The Company offers an unconditional satisfaction guarantee to its customers and accepts all product returns. Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise.  

The fair values of stock options granted were estimated on the dates of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 4.0% and 3.125% for 2005 and 2004, respectively; dividend yields of 0% for both periods; volatility factors of .366 for 2005 and .302 for 2004; and an expected life of the valued options of 5 years.

The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the three months ended March 31, 2005 and 2004::

We operate 30 company-owned Leather Factory wholesale distribution centers in 20 states and three Canadian provinces. Our business concept centers around 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.

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. 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 MayAugust 1, 2005, we have opened 4446 Tandy Leather retail stores located throughout the United States and Canada.

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

A description of our critical accounting policies appears in "Item 2. 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, 2004.

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,“will,” “could,“could,” “should,“should,” “anticipate,“anticipate,” “believe,“believe,” “budgeted,“budgeted,” “expect,“expect,” “intend,“intend,” “plan,“plan,” “project,“project,” “potential,“potential,” “estimate,“estimate,” “continue,“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 which could cause actual results to differ materially from those suggested by the forward-looking statements include, among other things:

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.

On our consolidated balance sheet, total assets increased from $22.1 million at year-end 2004 to $23.2$25.5 million at March 31,June 30, 2005. Our accounts receivable and inventory accounted for the majority of the increase. Total stockholders’ equity increased from $17.3 million at December 31, 2004 to $18.4$19.3 million at March 31,June 30, 2005. Most of the increase was from earnings in the first quarterhalf of this year. Our current ratio fell slightly from 4.79 at December 31, 2004 to 4.443.70 at March 31, 2005.June 30, 2005 as a result of the increase in inventory-in-transit at the end of the quarter.

Our investment in accounts receivable was $2.5 million at March 31,June 30, 2005, up $512,000$489,000 from $2.0 million at year-end 2004. This is a result of an increase in credit sales during the quarter ended March 31,first half of 2005 as compared to that of the quarter ended December 31,last half of 2004 and a slight increase in the average days outstanding on our accounts. The average days to collect accounts for the first quarterhalf of 2005 slowed from the fourth quarter of 2004 from 43.643 days to 51.8 days primarily as a result of the accounts receivable obtained via an acquisition completed in December 2004.46 days.

Accounts payable decreased $432,000remained virtually unchanged from the end of 2004 to $1.5 million at the end of the firstsecond quarter due primarily to the decrease in inventory purchases during the quarter.of 2005, increasing $56,000. Accrued expenses and other liabilities increased $455,000.$1.7 million. The increase is due to the accrual recorded for inventory enroute to us as of the end of the quarterJune 30, 2005 in the amount of $1.0$2.0 million, partially offset by a reduction in accrued payroll and bonuses and various other expense accruals. The bonuses accrued at the end of December 2004 were paid in March 2005.

During the first quarterhalf of 2005, cash flow provided by operating activities was $500,000.$924,000. The net income generated for the quarteryear and the increase in accrued expenses accounted for the majority of the cash flow, partially offset by increases in accounts receivable and inventory. Cash flow used in investing activities totaled $110,000, $88,000$213,000, $139,000 of which pertains to the purchase and additional development of a new computer system. Once the system is usable for point-of-sale and inventory management, we intend to reclassify the cost to property and equipment. Equipment purchased during the quarterto date in 2005 totaled $29,000.$83,000. Cash flow used by financing activities was $483,000,$456,000, consisting of payments on our revolving credit facility and note payable during the quartercapital lease obligation totaling $538,000,$572,000, partially offset by proceeds from stock option exercises by employees totaling $55,000.$116,000.

At March 31, 2004, ourAs of June 30, 2005, we had no bank debt totaled $1.3 million. At March 31, 2005, the balance was zero.debt.

We expect to fund our operating and liquidity needs as well as our current expansion of Tandy Leather's retail store chain from a combination of current cash balances and internally generated funds and ourfunds. We also have a $3.0 million revolving credit facility with JPMorgan Chase Bank, which is based upon the level of our accounts receivable and inventory. At March 31, 2005, the available and unused portion of the credit facility was approximately $3.0 million.we could borrow from if necessary.

For disclosures about market risk affecting the Company, see Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for our fiscal year ended December 31, 2004. We believe that our exposure to market risks has not changed significantly since December 31, 2004.

At the end of the firstsecond quarter of 2005, our President, Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended. Based upon this evaluation and notwithstanding the limitations contained in the final paragraph of this Item 4, they concluded that, as of March 31,June 30, 2005, our disclosure controls and procedures offer reasonable assurance that the information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in the rules and forms adopted by the Securities and Exchange Commission.

During the period covered by this report, there has been no change in our internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, these controls.

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.