SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2005

Commission File Number 0-18927

TANDY BRANDS ACCESSORIES, INC.

690 East Lamar Boulevard, Suite 200, Arlington, TX 76011
(Address of principal executive offices and zip code)

(817) 548-0090
(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report:

Not Applicable

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Form 10-Q
Quarter Ended March 31, 2005

TABLE OF CONTENTS

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
File Number 0 -18927
Form 10 — Q

The accompanying notes are an integral part of these condensed financial statements.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
File Number 0 -18927
Form 10 — Q

The accompanying notes are an integral part of these condensed financial statements.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
File Number 0 -18927
Form 10 — Q

The accompanying notes are an integral part of these condensed financial statements.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 — Accounting Principles

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and the accrual for the legal contingency as discussed in Note 11) considered necessary for a fair presentation have been included. Our first and second quarter sales and net income normally reflect a seasonal increase compared to the third and fourth quarters of our fiscal year. Consequently, operating results for the three-month period ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ended June 30, 2005. The consolidated balance sheet at June 30, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

     Certain prior year amounts have been reclassified to conform to the fiscal 2005 presentation.

Note 2 — Impact of New Accounting Standards

     On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which will become effective for most publicly owned companies for annual periods beginning after June 15, 2005. This Statement requires companies to record compensation expense for all share-based payments, such as employee stock options, at fair value. We will be required to adopt this statement on July 1, 2005, for fiscal 2006. The statement permits adoption of its requirements using one of two methods. The “modified prospective” method requires compensation cost to be recognized for all share-based payments granted after the effective date and for all awards granted to employees prior to the effective date that remain unvested as of the effective date. The other method is the “modified retrospective” method, which includes the requirements of the “modified prospective” method, but also permits companies to restate prior years’ income based on amounts previously recognized in the pro forma disclosures under Statement 123 for all prior periods presented. The disclosures in Note 7 present the pro forma effects on our financial statements of the application of the fair value method to the stock options issued to our employees and our non-employee directors during fiscal 2005. We are currently evaluating the impact of the adoption of this statement and estimate the effect on our consolidated financial position and statements of operations, stockholders’ equity and cash flows will approximate the pro forma effects presented in Note 7 and previously disclosed in our consolidated financial statements for the year ended June 30, 2004.

     In addition, Statement 123R requires the benefits of tax deductions in excess of recognized compensation cost to be reported in the Statement of Cash Flows as a financing cash flow rather than an operating cash flow as currently reported. This would result in reduced operating cash flows for any quarter in which employee stock options were exercised, beginning with our first quarter of fiscal 2006.

     In November 2004 the FASB issued Statement 151, “Inventory Costs,” to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not anticipate that our adoption of this statement in fiscal 2006 will have a material impact on our consolidated financial position or statements of operations, stockholders’ equity and cash flows.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 3 — Comprehensive Income (loss)

     The following table illustrates the components of comprehensive income (loss), net of related tax, for the three and nine months ended March 31, 2005 and 2004 (in thousands).

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 4 — Earnings (loss) Per Share

     The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts).

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 5 — Disclosures about Segments of an Enterprise and Related Information

     We sell our products to a variety of retail outlets, including mass merchants, national chain stores, major department stores, men’s and women’s specialty stores, catalog retailers, grocery stores, drug stores, golf pro shops, sporting goods stores and the retail exchange operations of the United States military. Our company and our corresponding customer relationships are organized along men’s and women’s product lines. As a result, we have two reportable segments: (1) men’s accessories, consisting of belts, wallets, suspenders, neckwear, other small leather goods, and gift accessories, and (2) women’s accessories, consisting of belts, wallets, handbags, socks, scarves, hats and hair accessories. Our men’s accessories segment includes the operating results of Superior Merchandise Company (ETON), which we acquired on July 1, 2004 (see Note 10). General corporate expenses are allocated to each segment based on the respective segment’s asset base. Depreciation and amortization expense related to assets recorded on our corporate accounting records are allocated to each segment as described above. Management measures profit or loss on each segment based upon income or loss before taxes utilizing the accounting policies consistent in all material respects with those described in Note 1 of our 2004 Annual Report. No inter-segment revenue is recorded.

     The following table sets forth information regarding operations and assets by reportable segment (in thousands).

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 6 — Goodwill and Intangibles

     Effective July 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” This statement changed the accounting for goodwill and intangible assets with an indefinite life from an amortization approach to an impairment-only approach. The SFAS No. 142 goodwill impairment model is a two-step process. The first step is to compare the fair value of a reporting unit that has goodwill assigned to it to its carrying value. We estimate the fair value of a reporting unit using a discounted cash flow analysis. If the fair value of the reporting unit is determined to be less than its carrying value, a second step is performed to compute the amount of goodwill impairment, if any. The second step is to allocate the fair value of the reporting unit to the reporting unit’s net assets other than goodwill. The excess of the fair value of the reporting unit over the amounts assigned to its net assets other than goodwill is considered the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared to the carrying value of its goodwill. Any shortfall represents the amount of goodwill impairment.

     We continually evaluate whether events and circumstances have occurred that indicate the remaining balance of goodwill may not be recoverable. In evaluating impairment, we estimate the sum of the expected future cash flows derived from such goodwill. Such evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses and other factors. Currently the Company does not believe that impairment of our business units exists at March 31, 2005, given our restructuring and consolidating efforts related to our women’s mass merchant and department store business units. However, due to the lower than expected sales in our women’s mass merchant accessories business, we feel there is some possibility that we may record a non-cash charge related to goodwill impairment based on our annual goodwill assessment during the fourth quarter.

     Prior to the adoption of SFAS No. 142, we amortized goodwill and other intangible assets using the straight-line method over their estimated useful lives, which range from three to forty years. We continue to amortize intangibles with finite lives, primarily customer lists and trade names, over their useful lives. Trade names are normally amortized over a range from twenty to forty years, with customer lists and other intangibles amortized over a range from three to fifteen years.

     The following table sets forth information regarding our intangibles with finite lives and related remaining lives.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 7 — Stock-Based Compensation

We may, with the approval of our board of directors, grant stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. We account for stock option grants using the intrinsic value method in accordance with the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and, accordingly, we recognize no compensation expense for the stock option grants. The following table reflects the impact on net income if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” to stock-based employee compensation for the three- and nine-month periods ended March 31, 2005 and 2004:

  Pro forma information regarding net income and earnings per share is required by SFAS No. 123, “Accounting for Stock-Based Compensation,” and has been determined as if we had accounted for our stock options under the fair value method of SFAS No. 123.

     On October 14, 2004, an aggregate of 5,770 shares of restricted stock were awarded to the non-employee members of the board of directors. These restricted shares will become fully vested on October 14, 2007, with one-third of the shares vesting on each anniversary of the date of grant. Generally, upon the death, disability, resignation, or termination of a director, that director’s shares become fully vested. These shares of stock, while not transferable, bear rights of ownership, including voting and dividend rights, during the vesting period. An additional 3,600 shares of restricted stock were awarded to new directors during the first nine months of fiscal 2005 with a vesting date three years from date of grant and other terms as described above. The non-employee members of our board of directors were also awarded options to purchase an aggregate of 10,386 shares of our common stock at an exercise price of $14.33 per share on October 14, 2004. These stock options will become fully vested six months after the date of grant. Additional options to purchase shares of our common stock were awarded to the two new directors on the dates of their election, which also fully vest six months after the date of grant. (3500 shares were awarded on August 12, 2004, with an exercise price of $13.625 and 3500 shares were awarded on February 8, 2005, with an exercise price of $14.72.)

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 7 — Stock-Based Compensation (continued)

     On July 1, 2004, our executive officers were awarded a total of 22,800 shares of restricted stock, which will become fully vested on July 1, 2007. These shares of stock, while not transferable, bear rights of ownership, including voting and dividend rights, during the three-year vesting period. There are no performance requirements related to vesting, only continued employment through the vesting date. Unearned compensation in the amount of $302,328 was recorded during the first quarter of fiscal 2005. Compensation expense of approximately $48,000, related to these restricted shares and the restricted shares awarded July 1, 2003, was recorded during the quarter ended March 31, 2005. Our executive officers were also awarded stock options to purchase a total of 56,100 shares of our common stock on July 1, 2004. Other key employees were awarded stock options to purchase a total of 90,500 shares of our common stock on July 1, 2004, as well. These stock options vest in one-third increments on each anniversary of the date of grant.

Note 8 — Employee Benefit Plans

     During the quarter ended March 31, 2005, we recorded expense of $78,000 related to our Supplemental Executive Retirement Plan for certain of our key executive officers. Based on the actuarial calculation for our year ended June 30, 2004, we anticipate that we will recognize approximately $330,000 in expense related to this plan during fiscal 2005. In December 2004 we funded $500,000 of the liability recorded for this Plan.

     We recorded expense of $14,000 related to our Benefit Restoration Plan for certain of our key executive officers during the quarter ended March 31, 2005. Adjustments to expense are recorded each quarter based on the differential between the cost of Company stock owned by the Plan and the market value of that stock on the last day of the quarter. During the nine months ended March 31, 2005, we recorded expense of $308,000 related to this Plan.

Note 9 — Credit Facility

     On August 26, 2004, we amended our secured revolving credit facility with certain financial institutions. The amendment extended the expiration of our agreement from November 30, 2006, to November 30, 2007, and increased the facility from $60,000,000 to $85,000,000. Of this amount, $10,000,000 is a sub-limit of the credit facility (“swing line”), which may be used for same day advances to be provided solely by the administrative agent (a financial institution) of the credit facility. Both the credit facility and swing line bear interest at variable rates with short-term durations. The credit facility may be used for borrowings and letters of credit. The amended facility contains an accordion feature to increase the facility by up to an additional $25,000,000 by adding a financial institution at a later date. Although the previous credit facility was secured by substantially all of our assets and the assets of our subsidiaries, the amended facility is unsecured. The amended facility requires the maintenance of certain financial covenants, which, if not met, could adversely impact our liquidity.

     Our amended credit facility permits the payment of dividends and does not require us to enter into an interest rate swap agreement against the borrowings under the credit facility. The credit facility also includes a commitment fee based on certain financial performance objectives ranging from 20 to 37.5 basis points on the unused balance. Principal payments on the credit facility are due on the expiration date. The amended credit facility is guaranteed by all of our subsidiaries, except our Canadian subsidiary.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 10 — Acquisitions

     On July 1, 2004, we completed our acquisition of all the equity interest in Superior Merchandise Company (sometimes referred to as “Superior” or “ETON”). The total purchase price was $10,000,000 and was funded entirely with cash, drawing on our existing credit line. In addition, we retired all of Superior’s outstanding debt totaling approximately $806,000. Superior, which also operates under the name of ETON®, primarily markets and distributes men’s and women’s gift accessories under both the ETON® and the licensed totes® brands. The addition of totes® and ETON® to our brand portfolio are anticipated to provide the Company a dominant position in the gift accessories marketplace with an additional product category within our core accessories business. The pro forma effects of this acquisition are not material.

     The operating results of ETON are included under our men’s accessories reporting segment (see Note 5) for the first nine months of fiscal 2005. For the nine months ended March 31, 2005, ETON has recorded sales of $13.2 million, net of returns and allowances of $4.3 million. Included in that amount is a $900,000 reserve for sales returns at March 31, 2005. Actual returns may be significantly different than the estimates used in determining the return reserve. Future operating results for ETON could be affected by actual returns if they vary significantly from the amount reserved.

     Due to the nature of ETON’s business, a significant percentage of sales in gift accessories occur during the Christmas holiday season and a reserve is recorded during that quarter for anticipated returns expected to occur during the following quarter. Although our $1.8 million reserve recorded as of December 31, 2004, was based on historical returns experience, actual returns during the third quarter exceeded that reserve due to lower than anticipated sell through by customers and delays in shipping certain gift items such that customers received these items later in the holiday season than planned. During the quarter ended March 31, 2005, we recorded an additional adjustment to reserve for returns, decreasing income before income tax, net income, and earnings (loss) per diluted share by approximately $1.6 million, $1 million and $0.16 per share, respectively. As of March 31, 2005, our balance sheet includes an additional $900,000 return reserve for remaining unprocessed holiday returns and future returns based on third quarter fiscal 2005 sales.

     Our purchase price resulted in goodwill of approximately $6,400,000 related to the acquisition of ETON, which is included in our balance sheet as of March 31, 2005. Based upon an analysis of the value of the intangible assets related to customer lists and trade names, $2,000,000 was reclassified from goodwill to intangible assets during the quarter ended December 31, 2004, and an additional $600,000 was reclassified during the quarter ended March 31, 2005. This purchase price allocation was completed during the third quarter of fiscal 2005.

Note 11 — Contingencies

     During the second quarter of fiscal 2005, we recorded a $680,000 one-time non-recurring charge related to a preliminary agreement to settle a legal dispute related to certain products produced by the company. The charge was recorded in selling, general and administrative expense for the period. A settlement equal to the amount previously accrued was paid during the quarter ended March 31, 2005.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

     Tandy Brands Accessories, Inc. is a leading designer, manufacturer and marketer of branded men’s, women’s and children’s accessories, including belts and small leather goods, such as wallets. Our product line also includes handbags, socks, scarves, gloves, hats, hair accessories, suspenders, cold weather accessories, sporting goods, neckwear and gift accessories. Our merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names, including DOCKERS®, LEVI’S®, LEVI STRAUSS SIGNATURE™, JONES NEW YORK®, TOTES®, ROLFS®, HAGGAR®, WOOLRICH®, JORDACHE®, BUGLE BOY®, CANTERBURY®, PRINCE GARDNER®, PRINCESS GARDNER®, AMITY®, COLETTA®, STAGG®, ACCESSORY DESIGN GROUP®, TIGER® and ETON®, as well as private brands for major retail customers. We sell our products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, department stores, men’s and women’s specialty stores, catalog retailers, grocery stores, drug stores, golf pro shops, sporting goods stores and the retail exchange operations of the United States military.

     The third quarter of fiscal 2005 reflects strong sales in our core men’s business, although a slowdown in our women’s business due to soft retail sales resulted in lower than expected sales of women’s mass merchant accessories for the quarter. We see opportunities in a number of new programs, expanded markets for our ETON gift accessories, and the introduction of a new product line in our women’s accessories division.

     On February 8, 2005, we announced a dividend of $.0275 per share payable to stockholders of record as of March 31, 2005. This dividend was paid on April 20, 2005.

RESULTS OF OPERATIONS

Three and Nine Months Ended March 31, 2005, Compared to the Three and Nine Months Ended March 31, 2004

Net Sales and Gross Margins

     The following table illustrates sales and gross margin data from our reportable segments for the three and nine months ended March 31, 2005, compared to the same periods in 2004.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

     For the three-month period ended March 31, 2005, net sales increased by $1.3 million, or 3.2%, compared to net sales for the same period in the prior year. Net sales of men’s accessories increased by $1.6 million dollars, or 6.6%, for the quarter compared to the same period last year due to strong sales from belt and small leather goods programs in the mass merchant category and the addition of our men’s jewelry and private label neckwear programs at the department store level. Net sales of women’s accessories decreased by $260,000, or 1.4%, for the quarter compared to the same period in the prior year. Sales of our women’s mass merchant accessories were $1.1 million below the prior year, while our women’s department store sales exceeded the same quarter in the prior year by approximately $840,000 due to strong sales of a new program in our small leather goods.

     For the nine-month period ended March 31, 2005, net sales increased 4.3% from the same period in the prior year. The increase is due to increased sales of men’s accessories to our mass merchant customers, the addition of neckwear and jewelry in our men’s department store division, and the gift accessories business from the acquisition of ETON in July, 2004. Sales of our women’s accessories declined compared to last year due to lower sales in both our women’s mass merchant category and our women’s department store division as a result of competitive market pressures and weakened trends in fashion accessories.

     For the nine months ended March 31, 2005, ETON recorded sales of $13.2 million, net of $4.3 million of returns and allowances. At December 31, 2004, our balance sheet included a $1.8 million reserve for sales returns by ETON’s customers. Due to the nature of ETON’s business, a significant percentage of sales in gift accessories occur during the Christmas holiday season and a reserve is recorded during that quarter for anticipated returns expected to occur during the following quarter. Although our $1.8 million reserve recorded as of December 31, 2004 was based on historical returns experience, actual returns during the third quarter exceeded that reserve due to lower than anticipated sell through by customers and delays in shipping certain gift items such that customers received these items later in the holiday season than planned. During the quarter ended March 31, 2005, we recorded an additional adjustment to reserve for returns, decreasing income before income tax, net income, and earnings per diluted share by approximately $1.6 million, $1 million, and $0.16, respectively. As of March 31, 2005, our balance sheet includes an additional $900,000 return reserve for remaining unprocessed holiday returns and future returns based on third quarter fiscal 2005 sales. Actual returns may be significantly different than the estimates used in determining the return reserve. Fourth quarter operating results for ETON could be affected by actual returns which vary significantly from the amount reserved.

     As a percentage of sales, gross margins increased .5% for the three-month period and 2.5% for the nine-month period ended March 31, 2005, compared to the same period in the prior year. The gross margin increases are due to a higher sales mix of men’s accessories, which includes the higher margin gift accessories’ business, and improved margins in our women’s mass merchant categories compared to the same period last year. We anticipate our ETON gift accessories business will generate sales with gross margins that are approximately 250 to 500 basis points above our core men’s accessories business. Nevertheless, any material changes in sales mix, such as higher mass merchant accessory sales or direct shipments, could lower our gross margin percentages during a particular season.

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Operating Expenses

     The following table illustrates selling, general, and administrative (“SG&A”) expense data from our reportable segments for the three and nine months ended March 31, 2005, compared to the same period in the prior year:

     Selling, general and administrative expenses for the three months ended March 31, 2005, increased 18.5% compared to the same period last year. The increased costs relate to a rise in distribution labor related to increased men’s sales, processing of ETON returns of approximately $521,000, higher advertising expense of approximately $529,000, legal and consulting fees of approximately $513,000 and the negative fixed cost leverage in our ETON and women’s mass merchant business. The implementation of a new software application for our Yoakum, Texas facility during this quarter also resulted in higher costs, such as consulting fees.

     For the nine-month period ended March 31, 2005, selling, general and administrative expenses increased 20.9%. Increased costs include the planned integration costs related to the operation of an additional facility in New Orleans, such as rent, wages, and other operating costs resulting from our acquisition of ETON. Included in these planned ETON integration costs are such expenses as rent expense of $298,000 for the New Orleans facilities, wages and related payroll costs of $800,000, and contract labor expenses of approximately $300,000. During the third quarter of fiscal 2005, most of the expenses related to the New Orleans operations were phased out, with inventory and shipping operations relocated to our West Bend, Wisconsin, facility. Commission expense increased by $800,000 due to the sales increase related to our acquisition of ETON. Total royalty expense for the nine-month period increased to $2.2 million compared to $1 million for the same period in the previous year, due to payments for ETON royalties as well as increased royalty expense in our other divisions. Other variable costs also increased due to the $7.4 million sales increase over the prior year. Also included in the SG&A expense for the nine-month period is a $680,000 charge related to an agreement to settle a legal dispute related to certain products produced by the company (see Note 11 — Contingencies).

     Depreciation and amortization expense increased for the three and nine months ended March 31, 2005, compared to the same period the previous year due to amortization of intangibles related to our acquisition of ETON, certain leasehold improvements in our corporate offices, and assets related to software implementation in our Yoakum, Texas, facility.

     Interest expense for the three and nine months ended March 31, 2005, decreased $283,000 and $995,000, respectively, compared to the same periods in the previous year. This overall decrease primarily relates to reduced interest rates resulting from the expiration of our loan swap agreement in June 2004.

     The effective tax rate for the nine months ended March 31, 2005, was 38.0%, which is slightly below the effective tax rate for the same period in the previous year due to lower effective state and local tax rates.

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     Net loss for the three-month period ended March 31, 2004, was $997,000, or ($0.16) per diluted share, compared to net income of $132,000, or $.02 per diluted share, for the same period last year. For the nine-month period ended March 31, 2005, net income decreased 11.3% to $6,108,000, or $0.93 per diluted share, compared to net income of $6,886,000, or $1.08 per diluted share, for the same period last year.

     As stated in our earnings release, the Company will be restructuring and consolidating its sales, merchandising, and administrative efforts related to the women’s mass merchant and department store business units. These activities are expected to result in one-time, non-operational charges related to severance of approximately $0.02 per share that will impact reported results for the fourth quarter. As a result, the Company anticipates fourth quarter net sales to be in the range of $41 million to $44 million and a net loss to be in the range of ($0.12) to ($0.17) per diluted share. The net loss for the fourth quarter excludes any potential non-cash charge related to goodwill impairment in connection with the Company’s women’s mass merchant accessory business unit that may result as part of our annual goodwill assessment. For the 2005 fiscal year, the Company anticipates net sales to be in the range of $219 to $223 million and earnings to be within a range of $0.75 to $0.80 per diluted share.

     On April 22, 2005, the Company announced that the Board of Directors approved a quarterly dividend of $0.0275 per common share that will be payable July 20, 2005, to shareholders of record at the close of business on June 30, 2005.

LIQUIDITY AND CAPITAL RESOURCES

     For the nine months ended March 31, 2005, our operating activities used cash of $2,281,000, compared to our operating activities providing $19,552,000 in the same period the previous year. This change is due to increased inventory procurement for both ETON and our core men’s division compared to the prior year and an increase in our accounts receivable at March 31, 2005, due to increased sales and the timing of shipments to customers. Our investing activities used cash of $12,806,000 for the nine months ended March 31, 2005, compared to $2,549,000 in the same period the previous year due primarily to our acquisition of Superior for $10,000,000 on July 1, 2004. The purchase was funded entirely with cash, drawing on our existing credit line.

     Capital expenditures totaled $2,806,000 for the nine months ended March 31, 2005, an increase of $257,000 from the same period the previous year. This increase is attributed to the implementation of a new distribution software application at our facility in Yoakum, Texas, and the acquisition of additional computer hardware related to that project. The Yoakum software implementation project was completed during the third quarter of fiscal 2005. Other capital expenditures during the year are related to additional leasehold improvements in our corporate offices. We anticipate that our total capital expenditures for the fiscal year ending June 30, 2005, will be approximately $3,500,000. We expect to fund the remainder of our capital commitments with our working capital and by drawing on our existing credit facility.

     Generally, our primary sources of liquidity are cash flows from operating activities and our credit facility. We have an $85,000,000 unsecured revolving credit facility, which can be used for seasonal borrowings and letters of credit. In addition, this facility contains an accordion feature to increase the facility by up to an additional $25,000,000 by adding an additional financial institution at a later date. Although our credit facility is unsecured, it is guaranteed by all of our subsidiaries, except our Canadian subsidiary. The credit facility requires us to maintain certain financial covenants. If we do not comply with these covenants, our liquidity position could be adversely impacted. Our borrowings under our credit facility were $22,584,000 and $31,637,000 as of March 31, 2005, and 2004, respectively. We also have a Canadian line of credit of approximately $826,900 secured by a letter of credit from a United States bank.

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LIQUIDITY AND CAPITAL RESOURCES (continued)

     At March 31, 2005, we had credit availability under our credit facility and our Canadian line of credit as follows:

     During fiscal 2005 we declared dividends as set forth in the following table:

     We believe we have adequate financial resources and access to sufficient credit lines to satisfy our future working capital needs.

CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

     In connection with our acquisition of ETON on July 1, 2004, we assumed ETON’s royalty and lease liabilities. With the exception of the foregoing, there have been no material changes outside the ordinary course of our business in any of our contractual obligations, contingent liabilities, or commitments since June 30, 2004. Estimated lease and royalty payments for ETON as of July 1, 2004, are presented in the following table:

OFF-BALANCE SHEET ARRANGEMENTS

     We do not have any off-balance sheet arrangements.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

SEASONALITY

     Historically, our quarterly sales and net income results are fairly consistent throughout the fiscal year, with a seasonal increase during the first and second quarter.

INFLATION

     Although our operations are affected by general economic trends, we do not believe inflation has had a material effect on our operating results.

WEBSITE ACCESS TO COMPANY REPORTS

     Our website address is www.tandybrands.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filed by our officers, directors and stockholders holding 10% or more of our common stock, and all amendments to those reports are available free of charge through our website, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

FORWARD-LOOKING STATEMENTS

     This Form 10-Q contains forward-looking statements that are based on current expectations, estimates and projections about the industry in which we operate, management’s beliefs, and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” or variations of such words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. Such factors as general economic conditions, conditions within our industry, economic or political disruptions in Asia and other parts of the world from which we import goods, termination of key customer relationships, changes in consumer demands or spending patterns, trends in fashion accessories, inventory replenishment levels of our key customers and termination or non-renewal of certain key license agreements may impact future operating results. You are encouraged to consider all such factors in evaluating the information in this quarterly report. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     We are subject to interest rate risk on our long-term debt. The effect of a one-percent increase or decrease in the interest rate on our long-term debt could lower or increase our pre-tax operating results by approximately $226,000. We manage our exposure to changes in interest rates. Our current credit facility does not require us to enter into an interest rate swap agreement against the borrowings under the credit facility. Consequently, we currently have no interest rate swap agreement in effect. We do not expect the potential impact of market conditions on the fair value of our indebtedness to be material.

     At March 31, 2005, our borrowings under our credit facility totaled $22,584,000, bearing a weighted-average interest rate of 3.36%

     In addition to interest rate risk on our long-term debt, we are also exposed to market risk with respect to changes in the global price level of certain commodities used in the production of our products. We routinely purchase leather hides during the year for use in the manufacture of men’s belts. We also purchase a substantial amount of leather items from third-party suppliers. An unanticipated material increase in the market price of leather could increase the cost of these products to us and, therefore, have a negative effect on our results of operations.

ITEM 4. Controls and Procedures

     We have evaluated, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective in timely alerting them to material information (including information relating to our consolidated subsidiaries) required to be included in our Securities Exchange Act of 1934 filings.

     There has been no change in our internal control over financial reporting during the third quarter of fiscal 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The following table provides information regarding repurchases of shares of common stock made by us during the quarter ended March 31, 2005. All such shares were purchased in the open market and are held in a rabbi trust established under our Benefit Restoration Plan:

ITEM 6. Exhibits

     A list of exhibits filed as part of this report is set forth in the Exhibit Index, which immediately precedes such exhibits and is incorporated herein by reference.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

SIGNATURES

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

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EXHIBIT INDEX

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EXHIBIT INDEX