UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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

Exchange Act of 1934 (Amendment No. ___)

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TANDY LEATHER FACTORY, INC.

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(Name of Registrant as Specified in Its Charter)

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[   ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously.  Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

Please advise our transfer agent, Computershare Trust Company, 350 IndianaBroadridge Corporate Issuer Solutions, 1717 Arch Street, Suite 800, Golden, Colorado 80401,1300, Philadelphia, PA  19103, of any change in your address.

* Represents beneficial ownership of less than 1% of our outstanding shares of common shares.stock.

All directors are to be elected at the Annual Meeting to hold office until the next annual meetingAnnual Meeting of stockholders and until their successors have been duly elected and qualified.  Currently there are nine directors.  It is the intention of the persons named in the accompanying form of proxy card to vote for the election of all nine nominees listed below for election as our directors unless authority to so vote is withheld.  All nominees have indicated their willingness to serve for the ensuing term.  If any nominee is unable or declines to serve as a director at the date of the Annual Meeting, the persons named in the proxy card have the right to use their discretion to vote for a substitute.

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

Meeting Attendance

During fiscal 2010,2011, the Board of Directors held five meetings.  All current directors who served during 20102011 attended 75% or more of the aggregate of the total number of meetings of the Board of Directors and of committees of the Board of which he or she was a member.  We encourage and expect our Board members to attend our Annual Meeting absent extenuating circumstances, but we do not have a formal policy requiring attendance.  All of our Board members attended our Annual Meeting held in 2010.2011.

Director Independence

The Board of Directors has considered the listing requirements of the NASDAQ for "independence" of directors, and it has determined that T. Field Lange, Joseph R. Mannes, L. Edward Martin III, Michael A. Nery, and J. Bryan Wilkinson, our non-employee directors, are independent.  Our independent directors hold executive sessions at least once a year.

 
 

Board Leadership Structure

Until January 2007, we operated under the traditional U.S. board leadership structure with our Chief Executive Officer also serving as Chairman of the Board.  When Mr. Thompson, who had served as our only chairman/Chairman and CEO, resigned as CEO in December 2006, our Board re-evaluated its leadership structure.  Beginning in January 2007 with the appointment of Mr. Ron Morgan as our new CEO, the Board determined it appropriate to separate the roles of CEO and Chairman, allowing the CEO to run the Company and the Chairman to run the Board.  In addition, the Board believed Mr. Thompson, having been one of its founders, was the most qualified to lead the Board due to his invaluable experience and knowledge of the Company.company.  Mr. Morgan resigned as CEO in June 2009, at which time Jon Thompson was appointed to the position.

We believe our CEO and our Chairman have an excellent working relationship that has allowed the CEO to focus on the challenges that we face in the current business environment.  The separation of the CEO and Chairman positions provides strong leadership for our Board, while also positioning our CEO as our leader in the eyes of our customers, employees, and other stakeholders.

Our boardBoard has five independent members and four non-independent members.  We have three Boardboard committees comprised solely of independent directors, with two different independent directors serving as chairs of the committees.  We believe that the number of independent, experienced directors that make up our Board benefits us and our stockholders.

Risk Oversight

Our Audit Committee is primarily responsible for overseeing our risk management processes on behalf of the full Board, focusing on the most significant risks facing us and our general risk management strategy, and also ensuring that risks undertaken by us are consistent with the Board’s appetite for risk.  Management is responsible for the development, implementation, and maintenance of our risk management processes and provides periodic reports to the Audit Committee on its assessment of strategic, operational, financial, competitive, reputational, and legal risks to us.  We believe this division of responsibilities is the most effective approach for addressing the risks we face and that our Board leadership structure supports this approach.

Director Compensation

Non-employee directors receive $1,500 for each Board meeting attended in person and $500 for each Board meeting attended via telephone.  Each member of the Audit Committee receives $1,000 for each Audit Committee meeting attended, with the exception of the Audit Committee chairman who receives $1,500 for each Audit Committee meeting attended.  The members of each of the Compensation Committee and the Nominating Committee receive $500 for each committee meeting attended, with the exception of committee chairmen who received $750 for each committee meeting attended.  We entered into a consulting agreement with Wray Thompson effective JanuaryJune 1, 2010,2011, pursuant to which we pay Mr. Thompson $25,000 per year for serving as our Chairman of the Board.  In addition, we are currently authorized to grant nonqualified stock options to purchase 3,000 shares of our common stock per year to each of our non-employee directors under our 2007 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.

The table below summarizes the compensation paid by us to our non-employee directors during the year ended December 31, 2010.2011.  Our directors who are also employees (and Wray Thompson, who serves us as a consultant) receive no additional compensation for serving as directors.

 

As of the date of this proxy statement, our Board has four committees:  (1) Audit, (2) Compensation, (3) Nominating, and (4) 2007 Director Non-Qualified Stock Option Plan Committee.  The membership during the last fiscal year and the function of each committee are described below.

(1)  We treat Wray Thompson as an employee director for the purposes of his compensation as a director although he resigned as our CEO and as an employee effective December 31, 2006.  He continues to serve as our Chairman of the Board under a consulting arrangement pursuant to which we pay Mr. Thompson $25,000 per year.

 
 

We have a Nominating Committee consisting of fourfive directors, all of whom are "independent" under the listing requirements of NASDAQ.  The Nominating Committee met oncecommittee did not meet during 2010.2011.

The Board of Directors has adopted a written charter for the Nominating Committee, which is available on our website at www.tandyleatherfactory.com.   This charter provides that the Nominating Committee is responsible for identifying individuals qualified to become directors consistent with criteria established by the Board of Directors.  Although the boardBoard of directorsDirectors has not yet established these criteria, the charter also provides that the Nominating Committee shall take into account such additional factors as it deems appropriate in evaluating candidates.  The goal of the Nominating Committee is to maintain a strong and experienced Board and to ensure that each member of our Board possesses the highest personal and professional ethics and integrity and is devoted to representing our best interests and the best interests of our stockholders.  The Nominating Committee considersThese factors whichmay include strength of character, mature judgment, career specialization, relevant technical skills, diversity and the extent to which a candidate would fill a present need on the Board.    The Nominating Committee values all types of diversity, including diversity of viewpoint, background, technical skills, industry knowledge and experience and takes such diversity into account when considering the overall mix of qualifications of candidates for nomination to the Board.board.  In addition, the charter states that the Nominating Committee will consider stockholder recommendations of director nominees, as well as nominations by our senior officers.  The Nominating Committee plans to evaluate all director nominees in a like manner without regard as to who recommended the nomination.  Traditionally, we have not engaged third parties to identify or evaluate potential directors or to assist in that process.  In addition, the Nominating Committee makes a review and evaluation at least annuallyperiodically of the Board of Directors and the Nominating Committee's own performance.  Further, the Nominating Committeecommittee recommends persons to serve on the Nominating Committee as members, as well as the possible removal of any incumbent Nominating Committee members.

Stockholders may nominate director nominees for consideration by writing to our corporate secretary at 1900 Southeast Loop 820, Fort Worth, Texas  76140.  Any such nomination must include:

The Nominating Committee recommended to the Board of Directors that all nine director nominees listed in this Proxy Statementproxy statement serve as directors for a term ending on the date of the 20122013 Annual Meeting of Stockholders.

The Nominating Committee will consider nominees for directors recommended by our stockholders and will evaluate such nominees using the same criteria used to evaluate director candidates as described above.  In order to be considered by the Nominating Committee with respect to nominees for the 20122013 Annual Meeting of Stockholders, prospective nominee recommendations must be received by the corporate secretary no later than 30 days and no earlier than 60 days before such meeting.

The Audit Committee’s basic role is to assist the Board in fulfilling its fiduciary responsibility pertaining to our accounting policies and reporting practices.  Among other duties, the Audit Committee is to be the Board's principal agent in assuring the independence of our outside auditor, the integrity of management, and the adequacy of disclosures to stockholders.  The Board has determined that all members of the Audit Committee are "independent" under the applicable rules of the NASDAQ and that Joseph R. Mannes, chairman of the Audit Committee in 20092010 and 2010,2011, and T. Field Lange, Audit Committee member, both qualify as an "audit committee financial expert" within the meaning of Item 407(d)(5) of Regulation S-K.  The Board of Directors has adopted a written charter for the Audit Committee, which is available on our website at www.tandyleatherfactory.com.  The Audit Committeecommittee met fourfive times during 2010.2011.   The Report of the Audit Committee for the fiscal year ended December 31, 20102011 appears below.

Our Audit Committee selected Weaver LLP to serve as our independent public accountant for the years ended December 31, 20092010 and 2010,2011, as well as for the first three quarters of 2011.2012.  A representative of Weaver LLP is expected to attend our Annual Meeting.  The representative will have the opportunity to make a statement at the Annual 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 2011.2012.  The Audit Committee expects to select the independent auditors to audit our annual financial statements for 20112012 during the next few months, as part of the Audit Committee’s normal selection process.

Weaver LLP performed the audits of our 20092010 and 20102011 financial statements, as well as the reviews of our Forms 10-Q for the same periods.  The amounts shown below are the aggregate amounts paid to Weaver LLPLLC during 20092010 and 20102011 for services in the categories indicated.

In accordance with the charter of our Audit Committee as in effect at the relevant times and the rules of the SEC, the Audit Committee approved all of the fees indicated above before the services were provided.

As members of the Audit Committee, we oversee the Company's financial reporting process on behalf of our Board of Directors.  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.

During 2010,2011, we recommended and the Board approved the appointment of Weaver LLP as independent auditors for the year ended December 31, 2010.2011.  Our auditors 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, 20102011 with our management and has discussed with Weaver LLP the matters required to be discussed by Statement on Auditing Standards Board StandardStandards No. 61, as amended, (AICPA, Professional Standards, Vol. 1 AU section 380) as adopted by the Public Company Accounting Oversight Board in Rule 3200T.  In addition, the Audit Committee has received from Weaver LLP the written disclosures and the letter required by the applicable requirementsrequirement of the Public Company Accounting Oversight Board regarding Weaver LLP’s communications with the Audit Committee concerning independence and the Audit Committee has discussed with Weaver LLP their independence from Tandy Leather Factory, Inc. and our management.

Based on these reviews and discussions, the Audit Committeeaudit 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, 2010,2011, for filing with the SEC.

The foregoing report was submitted by the Audit Committee and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A promulgated by the SEC or Section 18 of the Exchange Act.

The primary focus of our executive compensation programs is to improve our performance year over year and over a longer-term period.  The compensation programs were designed to provide the tools necessary to hire executives with the skills needed to manage the companyCompany to meet these goals and to retain them over the long-term.  In developing the programs, a key consideration was to have plans that were easy to understand and administer, while being competitive with companies of similar size and philosophy.  Over the past several years, management and the Compensation Committee have worked to refine the compensation programs used to ensure that they support these goals and our ongoing business objectives.  Our philosophy has been to reward team performance, measured by our overall results.  Each executive officer’s compensation is linked to their individual contribution toward increases in the size of our operations, our income, and increases in stockholder value.  At the 2011 Annual Meeting, stockholders were asked to approve Tandy Leather Factory, Inc.’s 2010 exeuctive compensation programs.  More than 96% of the shares voted approved the program.  In consideration of these results and other factors the the Compensatoin Committee elavulates on a regular basis, the committee concluded that Tandy Leather Factory, Inc.’s existing executive compensation programs continue to be the most apporpirate to support Tandy Leather Factory’s compensation philosophy and objections described in this discussion.

Compensation Committee

 
 

Compensation for our executive officers consists of the following components:

Each of these elements of pay is described below.

Base salaries are intended to reward our executive officers based upon their roles within the Companycompany and for their performance in those roles.  Base salaries are established when an executive officer is hired, based on prior experience and is informally compared to salaries for comparable positions in other companies.  No formal process is undertaken to review comparable executive compensation information from other companies.  Base salaries are generally increased annually assuming our financial performance including sales and earnings growth as well as cash and inventory levels, is satisfactory.

We award discretionary bonuses to our executive officers, generally limitedup to a maximum of 5% of pretax income based on historical bonus awards, as determined by the Compensation Committee.  We determine these bonuses on a subjective basis, considering business prospects for the upcoming year and the improvement in our net income and financial position for the year in question.  Awarded bonusesThese discretionary are considered on a calendar year basisawarded annually and paid to our executive officers duringin the first quarter of the following year.

Our benefits program includes a retirement plan and a group insurance program.  The objective of the program is to provide executive officers with reasonable and competitive levels of protection against the four contingencies (retirement, death, disability and ill health) that could interrupt the executive officer’s employment and/or income received as an active employee.  Our retirement plans are designed to provide a competitive level of retirement income to our executive officers and to reward them for continued service with the company.  The retirement program for executive officers consists of a tax-qualified 401(k) Plan that covers all full-time employees.  The group insurance program consists of life and health insurance benefits plans that cover all full-time employees.

None of the Compensation Committee members washas ever been employed by us as an officer, or former officer of ours, nor was any Compensation Committee member a party to any material transaction or relationship with us during the past year.fiscal year requiring disclosure pursuant to SEC rules.  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 Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis (“CD&A”) with management and, based on such review and discussion, recommended to the boardBoard of directorsDirectors that the CD&A be included in Tandy Leather Factory, Inc.’s Form 10-K and proxy statement.

The foregoing report was submitted by the Compensation Committee and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A promulgated by the SEC, other than as provided in Item 407 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act.

The following table includes information required by Item 402 of Regulation S-K promulgated by the SEC.  The amounts shown represent the compensation paid to our named executive officers for each fiscal year noted in the table, for services rendered to us.  For a more complete discussion of the elements of compensation included in this table, please refer to the discussion reflected in “Compensation Discussion and Analysis” above.

We made no grants of plan-based awards to any of our named executive officers during the year ended December 31, 2010.2011.

The following table provides information about outstanding equity awards at December 31, 20102011 for each of the named executive officers:

The following table summarizes the options exercised during the year ended December 31, 20102011 for each of the named executive officers:

Based upon a vote of stockholders at the 2011 Annual Meeting, following the Board's recommendation for an annual advisory vote to approve the compensation of our named executive officers, we are providing stockholders with an advisory vote on executive compensation. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law July 21, 2010, added Section 14A to the Securities Exchange Act of 1934, as amended, and requires that we provide our stockholders with an opportunity to cast an advisory vote on the compensation of our named executive officers as disclosed in this proxy statement pursuant to the compensation disclosure rules of the SEC. This proposal, commonly known as a “Say-on-Pay” vote, gives stockholders the opportunity to approve, reject or abstain from voting with respect to our fiscal 20102011 executive compensation programs and policies and the compensation paid to the named executive officers of the Company.

As discussed in this proxy statement under the heading “Compensation Discussion and Analysis,” our executive compensation program is designed to serve our Company and our stockholders by aligning executive compensation with stockholder interests and by encouraging and rewarding management initiatives that will benefit us and our stockholders, customers, and employees over the long-term.

At last year’s annual meeting, 96% of the votes cast on the advisory vote on executive compensation were in favor of our named executive officer compensation for 2010.  We are presentingasking our stockholders to again indicate their support for our named executive officer compensation as described in this proxy statement.  This proposal, which gives youcommonly known as a stockholder“say-on-pay” proposal, gives our stockholders the opportunity to express your viewtheir views on our named executive officers’ compensation.  This is not intended to address any specific item of compensation, by voting for or againstbut rather the overall compensation of our named executive officers and the philosophy, policies and practices described in this proxy statement.  Accordingly, we are asking our stockholders to approve, on an advisory basis, the following resolution:

“RESOLVED, that the stockholders of Tandy Leather Factory, Inc. approve, on an advisory basis, the compensation paid to the named executive officers of Tandy Leather Factory, Inc., as disclosed in the 2012 Proxy Statement pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis, the compensation tables, and the related narrative disclosures contained in the proxy statement related to the 2011 Annual Meeting of Stockholders of Tandy Leather Factory, Inc.disclosures.”

Approval of this proposal requires the affirmative vote of the holders of a majority of the shares entitled to vote on, and who vote for and against, this proposal.  Although your vote on this matter is advisory in nature and therefore will not be binding upon the Company, the Compensation Committee or the Board of Directors, your advisory vote will serve as an additional tool to guide the Board of Directors and the Compensation Committee in continuing to improve the alignment of our executive compensation programs with the interests of our Company and our stockholders.  The vote on this resolution is not intended to address any specific element of compensation but rather relates to overall compensation of our named executive officers, as described in the proxy statement in accordance with the compensation disclosure rules of the SEC.

Since the beginning of our last fiscal year, there have been no transactions, and there is no currently proposed transaction, in which we were or are to be a participant and the amount involved exceeds $120,000, and in which any related person, as defined under the Securities Act of 1933, as amended, had or will have a direct or indirect material interest. Such related persons include our directors and executive officers, nominees for director and their immediate family members.  It

Our Code of Business Conduct, which applies to all employees, including our Executive Officers and our Directors, provides that our employees and officers and members of our Board of Directors are expected to use sound judgment to help us maintain appropriate compliance procedures and to carry out our business with honesty and in compliance with law and high ethical standards.  In addition, our directors and officers are required to report any potential related party transactions to the Board.  Our Audit Committee, on behalf of the Board, reviews the materials facts of all reported matters, by taking into account, among other factors it deems appropriate, whether a transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the responsibilitysame or similar circumstances and the extent of managementthe related person’s interest in the transaction to presentdetermine whether an actual conflict of interest exists.  No Director may participate in any transactions that could be considereddiscussion or approval of a matter for which he or she is a related party.  An annual review and assessment of any ongoing relationship with a related party transaction to the Board of Directors for review and approval.  The Board of Directors can delegate the review and approval responsibility tois performed by the Audit Committee if it so chooses.and reported to the Board.

Sections 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders of more than 10% of our common stock to file reports regarding their ownershipownerships and changes in ownership of our securities with the SEC.  Based solely on a review of the copies of such reports furnished to us with respect to fiscal 20102011 and written representations from our directors and executive officers, we believe that, during fiscal 2010,2011, our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements.  Our disclosure on this topic is based solely on review of the information provided to us by persons subject to these requirements.

The following table sets forth information regarding our equity compensation plans (including individual compensation arrangements) that authorize the issuance of shares of our common stock.  The information is aggregated in two categories:  plans previously approved by our stockholders and plans not approved by our stockholders.  The table includes information for officers, directors, employees and non-employees.  All information is as of December 31, 2010.2011.

Solicitation of Proxies

We 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.

Stockholder Proposals for 20122013

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 not less than ten days before such annual meeting.  We have not received notice of any stockholder proposals to be presented at this year’s Annual Meeting.

If you would like your proposal to be included in next year’s proxy statement, you must submit the proposal to our corporate secretary by no later than December 15, 2011.2012.  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 SEC.  You may write to our corporate secretary at 1900 Southeast Loop 820, Fort Worth, Texas 76140 to present a proposal for consideration.

If a stockholder raises a matter at the Annual 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 Annual Meeting by a stockholder will require the affirmative vote of a majority of the shares deemed present at the Annual Meeting, whether in person or by proxy unless a higher approval threshold is required by applicable law.

Stockholder Communications with Board

Stockholders who wish to communicate with the Board of DirectorsChairman or with the directors as a group may do so by writing to the corporate secretary at Tandy Leather Factory, Inc., 1900 Southeast Loop 820, Fort Worth, Texas 76140.  The corporate secretary will forward your communication to the Chairmandirectors or the Board as a whole,Chairman as requested by the stockholder.  All appropriate communications addressed to directors will be reviewed by the corporate secretary.  Because other appropriate avenues of communication exist for matters that are not of stockholder interest, such as general business complaints or employee grievances, communications that do not relate to matters of stockholder interest will not be forwarded to the Board.board.  The corporate secretary has the option, but not the obligation, to forward these other communications to appropriate channels within the Company.

Householding of Annual Meeting Materials

General Information

A COPY OF FORM 10-K AS FILED WITH THE SEC WILL BE SENT TO ANY STOCKHOLDER WITHOUT CHARGE UPON WRITTEN REQUEST ADDRESSED TO SHANNON L. GREENE, CFO, TANDY LEATHER FACTORY, INC., 1900 SOUTHEAST LOOP 820, FORT WORTH, TEXAS 76140.

Management knows of no other business which may be properly brought before the Annual Meeting of Stockholders.  However if any other matters shall properly come before such meeting, it is the intention of the persons named in the enclosed Proxy to vote such Proxy in accordance with their best judgment on such matters.

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.  THEREFORE, WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND RETURN THE PROXY IN THE ENCLOSED ENVELOPE, OR TO VOTE ELECTRONICALLY AS DESCRIBED ON PAGE 1 OF THIS PROXY STATEMENT.