##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

|                                                                  |  |                                                                                         
|----------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|[x]                                                               |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 
|                                                                  |  |                                                                                         
|For the Quarter Ended November 2, 2002                           
|                                                                  |  |                                                                                         
|                                                                  |  | OR                                                                                      
|                                                                  |  |                                                                                         
|[   ]                                                             |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|                                                                  |  |                                                                                         
|For the transition period from _______________ to _______________

Commission file number 1-8578

McRae Industries, Inc.
(Exact name of Registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 56-0706710
(I.R.S. Employer Identification No.)

400 North Main Street
Mt. Gilead, North Carolina 27306
(Address of principal executive offices)

Telephone Number (910) 439-6147
(Registrants telephone number, including area code)

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 periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

Yes [X]        No [   ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date.

Common Stock, $l Par ValueClass A 1,891,072 shares as of December 12, 2002.
Common Stock, $1 Par ValueClass B  877,427 shares as of December 12, 2002.

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McRae Industries, Inc. and Subsidiaries

INDEX

|        |  |                                                                                       |  |  |       |          |  | 
|------- |  | ------------------------------------------------------------------------------------- |  |  | ----- | -------- |  | 
|        |  |                                                                                       |  |  |       | Page No.
|        |  |                                                                                       |  |  |       |         
|        |  | PART I. FINANCIAL INFORMATION                                                         |  |  |       |         
|ITEM 1. |  | Condensed Consolidated Financial Statements                                           |  |  |       |         
|        |  | Condensed Consolidated Balance Sheet                                                  |  |  | 3-4   |         
|        |  | Condensed Consolidated Statement of Operations                                        |  |  | 5     |         
|        |  | Condensed Consolidated Statement of Cash Flows                                        |  |  | 6     |         
|        |  | Notes to Condensed Consolidated Financial Statements                                  |  |  | 7-8   |         
|ITEM 2. |  | Management's Discussion and
Analysis of Financial Condition and Results of Operations |  |  | 9-14  |         
|ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |  | 14    |         
|ITEM 4. |  | Controls and Procedures                                                               |  |  | 14-15 |         
|        |  | PART II. OTHER INFORMATION                                                            |  |  |       |         
|ITEM 1. |  | Legal Proceedings                                                                     |  |  | 15    |         
|ITEM 2. |  | Changes in Securities and Use of Proceeds                                             |  |  | 15    |         
|ITEM 3. |  | Default upon Senior Securities                                                        |  |  | 15    |         
|ITEM 4. |  | Submission of Matters to a Vote of Securities Holders                                 |  |  | 15    |         
|ITEM 5. |  | Other Information                                                                     |  |  | 15    |         
|ITEM 6. |  | Exhibits and Reports on Form 8-K                                                      |  |  | 15    |         
|        |  | Signatures                                                                            |  |  | 16    |         

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

|                            |                                                 |   |                  |        |                |   |        |        | 
|--------------------------- | ----------------------------------------------- | - | ---------------- | ------ | -------------- | - | ------ | ------ | 
|                            |                                                 |   | November 2, 2002 |        | August 3, 2002
|                            |                                                 |   |                  |        |               
|ASSETS                      |                                                 |   |                  |        |                |   |        |       
|Current assets:             |                                                 |   |                  |        |                |   |        |       
|                            | Cash and cash equivalents                       |   | $                | 2,094  |                |   | $      | 5,822  | 
|                            | Accounts and notes receivable, net              |   |                  | 12,830 |                |   |        | 9,517  | 
|                            | Inventories (See Note B)                        |   |                  | 16,759 |                |   |        | 16,241 | 
|                            | Net investment in capitalized leases            |   |                  | 254    |                |   |        | 254    | 
|                            | Income tax receivable                           |   |                  | 448    |                |   |        | 242    | 
|                            | Prepaid expenses and other current assets       |   |                  | 249    |                |   |        | 104    | 
|                            |                                                 |   |                  |        |                |   |        |        | 
|                            | Total current assets                            |   |                  | 32,634 |                |   |        | 32,180 | 
|                            |                                                 |   |                  |        |                |   |        |        | 
|Property and equipment, net |                                                 |   | 4,597            |        |                |   | 4,458  |       
|Other assets:               |                                                 |   |                  |        |                |   |        |       
|                            | Notes and accounts receivable, related entities |   |                  |       |                |   |        | 395    | 
|                            | Net investment in capitalized leases            |   |                  | 391    |                |   |        | 441    | 
|                            | Notes receivable                                |   |                  | 101    |                |   |        | 127    | 
|                            | Real estate held for investment                 |   |                  | 1,242  |                |   |        | 652    | 
|                            | Goodwill                                        |   |                  | 362    |                |   |        | 362    | 
|                            | Cash surrender value of life insurance          |   |                  | 2,251  |                |   |        | 2,251  | 
|                            | Trademarks                                      |   |                  | 1,049  |                |   |        | 1,049  | 
|                            | Other                                           |   |                  | 285    |                |   |        | 14     | 
|                            |                                                 |   |                  |        |                |   |        |        | 
|                            | Total other assets                              |   |                  | 5,681  |                |   |        | 5,291  | 
|                            |                                                 |   |                  |        |                |   |        |        | 
|                            |                                                 | $ | 42,912           |        |                | $ | 41,929 |       
|                            |                                                 |   |                  |        |                |   |        |        | 

See notes to condensed consolidated financial statements

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McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

|                                             |                            |                                                                                                                    |                                        |        |                  |        |                |        |       |        | 
|-------------------------------------------- | -------------------------- | ------------------------------------------------------------------------------------------------------------------ | -------------------------------------- | ------ | ---------------- | ------ | -------------- | ------ | ----- | ------ | 
|                                             |                            |                                                                                                                    |                                        |        | November 2, 2002 |        | August 3, 2002
|                                             |                            |                                                                                                                    |                                        |        |                  |        |               
|Liabilities and Shareholders Equity         |                            |                                                                                                                    |                                        |        |                  |        |                |       
|Current liabilities:                         |                            |                                                                                                                    |                                        |        |                  |        |                |       
|                                             |                            |                                                                                                                    | Notes payable, banks  current portion |        | $                | 527    |                |        | $     | 527    | 
|                                             |                            |                                                                                                                    | Accounts payable                       |        |                  | 4,480  |                |        |       | 4,361  | 
|                                             |                            |                                                                                                                    | Accrued employee benefits              |        |                  | 595    |                |        |       | 475    | 
|                                             |                            |                                                                                                                    | Deferred revenues                      |        |                  | 929    |                |        |       | 1,039  | 
|                                             |                            |                                                                                                                    | Accrued payroll and payroll taxes      |        |                  | 784    |                |        |       | 753    | 
|                                             |                            |                                                                                                                    | Income taxes                           |        |                  |       |                |        |       |       | 
|                                             |                            |                                                                                                                    | Contract contingencies                 |        |                  | 619    |                |        |       | 669    | 
|                                             |                            |                                                                                                                    | Other                                  |        |                  | 1,105  |                |        |       | 527    | 
|                                             |                            |                                                                                                                    |                                        |        |                  |        |                |        |       |        | 
|                                             |                            |                                                                                                                    | Total current liabilities              |        |                  | 9,039  |                |        |       | 8,351  | 
|                                             |                            |                                                                                                                    |                                        |        |                  |        |                |        |       |        | 
|Notes payable, banks, net of current portion |                            |                                                                                                                    | 3,770                                  |        |                  |        | 3,900          |       
|Minority interest                            |                            |                                                                                                                    | 96                                     |        |                  |        | 97             |       
|Shareholders equity:                        |                            |                                                                                                                    |                                        |        |                 
|                                             | Common stock:              |                                                                                                                    |                                        |        |                  |        |                |        |      
|                                             |                            | Class A, $1 par; Authorized 5,000,000
shares; Issued and outstanding, 1,891,072
and 1,879,072 shares, respectively |                                        |        | 1,891            |        |                |        | 1,879 |       
|                                             |                            | Class B, $1 par; Authorized 2,500,000
shares; Issued and outstanding, 877,427
and 889,427 shares, respectively     |                                        |        | 877              |        |                |        | 889   |       
|                                             | Additional paid-in capital |                                                                                                                    |                                        | 791    |                  |        |                | 791    |      
|                                             | Retained earnings          |                                                                                                                    |                                        | 26,448 |                  |        |                | 26,022 |      
|                                             |                            |                                                                                                                    |                                        |        |                  |        |                |        |       |        | 
|                                             |                            |                                                                                                                    | Total shareholders equity             |        |                  | 30,007 |                |        |       | 29,581 | 
|                                             |                            |                                                                                                                    |                                        |        |                  |        |                |        |       |        | 
|                                             |                            | $                                                                                                                  | 42,912                                 |        |                  | $      | 41,929         |       
|                                             |                            |                                                                                                                    |                                        |        |                  |        |                |        |       |        | 

See notes to condensed consolidated financial statements

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McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

|                                                                   |                                     |                               |           |                    |     |             |           |        |     | 
|------------------------------------------------------------------ | ----------------------------------- | ----------------------------- | --------- | ------------------ | --- | ----------- | --------- | ------ | --- | 
|                                                                   |                                     |                               |           | Three Months Ended
|                                                                   |                                     |                               |           |                   
|                                                                   |                                     |                               |           | November 2,        |     | October 27,
|                                                                   |                                     |                               |           | 2002               |     | 2001       
|                                                                   |                                     |                               |           |                    |     |            
|Net revenues                                                       |                                     | $                             | 19,539    |                    |     | $           | 14,553    |       
|                                                                   | Costs and expenses:                 |                               |           |                    |     |             |           |        |    
|                                                                   | Cost of revenues                    |                               |           | 14,798             |     |             |           | 10,835 |    
|                                                                   | Research & development              |                               |           | 160                |     |             |           | 138    |    
|                                                                   | Selling, general and administrative |                               |           | 3,664              |     |             |           | 3,246  |    
|                                                                   | Other expense (income), net         |                               |           | (12                | )   |             |           | (44    | )  
|                                                                   | Interest expense                    |                               |           | 49                 |     |             |           | 77     |    
|                                                                   |                                     |                               |           |                    |     |             |           |       
|Total costs and expenses                                           |                                     |                               | 18,659    |                    |     |             | 14,252    |       
|                                                                   |                                     |                               |           |                    |     |             |           |       
|Earnings from operations before
income taxes and minority interest |                                     |                               | 880       |                    |     |             | 301       |       
|Provision for income taxes                                         |                                     |                               | 342       |                    |     |             | 115       |       
|Minority shareholders interest
in earnings of subsidiary          |                                     |                               | (1        | )                  |     |             | (3        | )     
|                                                                   |                                     |                               |           |                    |     |             |           |       
|                                                                   |                                     | Net earnings                  |           | $                  | 539 |             |           | $      | 189 | 
|                                                                   |                                     |                               |           |                    |     |             |           |       
|                                                                   |                                     | Net earnings per common share |           | $                  | .19 |             |           | $      | .07 | 
|                                                                   |                                     |                               |           |                    |     |             |           |       
|Weighted average number of
common shares outstanding               |                                     |                               | 2,768,499 |                    |     |             | 2,768,499 |       
|                                                                   |                                     |                               |           |                    |     |             |           |       

See notes to condensed consolidated financial statements

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McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                 |                                          |   |                    |      |                  |   |        |      |  
|------------------------------------------------ | ---------------------------------------- | - | ------------------ | ---- | ---------------- | - | ------ | ---- | -
|                                                 |                                          |   | Three Months Ended
|                                                 |                                          |   |                   
|                                                 |                                          |   | November 2, 2002   |      | October 27, 2001
|                                                 |                                          |   |                    |      |                 
|Net cash used in operating
activities            |                                          | $ | (3,238             | )    |                  | $ | (2,872 | )   
|Cash flows from investing activities:            |                                          |   |                    |      |                  |   |        |     
|                                                 | Proceeds from sales of assets            |   |                    | 1    |                  |   |        |     |  
|                                                 | Purchase of trade names and other assets |   |                    | (150 | )                |   |        | (800 | )
|                                                 | Capital expenditures                     |   |                    | (125 | )                |   |        | (798 | )
|                                                 | Net collections of long-term receivables |   |                    | 26   |                  |   |        | 81   |  
|                                                 |                                          |   |                    |      |                  |   |        |     
|Net cash used in investing activities            |                                          |   | (248               | )    |                  |   | (1,517 | )   
|                                                 |                                          |   |                    |      |                  |   |        |     
|Cash flows from financing activities:            |                                          |   |                    |      |                  |   |        |     
|                                                 | Principal repayments of notes payable    |   |                    | (129 | )                |   |        | (105 | )
|                                                 | Dividends paid                           |   |                    | (113 | )                |   |        | (93  | )
|                                                 |                                          |   |                    |      |                  |   |        |     
|Net cash used in financing activities            |                                          |   | (242               | )    |                  |   | (198   | )   
|                                                 |                                          |   |                    |      |                  |   |        |     
|Net decrease in cash and cash
equivalents        |                                          |   | (3,728             | )    |                  |   | (4,587 | )   
|Cash and cash equivalents at beginning
of period |                                          |   | 5,822              |      |                  |   | 7,341  |     
|                                                 |                                          |   |                    |      |                  |   |        |     
|Cash and cash equivalents at end of period       |                                          | $ | 2,094              |      |                  | $ | 2,754  |     
|                                                 |                                          |   |                    |      |                  |   |        |     

|      |  |                                                                                                                                                                                                                               
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE: |  | Non-cash operating and investing activities excluded from this statement
of cash flows to the transfer of office equipment from inventory to
property and equipment amounted to $306,000 for the first quarter of
fiscal 2003.

See notes to condensed consolidated financial statements

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McRae Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE A  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulation of the
Securities and Exchange Commission (SEC). Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In addition, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three months
ended November 2, 2002 are not necessarily indicative of the results that may
be expected for the year ending August 2, 2003. The interim condensed
consolidated financial information should be read in conjunction with the
Companys August 3, 2002 audited consolidated financial statements and
footnotes thereto included in the McRae Industries, Inc. Annual Report filed
with the SEC.

Certain reclassifications have been made to the prior years financial
statements to conform with the current years presentation.

NOTE B  INVENTORIES

The components of inventory consist of the following (in thousands):

|                |  |                  |        |                |  |   |        | 
|--------------- |  | ---------------- | ------ | -------------- |  | - | ------ | 
|                |  | November 2, 2002 |        | August 3, 2002
|                |  |                  |        |               
|Raw materials   |  | $                | 2,773  |                |  | $ | 3,332  | 
|Work-in-process |  |                  | 1,130  |                |  |   | 1,049  | 
|Finished goods  |  |                  | 12,856 |                |  |   | 11,860 | 
|                |  |                  |        |                |  |   |        | 
|                |  | $                | 16,759 |                |  | $ | 16,241 | 
|                |  |                  |        |                |  |   |        | 

NOTE C  SUBSEQUENT EVENTS

On November 29, 2002, the Company declared a cash dividend of $.06 cents per
share on its Class A Common Stock payable on December 27, 2002 to shareholders
of record on December 13, 2002.

NOTE D  CHANGE IN ACCOUNTING PRINCIPAL

Effective August 4, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The Company
has determined that its goodwill was not impaired under SFAS No. 142. Under
SFAS No. 142, goodwill is no longer amortizable. Instead, goodwill is evaluated
for impairment on an annual basis.

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NOTE E  SUMMARY OF BUSINESS SEGMENTS

|                                    |                                      |   |                    |       |             |   |        |       |  
|----------------------------------- | ------------------------------------ | - | ------------------ | ----- | ----------- | - | ------ | ----- | -
|                                    |                                      |   | Three Months Ended
|                                    |                                      |   |                   
|                                    |                                      |   | November 2,        |       | October 27,
|                                    |                                      |   | 2002               |       | 2001       
|                                    |                                      |   |                    |       |            
|(Dollars in Thousands)              |                                      |   |                    |       |             |   |        |      
|Net revenues                        |                                      |   |                    |       |             |   |        |      
|                                    | Bar Code                             |   | $                  | 2,877 |             |   | $      | 2,307 |  
|                                    | Office Products                      |   |                    | 4,841 |             |   |        | 4,386 |  
|                                    | Military Boots                       |   |                    | 5,198 |             |   |        | 3,938 |  
|                                    | Western/Work Boots                   |   |                    | 6,546 |             |   |        | 3,942 |  
|                                    | Eliminations/Other                   |   |                    | 77    |             |   |        | (20   | )
|                                    |                                      |   |                    |       |             |   |        |       |  
|                                    |                                      |   | 19,539             |       |             |   | 14,553 |      
|                                    |                                      |   |                    |       |             |   |        |       |  
|Net earnings (loss)
from operations |                                      |   |                    |       |             |   |        |      
|                                    | Bar Code                             |   |                    | (218  | )           |   |        | (519  | )
|                                    | Office Products                      |   |                    | (338  | )           |   |        | (186  | )
|                                    | Military Boots                       |   |                    | 829   |             |   |        | 849   |  
|                                    | Western/Work Boots                   |   |                    | 481   |             |   |        | 27    |  
|                                    | Eliminations/Other                   |   |                    | 126   |             |   |        | 130   |  
|                                    |                                      |   |                    |       |             |   |        |       |  
|                                    |                                      |   | 880                |       |             |   | 301    |      
|                                    | Provision for income
taxes (benefit) |   |                    | 342   |             |   |        | 115   |  
|                                    | Minority shareholders
interest      |   |                    | (1    | )           |   |        | (3    | )
|Net earnings (loss)                 |                                      | $ | 539                |       |             | $ | 189    |      
|                                    |                                      |   |                    |       |             |   |        |       |  

|                   |  |             |        |           |  |   |        | 
|------------------ |  | ----------- | ------ | --------- |  | - | ------ | 
|                   |  | November 2, |        | August 3,
|                   |  | 2002        |        | 2002     
|                   |  |             |        |          
|Assets             |  |             |        |           |  |   |        | 
|Bar Code           |  | $           | 5,269  |           |  | $ | 5,946  | 
|Office Products    |  |             | 10,488 |           |  |   | 11,265 | 
|Military Boots     |  |             | 4,421  |           |  |   | 4,347  | 
|Western/Work Boots |  |             | 16,002 |           |  |   | 13,536 | 
|Eliminations/Other |  |             | 6,732  |           |  |   | 6,835  | 
|                   |  |             |        |           |  |   |        | 
|                   |  | $           | 42,912 |           |  | $ | 41,929 | 
|                   |  |             |        |           |  |   |        | 

8



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|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto, and
with the Companys Annual Report on Form 10-K for the fiscal year ended August
3, 2002, including the financial information and managements discussion and
analysis contained therein.

CRITICAL ACCOUNTING ESTIMATES

Our timely preparation of financial reports and related disclosures requires us
to use estimates and assumptions that may cause actual results to be materially
different from our estimated results. Specifically, we use estimates when
accounting for depreciation, amortization, cost per copy contract
contingencies, useful lives for intangible assets, and asset valuation
allowances (including those for bad debts, inventory, and deferred income tax
asset valuation allowances). Our most critical accounting estimates include the
following:

Contract Contingencies

Our office products business leases equipment (usually for a sixty-month
period) to county-wide education systems and sells the lease to third party
leasing companies. Under this program the school system is billed on a monthly,
quarterly or annual basis at a specified rate for each copy they make. The cost
per copy charged to the school system is designed to cover the equipment cost,
supplies (except for paper and staples), service, a finance charge and a profit
margin. Quarterly, on a program-by-program basis, we project the expected
outcome over the life of the program. We use historical copy usage to predict
the number of copies to be made over the remaining life of the program. We
adjust this estimate of the number of expected future copies based on known
factors that will influence copy rates in each program. We use historical
service and supply costs incurred on each program to estimate future service
and supply costs on a per copy basis. We adjust these estimated costs for known
factors that will impact service and supplies in the future. We also estimate
any other costs expected to be incurred such as deprecation on rental
equipment. On programs where the sum of the estimated future costs exceeds the
expected future revenue, we recognize a provision for losses.

Intangible Assets

We determine the utility of goodwill and trademarks based on estimated future
cash flows and test for impairment in accordance with applicable accounting
pronouncements. Effective August 4, 2002 we adopted Statement of Financial
Accounting Standards No. 142 Goodwill and Other Intangible Assets.

Inventories

Inventories are recorded at the lower of cost or market value. We regularly
review inventory quantities on hand and record a provision for excess and
obsolete inventory based primarily on our estimated forecast and demand
requirements for the next twelve months. Actual demand and market conditions
may be different from those projected by our management.

Revenue Recognition

The Government unilaterally modified the Companys current boot contract to
require a bill and hold procedure, on June 1, 2001. Under bill and hold, the
Government issues a specific boot production order which, when completed and

9



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ready for shipment, is inspected and accepted by the Quality Assurance
Representative (QAR), thereby transferring ownership to the Government. Under
this contract modification, after inspection and acceptance by the QAR, the
boots become Government-owned property. Also, after QAR inspection and
acceptance, the Company invoices and receives payment from the Government, and
warehouses and distributes the related boots against Government-issued
requisition orders, which the Company receives five days per week.
Government-owned boots stored in the Companys warehouse are complete,
including packaging and labeling. The bill and hold procedure requires physical
segregation and specific identification of Government-owned boots, and because
they are owned by the Government, the Company cannot use them to fill any other
customers order. The Company has certain custodial responsibilities for these
boots, including loss or damage, which the Company insures. The related
insurance policies specifically provide that loss payment on finished stock and
sold personal property completed and awaiting delivery is based on the
Companys selling price. In accordance with guidance issued under Securities
and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements, revenues from bill and hold transactions are
recognized at the time of acceptance by the QAR.

Income Taxes

As part of the process of preparing our consolidated financial statements, we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual current exposure
together with assessing temporary differences resulting from differing
treatment of items, such as leasing activity, allowances and depreciation, for
tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our consolidated balance sheet. We
must then assess the likelihood that our deferred tax assets will be recovered
from future taxable income and to the extent we believe that recovery is not
likely, we must establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we must include an
expense within the tax provision in the statement of operations. Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. In the event that actual results differ
from these estimates or we adjust these estimates in future periods we may need
to establish an additional valuation allowance which could materially impact
our financial position and results of operations.

FINANCIAL CONDITION AND LIQUIDITY

At the end of the first quarter of fiscal 2003, our cash and cash equivalents
amounted to $2.1 million, down $3.7 million from the amount reported at the end
of fiscal 2002. Working capital totaled $23.6 million at November 2, 2002 as
compared to $23.8 at August 3, 2002.

Currently, we have two lines of credit with a bank totaling $4.7 million, all
of which was available at November 2, 2002. One credit line totaling $1.75
million expires in June 2003. The other credit line totaling $3.0 million
expires in November 2003. We believe that the current cash and cash
equivalents, cash generated from operations and the available lines of credit
will be sufficient to meet our capital requirements for the remainder of fiscal
2003. We do not currently utilize any off-balance sheet financing arrangements
and do not anticipate doing so in the future. Our contractual commitments for
fiscal 2003 are approximately $835,000.

10



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Selected cash flow data for the first quarter of fiscal 2003 and 2002 are
presented below (in thousands of dollars):

|                      |                                                         |  |                        |        |                  |  |   |        |  
|--------------------- | ------------------------------------------------------- |  | ---------------------- | ------ | ---------------- |  | - | ------ | -
|                      |                                                         |  | For the Quarters Ended
|                      |                                                         |  |                       
|                      |                                                         |  | November 2, 2002       |        | October 27, 2001
|                      |                                                         |  |                        |        |                 
|Source (Use) of Cash  |                                                         |  |                        |        |                  |  |   |       
|Operating activities: |                                                         |  |                        |        |                  |  |   |       
|                      | Net earnings adjusted for depreciation
and amortization |  | $                      | 831    |                  |  | $ | 560    |  
|                      | Accounts receivable                                     |  |                        | (3,313 | )                |  |   | (2,702 | )
|                      | Inventories                                             |  |                        | (824   | )                |  |   | (3,732 | )
|                      | Accounts payable                                        |  |                        | 119    |                  |  |   | 2,654  |  
|                      | Net cash used in operating activities                   |  |                        | (3,238 | )                |  |   | (2,872 | )

Net cash used in operating activities amounted to approximately $3.2 million as
adjusted for non-cash transfers from inventory to rental equipment for the
office products business. For the first quarter of fiscal 2003, net earnings
plus depreciation and amortization totaled $831,000 as a result of increased
product sales reported by each of our primary businesses. Accounts receivable
grew approximately $3.3 million primarily attributable to timing of customer
payments related to the increase in sales. Inventories in the western boot and
office products businesses increased approximately $1.3 million to cover the
increase in demand for their products and was partially offset by lower
inventory levels in the military boot and bar code businesses.

Capital expenditures were approximately $150,000 primarily for production and
computer equipment. Rental equipment related to the office products business
cost per copy program increased by approximately $309,000 for the first quarter
of fiscal 2003.

Our debt service used approximately $178,000 of cash for principal and interest
payments. Dividends paid during the first quarter amounted to nearly $113,000.

The continued expansion of our western boot business could have a significant
adverse effect on liquidity as cash requirements increase to finance larger
inventories and trade accounts receivable. In addition, a decrease in military
boot sales to the U.S. Government because of lower boot requirements or our
failure to win a new contract to replace the one expiring in December 2002
could have a significant adverse impact on our liquidity (See discussion below
under Military Boot Business).

FIRST QUARTER FISCAL 2003, COMPARED TO FIRST QUARTER FISCAL 2002

Consolidated net revenues for the first quarter of fiscal 2003 totaled $19.5
million, an increase of 34% over the $14.6 million reported for the first
quarter of fiscal 2002. This increase in net revenues resulted from higher
product sales in each of the Companys primary businesses.

Consolidated gross profit amounted to $4.7 million for the first quarter of
fiscal 2003 as compared to $3.7 million for the same period of fiscal 2002.
This growth in gross profit was primarily attributable to the increase in net
revenues. Gross profit as a percentage of net revenues decreased from
25.6% for
the first quarter of fiscal 2002 to 24.3% for the first quarter of fiscal 2003
as a result of higher manufacturing costs, increased service and supply costs
and competitive market pressures.

Consolidated selling, general and administrative (SG&A) expenses totaled $3.8
million for the first quarter of fiscal 2003 as compared to $3.4 million for
the

11



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##### 



first quarter of fiscal 2002. As a percentage of net revenues, SG&A
expenditures decreased from 23.3% for the first quarter of fiscal 2002 to 19.6%
for the first quarter of fiscal 2003.

As a result of the above, consolidated earnings from operations amounted to
$880,000 for the first quarter of fiscal 2003 as compared to $301,000 for the
first quarter of fiscal 2002.

Bar Code Business

Net revenues for the bar code business totaled $2.9 million for the first
quarter of fiscal 2003, up 26% from net revenues of $2.3 million for the first
quarter of fiscal 2002. This increase in net revenues resulted primarily from a
slightly improved economic outlook.

Gross profit amounted to $800,000 for the first quarter of fiscal 2003 as
compared to $649,000 for the same period of fiscal 2002. The growth in gross
profit was attributable to the increase in net revenues. Gross profit as a
percentage of net revenues fell slightly from 28.1% for the first quarter of
fiscal 2002 to 27.8% for the first quarter of fiscal 2003 primarily as a result
of a smaller contribution of manufactured products in the sales mix.

SG&A and research and development costs were $1.0 million for the first quarter
of fiscal 2003 as compared to $1.2 million for the first quarter of fiscal
2002. This decrease in expenses was primarily attributable to lower employment
related costs and reduced advertising expenditures.

As a result of the above, the bar code business loss from operations totaled
$218,000 for the first quarter of fiscal 2003, an improvement over the $519,000
operating loss reported for the first quarter of fiscal 2002.

Office Products Business

Net revenues for the office products business amounted to $4.8 million for the
first quarter of fiscal 2003, an increase of 9.1% over the $4.4 million
reported for the first quarter of fiscal 2002. This improvement in net revenues
was primarily attributable to increased commercial and state government
equipment sales and higher maintenance agreement revenues.

Gross profit for the first quarter of fiscal 2003 amounted to $932,000, down
from $1.1 million for the first quarter of fiscal 2002. This decrease in gross
profit was primarily the result of higher beginning of the school year supply
and service costs related to the county-wide school system cost per copy
programs. As has been typically the case, we expect to incur lower
supply and service cost over the remainder of the school year.

SG&A expenses for the first quarter of fiscal 2003 and fiscal 2002 were
approximately $1.3 million with lower 2003 employment related costs being
offset by higher advertising costs.

As a result of the above, the office products business loss from operations
amounted to $338,000 for the first quarter of fiscal 2003 as compared to a loss
from operations of $186,000 for the same period of fiscal 2002.

Military Boot Business

Net revenues for the military boot business for the first quarter of fiscal
2003 totaled $5.2 million, up 33% from the $3.9 million for the first quarter
of fiscal 2002. This growth in net revenues was primarily attributable to
increased

12



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military boot requirements for the U.S. Government (the Government). Commercial
military boot sales increased from $127,000 for the first quarter of fiscal
2002 to $343,000 for the first quarter of fiscal 2003.

Gross profit was $1.0 million, unchanged for the first quarters of fiscal 2003
and 2002. Gross profit as a percentage of net revenues decreased from 25.9% for
the first quarter of fiscal 2002 to 19.9% for the first quarter of fiscal 2003.
This decrease in gross profit percentage was primarily attributable to lower
sales prices and higher manufacturing labor related costs.

SG&A expenses were relatively flat at approximately $200,000 for the first
quarters of both fiscal 2003 and 2002.

As a result of the above, the military boot business earnings from operations
amounted to $829,000 for the first quarter of fiscal 2003 as compared to
$849,000 for the first quarter of fiscal 2002.

Our most recent Contract (the Contract) with the Government is set to expire on
December 31, 2002. The Government has issued two solicitations to replace its
expiring direct molded sole contracts, including the Contract. The first
solicitation covers the three direct molded sole styles of vulcanized military
combat boots. The second solicitation covers the newly adopted waterproof
membrane type of standard issue combat boot, which will replace the current
molded style standard issue combat boot that has historically accounted for the
majority for the Governments order under the Contract. We have submitted bids
for both solicitations and are awaiting the Governments award decisions, which
we expect to occur in December 2002. There are no assurances, however, that we
will be successful in obtaining either of these contracts to produce boots for
the Government. The Companys operating results could be materially adversely
affected if it is not successful in obtaining either of these contracts to
produce boots for the Government.

Western and Work Boot Business

Net revenues for the western and work boot business for the first quarter of
fiscal 2003 were $6.5 million, up 67% from $3.9 million for the first quarter
of fiscal 2002. This growth in net revenues was primarily attributable to
strong demand for the Dan Post western boot products. The Dan Post brand was
purchased in October 2002 and, as a result, had little impact on the first
quarter of fiscal 2002.

Gross profit grew from $929,000 for the first quarter of fiscal 2002 to $1.9
million for the first quarter of fiscal 2003 primarily attributable to the
increase in net revenues. Gross profit as a percentage of net revenues for the
first quarter of fiscal 2003 was 29.2% as compared to 23.6% for the same period
of fiscal 2002. This improvement in gross profit percentage resulted from
increased sales of higher margin branded products.

SG&A expenses for the first quarter of fiscal 2003 amounted to $1.3 million as
compared to $719,000 for the first quarter of fiscal 2002. The increase in SG&A
costs was primarily attributable to higher sales commissions, advertising
expenditures, administrative support salaries and professional fees associated
with trademark protection. As percentage of net revenues, SG&A expenses were
19% for the first quarter of fiscal 2003 as compared to 18% for the first
quarter of fiscal 2002.

As a result of the above, operating profit for the western and work boot
business was $481,000 for the first quarter of fiscal 2003 as compared to
$27,000 for the first quarter of fiscal 2002.

13



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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2002, SFAS No. 145, Rescission of FASB Statements No.4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, was issued
and established the accounting and reporting standards associated with the
reporting of gains and losses from extinguishment of debt and to provide
consistent accounting treatment for certain lease modifications that have
similar economic effects as a sale-leaseback transaction. We have adopted this
standard with no impact on our financial statements.

In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, was issued and established the accounting and reporting
standards associated with the proper recognition of certain costs related to
exit or disposal activities. SFAS No. 146 applies to exit or disposal
activities initiated after December 31, 2002. Currently, we have no exit or
disposal plans.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report includes certain
forward-looking statements as such term is defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Important factors that could cause actual results or events to differ
materially from those projected, estimated, assumed or anticipated in any such
forward-looking statements include: the effect of competitive products and
pricing, risks unique to selling goods to the Government (including variation
in the Governments requirements for our products and the Governments ability
to terminate its contracts with vendors), loss of key customers, acquisitions,
supply interruptions, additional financing requirements, loss of key
management personnel, our ability to successfully develop new products and
services, and the effect of general economic conditions in our markets.

|        |  |                                                           
|------- |  | ----------------------------------------------------------
|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to the impact of interest rate changes due to its
aggregate $4.75 million lines of credit and a term loan through its wholly
owned subsidiary, Dan Post Boot Company. As of November 2, 2002, there was no
outstanding indebtedness under the lines of credit and $4.1 million was
outstanding on the term loan. The Company does not buy or sell derivative
financial instruments for trading or other purposes. Borrowings under the
Companys credit facilities described above bear interest at rates based upon
the prime rate or prime rate less a margin of one-half percent offered by
the applicable lender. The Company has not entered into any swap agreements or
engaged in any other hedging activities with respect to this variable rate
indebtedness. A 10% increase in the interest rates under the Companys credit
facilities would increase annual interest expense by approximately $19,000
(assuming the Companys aggregate borrowings under the credit facilities
averaged $4.0 million during a fiscal year).

|        |  |                        
|------- |  | -----------------------
|ITEM 4. |  | CONTROLS AND PROCEDURES

Within the 90-day period prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and
principal financial officer, of the effectiveness of the design and operation
of the Companys disclosure controls and procedures pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934 (the Exchange Act). Based upon that
evaluation, the Chief Executive Officer and principal financial officer
concluded that the Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
(including

14



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##### 



its consolidated subsidiaries) required to be included in the Companys
Exchange Act filings.

There have been no significant changes in the Companys internal controls or
other factors, which could significantly affect internal controls subsequent
to the date the Company carried out its evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

While from time to time we are engaged in litigation incidental to our
business, we are not currently party to any material legal proceedings.

Items 2, 3, 4, and 5.

These items are not applicable and have been omitted.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

|     |  |                                                                                                                                                                                                     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Registrants Form S-14, Registration No. 2-
85908).                                                                   
|     |  |                                                                                                                                                                                                     
|3.2  |  | Amendment to the Certificate of Incorporation (Incorporated by
reference to Exhibit 3 to the Registrants Form 10-K for the year
ended August 1, 1987).                                             
|     |  |                                                                                                                                                                                                     
|3.3  |  | Restated Bylaws of the Registrant effective May 29, 2001.
(Incorporated by reference to Exhibit 3.3 to the Registrants
Form 10-K for the year ended July 28, 2001).                                
|     |  |                                                                                                                                                                                                     
|99.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for D.
Gary McRae, President and CEO (Filed herein). Page 21.               
|     |  |                                                                                                                                                                                                     
|99.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for
Marvin G. Kiser, Sr., Vice President of Finance (Filed herein).
Page 22.

(b)  No reports on Form 8-K were filed during the quarter ended November
2, 2002.

15



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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.

|                       |  |                                                              
|---------------------- |  | -------------------------------------------------------------
|                       |  | McRae Industries, Inc.
(Registrant)                          
|                       |  |                                                              
|Date:December 17, 2002 |  | By: /s/ D. Gary McRae                                        
|                       |  |                                                              
|                       |  | D. Gary McRae
President and CEO
(Principal Executive Officer)
|                       |  |                                                              
|Date:December 17, 2002 |  | By: /s/ Marvin G. Kiser, Sr.                                 
|                       |  |                                                              
|                       |  | Marvin G. Kiser, Sr.
(Principal Accounting Officer)          

16



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I, D. Gary McRae, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of McRae Industries,
Inc.;                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and

17



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##### 





|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: December 17, 2002

/s/  D. Gary McRae
D. Gary McRae
President and CEO

18



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##### 





I, Marvin G. Kiser, Sr., certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of McRae Industries,
Inc.;                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and

19



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|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: December 17, 2002

/s/  Marvin G. Kiser, Sr.
Marvin G. Kiser, Sr.
Vice President of Finance

20