,536
-
(23,881)
-
$966,655
-
17,168
-
983,823

As of December 31, 2009 and 2008, our intangible assets and related accumulated amortization consisted of the
following:

Trademarks, Copyrights
Non-Compete Agreements

As of December 31, 2009
Accumulated
Amortization

$356,067
62,136
418,203

As of December 31, 2008
Accumulated
Amortization

$319,776
46,809
366,585

Gross

$544,369
181,636
$726,005

Gross

$544,369
177,708
$722,077

Net
$188,302
119,500
$307,802

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

Excluding goodwill, we have no intangible assets not subject to amortization under U.S. GAAP. Amortization of
intangible assets of $51,291 in 2009, $53,350 in 2008, and $51,542 in 2007 was recorded in operating expenses.
The weighted average amortization period is 15 years for trademarks and copyrights and 4.22 years for 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:

2010
2011
2012
2013
2014

Leather
Factory
$29,190
28,263
7,427
-
-

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

Total
$59,527
58,600
37,764
30,337
30,337

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



Fair value of financial Instruments

We measure fair value as an exit price, which is the amount that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants. As a basis for considering such assumptions,
accounting standards establish a three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:

Level 1 – observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – include other inputs that are directly or indirectly observable in the marketplace.

Level 3 – unobservable inputs which are supported by little or no market activity.

Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.

Our 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

We have one stock option plan which provides for stock option grants to non-employee directors. No options have
been awarded as of December 31, 2009. 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 expirations of the plans had
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. We recognized share based compensation expense
of approximately $3,000, $30,000, and $19,000 for the years ended December 31, 2009, 2008 and 2007,
respectively, as a component of operating expenses.

During the years ended December 31, 2009 and 2008, the stock option activity under our stock option plans was as
follows:

Weighted
Average
Exercise
Price

#
of
shares

Weighted Average
Remaining
Contractual Term
(in years)

Aggregate
Intrinsic
Value

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

Outstanding, January 1, 2009
Granted
Cancelled
Exercised
Outstanding, December 31, 2009
Exercisable, December 31, 2009

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

224,700
-
-
(27,000)
197,700
197,700

$2.11
-
-
1.21
$2.16
$2.15

$2.16
-
-
0.92
$2.33
$2.33

3.09
3.07

2.29
2.29

$262,001
$259,461

$246,088
$246,088

Other information pertaining to option activity during the twelve month periods ended December 31, 2009, 2008 and
2007 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

2009
N/A
$2,540
$15,913

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

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

As of December 31, 2009, all stock options were fully vested so there is no unrecognized compensation cost related
to nonvested stock options to be recognized in future periods.

Cash received from the exercise of stock options and warrants for the years ended December 31, 2009, 2008 and
2007 was $24,818, $14,500, and $107,780, 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 expected
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 $1,342,000, $1,500,000 and $1,641,000 for the years ended December 31, 2009,
2008 and 2007, 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 $144,000 and $137,000 at December
31, 2009 and 2008, respectively. Total advertising expense was $2,953,000 in 2009; $3,036,346 in 2008; and
$3,440,762 in 2007.

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 2008 financial statements to conform to the 2009 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, 2009 and 2008 consisted of certificates of deposit, which are considered to be Level 2
assets. The contractual maturities of the certificates of deposit as of December 31, 2009 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

$2,132,000
2,687,000
-
99,000
99,000
$5,017,000

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 $136,023 and $43,014, respectively, at December 31, 2009 and 2008. The
following is a roll forward of the allowance for doubtful accounts:

Year ended:
December 31, 2009
December 31, 2008
December 31, 2007

Balance at
beginning of
year

Reserve
"purchased"
during year

Additions (reductions)
charged to costs and
expenses

Foreign
exchange
gain/loss

Write-offs

$43,014
$104,634
$149,172

-
-
(11,918)

112,272
65,921
98,508

632
(2,768)
3,192

(19,895)
(124,773)
(134,320)

Balance
at end of
year
$136,023
$43,014
$104,634

 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

Less: accumulated depreciation

December 31, 2009

December 31, 2008

$14,861,855
609,002
1,394,969
$16,865,826

$5,324,404
1,451,132
677,431
5,234,868
2,377,683
45,979
15,111,497
(5,431,776)
$9,679,721

$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

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

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

TOTAL

$36,644
9,600
612,779
132,861
$791,884

$62,921
252,000
$314,921

$1,119,399
360,738
542,812
267,465
1,394,969
302,761
$3,988,144

$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

Depreciation expense was $1,073,713, $932,199, and $577,405 for the years ended December 31, 2009, 2008 and
2007, respectively.

In 2009, we recorded an impairment loss due to the discontinued use and abandonment of specific computer
software. The software was purchased in 2004 for the purpose of upgrading and replacing our current point-of-sale
and accounting systems. We have been using the software in a limited capacity for several years and amortizing the
cost of the system accordingly. However, we made the decision in the fourth quarter of 2009 that we would not
continue its use due to inconsistencies and incompatibility with our current systems and discontinued use accordingly.
Due to licensing restrictions, we are unable to sell the software to a third party. The resulting fair value of $0 for the
asset is considered a Level 3 valuation. The impairment loss totaled $343,543 and is included in operating expenses.
The amortization to date and the impairment loss is reported in our Wholesale Leathercraft segment.

Also, in 2009, we recorded a loss on disposal of equipment due to the abandonment and/or disposal of obsolete
equipment. The disposal consisted of numerous pieces of various computer equipment purchased between 2002 and
2006. The loss totaled $21,540 and is included in Operating expenses, $5,393 of which is reported in our Retail
Leathercraft and $16,147 which is reported in our Wholesale Leathercraft segment.

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 191,000 square foot building situated on 30 acres of land located 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, 2009 and 2008, 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

2009

2008

$3,712,500
3,712,500
(202,500)
$3,510,000

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

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. We were in compliance with these covenants as of December
31, 2009.

Scheduled maturities of the Company’s notes payable and long-term debt are as follows:

2010
2011
2012
2013
2014
2015 and thereafter

$202,500
202,500
202,500
202,500
202,500
2,700,000
$3,712,500

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, 2009. Accumulated depreciation on the asset at
that date was $140,650. Amortization of the capitalized cost is charged to depreciation expense.

At December 31, 2009 and 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

2009

2008

-
-
-
-
-

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

This capital lease obligation was paid in full during 2009.

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.

The following table summarizes the number of shares held by the Plan and the market value as of December 31,
2009, 2008, and 2007:

Allocated
Unearned
Total

Number of Shares
2008
-
-
-

2009
-
-
-

2007
844,381

844,381

2009
-
-
-

Market Value
2008
-
-
-

2007
$2,761,126
-
$2,761,126

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 2009 and
2008, 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

2009
2008
2007

$4,900
$4,600
$9,000

$124,488
$120,025
$240,774

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

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 2009, 2008 or 2007.

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):

2009

2008

2007

Federal
State

$1,461,655
197,828
1,659,483

37,632
3,144
40,776

$766,333
202,600
968,933

428,660
48,830
477,490

$1,482,774
314,626
1,797,400

(52,044)
(4,936)
(56,980)

$1,700,259

$1,446,423

$1,740,420

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

United States
United Kingdom
Canada

2009
$4,437,072
324,924
284,350
$5,046,346

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

2007

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

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

2009

2008

$50,650
131,447
45,116
89,384
316,597

604,287
123,193
727,480

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

549,465
106,583
656,048

Net deferred tax asset (liability)

$(410,883)

$(370,808)

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)

2009
$271,481
(682,364)
$(410,883)

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

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

Statutory rate
State and local taxes
Domestic production activities deduction
Other, net
Effective rate

2009

2008

2007

34%
4%
(2%)
(2%)
34%

34%
9%
(2%)
(4%)
37%

34%
6%
(1%)
(3%)
36%

We file 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. We are no longer subject to U.S. federal income tax examinations by tax
authorities for years prior to the tax year ended December 2007. Depending on the jurisdiction, we are no longer
subject to state examinations by tax authorities for years prior to the December 2006 and December 2007 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 2010 to May
2016. Rent expense on all operating leases for the years ended December 31, 2009, 2008, and 2007, was
$2,513,297, $2,575,642 and $2,682,574, respectively.

Future minimum lease payments under noncancelable operating leases at December 31, 2009 were as follows:

Year ending December 31:

2010
2011
2012
2013
2014
2015 and thereafter

Total minimum lease payments

$2,485,289
2,071,300
1,527,261
802,327
421,161
98,248
$7,405,586

Litigation

We are involved in various litigation that arises 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 5% of our consolidated revenues in 2009, 2008 and 2007, sales to our five
largest customers represented 6.3%, 6.2% and 8.3%, 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, 2009 and 2008, 27% and 21%, 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 aggregate 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, 2009 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.

 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.

 Stock Option Summary

All options expire ten years from the date of grant and are exercisable at any time after vesting. Of the combined
1,200,000 shares available for issuance under the three plans. There are 100,000 un-optioned shares available
for future grants.

A summary of stock option transactions for the years ended December 31, 2009, 2008, and 2007, is as follows:

2009

2008

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

$2.16
-
-
-

0.92
$2.33

$2.33

Option
Shares

224,700

-
-
-

(27,000)
197,700

197,700

Option
Shares

236,700

-
-
-

(12,000)
224,700

222,700

Weighted
Average
Exercise
Price

Option
Shares

2007

Weighted
Average
Exercise

Price

$2.11
-
-
-

1.21
$2.16

$2.15

$2.05
-
-
-

1.81
$2.11

$1.97

296,200

-
-
-

(59,500)
236,700

220,700

The following table summarizes outstanding options into groups based upon exercise price ranges at December 31,
2009:

Options Outstanding
Weighted
Average
Exercise
Price

Weighted
Average
Maturity
(Years)

Option
Shares

-
17,000
105,700
2,000
12,000
61,000
197,700

-
0.952
1.350
1.900
3.270
4.241
$2.330

-
0.71
1.39
1.74
4.31
3.91
2.29

Options Exercisable

Weighted
Average
Exercise

Price

Weighted
Average
Maturity
(Years)

Option
Shares

-
17,000
105,700
2,000
12,000
61,000
197,700

-
0.952
1.350
1.900
3.270
4.241
$2.330

-
0.71
1.39
1.74
4.31
3.91
2.29

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, 2009, 2008, and 2007, is as follows:

2009

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
warrants granted during year

Warrant
Shares

7,500
-
(7,500)
-
-
-

Weighted
Average
Exercise
Price

Weighted
Average
Exercise

Price

Warrant
Shares

$3.620
-
3.100
-
-
$5.000

$5.000

$3.650
-
-
-
3.658
$3.620

$3.620

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

27,500

Warrant
Shares

27,500
-
(20,000)
-
-
7,500

7,500

Weighted
Average
Exercise
Price

$5.000
-
5.000
-
-
-

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 NYSE Amex 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.

On February 27, 2009, our Board of Directors authorized a share repurchase program of up to 1 million shares of our
common stock at prevailing market prices not to exceed $2.85. The share repurchase program commenced on April 1,
2009. On December 4, 2009, our Board amended the repurchase program to increase the maximum purchase price
to $3.70. The plan terminates on December 10, 2010. We repurchased a total of 60,927 shares in 2009 for a total
purchase price of $199,264.

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. DISCONTINUED OPERATIONS

Our subsidiary, Roberts, Cushman and Company, Inc., is classified as discontinued operations. The distributor of
custom hat trims ceased doing business in the fourth quarter of 2009 as a result of decreased sales. All prior periods
presented have been adjusted to reflect this presentation. Sales, earnings before income tax, and provision for
income taxes of the discontinued operation for each year were as follows:

Sales
Earnings before income taxes

Current provision (benefit):

Deferred provision (benefit):

Federal
State

2009
$498,234
$84,942

2008
$745,556
$153,804

2007
$1,097,274
$191,890

$29,205
(475)
28,730

(645)
(56)
(701)

$59,825
35
59,860

1,194
414
1,608

$11,407
(5,212)
6,195

(5,109)
(1,804)
(6,913)

$28,029

$61,468

$(718)

The classes of assets and liabilities of discontinued operations in our consolidated balance sheet as of December 31
were as follows:

2009

2008

Trade receivables, less allowance
Inventory
Property and equipment, net
Deferred income tax asset
Total assets
Accrued expenses and other liabilities
Income taxes payable
Deferred income tax liability
Total liabilities
Net assets (liabilities)

$5,908
671
-
-
6,579
-
31,795
-
31,795
$(25,216)

$83,441
45,787
5,046
956
135,230
4,614
50,691
986
56,291
$78,939

15. SEGMENT INFORMATION

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

a. Wholesale Leathercraft, which consists of a chain of wholesale stores 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, which 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.

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.

Wholesale
Leathercraft

Retail
Leathercraft

International
Leathercraft

Discontinued
Operations

Total

For the year ended December 31, 2009

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, 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

$25,095,392
14,678,410
2,017,915
297,864
45,342
1,765,393
994,759
653,792
$37,216,532

$26,423,858
14,935,331
1,782,526
332,107
(501,697)
1,952,116
836,134
3,481,852
$33,657,764

$29,555,978
16,446,853
2,776,711
122,209
(425,145)
3,079,647
485,499
5,535,036
$32,217,748

$28,079,863
17,099,499
2,900,701
-
(4,614)
2,896,087
116,439
137,386
$5,607,481

$25,231,145
15,543,293
2,188,283
-
5,872
2,182,411
126,326
74,550
$6,404,198

$24,663,750
14,733,479
1,544,320
-
(11,975)
1,556,295
143,123
207,455
$5,272,466

$1,307,484
831,465
176,485
-
123,437
299,922
13,811
387
$496,639

$836,535
571,735
54,533
-
230,790
(176,257)
13,443
92,859
$778,721

-
-
-
-
-
-
-
-
-

$54,482,739
32,609,374
5,095,101
297,864
(164,165)
4,961,402
1,125,009
791,565
$43,327,231

$52,491,538
31,050,359
4,025,342
332,107
(265,035)
3,958,270
975,903
3,649,261
$40,975,913

$54,219,728
31,180,332
4,321,031
122,209
(437,120)
4,635,942
628,622
5,742,491
37,651,506

$6,579

$135,230

$161,292

Net sales by geographic areas were as follows:

United States
Canada
All other countries

2009

$47,433,609
4,686,330
2,362,800
$54,482,739

2008
$45,794,226
4,740,722
1,956,590
$52,491,538

2007

$47,906,206
4,698,510
1,615,012
$54,219,728

Geographic sales information is based on the location of the customer. Except for Canada, we had no sales to any
single foreign country that was material to our consolidated net sales for the years ended December 31, 2009, 2008
and 2007. We do not have any significant long-lived assets outside of the United States.

16. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued The Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles, which establishes the FASB Accounting Standards Codification (the “Codification”) as the
single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases issued by the Securities and Exchange
Commission (“SEC”) are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all
existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not
included in the Codification became nonauthoritative. The Codification was effective for us July 1, 2009 and its
adoption did not have a material impact on our consolidated financial condition or results of operations.

In May 2009, the FASB issued accounting guidance on subsequent events which requires companies to address the
accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued
or are available to be issued. Specifically, companies must name the two types of subsequent events either as
recognized or non-recognized subsequent events. We adopted this standard, as required, for the period
ended June 30, 2009. The adoption of this accounting guidance did not have a material impact on our financial
position, results of operations and cash flows.

In April 2009, the FASB issued accounting guidance requiring disclosure about the method and significant
assumptions used to establish the fair value of financial instruments for interim reporting periods as well as annual
statements. The adoption of this accounting guidance did not have a material impact on our consolidated financial
condition or results of operations.

In December 2007, the FASB issued accounting guidance which requires all companies 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 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. This guidance was effective for us in January 2009 and did not have a material impact on our financial
position, results of operations and cash flows.

17. QUARTERLY FINANCIAL DATA (UNAUDITED)

2009

Net sales
Gross profit
Net income from continuing operations
Net income
Net income from continuing operations per common share:

Net income per common share:

Basic
Diluted

Weighted average number of common shares outstanding:

First
Quarter

Third
Quarter

Second
Quarter

Fourth
Quarter
$13,183,095 $13,046,498 $12,663,604 $15,589,542
9,633,738
1,300,846
1,305,925

7,559,149
551,142
552,965

7,740,446
673,058
697,916

7,676,041
736,097
761,251

0.06
0.06

0.07
0.07

0.05
0.05

0.12
0.12

Basic
Diluted

10,670,111
10,792,954

10,673,245
10,731,998

10,387,462
10,457,318

10,160,119
10,238,142

2008

Net sales
Gross profit
Net income from continuing operations
Net income
Net income from continuing operations per common share:

Net income per common share:

Basic
Diluted

Weighted average number of common shares outstanding:

First
Quarter

Third
Quarter

Second
Quarter

Fourth
Quarter
$13,050,723 $13,647,446 $12,047,794 $13,745,575
8,425,718
926,219
943,419

7,055,440
393,393
421,014

7,911,954
622,118
655,250

7,657,247
570,117
584,498

0.05
0.05

0.06
0.06

0.04
0.04

0.09
0.09

Basic
Diluted

10,977,092
11,067,863

10,981,378
11,076,340

10,988,092
11,073,942

10,779,703
10,845,517

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, 2009 and 2008, 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, 2009. 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, 2009, and 2008 and the consolidated results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of America.

WEAVER AND TIDWELL, L.L.P.

Fort Worth, Texas
March 25, 2010

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, 2009. 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, 2009, 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, 2009 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
2010 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 2010 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 2010 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 2010 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 2010 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 2010 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 2010 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 2010 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, 2009 and 2008
 Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007
 Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2009, 2008 and

2007

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:

Jon Thompson
Chief Executive Officer and President

By:

Dated: March 26, 2010

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

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

Date

March 26, 2010

Wray Thompson

/s/ Jon W. Thompson
Jon Thompson

Chief Executive Officer, President and Director

March 26, 2010

/s/ Shannon L. Greene

Shannon L. Greene

Chief Financial Officer, Chief Accounting Officer,
Treasurer and Director

March 26, 2010

/s/ Mark J. Angus
Mark J. Angus

Senior Vice President and Assistant Secretary

March 26, 2010

/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

/s/ Michael A. Nery

Director

Michael A. Nery

/s/ William M. Warren
William M. Warren

Secretary

March 26, 2010

TANDY LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX

Exhibit
Number
3.1

3.2

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

14.1

21.1

Description
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.

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.

Consultation Agreement, dated as of January 1, 2010, 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
January 5, 2010 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.

*23.1

Consent of Weaver & Tidwell LLP dated March 25, 2010

*31.1

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

*31.2

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

32.1

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
Tandy Leather Factory, Inc.

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)
Managing Director
Buis & Company

Michael A. Nery (1)
Manager
Nery Capital Partners

Jon Thompson
Chief Executive Officer and President
Tandy Leather Factory, Inc.

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

Executive Officers of Tandy Leather Factory, Inc.
Jon Thompson
Chief Executive Officer and President

Shannon L. Greene
Chief Financial Officer & Treasurer

Mark Angus
Senior Vice President

William M. Warren
Secretary and General Counsel

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

Stock Listing
Symbol: TLF
NYSE Amex

Independent Public Accountants
Weaver LLP
Fort Worth, Texas

Annual Meeting of Stockholders
May 18, 2010
10:00 am
Corporate Headquarters
Tandy Leather Factory, Inc.
1900 SE Loop 820
Fort Worth, Texas 76140

Tandy Leather Factory, Inc.

annual report 2009

an report 2009.indd 2

3/24/10 2:14:14 PM