Our Business

We are the world's largest specialty retailer and wholesale distributor of leather and leathercraft related items. We market our products to our growing list of customers through company-owned retail and wholesale stores. We are a Delaware corporation and our common stock trades on the American Stock Exchange under the symbol "TLF." We operate our business in four segments: Wholesale Leathercraft, which operates wholesale stores in North America under the trade name, The Leather Factory, Retail Leathercraft, which operates retail stores in North America under the trade name, Tandy Leather Company, International Leathercraft, which operates combination retail/wholesale stores outside of North America under the trade name, Tandy Leather Factory, and Other. See Note 4 to the Consolidated Financial Statements for additional information concerning our segments, as well as our foreign operations.

Our Wholesale Leathercraft segment operates 30 company-owned wholesale stores in 20 states and three Canadian provinces. These stores are engaged in the wholesale distribution of leather and related items, including leatherworking tools, buckles and belt adornments, leather dyes and finishes, saddle and tack hardware, and do-it-yourself kits, to retailers, manufacturers, and end users. Our Wholesale Leathercraft segment also includes our National Account sales group.

Our Retail Leathercraft segment operates company-owned Tandy Leather retail stores in 34 states and five Canadian provinces. Tandy Leather, the oldest and best-known supplier of leather and related supplies used in the leathercraft industry, has been the primary leathercraft resource for decades. Tandy Leather's products include quality tools, leather, accessories, kits and teaching materials. In 2002, we began expanding Tandy Leather's industry presence by opening retail stores. As of May 1, 2008, we were operating 72 Tandy Leather retail stores located throughout the United States and Canada.

Our International Leathercraft segment operates one company-owned store in Northampton, United Kingdom. The store, which opened in February 2008, functions as a combination retail and wholesale store.

Our "Other" segment consists of Roberts, Cushman and Co., a wholly-owned subsidiary that custom designs and distributes decorative hat trims for headwear manufacturers.

Critical Accounting Policies

A description of our critical accounting policies appears in Item
7. Management's Discussions and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2007.

Certain statements contained in this report and other materials we file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made or to be made by us, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally are accompanied by words such as "may," "will," "could," "should," "anticipate," "believe," "budgeted," "expect," "intend," "plan," "project," "potential," "estimate," "continue," or "future" variations thereof or other similar statements. There are certain important risks that could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of the important risks, including those described below, could cause actual results to differ materially from those suggested by the forward-looking statements. Please refer also to our annual report on Form 10-K for fiscal year 2007 for additional information concerning these and other uncertainties that could negatively impact the Company.

††† We believe that the continued rise in oil and natural gas prices will increase the costs of the goods that we sell, including the costs of shipping those goods from the manufacturer to our stores and customers.

Various oils used to manufacture certain leather and leathercrafts are derived from petroleum and natural gas. Also, the carriers who transport our goods rely on petroleum-based fuels to power their ships, trucks and trains. They are likely to pass their increased costs on to us. We are unsure how much of this increase we will be able to pass on to our customers.

††† 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. Furthermore, 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.

General economic factors that are beyond our control impact our forecasts and actual performance. These factors include interest rates, recession, inflation, deflation, consumer credit availability, consumer debt levels, tax rates and policy, unemployment trends and other matters that influence consumer confidence and spending.

We assume no obligation to update or otherwise revise our forward-looking statements even if experience or future changes make it clear that any projected results, express or implied, will not be realized.

Results of Operations

The following tables present selected financial data of each of our four
segments for the quarters ended March 31, 2008 and 2007.

                        Quarter Ended March 31, 2008         Quarter Ended March 31, 2007
                                           Operating                            Operating
                            Sales            Income             Sales            Income
Wholesale Leathercraft      $6,738,211        $123,955          $7,940,487       $1,346,203
Retail Leathercraft          6,270,774         614,452           6,254,219          553,748
Int'l Leathercraft              41,737        (41,460)                   -                -
Other                          209,438          24,437             313,099           54,830
Total Operations           $13,260,160        $721,384         $14,507,805       $1,954,781

Consolidated net sales for the quarter ended March 31, 2008 decreased $1.2 million, or (8.6)%, compared to the same period in 2007. Retail and International Leathercraft's sales increased $16,500 and $41,700, respectively, while Wholesale Leathercraft and Other reported decreases of $1.2 million and $104,000, respectively. Operating income on a consolidated basis for the quarter ended March 31, 2008 was down 63.1% or $1.2 million from the first quarter of 2007.

The following table shows in comparative form our consolidated net income for the first quarters of 2008 and 2007:

2008 2007 % change Net income $584,498 $1,346,355 56.6%

While Wholesale Leathercraft recorded 51% of our sales in the quarter, all segments, excluding International Leathercraft, contributed to our consolidated net income. Additional information appears below for each segment.

Wholesale Leathercraft

Our Wholesale Leathercraft operation consists of 30 wholesale stores and our
National Account group. The following table presents the combined sales mix by
customer categories for the quarters ended March 31, 2008 and 2007:

                                                 Quarter ended
Customer Group                                03/31/08   03/31/07
 RETAIL (end users, consumers, individuals)        28%        29%
 INSTITUTION (prisons, prisoners, hospitals,        7%         6%
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle       43%        38%
& tack shops, authorized dealers, etc.)
 MANUFACTURERS                                     10%        11%
 NATIONAL ACCOUNTS                                 12%        16%
                                                  100%       100%

Net sales decreased 15.1%, or $1.2 million, for the first quarter of 2008 as follows:

                       Quarter Ended   Quarter Ended        $         %
                          03/31/08        03/31/07        change    change
Same store sales (29)     $5,829,014      $6,624,606     $(795,592)  (12)%
New store (1)                162,938         185,263       (22,325)  (12)%
National account group       746,259       1,130,618      (384,359)  (34)%
                          $6,738,211      $7,940,487   $(1,202,276)  (15)%

Operating income for Wholesale Leathercraft during the current quarter decreased by $1.2 million from the comparative 2007 quarter, a decline of 91%. The lower sales accounted for the majority of the decrease in operating income, as well as an increase in operating expenses of $259,000. The moving expenses incurred to move our corporate offices, central warehouse and other support departments at the end of the quarter of $125,000 and the accelerated depreciation expense in anticipation of the abandonment of the leasehold improvements at our former offices of $125,000 accounted for the majority of operating expense increase for the quarter.

Retail Leathercraft

Our Retail Leathercraft operation consists of 72 Tandy Leather retail stores at
March 31, 2008, compared to 65 stores at March 31, 2007. Net sales were
virtually flat for the first quarter of 2008 over the same quarter last year. A
store is categorized as "new" until it is operating for the full comparable
period in the prior year.

                              #    Qtr ended  Qtr ended    $ Incr   % Incr
                            Stores  03/31/08   03/31/07    (decr)   (decr)
Same (existing) store sales   65   $5,889,635 $6,254,219 $(364,584)   (6)%
New store sales               7       381,139          -    381,139    N/A
Total sales                   72   $6,270,774 $6,254,219    $16,555     0%

The following table presents sales mix by customer categories for the quarters ended March 31, 2008 and 2007 for our Retail Leathercraft operation:

                                                 Quarter ended
Customer Group                                03/31/08   03/31/07
 RETAIL (end users, consumers, individuals)        64%        65%
 INSTITUTION (prisons, prisoners, hospitals,         8          7
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle        27         26
& tack shops, authorized dealers, etc.)
 NATIONAL ACCOUNTS                                   -          -
 MANUFACTURERS                                       1          2
                                                  100%       100%

Sales to each customer group increased slightly over the first quarter of 2007, except for the Manufacturers group. Our experience is that small manufacturers and wholesalers tend to be especially cautious in their purchasing during a weak economy since they generally do not maintain excess cash to invest in raw materials and inventory. As a result, their purchases from us tend to be more sporadic and smaller in dollars spent.

Operating income increased $61,000 from the comparative 2007 quarter. Operating income as a percentage of sales also increased slightly from 8.9% in the first quarter of 2007 to 9.8% in the first quarter of 2008. Our gross margin increased from 60.5% to 62.3%. Operating expenses as a percentage of sales increased from 51.6% to 52.5%. Operating expenses increased $67,000 over the first quarter of 2007. The seven new stores opened since March 31, 2007 account for additional operating expenses of $234,000. Offsetting those expenses are reductions in supplies, employee benefits, property taxes, and moving expenses.

International Leathercraft

Sales totaled $42,000 for the first quarter of 2008, generated from our new store located in the UK. The store was opened in February 2008. Gross profit margin was 71%, which was higher than comparable stores in the U.S.. The store generated higher profit margins primarily due to the store's unique sales mix and the level at which we set our selling prices in the UK. We establish such levels to compensate for the higher cost of doing business overseas compared to the US. We do not expect the gross margins to maintain this level in the future. Operating expenses totaled $71,000, the largest contributors being employee compensation, store set-up supplies, and legal fees.

Other (Roberts, Cushman)

Sales decreased $104,000 or 33% for the first quarter of 2008. Gross profit margins fell to 40% from 43.3% a year ago. Operating income decreased $30,000 due to the reduction in sales. Operating expenses decreased $21,000 from the first quarter of 2007 due to the reduction of insurance costs and collection of customer accounts previously written off as uncollectible.

Other Expenses

We paid $81,000 in interest in the first quarter of 2008 on our bank debt, compared to zero in the first quarter of 2007. We recorded $41,000 in interest income during the quarter as earned on our cash balances compared to $47,000 a year ago. We also received $215,000 as a signing bonus on an oil and gas lease. We recorded $15,000 in income for currency fluctuations in the first quarter of 2008. Comparatively, in the first quarter of 2007, we recorded $8,000 in income for currency fluctuations.

Capital Resources, Liquidity and Financial Condition

On our consolidated balance sheet, total assets increased from $37.6 million at year-end 2007 to $39.8 million at March 31, 2008. Property and equipment, specifically the building improvements, accounted for the majority of the increase. Total stockholders' equity increased from $29.8 million at December 31, 2007 to $30.3 million at March 31, 2008, the increase being attributable to earnings in the first quarter of this year. Our current ratio fell from 7.4 at December 31, 2007 to 5.9 at March 31, 2008 due to the reduction in inventory during that time period.

Our investment in inventory decreased by $1.2 million at March 31, 2008 from year-end 2007. The decrease is due to a decrease in purchases as a result of weak sales. Inventory turnover decreased to an annualized rate of 3.15 times during the first quarter of 2008, from 3.59 times for the first quarter of 2007. Inventory turnover was 3.19 times for all of 2007. We compute our inventory turns as sales divided by average inventory. At the end of the first quarter, our total inventory on hand was slightly under our internal targets for optimal inventory levels. We are pleased with the efforts made by our buying department to reduce purchases in light of these difficult economic times.

Trade accounts receivable was $2.0 million at March 31, 2008, down $495,000 from $2.5 million at year-end 2007. Aggressive collection efforts as well as a tighter credit policy accounts for the reduction. The average days to collect accounts for the first quarter of 2008 were 59 days, up from the first quarter of 2007 of 57 days. We have experienced a slow paying pattern with many of our small customers which explains the lengthening days to collect. To compensate, we have tightened our credit policy and are closely managing our customer accounts to ensure collectibility.

Accounts payable remained virtually unchanged at $1.5 million at March 31, 2008 compared to year-end 2007. Accrued expenses increased $575,000 due primarily to the increase in inventory in transit at quarter-end compared to December 31, 2007.

During the first quarter of 2008, cash flow provided by operating activities was $3.2 million. The net income generated for the quarter contributed a portion of the cash flow, in addition to the reduction in accounts receivable and inventory. Cash flow used in investing activities totaled $1.4 million consisting of the improvements made on the building of $2.1 million offset by a reduction in other assets of $690,000. Cash flow used by financing activities totaled $26,000, consisting of payments on our capital lease of $45,000, offset by proceeds from miscellaneous sales of assets of $18,000.

We expect to fund our operating and liquidity needs as well as our store growth from a combination of current cash balances and internally generated funds.