Edgar Filing: LEATHER FACTORY INC

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )

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[ ] Preliminary Proxy Statement
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14a-6(e)(2))
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THE LEATHER FACTORY, INC.
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(Name of Registrant as Specified in Its Charter)

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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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[X] No fee required.

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[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously. Identify the previous filing by registration statement number, or
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4) Date Filed:

THE LEATHER FACTORY, INC.
3847 East Loop 820 South
Fort Worth, Texas 76119

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To be Held on May 23, 2002

Dear Stockholder:

We will hold this year's annual meeting of stockholders on May 23, 2002 at
10:00 a.m. We will hold the meeting in the Superbowl Room at the Wyndham Hotel,
1500 Convention Center Drive, Arlington, Texas. At the meeting, we will ask you
to consider and vote on the re-election of the current nine directors. If
re-elected they will serve for a one-year term that will expire at our 2003
annual meeting of stockholders, or until their successors are elected and
qualified.

We will also discuss and take action on any other business that is properly
brought before the meeting.

If you were a stockholder on April 23, 2002, you are entitled to notice of
and to vote on the proposals at this year's meeting.

We hope you will find it convenient to attend the annual meeting in person.
Whether or not you plan to attend, please complete, date and sign the enclosed
proxy card and return it promptly in the enclosed postage-paid envelope to
ensure your vote is represented. You may also revoke your proxy in the manner
described in the accompanying proxy statement at any time before the vote is
taken and vote your shares personally at the meeting.

Please advise the Company's transfer agent, Securities Transfer
Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034, of any change
in your address.

By Order of the Board of Directors,

/s/ William M. Warren
---------------------
William M. Warren
General Counsel and Secretary
Fort Worth, Texas
April 23, 2002

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY; THEREFORE, WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED
PROXY IN THE POSTAGE-PAID ENVELOPE ALSO PROVIDED. YOU MAY, IF YOU WISH, WITHDRAW
YOUR PROXY AT ANY TIME PRIOR TO THE TIME IT IS VOTED AND VOTE YOUR SHARES
PERSONALLY.

THE LEATHER FACTORY, INC.
3847 East Loop 820 South
Fort Worth, Texas 76119

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS

To Be Held on May 23, 2002

We are pleased to present you with this "plain English" proxy statement in
connection with this year's annual meeting. We hope you will find it easy to
read and understand. We also hope you will come to our annual stockholders'
meeting on Thursday, May 23, 2002.

As you will see in the accompany Annual Report, the past year was a
significant year for The Leather Factory, Inc. At the annual meeting, after we
vote on the proposals described in this proxy statement, we will present a brief
report on the past year for The Leather Factory, as well as an overview of our
plans for the upcoming year and beyond. As always, we will conclude the meeting
by inviting you to ask questions and make comments.

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY; THEREFORE, WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE ALSO PROVIDED. YOU MAY, IF YOU WISH,
WITHDRAW YOUR PROXY AT ANY TIME PRIOR TO THE TIME IT IS VOTED AND VOTE YOUR
SHARES PERSONALLY.

This proxy statement was first mailed to stockholders on or about April 24,
2002.

On behalf of the board of directors, I would like to express our
appreciation for your continued interest in The Leather Factory, Inc. We look
forward to greeting as many of our shareholders as possible at this year's
meeting.

Sincerely,

/s/ Wray Thompson
-----------------
Wray Thompson
Chairman and Chief Executive Officer

QUESTIONS AND ANSWERS

Why did I receive this proxy statement?

We are mailing this proxy statement to everyone who was a stockholder of record
of our company on April 23, 2002. Only stockholders of record on the close of
business on this date are entitled to vote at the meeting. The purposes of this
proxy statement are:

o To let our stockholders know when and where we will hold our annual
stockholders' meeting;
o To provide detailed information about the nine directors who will be
voted on for re-election;
o To provide updated information about our company you should consider
in order to make an informed decision at the meeting.

At the close of business on the record date, there were 10,031,161 shares of our
common stock outstanding and entitled to vote. There were approximately 640
holders of record. Each holder of record is entitled to one vote per share. To
achieve a quorum at the meeting, a majority of our outstanding shares must be
present either in person or by proxy.

What will occur at the annual meeting?

First, we will determine whether enough stockholders are present at the
meeting to conduct business. A stockholder will be deemed to be "present" at the
meeting if the stockholder is:

o Present in person, or
o Not present in person but has voted by proxy prior to the meeting.

According to our bylaws, holders of at least a majority of our outstanding
shares must be present at this year's meeting in order to conduct the meeting.
If holders of fewer than a majority of our outstanding shares are present at the
meeting, we will reschedule the meeting. A new meeting date will be announced at
the meeting.

After each proposal has been voted on at the meeting, we will discuss and
take action on any other matter that is properly brought before the meeting.
Also, some of our officers will report on our recent financial results and our
current operations.

If enough stockholders are present at the meeting to conduct business, then
we will vote on the proposal to re-elect the nine director nominees as members
of our board of directors for the upcoming year. Our board of directors has
approved this proposal and is now soliciting your vote on the proposal and
recommends that you vote FOR the re-election of each of the director nominees.

How do I vote if I do not plan to attend the annual meeting?

In addition to voting in person at the meeting, you may mark your
selections on the enclosed proxy card, date and sign the card, and return the
card in the enclosed envelope. We encourage you to vote now even if you plan to
attend the meeting in person. If your shares are in a brokerage account, you may
receive different voting instructions from your broker.

With respect to the election of directors, votes may be cast in favor or
withheld. Votes that are withheld will be excluded in determining if nominee(s)
have received a plurality of votes, but will be counted in determining if a
quorum is present.

Please understand that voting by any means other than voting in person at
the meeting has the effect of appointing Robin L. Morgan, our Vice-President of
Administration, and William M. Warren, our Secretary, as your proxies. They will
be required to vote on the election of directors described in this proxy
statement exactly as you have voted. However, if any other matter requiring a
stockholder vote is properly raised at the meeting, the Ms. Morgan and Mr.
Warren will be authorized to use their discretion to vote on such issues on your
behalf.

All shares of common stock represented at the annual meeting by properly
executed proxies received prior to or at the meeting and not revoked will be
voted at the meeting in accordance with the instructions indicated in such
proxies. If no instructions are indicated on a proxy, it will be voted FOR the
election of each of the nominees for director.

What if I hold my shares in "street name," and I do not give instructions to my
broker or its nominee?

In general, the broker or nominee would have the discretion to vote these
shares. Should there be any "broker non-votes," they will be counted as shares
that are present determining the presence of a quorum. At present, we are not
aware of anything that will come before the meeting involving matters where
American Stock Exchange rules bar brokers and nominees from voting if the
beneficial owner fails to execute and return a proxy.

How many votes are necessary to re-elect the nominees for director?

Each nominee must receive the affirmative vote of a plurality of shares
either present at the meeting or represented by proxy to be elected. The
affirmative vote of holders of a majority of the shares either present at the
meeting or represented by proxy is required on any other action that may
properly be presented at the meeting. Cumulative voting is not allowed.

You should note that certain officers and directors of the Company own
approximately two-thirds of the outstanding shares of common stock that will be
entitled to vote at the meeting (see "Security Ownership of Certain Beneficial
Owners and Management"). We anticipate that these shares will be voted in favor
of the nominees for director. Thus, approval of the nine nominees for director
is likely.

What if a nominee if unwilling or unable to stand for re-election?

Each of the persons nominated for re-election has agreed to stand for
re-election. We are not aware of any intention of any nominee not to stand for
re-election or any circumstances which would cause any nominee not to stand for
re-election. However, if unexpected events arise which cause one or more of the
nominees to be unable to stand for re-election, then one of the following would
occur:

o Our board of directors can vote at the meeting to reduce the size of
the board of directors;
o Our board of directors may, during the meeting, nominate another
person for director; or
o Pursuant to our bylaws, the board of directors could leave the vacancy
open until the board appoints a new director at a later time.

Your vote is completely confidential.

It is important for you to understand that if our board of directors
nominates someone at the meeting, the person to whom you have given your proxy
will be able to use his or her discretion to vote on your behalf for the
candidate of his or her choice.

Who counts the votes and how are the votes treated?

We will appoint two persons as inspectors of election for the meeting who
will count the votes cast. They will treat shares represented by proxies that
withhold authority as shares that are present and entitled to vote when
determining if a quorum exists for any matter voted upon by the stockholders.

What if I want to change my vote?

You can change your vote on a proposal at any time before the meeting for
any reason by revoking your proxy. Proxies may be revoked by:

o Filing a written notice of revocation, which includes a later date
than the proxy date, with our secretary at or before the meeting;
o Properly executing a later proxy relating to the same shares; or

o Attending the meeting and voting in person; however, attendance at the
meeting will not in and of itself constitute a revocation of a proxy.

Any written notice revoking a proxy should be sent to: Secretary, The
Leather Factory, Inc., 3847 East Loop 820 South, Fort Worth, Texas 76119.

Who pays for this solicitation?

We, the company, will pay for the cost of soliciting proxies. Our
directors, officers and employees may solicit proxies. They will not be paid for
soliciting the proxies but may be reimbursed for out-of-pocket expenses related
to the proxy solicitation. Proxies may be solicited in person, by mail, by
telephone, by telegram or other means of communication. We will make
arrangements with custodians, nominees and fiduciaries in order to forward proxy
solicitation materials to beneficial owners of common stock.

Who is our independent public accountant?

Our board of directors selected Hein + Associates LLP to serve as our
independent public accountant for the year ended December 31, 2001. A
representative of Hein + Associates LLP is expected to attend the meeting. The
representative will have the opportunity to make a statement at the meeting and
respond to appropriate questions from you, our stockholders. Our board of
directors has not named the independent public accountant that will serve as
outside auditor for 2002.

What audit fees did we pay to our independent auditors this past year for our
audit?

Audit Fees. During 2001, we paid Hein + Associates LLP an aggregate of $38,558
for professional services rendered for the audit of our annual financial
statements and the reviews of our financial statements included in our Forms
10-Q.

All Other Fees. There were no fees paid to Hein + Associates LLP for non-audit
services in 2001.

How do I raise an issue for discussion or vote at the annual meeting?

If you wish to present a proposal for consideration at an annual meeting,
you must send written notice of the proposal to our corporate secretary. We have
not received notice of any stockholder proposals to be presented at this year's
meeting.

If you would like your proposal to be included in next year's proxy
statement, you must submit it to our corporate secretary by no later than
December 26, 2002. We will include your proposal in our next annual proxy
statement if it is a proposal that we would be required to include pursuant to
the rules of the Securities and Exchange Commission.

You may write to our corporate secretary at 3847 East Loop 820 South, Fort
Worth, Texas 76119 to present a proposal for consideration.

If a stockholder raises a matter at the meeting that requires a stockholder
vote, the person to whom you have given your proxy will use his or her
discretion to vote on the matter on your behalf.

According to our by-laws, any proposal properly raised at the meeting by a
stockholder will require the affirmative vote of a majority of the shares deemed
present at the meeting, whether in person or by proxy.

How can I receive a copy of the annual report?

We provide a free copy of our Annual Report on Form 10-K that includes the
financial statements and schedules, but does not include the exhibits. If you
would also like the report's exhibits, we will provide copies of the exhibits.
We may charge a reasonable fee for providing these exhibits.

In order to receive this report, you must request a report in writing and
mail the request to The Leather Factory, Inc., PO Box 50429, Fort Worth, Texas
76105-0429, Attention: Shannon L. Greene, Chief Financial Officer.

PROPOSAL ONE: RE-ELECTION OF DIRECTIONS

Our bylaws provide that the board of directors shall be fixed and
determined only by resolution of the board. Currently, the number of directors
comprising the board of directors has been set at nine (9). The current
directors are being nominated for re-election to our board to serve a one-year
term of office that expires at the 2003 annual stockholders' meeting or until
their successors are elected and qualified.

Who is nominated for re-election to our board of directors?

Wray Thompson, 70, has served as our Chairman of the Board and Chief
Executive Officer since June 1993. He also served as President from June 1993 to
January 2001. Mr. Thompson was a co-founder of the company. Mr. Thompson also
serves as a member of the 1995 stock option plan committee and the 1995 director
non-qualified stock option plan committee. During 2001, Mr. Thompson was also a
member of the compensation committee.

Shannon L. Greene, 36, has served as our Chief Financial Officer and
Treasurer since May 2000. She was appointed to serve on the Board of Directors
in January 2001. From September 1997 to May 2000, Ms. Greene served as our
controller or assistant controller. From January 1996 until she joined us, Ms.
Greene was chief financial officer and controller of a venture capital group
specializing in the computer industry. Ms. Greene also is a member of the
company's Employees' Stock Ownership Plan (ESOP) Committee and is a certified
public accountant. 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 National Investor Relations
Institute.

Joseph R. Mannes, 43, has served as a director of the company since May
1998. Currently, Mr. Mannes serves as the managing director in the corporate
finance department of SAMCO Capital Markets, a Dallas, Texas broker-dealer. From
October 1998 until July 2001, he was chief financial officer and secretary of
Clearwire Technologies, Inc. of Arlington, Texas, a manufacturer and service
provider of wireless Internet networks, as well as a provider of Internet
connectivity. From January to July 2000, he also served as chief financial
officer of E-Certify Corporation, a security-oriented information technologies
consultancy focusing on web applications. From April 1997 to September 1998, he
was vice president and general manager of Imagic Online, the online game
subsidiary of Interactive Magic, a Cary, NC, computer game company. Mr. Mannes
is a chartered financial analyst. He also serves on the advisory board of
Conchemco, Inc. and is chairman of HiTech Creations, Inc. Mr. Mannes also serves
the company as a member of the 1995 stock option plan committee, the
compensation committee, and is chairman of the audit committee.

H.W. Markwardt, 66, has served as a director of the company since May 1996.
He was the founder of Encon Industries, L.P. ("Encon"), Fort Worth, Texas, an
importer of ceiling fans, and served as Encon's chief operating officer from
1977 until 1995. He currently manages his personal investments. Mr. Markwardt
also serves the company as a member of the 1995 stock option plan committee, the
audit committee, and the compensation committee. He is the father of Michael A.
Markwardt, another of the company's directors.

Michael A. Markwardt, 43, was appointed to serve as a director of the
company in January 2001. Since 1999, he is the primary shareholder of a family
investment business. Prior to 1999, he was president of Encon Electric, LP. He
holds professional affiliations in Young President's Organization, Home Center
Industry President's Council, and InterTrade Industries Board. He has extensive
experience in importing, particularly from the Orient. Mr. Markwardt also serves
the company as a member of the audit and compensation committees. He is the son
of H.W. Markwardt, another of the company's directors.

Robin L. Morgan, 51, has served as our Vice President of Administration and
director of the company since June 1993. Ms. Morgan is responsible for import,
banking, and procurement for our import product lines and maintains all
inventory costs. She also administers special projects, employee benefit plans,
and insurance programs. Ms. Morgan also serves as chairman of the company's ESOP
committee and is a member of the 1995 director non-qualified stock option plan
committee. Ms. Morgan is married to Ronald C. Morgan, another of the company's
directors.

Ronald C. Morgan, 54, has served as our President since January 2001 and
has served as Chief Operating Officer and director since June 1993. Mr. Thompson
was also a co-founder of the company. Mr. Morgan also serves as a member of the
company's ESOP Committee, the 1995 stock option plan committee, and the 1995
director non-qualified stock option plan committee. Mr. Morgan is married to
Robin L. Morgan, another of the company's directors.

Anthony C. Morton, 42, has served as a director of the company since
January 1998. Mr. Morton, a certified public accountant, is the vice president
and chief financial officer of PYCO Industries, Inc. in Lubbock, Texas. He
served as our Chief Financial Officer and Treasurer from January 1998 through
December 1998 and as our Controller from August 1993 to January 1998. Mr. Morton
also serves the company as a member of the audit and compensation committees.

William M. Warren, 57, has served as Secretary and director of the company
since June 1993. Mr. Warren has been General Counsel of the company since its
formation in 1980. Since 1979, Mr. Warren has been president of the law firm
Loe, Warren, Rosenfield, Kaitcer & Hibbs, P.C., Fort Worth, Texas. Other
directorships held by Mr. Warren include his law firm, Wichita, Tillman and
Jackson Railroad Company, and Idaho Northern & Pacific Railroad Company. Mr.
Warren also serves as trustee of the James D. Burton Estate.

The information relating to the occupations and security holdings of our
directors is based upon information received from them.

How do we compensate our directors?

Meeting fees. Except in the case of Mr. Warren, who bills the company at
his customary professional rate for time spent attending board and committee
meetings, non-employee directors receive $1,000 for each board meeting attended
and $250 for each committee meeting attended. We also reimburse our directors
for travel, lodging and related expenses they incur in attending board and
committee meetings.

Stock Options. We are currently authorized to grant nonqualified stock
options to purchase 2,000 shares of our common stock per year to each of our
non-employee directors under our 1995 Director Non-Qualified Stock Option Plan.
The goal of this stock option plan is to provide a means of attracting and
retaining competent non-employee personnel to serve on our board of directors by
offering individuals long-term equity incentives tied to our performance. Each
of our non-employee directors is eligible to participate in this option plan.

Our directors who are also employees receive no additional compensation for
serving as directors.

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

Who owns more than 5% of our stock?

The following table sets forth information as of March 31, 2002 with
respect to the shares of our common stock beneficially owned by the person
(excluding our officers and directors) who we know to be the beneficial owner of
more than 5% of our common stock.

Number of Shares Percent of
Name and Address of Beneficial Owner Beneficially Owned (1) Class
------------------------------------ ---------------------- ----------
The Leather Factory, Inc.
Employees' Stock Ownership Plan & Trust
PO Box 50429
Fort Worth, Texas 76105-0429 895,928 (2) 8.95%
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(2) The Trustee of the Employees' Stock Ownership Plan & Trust ("ESOP") votes
the shares held by the ESOP that are allocated to participant accounts as
directed by the participants or beneficiaries of the ESOP. Except in
certain limited circumstances, the Trustee may acquire and dispose of the
assets of the ESOP only as the ESOP Committee directs. The ESOP Committee
is made up of officers and other employee participants of the Company and
presently consists of Ronald C. Morgan, Robin L. Morgan, Shannon L. Greene,
and three other employees. As members of this Committee, these persons may
be deemed to share investment power with respect to the allocated shares
held by the ESOP. Each member of the ESOP Committee disclaims beneficial
ownership of the securities held by the ESOP except for those that have
been allocated to the member as a participant in the ESOP. The total number
of shares held by the ESOP includes 286,222 shares that are beneficially
owned by the Executive Officers and are also included in the table below as
being owned by those persons.

How much stock do our executive officers and directors own?

The following table sets forth information as of March 31, 2002 with
respect to the shares of our common stock beneficially owned by each of our
directors and executive officers and our directors and executive officers as a
group.

Number of Shares Percent of
Names of Directors and Executive Officers Beneficially Owned (1) Class
----------------------------------------- ---------------------- -----

Wray Thompson (2) 2,862,901 28.60
Ronald C. Morgan (3) (4) 3,309,870 33.06
Robin L. Morgan (3) (4) 3,309,870 33.06
Shannon L. Greene (4) (5) 48,906 *
Joseph R. Mannes (6) 8,000 *
H.W. Markwardt (7) 31,000 *
Michael A. Markwardt (8) 9,000 *
Anthony C. Morton (9) 12,145 *
William M. Warren (10) 45,025 *
All Executive Officers and Directors
as a group (9 persons) 6,326,847 62.80
-------------------
* Represents less than one percent.

(1) Shares are deemed to be "beneficially owned" by a person if the person,
directly or indirectly, has or shares (a) voting power with respect to the
shares, including the power to vote or to direct the voting of the shares,
or (b) investment power with respect to the shares, including the power to
dispose or to direct the disposition of the shares. In addition, a person
is deemed to be the beneficial owner of shares if the person has the right
to acquire beneficial ownership of the shares within 60 days. Directors and
officers have sole voting and investment power with respect to the shares
shown unless otherwise indicated below.
(2) Includes 2,752,147 shares held of record by Mr. Thompson and 110,754 shares
held in our ESOP for his account.
(3) Includes 3,141,308 shares held of record by Mr. and Ms. Morgan and 168,562
held in our ESOP for their account. Shares beneficially owned by Mr. Morgan
and Ms. Morgan are held as community property. Therefore, the total number
of shares held by them is shown as owned by each of them.
(4) Member of the ESOP Committee. Ownership amounts do not include shares held
by the ESOP that are not allocated to the named officer as a participant.
(5) Includes 15,000 shares held of record by Ms. Greene, 6,906 shared held in
our ESOP and 27,000 shares subject to stock options exercisable within 60
days.
(6) Includes 8,000 shares subject to stock options, exercisable within 60 days.
(7) Includes 27,000 shares held of record by Mr. Markwardt and 4,000 shares
subject to stock options, exercisable within 60 days.
(8) Includes 5,000 shares held of record by Mr. Markwardt and 4,000 shares
subject to stock options, exercisable within 60 days.
(9) Includes 6,145 shares held of record by Mr. Morton and 6,000 shares subject
to stock options, exercisable within 60 days.
(10) Includes 31,025 shares held of record and 14,000 shares subject to stock
options, exercisable within 60 days.

Have our directors, executive officers and 10% stockholders complied with
Section 16(a) of the Securities Exchange Act of 1934?

Michael A. Markwardt, a director, was late in filing Form 3 upon becoming a
director of the company and Form 4 upon purchasing a small amount of the
company's common stock as required, by Rule 16a-3 adopted under the Securities
Exchange Act of 1934. Our disclosure on this topic is based solely on review of
the information provided to us by persons subject to these requirements.

OTHER INFORMATION YOU NEED TO MAKE A DECISION

Who are our executive officers?

The following table lists the names and ages of our current executive
officers and all positions they hold. Each of the listed officers also serves as
directors. Their respective business experience information can be found under
"Who is nominated for re-election to our board of directors?"

Name Age Positions Held
----- --- --------------
J. Wray Thompson 70 Chief Executive Officer

Ronald C. Morgan 54 President and Chief Operating Officer

Robin L. Morgan 51 Vice President of Administration and
Assistant Secretary

Shannon L. Greene 36 Chief Financial Officer and Treasurer

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

How do we compensate our executive officers?

The compensation committee of our board of directors is responsible for
oversight of our executive compensation program. The committee submits all
issues concerning executive compensation to the full board of directors for
approval. This committee does not review or approve stock option grants.
Additional information about the compensation committee and its membership is
given below.

Annual and Other Compensation. The following table includes certain
information concerning annual and other compensation for all executive services
for the years ended December 31, 2001, 2000 and 1999 paid to Mr. Thompson, our
Chief Executive Officer and Mr. Morgan, our President and Chief Operating
Officer. No other person serving as an executive officer as of December 31, 2001
received salary and bonus compensation in excess of $100,000 during fiscal 2001,
or in either of the prior two years.

SUMMARY COMPENSATION TABLE

Annual Compensation All Other
------------------- ---------
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($)(1)
--------------------------- ---- ---------- --------- -------------------

Wray Thompson 2001 $157,500 $35,000 $8,937
Chairman and CEO 2000 157,500 25,000 9,575
1999 162,500 - 6,805

Ronald C. Morgan 2001 $141,600 $35,000 $8,758
President and Chief 2000 141,600 25,000 8,638
Operating Officer 1999 146,600 - 6,118

(1) The amounts in this column represent the amounts accrued on behalf of the
named individuals for the annual contribution to the Company's ESOP.

Did we have transactions with our officers, directors or 5% stockholders?

During 2001, the law firm of Loe, Warren, Rosenfield, Kaitcer and Hibbs,
P.C., of which Mr. William M. Warren, Secretary, General Counsel, and director
of the company, is a shareholder, was compensated for rendering services to the
Company.

How did our common stock perform compared to certain indexes?

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 common stock of a peer group of
companies (the "Peer Group") whose returns are weighted according to their
respective market capitalization. The graph assumes that $100 was invested on
December 31, 1996 in the Company's common stock, the Standard & Poor's SmallCap
600 Index, and the Peer Group, and that all dividends were reinvested. The Peer
Group consists of companies with publicly traded stock included in SIC 5190 -
Miscellaneous Non-Durable Goods Wholesale. The returns shown on the graph are
not necessarily indicative of future performance.

COMPARISON OF FIVE-YEAR TOTAL RETURN
For The Leather Factory, Inc., the Peer Group Index (1) ,
and the S&P SmallCap 600 Index

[OBJECT OMITTED]

------------------------ -------- -------- -------- -------- -------- --------
Company Name / Index Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01
------------------------ -------- -------- -------- -------- -------- --------
LEATHER FACTORY INC 100 61.58 30.79 100.00 123.15 256.16
------------------------ -------- -------- -------- -------- -------- --------
S&P SMALLCAP 600 INDEX 100 25.58 123.95 139.32 155.76 165.94
------------------------ -------- -------- -------- -------- -------- --------
PEER GROUP 100 111.52 81.95 63.07 43.96 60.95
------------------------ ------- -------- -------- -------- -------- --------
Data Source: S&P Compustat Services
--------------------------------------------------------------------------------

(1) The Peer Group Index is comprised of the following 12 companies: Advanced
Marketing Services, AG Services of America, Amcon Distributing Co., Central
Garden & Pet Co., Core-Mark International Inc., Educational Development Corp,
Enesco Group Inc., Finishmaster Inc., KIK Technology Intl Inc., Media Source
Inc., Ourpets Co., U S A Floral Prods Inc.

How many board meetings were held last year?

We held three meeting of our board of directors during 2001. Each director
attended all board meetings and all meetings of committees on which they served.

What are the board of directors' committees? What functions do they serve?

Our Board has appointed four committees. Each is discussed separately
below. The Board of Directors however does not have a standing nominating
committee. The entire board selects nominees to serve as directors.

Audit Committee.

H.W. Markwardt, Michael A. Markwardt, Joseph R. Mannes, and Anthony C.
Morton currently serve on our audit committee. Mr. Mannes is the chairman of the
committee. Each member of the audit committee is "independent", as defined by
the American Stock Exchange. The primary function of our audit committee is to
serve as the focal point for communication among the board of directors, the
independent auditors, and the company's management, as it relates to financial
accounting, reporting, and controls.

The audit committee's basic role is to review and approve the scope of the
annual examination of our books and records. Other roles of the committee
include:

o Reviewing the findings and recommendations of our outside auditors
when the audit is complete;
o Considering the organization, scope and adequacy of our internal
accounting and financial reporting controls in effect; and
o Evaluating the independent accountants and recommend to the board the
selection, retention or replacement of the independent accounts;

The audit committee met two times during 2001. The Audit Committee has not
made a recommendation to the Board regarding the retention or non-retention of
Hein + Associates LLP as independent outside auditor for 2002. The committee
historically meets in the fall to discuss the selection of auditors for the
current year.

Report of the Audit Committee

The audit committee oversees our financial reporting process on behalf of
our board of directors. Our management is responsible for the preparation,
presentation, and integrity of our financial statements, accounting and
financial reporting principles, internal controls, and procedures designed to
ensure compliance with accounting standards, applicable laws, and regulations.
Our independent auditors, Hein + Associates LLP, are responsible for performing
an independent audit of the consolidated financial statements and expressing an
opinion on the conformity of those audited financial statements with accounting
principles generally accepted in the United States.

The audit committee has reviewed and discussed our audited financial
statements for the year ended December 31, 2001 with our management and has
discussed with Hein + Associates LLP the matters required to be discussed by
Statement on Auditing Standards Board Standard No. 61, as amended,
"Communication with Audit Committees". In addition, Hein + Associates LLP has
provided the audit committee with the written disclosures and the letter
required by Independence Standards Board Standards No. 1, "Independence
Discussions with Audit Committees", and the audit committee has discussed with
Hein + Associates LLP their independence from The Leather Factory, Inc. and its
management.

Based on these reviews and discussed, the audit committee recommended to
the Board of Directors that the audited financial statements be included in our
Annual Report on Form 10-K for the year ended December 31, 2001, for filing with
the Securities and Exchange Commission.

AUDIT COMMITTEE
THE LEATHER FACTORY, INC.

JOSEPH R. MANNES, Chairman
H.W. MARKWARDT
MICHAEL A. MARKWARDT
ANTHONY C. MORTON

Compensation Committee.
-----------------------

The compensation committee is responsible for recommending to the board of
directors the compensation program of the executive officers. The names of the
committee members appear at the end of the committee's report below.

The basic philosophy of the executive compensation program is to link the
compensation of its executive officers to their contribution toward increases in
the size of the operations and income of the company and accordingly, increases
in stockholder value. Consistent with that philosophy, the executive
compensation program is designed to meet the following policy objectives:

1. Attracting and retaining qualified executives critical to the long-term
success of the company;
2. Tying executive compensation to the company's general performance and
specific attainment of long-term strategic goals;
3. Rewarding executives for contributions to strategic management designed to
enhance long-term stockholder value; and
4. Providing incentives that align the executive's interest with those of the
company's stockholders.

The compensation committee met one time during 2001.

During 2001, Mr. Thompson was the only member of our compensation committee
who was also an officer or employee of the company. None of the members were a
party to any material transaction with us during the past year. In addition,
none of our executive officers served as a member of the compensation or similar
committee or board of directors of any other entity of which an executive
officer served on our compensation committee or our board of directors.
Effective March 15, 2002, Mr. Thompson resigned from the committee.

Report of the Compensation Committee

In 2001, a majority of our compensation committee was non-employee
directors. Except for Mr. Thompson, none of these directors participate in the
compensation programs described in this report. The compensation committee is
responsible for reviewing and making recommendations to our board of directors
regarding the compensation of our executive officers. Our board of directors has
final approval of executive officer compensation. We review the performance of
each executive officer on at least an annual basis.

What are the components of our executive officers compensation program?

Executive officer compensation consists of the following components:

o Annual base salary; o Annual incentive bonus;

o Long-term compensation in the o Company contributions under
form of stock option grants; our ESOP.

How are base salaries determined?

During 2001, we sought to establish base salaries of our executive officers
at levels that, in the judgment of the committee members and the board of
directors, were sufficiently competitive to attract and retain qualified
executive officers. These salary levels were determined based on prior
experience and compared to salaries for comparable positions in other companies.
Base salaries are generally increased annually assuming the company's financial
performance and position is satisfactory.

Were incentive bonuses paid?

Historically, the company awards discretionary bonuses to its executive
officers as well as certain other employees. These bonuses are determined on a
subjective basis, considering prior bonus amounts awarded, the availability of
cash, the business prospects for the upcoming year, and the increase in net
income for the year in question as general guidelines. The compensation
committee determines the bonuses awarded to the executive officers, while the
chief executive officer and president determine bonuses awarded to non-officer
employees. Mr. Thompson abstained from the committee's consideration of his
compensation. For the fiscal year ended December 31, 2001, bonuses were awarded
to each of the executive officers due to the improvement in fiscal 2001 results
over fiscal 2000.

What is the long-term component of executive compensation?

Stock options. Our stock option plan prohibits grants of stock options to
Mr. Thompson, Mr. Morgan and Ms. Morgan. Ms. Greene was granted options to
purchase 60,000 shares of our common stock during 2001. The options vest over a
five-year period.

Employees' Stock Ownership Plan. Our ESOP was established to provide
long-term incentive compensation for our employees. The executive officers
participate in the ESOP in the same manner as all other plan participants. The
company makes annual cash or stock contributions to a trust for the benefit of
eligible employees and the trust in turn invests in shares of the Company's
Common Stock. An unaffiliated bank is trustee of the trust.

How was our chief executive officer's compensation determined?

During 2001, our chief executive officer's base salary rate was $157,500,
no increase from 2000. This base salary was, in the opinion of the committee and
the board of directors, consistent with salaries for comparable positions within
our industry. The incentive bonus awarded to our chief executive officer for
2001 was $35,000, as determined by the compensation committee based on the
financial improvement of the company.

The compensation committee of our board of directors has provided this
report.

COMPENSATION COMMITTEE
THE LEATHER FACTORY, INC.

H.W. MARKWARDT, Chairman
MICHAEL A. MARKWARDT
JOSEPH R. MANNES
ANTHONY C. MORTON
WRAY THOMPSON

1995 Stock Option Plan Committee.
---------------------------------

Ronald C. Morgan, H.W. Markwardt, Joseph R. Mannes, Robin L. Morgan, and
Wray Thompson currently serve on our stock option plan committee. Mr. Morgan is
the chairman of the committee. This committee has the general duty to review and
approve the granting of incentive stock options to key personnel pursuant to the
1995 Stock Option Plan. The committee met one time during 2001.

1995 Director Stock Option Plan Committee.
------------------------------------------

Ronald C. Morgan, Robin L. Morgan, and Wray Thompson currently serve on
this committee. Wray Thompson is the chairman of the committee. This committee
reviews and approves granting of stock options to the non-employee directors
pursuant to the 1995 Director Non-Qualified Stock Option Plan. The committee met
two times during 2001.

REVOCABLE PROXY
THE LEATHER FACTORY, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS

The undersigned hereby appoint(s) Robin L. Morgan and William M. Warren, or
either of them, with full power of substitution, proxies of the undersigned,
with all the powers that the undersigned would possess if personally present to
cast all votes that the undersigned would be entitled to vote at the Annual
Meeting of Stockholders of The Leather Factory, Inc. (the "Company") to be held
on Thursday, May 23, 2002, in the Superbowl Room, Wyndham Hotel, 1500 Convention
Center Drive, Arlington, Texas at 10:00 a.m., Central Daylight Time, and any and
all adjournments or postponements thereof (the "Annual Meeting"), including
(without limiting the generality of the foregoing) to vote and act as follows:

1. Election of eight directors.
[ ] FOR the nominees listed below [ ] WITHHOLD AUTHORITY
(except as indicated to the to vote for the nominees
contrary below). listed below.

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

Instructions: To withhold authority to vote for any individual nominee or
nominees, write their name(s) here.

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

Your Board of Directors unanimously recommends a vote FOR the nominees set forth
above
(Continued and to be signed on the reverse side)

(Continued from other side)

2. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the Annual Meeting.

This Proxy will be voted at the Annual Meeting or any adjournments or
postponements thereof as specified. If no specifications are made, this Proxy
will be voted FOR the election of directors. This Proxy hereby revokes all prior
proxies given with respect to the shares of the undersigned.

Please complete, date, sign and mail this Proxy promptly in the enclosed
envelope. No postage is required for mailing in the United States.

Dated: , 2002
--------------------------------

--------------------------------------------
Signature(s)

IMPORTANT: Please date this Proxy and sign exactly as your
name appears to the left. If shares are held by joint
tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give
title as such. If a corporation, please sign in full
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representative. If a partnership, please sign in partnership
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