Edgar Filing: LEATHER FACTORY INC

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

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THE LEATHER FACTORY, INC.
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(Name of Registrant as Specified in Its Charter)

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[GRAPHIC OMITED]

THE LEATHER FACTORY, INC.
3847 EAST LOOP 820 SOUTH
FORT WORTH, TEXAS 76119

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TIME AND DATE: 10:00 a.m. local time on Thursday, May 15, 2003

PLACE: Wyndham Hotel, Champions Ballroom III
1500 Convention Center Drive, Arlington, TX

ITEMS OF BUSINESS: (1) To elect directors
(2) To consider such other business as may properly come
before the meeting

ADJOURNMENTS AND Any action on the items of business described above may be
POSTPONEMENTS considered at the time and on the date specified above or at
any time and date to which the annual meeting may be properly
adjourned or postponed.

RECORD DATE: You are entitled to vote only if you were a shareholder of
common stock at the close of business on April 15, 2003.

VOTING YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE
ANNUAL MEETING, WE ENCOURAGE YOU TO READ THIS PROXY STATEMENT AND SUBMIT YOUR
PROXY OR VOTING INSTRUCTIONS AS SOON AS POSSIBLE. YOU MAY SUBMIT YOUR PROXY OR
VOTING INSTRUCTIONS FOR THE ANNUAL MEETING BY COMPLETING, SIGNING, DATING AND
RETURNING YOUR PROXY OR VOTING INSTRUCTION CARD IN THE PRE-ADDRESSED ENVELOPE
PROVIDED. FOR SPECIFIC INSTRUCTIONS ON HOW TO VOTE YOUR SHARES, PLEASE REFER TO
THE SECTION TITLED "QUESTIONS AND ANSWERS" IN THIS PROXY STATEMENT AND THE
INSTRUCTIONS ON THE PROXY OR VOTING INSTRUCTION CARD.

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

This notice of annual meeting and proxy statement and proxy card are being
distributed on or about April 15, 2003.

[GRAPHIC OMITED]

THE LEATHER FACTORY, INC.
3847 EAST LOOP 820 SOUTH
FORT WORTH, TEXAS 76119

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 15, 2003

To our Stockholders:

I am pleased to invite you to attend the annual meeting of stockholders of The
Leather Factory, Inc. to be held on Thursday, May 15, 2003 at 10:00 a.m., local
time, at the Wyndham Hotel, Champions Ballroom III, 1500 Convention Center
Drive, Arlington, Texas.

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 company, 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.

Your vote is important. Whether or not you plan to attend the annual meeting, I
hope you will vote as soon as possible. Voting now by written proxy will ensure
your representation at the annual meeting regardless of whether you attend in
person.

On behalf of the board of directors, I would like to express our appreciation
for your continued support of The Leather Factory, Inc. We look forward to
greeting as many of our stockholders 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 15, 2003. 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:

- To let our stockholders know when and where we will hold our annual
stockholders' meeting;
- To provide detailed information about the directors who will be voted on
for re-election; and
- 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 10,212,461 shares of our
common stock outstanding and entitled to vote. There were approximately 650
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:

- Present in person, or
- 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 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.
4

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 exactly as you have voted on the election of directors
described in this proxy statement. However, if any other matter requiring a
stockholder vote is properly raised at the meeting, then 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 IS THE DIFFERENCE BETWEEN HOLDING SHARES AS A STOCKHOLDER OF RECORD AND AS
A BENEFICIAL OWNER?

Many Leather Factory ("TLF") stockholders hold their shares through a broker or
other nominee rather than directly in their own name. There are some
distinctions between shares held of record and those owned beneficially.

Stockholder of Record. If your shares are registered directly in your name with
TLF's transfer agent, Securities Transfer Corporation, you are considered, with
respect to those shares, the stockholder of record, and these proxy materials
are being sent directly to you by us. As the stockholder of record, you have
the right to grant your voting proxy directly to TLF or to vote in person at the
meeting. We have enclosed or sent a proxy card for you to use.

Beneficial Owner. If your shares are held in a brokerage account or by another
nominee, you are considered the beneficial owner of shares held in street name,
and these proxy materials are being forwarded to you together with a voting
instruction card. As the beneficial owner, you have the right to direct your
broker or nominee how to vote and are also invited to attend the annual meeting.

Since a beneficial owner is not the stockholder of record, you may not vote
these shares in person at the meeting unless you obtain a "legal proxy" from the
broker, trustee or nominee that holds your shares, giving you the right to vote
the shares at the meeting. Your broker, trustee or nominee has enclosed or
provided voting instructions for you to use in directing the broker, trustee or
nominee how to vote your shares.

WHAT IF I HOLD MY SHARES IN "STREET NAME," AND I DO NOT GIVE INSTRUCTIONS TO MY
BROKER OR 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.
5

You should note that certain officers and directors of the Company own
approximately three-fifths 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 nominees for
director is likely.

WHAT IF A NOMINEE IS UNWILLING OR UNABLE TO STAND FOR ELECTION?

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

- Our board of directors can vote at the meeting to reduce the size of the
board of directors;
- Our board of directors may, during the meeting, nominate another person
for director; or
- 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:

- Filing a written notice of revocation, which includes a later date than
the proxy date, with our secretary at or before the meeting;
- Properly executing a later proxy relating to the same shares; or
- 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.
6

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, 2002. 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 Audit
Committee has not named the independent public accounting firm that will serve
as outside auditor for 2003.

WHAT FEES DID WE PAY TO OUR INDEPENDENT AUDITORS DURING THIS PAST YEAR?

Audit Fees. During 2002, we paid Hein + Associates LLP an aggregate of $45,436
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.

Tax and All Other Fees. There were no fees paid to Hein + Associates LLP for
tax or any other non-audit services in 2002.

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,
2003. 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.

BOARD STRUCTURE AND COMPOSITION

As of the date of this proxy statement, our Board has nine directors and the
following four committees: (1) Audit, (2) Compensation, (3) 1995 Director
Non-Qualified Stock Option Plan committee, and (4) 1995 Stock Option Plan
Committee. The membership during the last fiscal year and the function of each
committee are described below. The Board of Directors does not have a standing
nominating committee. The entire board selects nominees to serve as directors.
During fiscal 2002, the Board held four meeting and each director attended 100%
of all Board and applicable committee meetings.

DIRECTOR NON-
QUALIFIED STOCK STOCK
NAME OF DIRECTOR AUDIT COMPENSATION OPTION PLAN OPTION PLAN
------------------ ----- ------------ --------------- -----------
NON-EMPLOYEE DIRECTORS:
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Joseph R. Mannes X* X X
H.W. Markwardt X X X
Michael A. Markwardt X X*
Anthony C. Morton(1) (X) (X)
William M. Warren (1)

EMPLOYEE DIRECTORS:
-------------------
Wray Thompson X* X
Shannon L. Greene
Robin L. Morgan(1) X X
Ronald C. Morgan X X*
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Number of Meetings in
Fiscal 2002 2 1 1 0
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_________________
X = Committee member; * = Committee Chairman; (X) = former Committee
member

(1) Elected not to stand for re-election. Mrs. Morgan and Mr. Warren will
continue to serve as officers.

AUDIT COMMITTEE

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. All members of the Audit Committee are "independent" under the
applicable rules of the American Stock Exchange. 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:

- Reviewing the findings and recommendations of our outside auditors when
the audit is complete;
- Considering the organization, scope and adequacy of our internal
accounting and financial reporting controls in effect; and
- Evaluating the independent accountants and recommend to the board the
selection, retention or replacement of the independent accounts.
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 2003. The committee historically meets in the fall to discuss the
selection of auditors for the current year.

The Audit Committee operates under a written charter adopted by the Board, which
was published in the 2002 Proxy Statement. The report of the Audit Committee is
included on page 17.

COMPENSATION COMMITTEE

The compensation committee is responsible for recommending to the board of
directors the compensation program of the executive officers. 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.

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. The report of the Compensation Committee is included on page 18.

1995 STOCK OPTION PLAN 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 did not meet during 2002 as no stock options were granted.

1995 DIRECTOR STOCK OPTION PLAN 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 one time during 2002.

PROPOSAL ONE: ELECTION OF DIRECTORS

There are seven nominees for election to our Board this year. All of the
nominees, except Mr. Lange, have served as directors since the last annual
meeting. Information regarding the business experience of each nominee is
provided below. Each directly is elected annually to serve until the next
annual meeting or until their successors are elected and qualified.

WRAY THOMPSON, 71, 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.

SHANNON L. GREENE, 37, 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 and
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.

T. FIELD LANGE, 35, is a director nominee. Mr. Lange, a certified public
accountant, is the president of Lange & Associates, P.C., a public accounting
firm in Fort Worth, Texas. Prior to opening his firm in 1996, Mr. Lange was an
audit and tax associate for Deloitte and Touche LLP. His professional
affiliations include the American Institute of Certified Public Accountants, the
Texas Society of Certified Public Accountants and its Fort Worth chapter. He is
a former member of the Board of Directors of the Fort Worth Unit of the American
Cancer Society and currently serves as Treasurer of St. Andrew's Episcopal
Church in Fort Worth.

JOSEPH R. MANNES, 44, 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.

H.W. MARKWARDT, 67, 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. He is the
father of Michael A. Markwardt, another of the company's directors.

MICHAEL A. MARKWARDT, 44, has served as a director of the company since January
2001. Since 1999, he is the primary stockholder of a family investment
business. Prior to 1999, he was president of Encon Electric, LP. He holds
professional affiliations in the Young President's Organization, Home Center
Industry President's Council, and InterTrade Industries Board. He is the son of
H.W. Markwardt, another of the company's directors.

RONALD C. MORGAN, 55, has served as our President since January 2001 and has
served as Chief Operating Officer and director since June 1993. Mr. Morgan was
also a co-founder of the company.

The information relating to the occupations and security holdings of our
directors is based upon information received from them.
10

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 $500 for each committee meeting attended, with the exception of the
committee chairman who receives $750 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.

COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

WHO OWNS MORE THAN 5% OF OUR STOCK AND HOW MUCH STOCK DO OUR EXECUTIVE OFFICERS
AND DIRECTORS OWN?

The following table sets forth information, as of March 31, 2003, concerning:

- The Leather Factory, Inc. Employees' Stock Ownership Plan & Trust, a
beneficial owner of more than 5% of TLF common stock;
- Beneficial ownership by current TLF directors and the named executive
officers set forth in the Summary Compensation table on page 14; and
- Beneficial ownership by all current TLF directors and TLF executive
officers as a group.

The information provided in the table is based on TLF's records, information
filed with the Securities and Exchange Commission and information provided to
TLF, except where otherwise noted.

The number of shares beneficially owned by each entity, person, director or
executive officer is determined under the rules of the Securities and Exchange
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under these rules, beneficial ownership
includes any shares as to which the individual has the sole or shared voting
power or investment power and also any shares that the individual has the right
to acquire now or within 60 days after the record date of April 15, 2003 through
the exercise of any stock option or other right. Unless otherwise indicated,
each person has sole voting and investment power (or shares such powers with his
or her spouse) with respect to the shares set forth in the following table.

BENEFICIAL OWNERSHIP TABLE

BENEFICIAL OWNERSHIP (1)
------------------------

NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT NATURE TOTAL PERCENT OF CLASS
--------------------------------------------- ------------ -------------- ---------- -----------------
THE LEATHER FACTORY, INC.
EMPLOYEES' STOCK OWNERSHIP PLAN & TRUST
PO Box 50429
Fort Worth, Texas 76105-0429 956,320(2) 956,320 9.36%

DIRECTORS AND NAMED EXECUTIVE OFFICERS:
WRAY THOMPSON 2,647,747 Direct
112,584 ESOP 2,760,331 27.03%

RONALD C. AND ROBIN L. MORGAN (3) 3,141,308 Direct
173,127 ESOP 3,314,435 32.45%

SHANNON L. GREENE 15,000 Direct
8,679 ESOP
54,000 Vested Options 77,679 *

JOSEPH R. MANNES 5,000 Direct
10,000 Vested Options 15,000 *

H.W. MARKWARDT 27,000 Direct
6,000 Vested Options 33,000 *

MICHAEL A MARKWARDT 5,000 Direct
6,000 Vested Options 11,000 *

ANTHONY C. MORTON 4,450 Direct
8,000 Vested Options 12,450 *

WILLIAM M. WARREN 31,025 Direct
16,000 Vested Options 47,025 *

ALL CURRENT DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP (9 PERSONS) 6,270,920 6,270,920 60.80%

____________
* Represents holdings of less than one percent.

(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as amended, "Vested Options" are options
that may be exercised now or within 60 days after the record date.

(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 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 294,390
shares that are beneficially owned by the Executive Officers and are also included in the table below as being owned
by those persons.

(3) Ronald C. Morgan, a director and the company's President, and Robin L. Morgan, the company's Vice President of
Administration and Assistant Secretary, are married. Shares beneficially owned by Mr. and Mrs. Morgan are held as
community property.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Sections 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors, executive officers and holders of more than 10% of TLF common stock
to file reports regarding their ownerships and changes in ownership of our
securities with the Securities and Exchange Commission. TLF believes that,
during fiscal 2002, its directors, executive officers and 10% stockholders
complied with all Section 16(a) filing requirements, with the following
exceptions: two late reports were filed by Wray Thompson in connection with (1)
a sale of 13,600 shares pursuant to Rule 144 and (2) a sale of 50,000 shares to
TLF's ESOP pursuant to an agreement between Mr. Thompson and the ESOP. 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. With the exception of Robin L. Morgan, the listed
officers also serve as directors and their respective business experience
information can be found under "Who is nominated for election to our board of
directors?"

NAME AGE POSITIONS HELD
----------------- --- --------------------------------------------------------
J. Wray Thompson 71 Chief Executive Officer

Ronald C. Morgan 55 President and Chief Operating Officer

Shannon L. Greene 37 Treasurer and Chief Financial Officer

Robin L. Morgan 52 Vice President of Administration and Assistant Secretary

Robin L. Morgan has served as our Vice President of Administration since June
1993. She is responsible for import, bank 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. Ms. Morgan is married to
Ronald C. Morgan, a director and the company's President.

All officers are elected annually by the Board of Directors to serve for the
ensuing year.
13

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.

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, 2002, 2001 and 2000 paid to our executive officers.

SUMMARY COMPENSATION TABLE
--------------------------

LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS
------------------- ------

NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SECURITIES UNDERLYING OPTIONS (#)
----------------------------------- ---------------------- ----------- ---------- ---------------------------------
WRAY THOMPSON 2002 $ 160,000 $ 50,000 -
Chairman and Chief 2001 157,500 35,000 -
Executive Officer 2000 157,500 25,000 -

RONALD C. MORGAN 2002 $ 145,000 $ 50,000 -
President and Chief 2001 141,600 35,000 -
Operating Officer 2000 141,600 25,000 -

SHANNON L. GREENE 2002 $ 85,000 $ 30,000 -
Treasurer and Chief 2001 78,500 20,000 60,000
Financial Officer 2000 72,500 10,000 50,000

ROBIN L. MORGAN 2002 $ 76,000 $ 10,000 -
Vice President of Administration 2001 73,000 7,500 -
and Assistant Secretary 2000 73,000 3,000 -

NAME AND PRINCIPAL POSITION ALL OTHER COMPENSATION ($)(1)
----------------------------------- ------------------------------
WRAY THOMPSON $ 11,331
Chairman and Chief 8,937
Executive Officer 9,575

RONALD C. MORGAN $ 10,459
President and Chief 8,758
Operating Officer 8,638

SHANNON L. GREENE $ 6,094
Treasurer and Chief 4,689
Financial Officer 4,228

ROBIN L. MORGAN $ 4,852
Vice President of Administration 3,995
and Assistant Secretary 4,287

(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.

OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table provides information on option exercises with respect to TLF
common stock in fiscal 2002 by the named executive officer and the values of the
officer's unexercised options at December 31, 2002. There were no stock
appreciation rights exercised or outstanding.

Name NUMBER OF SHARES ACQUIRED ON EXERCISE VALUE REALIZED
------------------------------------- --------------
Exercisable Unexercisable
------------------------------------- --------------
Shannon L. Greene - $ -

Name NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
------------------------------------------- ---------------------------------

Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Shannon L. Greene 42,000 72,000 $100,135 $170,715

(1) The value of unexercised options is based upon the difference between the
exercise price and the closing market price on December 31, 2002, which was
$3.38.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes our equity compensation plan information as of
December 31, 2002. Information is included for equity compensation plans
approved by our stockholders. We do not have any equity compensation plans not
approved by our stockholders.

WEIGHTED-AVERAGE COMMON SHARES AVAILABLE FOR
COMMON SHARES TO BE EXERCISED PRICE OF FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS (EXCLUDING SECURITIES REFLECTED
WARRANTS AND RIGHTS(1) AND RIGHTS IN COLUMN (A))
----------------------- ------------------ -------------------------------

Plan Category ( a ) ( b ) ( c )
-----------------------------------------------------------------------------------
Equity compensation
plans approved by
TLF stockholders 747,200 $1.196 106,000

(1) Includes options to purchase shares outstanding under the 1995 Stock Option
Plan and the 1995 Director Non-Qualified Stock Option Plan.
15

DID WE HAVE TRANSACTIONS WITH OUR OFFICERS, DIRECTORS OR 5% STOCKHOLDERS?

During 2002, the law firm of Loe, Warren, Rosenfield, Kaitcer and Hibbs, P.C.,
of which Mr. William M. Warren, the company's Secretary, is a shareholder, was
compensated for rendering legal services to the Company. Fees paid to the law
firm in 2002 totaled $38,774 (less than 5% of the firm's annual revenues).

During 2002, the public accounting firm of Cole, Greene & Ruggeburg, P.C., of
which the spouse of Ms. Shannon L. Greene, Treasurer, Chief Financial Officer,
and director of the company, is a minority stockholder, was engaged to provide
tax preparation services to the Company. Fees paid to the accounting firm in
2002 totaled $24,500 (less than 5% of the firm's annual revenues). Our Audit
Committee considered and approved the engagement of Cole, Greene & Ruggeburg,
P.C.

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,
1997 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

[STOCK PERFORMANCE GRAPH]

COMPANY NAME / INDEX DEC 97 DEC 98 DEC 99 DEC 00 DEC 01 DEC 02
------------------------------------
LEATHER FACTORY INC 100 50.00 162.50 200.00 416.00 676.00
------------------------------------
S&P SMALLCAP 600 INDEX 100 98.69 110.94 124.03 132.13 112.80
------------------------------------
PEER GROUP 100 56.75 46.26 34.29 47.27 48.92
------------------------------------

Data Source: S&P Compustat Services

(1) The following 12 companies comprise the Peer Group Index: Advanced Marketing
Services, AG Services of America, Amcon Distributing Co., Central Garden & Pet Co.,
Core-Mark International Inc., Dimon Inc., Educational Development Corp, Enesco Group
Inc., Finishmaster Inc., Media Source Inc., Royster-Clark Inc., Source Interlink COS
Inc.

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, 2002 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 discussions, 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, 2002, 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

REPORT OF THE COMPENSATION COMMITTEE

In 2002, our compensation committee consisted of non-employee directors. 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.

Compensation for our executive officers (including our chief executive officer)
consists of the following components:

- Annual base salary;
- Annual incentive bonus;
- Long-term compensation in the form of stock option grants;
- Company contributions under our ESOP.

Base salary. During 2002, 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.

Bonuses. 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, president, and chief financial officer
determine bonuses awarded to non-officer employees. For the fiscal year ended
December 31, 2002, bonuses were awarded to each of the executive officers based
on the improvement in operating results in fiscal 2002 results compared to
fiscal 2001.

Stock options. Ms. Greene is the only executive officer who is eligible for
stock option grants as our stock option plan specifically prohibits grants of
stock options to Mr. Thompson, Mr. Morgan and Ms. Morgan. No options were
granted to Ms. Greene during 2002.

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.

During 2002, our chief executive officer's base salary rate was $160,000, a 1.6%
increase from 2001. 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
2002 was $50,000, as determined by the compensation committee based on the
operating results of the company.

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

COMPENSATION COMMITTEE
THE LEATHER FACTORY, INC.

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