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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[X]   |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934    
|      |  |                                                                                         
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended August 2, 2003

Commission file number: 1-8578

McRAE INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)


|                                  |  |                                                
|--------------------------------- |  | -----------------------------------------------
|Delaware
(State of Incorporation) |  | 56-0706710
(I.R.S. Employer Identification No.)

400 North Main Street, Mount Gilead, North Carolina 27306
(Address of Principal Executive Offices)

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

Securities Registered Pursuant to Section 12(b) of the Act:

|                                   |                                           | 
|---------------------------------- | ----------------------------------------- | 
|Title of each class                | Name of each exchange on which registered
|Class A Common Stock, $1 Par Value | American Stock Exchange                  
|Class B Common Stock, $1 Par Value | American Stock Exchange                  

Securities Registered Pursuant to Section 12 (g) of the Act: None

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 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment of this Form 10-K.  [X]

Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).      Yes  [  ]  No  [X]

The aggregate market value of shares of the Registrants $1 par value
Class A and Class B Common Stock held by non-affiliates as of
February 1, 2003 was approximately $10,971,096 and $1,978,002,
respectively. On October 24, 2003, 1,918,972 Class A shares and
847,027 Class B shares of the Registrants Common Stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual shareholders meeting
to be held on December 18, 2003 are incorporated by reference into
Parts II and III.

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PART I




ITEM 1. BUSINESS

McRae Industries, Inc., (the Company, which may be referred to as we, us
or our), is a Delaware corporation organized in 1983 and is the successor to
a North Carolina corporation organized in 1959. Our principal lines of business
are: manufacturing and selling bar code reading and related printing devices;
manufacturing and selling military combat boots, western and work boots; and
selling, leasing, and servicing office equipment. Our commercial printing and
packaging business was discontinued during fiscal 2001. Additional financial
information about these lines of business can be found in Note 14 to the
financial statements.

Bar Code Operations

Our bar code unit manufactures and sells bar code reading and printing devices
and other items related to optical data collection, including licensing and
selling computer software through Compsee, Inc. (Compsee), a 99% owned
subsidiary. Compsee markets, sells, and services its products directly through
sales centers located throughout the United States.

Compsee designs and manufactures QuickReader, QuickLink, Turbowedge stationary
bar code readers, and APEX portable bar code scanners. Principal materials used
in Compsees assembly operations consist of various electrical and electronic
components that are readily available from a number of sources. Compsees
portable bar code scanner equipment includes the APEX II, which was introduced
in fiscal 1996, and the APEX III, which was introduced in fiscal 2001. The APEX
III provides batch and wireless data collection capability. The APEX IV is a
more rugged, pistol grip version of the APEX III product. The APEX products are
generally well received in the market and provided 15%, 19%, and 13% of Compsee
sales for fiscal 2003, 2002, and 2001, respectively. Compsee also purchases and
sells bar code products to compliment their
manufactured product lines. The markets in which this
business unit operates are generally highly competitive. We are not aware of
any reliable statistics that would enable us to determine the relative position
of Compsee or its products within the industry. Competition in the industry is
principally based on product features, customer service, and price. Our major
competitors for our manufactured products in the industry, some of which are
larger companies that have greater financial, development, marketing, and
distribution resources than we do, include PSC, Intermec, Handheld Products,
and Symbol Technologies.

Net revenues derived from this unit in fiscal 2003, 2002, and 2001 were 13%,
15%, and 22% of the Companys consolidated net revenues, respectively.
QuickReader, QuickLink, and Turbowedge bar code readers developed and marketed
by Compsee accounted for 6%, 9%, and 11% of Compsees net revenues for fiscal
2003, 2002, and 2001, respectively, and for 1%, 1%, and 3% of the Companys
consolidated net revenues during fiscal 2003, 2002, and 2001, respectively.
Purchased bar code products for resale accounted for 73%, 71%, and 72% of
Compsees net revenues for fiscal 2003, 2002, and 2001, respectively.

Office Products

McRae Office Solutions, Inc. (Office Solutions), a wholly owned subsidiary, is
a non-exclusive distributor of Toshiba photocopier and facsimile machines
throughout North Carolina and parts of Virginia and South Carolina. Office
Solutions operates eight district sales offices throughout the state of North
Carolina. Office Solutions is also a distributor in North Carolina of RISO
digital printing equipment. During fiscal 2002, the OKI color copier line was
added to the product mix. Machines, components, and certain supplies sold by
Office Solutions during fiscal 2003 are generally available only from Toshiba,
RISO, and OKI.

Office Solutions has three primary channels of distribution for its products.
The first channel provides equipment to North Carolina state agencies as a
preferred vendor for the State of North Carolina. The state contract business
accounted for 10%, 6.1%, and 6.1% of Office Solutions net revenues for fiscal
2003, 2002, and 2001, respectively.

The second channel is the Special Markets Group, which focuses on school
systems throughout the

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state of North Carolina. These school systems, many of which are county-wide,
pay a specified price for each copy made. This price covers the equipment,
service, and supply costs. Currently, we have equipment in 1,200 schools that
generate over 1 billion copies per year. The Special Markets Group accounted
for 54.9%, 60.1%, and 50.0% of Office Solutions net revenues for fiscal 2003,
2002, and 2001, respectively.

The third channel is the Commercial Accounts Market. This group targets
religious organizations and small to mid-size companies and offers its
customers an efficient, cost-effective solution for their print ministries and
general office printing requirements. The Commercial Accounts group provided
35.1%, 33.8%, and 43.9% of Office Solutions net revenues for fiscal 2003, 2002,
and 2001, respectively.

In fiscal 2000, Office Solutions purchased the rights to a software package
designed to scan, store, and provide easy retrieval of various document types.
In fiscal 2003 sales of this product were minimal. We are continuing to develop
this product and the related marketing strategies. We expect this product to
have a greater contribution to the overall sales mix in fiscal 2004.

The office products business is generally highly competitive, with price and
service being the dominant factors. We are not aware of any reliable
statistics that would indicate our relative position within this industry in
the geographical area in which we compete.

Net revenues derived from the office products segment during fiscal 2003, 2002,
and 2001 were 29%, 33%, and 33%, respectively, of the Companys consolidated
net revenues.

Footwear Manufacturing

Our footwear manufacturing operations include the manufacture and sale of
military combat boots. We have manufactured direct molded sole military combat
boots for the United States Government (the Government) since 1966. On April
30, 1996, we acquired American West Trading Company (American West), which
manufactures western and work boots, and has manufactured military dress
oxfords and military safety boots.

Whenever the Government determines a need for combat boots it solicits bid
responses from U.S. boot manufacturers. The solicitation process typically
includes the evaluation by the Government of written technical and cost
proposals. The Government awards contracts on negotiated per pair contract
prices based on actual and estimated allowable costs plus a reasonable profit
margin. This profit margin is subject to the Governments determination that
the prices are fair and reasonable. All recent Government contracts for
vulcanized military boots have been awarded to four manufacturers including us.

For fiscal 2003, we operated under several extensions of our contract with the
Government dated April 15, 1997. The Government issued two solicitations for
future boot requirements to replace the original contract that was set to
expire on April 15, 2002. One solicitation covered the three current direct
molded sole (DMS) styles of military combat boots, including the standard issue
all-leather combat boot that has historically accounted for the majority of the
Governments orders under the Contract. The second solicitation covered the
newly adopted infantry combat boot, which incorporates a waterproof membrane
construction. This boot has replaced the previous all-leather boot as the
Armys standard issue combat boot. We submitted bids for both solicitations.

On March 11, 2003, we were advised that we did not win a contract to produce
the new infantry combat boot. On September 30, 2003, the Government notified
us that we had been awarded a new contract (the Contract) to produce direct
molded sole military combat boots. The Contract covers a base year and two
one-year option periods. The Contract base year provides for a minimum boot
requirement of 135,102 pair and a maximum boot requirement of 544,778 pair with
a minimum and maximum dollar value of approximately $7.4 million and $30.1
million, respectively. The first year option provides for a minimum and a
maximum boot requirement of 276,460 pair and 1,077,552 pair, respectively. The
second year option ranges from a minimum of 236,460 pair to a maximum of
852,552 pair.

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No one company dominates the Government military boot industry. Our major
competitors in the direct molded sole military boot market include Wellco,
Inc., Belleville Shoe Manufacturing Company, and Altama Delta Corporation.
Price, quality, manufacturing efficiency, and delivery are the areas we
emphasize to strengthen our competitive position. We also sell boots to
civilian and other military customers including other countries. Military boot
sales under the Government contract were $15.7 million, $14.3 million, and
$11.7 million, for fiscal 2003, 2002, and 2001, respectively. Such sales
constituted 20%, 19%, and 20% of consolidated net revenues in fiscal 2003,
2002, and 2001, respectively. Sales of military boots to foreign countries were
$5.3 million, $4.9 million, and $4.6 million for the past three fiscal years,
respectively. For fiscal 2003, all of our foreign country sales were to Israel.

Our contracts with the Government are subject to partial or complete
termination under certain specified circumstances including, but not limited
to, the following: for the convenience of the Government, for the lack of
funding, and for our actual or anticipated failure to perform our contractual
obligations. If a contract is partially or completely terminated for its
convenience, the Government is required to negotiate a settlement with us to
cover costs already incurred. We have never had a contract either partially or
completely terminated.

Leather and synthetic rubber are the principal material components used in the
boot manufacturing process. Pursuant to Government contracts for military
combat boots, all materials used in manufacturing these boots must be and are
produced in the United States and must be certified as conforming to military
specifications. The synthetic rubber we use in our military combat boots is
available from only one domestic supplier. Therefore, if this domestic
supplier is not able to provide us with synthetic rubber, it would be necessary
for us to get an exemption from the Government to purchase this material in the
foreign market.

We have a technical assistance agreement with Ro-Search, Inc., a subsidiary of
Wellco, Inc., a competitor to whom we pay a fee for each pair of direct molded
sole boots we produce.

Dan Post Boot Company (Dan Post), formerly American West, designs,
manufactures, and sells, western and work boots for men, women, and children.
Dan Post utilizes seasoned and highly respected independent sales
representatives to market and sell its boots nationwide to major retail
discount stores, regional specialty chain stores, major western boot
distributors, and direct mail catalogs. The boots are marketed primarily under
the retailers private label and under the Dan Post, Dingo, and American
West Trading brands.

On June 29, 2001, Dan Post acquired the Dingo brand name and certain inventory
from Lucchese, Inc., a wholly owned subsidiary of Arena Brands, Inc. The Dingo
footwear line provides a lifestyle product to supplement our western boot
products. Also, in early October 2001, we purchased the Dan Post brand name and
certain inventory from Lucchese, Inc. The Dan Post brand is a high quality,
traditional western product and is well recognized by both retailers and
consumers. This addition to the product mix allows us to compete in the hand
crafted boot market.

In addition to the western and work boot product lines, in fiscal 1997, we
began producing two styles of military footwear (military dress oxfords and
military safety shoes) and can bid on future welt construction military
solicitations to supplement the western boot product lines. We had no sales of
military footwear (excluding direct molded sole boots) in either fiscal 2003 or
fiscal 2002 as compared to $520,000 for fiscal 2001.

During fiscal 2000, we expanded our western boot product line with imported
childrens boots we purchase from India and China. In addition, we currently
import western boots for adults from Brazil, Mexico, and China. During fiscal
2004, we plan to expand importation from China to include Dingo and American
West Trading branded products with higher margins. All of our imported boots
are produced by contract manufacturers based on specifications that we provide.

During fiscal 1997, we consolidated all our western and work boots
manufacturing operations into our Waverly, Tennessee facility. We sold our
Dresden, Tennessee facility during fiscal 2002 and moved the storage,
warehouse, and shipping functions housed at this facility to a 77,000 square
foot leased facility in Waverly, Tennessee. The upper parts of boots produced
at our plant are

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constructed from leather and/or synthetic material and the sole and heels
consist of either leather, rubber and/or rubber-plastic blended material. All
raw materials necessary for manufacturing the boots are readily available.

The western and work boot markets are highly competitive. We are not aware of
any reliable statistics that would enable us to determine Dan Posts or its
products relative positions within the industry; however, we believe we have
established a solid position in the market for all price ranges.

Dan Post manages its manufacturing and inventory according to the seasonality
of its business, which tends to have higher sales occurring generally in the
fall and winter months. Dan Post contributed $22.6 million, $19.4 million, and
$9.4 million of consolidated net revenues for fiscal 2003, 2002, and 2001,
respectively.

The Companys backlog of firm orders for military combat boots at August 2,
2003 and August 3, 2002 totaled approximately $6.8 million and $5.5 million,
respectively. We expect to fill all of the backlog as of August 2, 2003 during
the current fiscal year. The backlog of firm orders for western and work boots
at August 2, 2003 and August 3, 2002 totaled approximately $1.2 million and
$2.6 million, respectively. We expect to fill all of the backlog as of August
2, 2003 during the current fiscal year.

Net revenues derived from the military combat boot segment in fiscal 2003,
2002, and 2001 were 29%, 27%, and 29%, respectively, of the Companys
consolidated net revenues.

Net revenues derived from the western and work boot segment in fiscal 2003,
2002, and 2001 were 29%, 25%, and 16%, respectively, of the Companys
consolidated net revenues.

Other Businesses

The Companys Financing and Leasing Division manages our short-term investments
and marketable securities. This division is also engaged in equipment leasing
and the financing of receivables for other businesses and individuals.

Foreign Sales

Our only business that experiences significant foreign sales is the military
boot business. Sales of military boots to foreign countries were $5.3 million
(23.8% of total military boot sales), $4.9 million (24.4%), and $4.6 million
(27.4%) during fiscal 2003, 2002, and 2001, respectively. In fiscal 2003 and
fiscal 2002, all of our foreign country sales were to Israel as compared to 89%
in fiscal 2001.

Other Investment Interests

We own land in North and South Carolina that is being held for investment
purposes.

Regulation

We are subject to various laws and regulations concerning environmental matters
and employee safety and health. We believe we are operating in substantial
compliance with these laws and regulations.

Employment

As of August 2, 2003, we employed approximately 615 persons in all divisions
and subsidiaries. None of our employees are represented by collective
bargaining or a labor union. We consider our relations with our employees to be
good.

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Financial Information about Operating Segments

Financial information for the past three fiscal years with respect to our
operating segments are incorporated herein by reference to Note 14 to the
consolidated financial statements included in this Report.

Research and Development

Research and development costs related to development of future bar code and
imaging software products amounted to $1,010,000, $1,045,000, and $561,000 for
fiscal 2003, 2002, and 2001, respectively.

ITEM 2. PROPERTIES

The following table describes the location, principal use, and approximate size
of the principal facilities used in our business. Except for the Tennessee
warehouse, which we lease, we own all of these facilities.

|                         |  |                                                  |  |                   
|------------------------ |  | ------------------------------------------------ |  | ------------------
|Location                 |  | Principal Use                                    |  | Size              
|                         |  |                                                  |  |                   
|400 North Main Street    |  | Corporate headquarters, manufacturing, and sales |  | 71,000 square feet
|Mt. Gilead, N.C.         |  |                                                  |  |                   
|                         |  |                                                  |  |                   
|Highway 109 North        |  | Footwear manufacturing                           |  | 57,600 square feet
|Mt. Gilead, N.C.         |  |                                                  |  |                   
|                         |  |                                                  |  |                   
|2500 Port Malabar Blvd.  |  | Compsee bar code sales office                    |  | 5,250 square feet 
|Palm Bay, Florida        |  |                                                  |  |                   
|                         |  |                                                  |  |                   
|Highway 109 North        |  | Footwear warehouse                               |  | 3,500 square feet 
|Mt. Gilead, N.C.         |  |                                                  |  |                   
|                         |  |                                                  |  |                   
|Highway 109              |  | Footwear storage                                 |  | 11,200 square feet
|Richmond County, N.C.    |  |                                                  |  |                   
|                         |  |                                                  |  |                   
|Highway 24-27
Troy, N.C. |  | Footwear manufacturing and
warehousing           |  | 35,000 square feet
|                         |  |                                                  |  |                   
|Highway 109 North        |  | Footwear storage                                 |  | 4,800 square feet 
|Mt. Gilead, N.C.         |  |                                                  |  |                   
|                         |  |                                                  |  |                   
|601 E. Railroad Street   |  | Footwear manufacturing                           |  | 71,520 square feet
|Waverly, TN              |  |                                                  |  |                   
|                         |  |                                                  |  |                   
|5576 Highway 70 West     |  | Footwear warehouse                               |  | 77,000 square feet
|Waverly, TN              |  |                                                  |  |                   

In addition to these principal locations, we lease other sales offices
throughout the United States.

Our Waverly, Tennessee manufacturing facility is encumbered by a deed of trust
in favor of The Fidelity Bank to secure a loan in the amount of approximately
$3.7 million.

We believe that our current facilities are adequate for current and future
operations. However, if the U.S. Government significantly increases their
military boots requirements under the new contract, it is possible that
additional footwear manufacturing and storage facilities may be necessary.

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ITEM 3. 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Each of our classes of Common Stock is traded on the American Stock Exchange
(ticker symbols MRI.A and MRI.B). As of October 24, 2003, there were
approximately 400 record holders of Class A Common Stock and approximately 376
record holders of Class B Common Stock. High and low stock prices and dividends
declared per share for the last two fiscal years were:

CLASS A COMMON STOCK:

|        |  |             |      |             |  |             |      |           |  |     |     |          |  |   |      |  |  |   |      |  |  |   |     | 
|------- |  | ----------- | ---- | ----------- |  | ----------- | ---- | --------- |  | --- | --- | -------- |  | - | ---- |  |  | - | ---- |  |  | - | --- | 
|        |  | Fiscal 2003 |      | Fiscal 2002
|        |  |             |      |            
|        |  | Sales
Price |      | Cash        |  | Sales
Price |      | Cash     
|        |  |             |      | Dividends   |  |             |      | Dividends
|Quarter |  | High        |      | Low         |  | Declared    |      | High      |  | Low |     | Declared
|        |  |             |      |             |  |             |      |           |  |     |     |         
|First   |  | $           | 8.80 |             |  | $           | 7.02 |           |  | $   | .06 |          |  | $ | 5.80 |  |  | $ | 3.50 |  |  | $ | .05 | 
|Second  |  |             | 9.45 |             |  |             | 7.15 |           |  |     | .06 |          |  |   | 5.88 |  |  |   | 4.80 |  |  |   | .05 | 
|Third   |  |             | 8.20 |             |  |             | 7.20 |           |  |     | .06 |          |  |   | 5.98 |  |  |   | 5.30 |  |  |   | .05 | 
|Fourth  |  |             | 7.38 |             |  |             | 6.07 |           |  |     | .06 |          |  |   | 7.50 |  |  |   | 5.70 |  |  |   | .06 | 

CLASS B COMMON STOCK:

|        |  |             |      |             |  |      |      |     |  |   |      |  |  |   |      | 
|------- |  | ----------- | ---- | ----------- |  | ---- | ---- | --- |  | - | ---- |  |  | - | ---- | 
|        |  | Fiscal
2003 |      | Fiscal 2002
|        |  |             |      |            
|        |  | Sales Price |      | Sales Price
|        |  |             |      |            
|Quarter |  | High        |      | Low         |  | High |      | Low
|        |  |             |      |             |  |      |      |    
|First   |  | $           | 8.90 |             |  | $    | 6.95 |     |  | $ | 5.55 |  |  | $ | 3.80 | 
|Second  |  |             | 9.35 |             |  |      | 7.50 |     |  |   | 5.60 |  |  |   | 4.95 | 
|Third   |  |             | 8.05 |             |  |      | 7.20 |     |  |   | 5.95 |  |  |   | 5.40 | 
|Fourth  |  |             | 7.15 |             |  |      | 6.20 |     |  |   | 7.40 |  |  |   | 5.85 | 

While we have no formal policy with respect to payment of dividends, we expect
to continue paying regular cash dividends on our Class A Common Stock.
Dividends paid on Class B Common Stock, if any, must also be paid on Class A
Common Stock in an equal amount. Dividends paid on Class A Common Stock, if
any, are not also required to be paid on Class B Common Stock. We did not pay
any dividends on Class B Common Stock during the prior three fiscal years.
There can be no assurance as to future dividends on either class of Common
Stock, as the payment of any dividends is dependent on future actions of the
Board of Directors, earnings, capital requirements, and financial condition of
the Company.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following Selected Consolidated Financial Data of the Company presented
below for each of the five years in the period indicated has been derived from
our audited and consolidated financial statements. The Selected Consolidated
Financial Data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto, Managements Discussion and Analysis of
Financial Conditions and Results of Operations, and the other financial data
included elsewhere herein.

|                                                                 |  |                                           |           |        |  |         |           |         |  |         |           |   |  |   |           |   |  |   |           |  
|---------------------------------------------------------------- |  | ----------------------------------------- | --------- | ------ |  | ------- | --------- | ------- |  | ------- | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                                                 |  | (In thousands, except for per share data)
|Fiscal Years Ended                                               |  | 8-2-03                                    |           | 8-3-02 |  | 7-28-01 |           | 7-29-00 |  | 7-31-99
|                                                                 |  |                                           |           |        |  |         |           |         |  |        
|Income Statement Data:                                           |  |                                           |           |        |  |         |           |         |  |         |           |   |  |   |           |   |  |   |           |  
|Net revenues                                                     |  | $                                         | 77,042    |        |  | $       | 74,531    |         |  | $       | 57,145    |   |  | $ | 57,141    |   |  | $ | 48,289    |  
|Net earnings (loss)
from continuing
operations                   |  |                                           | 2,477     |        |  |         | 2,585     |         |  |         | (571      | ) |  |   | 1,502     |   |  |   | 815       |  
|Net earnings (loss)
from discontinued
operations                 |  |                                           |          |        |  |         |          |         |  |         | (126      | ) |  |   | (145      | ) |  |   | (33       | )
|Net earnings (loss)                                              |  |                                           | 2,477     |        |  |         | 2,585     |         |  |         | (697      | ) |  |   | 1,357     |   |  |   | 782       |  
|Net earnings (loss)
from continuing
operations per
common share: |  |                                           | 0.89      |        |  |         | 0.93      |         |  |         | (0.21     | ) |  |   | 0.54      |   |  |   | 0.29      |  
|                                                                 |  |                                           |           |        |  |         |           |         |  |         |           |   |  |   |           |   |  |   |           |  
|Balance Sheet Data:                                              |  |                                           |           |        |  |         |           |         |  |         |           |   |  |   |           |   |  |   |           |  
|Total assets                                                     |  | $                                         | 46,149    |        |  | $       | 41,929    |         |  | $       | 38,977    |   |  | $ | 42,697    |   |  | $ | 39,951    |  
|Long-term liabilities                                            |  |                                           | 4,875     |        |  |         | 3,900     |         |  |         | 4,598     |   |  |   | 5,057     |   |  |   | 5,280     |  
|Working capital                                                  |  |                                           | 25,203    |        |  |         | 23,829    |         |  |         | 21,202    |   |  |   | 22,520    |   |  |   | 20,962    |  
|Shareholders equity                                             |  |                                           | 31,602    |        |  |         | 29,581    |         |  |         | 27,371    |   |  |   | 28,589    |   |  |   | 27,901    |  
|Weighted average
number of common
shares outstanding(a)          |  |                                           | 2,768,499 |        |  |         | 2,768,499 |         |  |         | 2,768,499 |   |  |   | 2,768,499 |   |  |   | 2,768,499 |  
|Cash dividends
declared per common
share(b)                      |  | $                                         | 0.24      |        |  | $       | 0.21      |         |  | $       | 0.28      |   |  | $ | 0.36      |   |  | $ | 0.36      |  
|                                                                 |  |                                           |           |        |  |         |           |         |  |         |           |   |  |   |           |   |  |   |           |  



|(a) |  | Includes both Class A and Class B Common Stock  
|--- |  | ------------------------------------------------
|   
|(b) |  | Dividends were paid only on Class A Common Stock

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|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, and a finance charge. On a quarterly basis, on a
program-by-program basis, we project an 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
depreciation on rental equipment. On programs where the sum of the
estimated future costs exceeds the expected future revenue, we recognize
a provision for 100% of the expected losses for these programs.

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. We estimate future cash flows based on
historical performance and our knowledge of known factors likely to
impact future cash flows.

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

We recognize revenue under our current boot contract when the boots are
inspected and accepted by the Governments Quality Assurance
Representative (QAR), thereby transferring ownership to the Government.
Pursuant to the contract, the boots become Government-owned property
after inspection and acceptance by the QAR. The boots are transferred and
stored in our warehouse, which is a designated storage facility approved
by the Government, and accounted for as bill and hold sales in
accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements.

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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.

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DESCRIPTION OF BUSINESS SEGMENTS

We have four primary business units: our bar code unit operates under the name
Compsee, Inc. (Compsee); our office products unit operates under the name McRae
Office Solutions, Inc. (Office Solutions); our military boot unit operates
under the name McRae Footwear and our western and work boot unit operates under
the name Dan Post Boot Company (Dan Post), formerly American West Trading
Company. Our commercial printing unit, which was discontinued in fiscal 2001,
operated under the name Rae-Print, Inc. We also operate other smaller
businesses.

A summary of net revenues; gross profits; selling, general and administrative
expenses; and operating profits (loss) of our major business units for fiscal
years 2001 through 2003 is presented in the following table. Certain
reclassifications have been made to the prior year amounts to conform with the
current year presentation. In particular, the prior year amounts have been
adjusted to reflect the discontinuance of the commercial printing unit in
fiscal 2001.

|             |                    |  |                        |        |                |  |             |        |                         |  |      |        |      |  |      |       |    |  |  |       |   |  |  |     |  |  |  |     |  |  |  |     | 
|------------ | ------------------ |  | ---------------------- | ------ | -------------- |  | ----------- | ------ | ----------------------- |  | ---- | ------ | ---- |  | ---- | ----- | -- |  |  | ----- | - |  |  | --- |  |  |  | --- |  |  |  | --- | 
|             |                    |  | Fiscal Year            |        | Percent change |  | Fiscal Year
|             |                    |  | 2003                   |        | 2002           |  | 2001        |        | over prior period       |  | 2003 |        | 2002 |  | 2001
|             |                    |  | Dollars (In thousands) |        | 2003           |  | 2002        |        | Percent of Net Revenues
|             |                    |  |                        |        |                |  |            
|Net Revenues |                    |  |                        |        |                |  |             |        |                         |  |      |        |      |  |      |       |    |  |  |       |   |  |  |     |  |  |  |     |  |  |  |    
|             | Bar Code           |  | $                      | 9,776  |                |  | $           | 10,881 |                         |  | $    | 12,454 |      |  |      | (10.2 | )  |  |  | (12.6 | ) |  |  | 13  |  |  |  | 15  |  |  |  | 22  | 
|             | Office Products    |  |                        | 22,541 |                |  |             | 24,732 |                         |  |      | 18,640 |      |  |      | (8.9  | )  |  |  | 32.7  |   |  |  | 29  |  |  |  | 33  |  |  |  | 33  | 
|             | Military Boots     |  |                        | 22,272 |                |  |             | 20,030 |                         |  |      | 16,792 |      |  |      | 11.2  |    |  |  | 19.3  |   |  |  | 29  |  |  |  | 27  |  |  |  | 29  | 
|             | Western/Work Boots |  |                        | 22,618 |                |  |             | 19,360 |                         |  |      | 9,371  |      |  |      | 16.8  |    |  |  | 106.6 |   |  |  | 29  |  |  |  | 25  |  |  |  | 16  | 
|             | Eliminations/Other |  |                        | (165   | )              |  |             | (472   | )                       |  |      | (112   | )    |  | NM   |       | NM |  |  | 0     |   |  |  | 0   |  |  |  | 0   | 
|             |                    |  |                        |        |                |  |             |        |                         |  |      |        |      |  |      |       |    |  |  |       |   |  |  |     |  |  |  |     |  |  |  |     | 
|             | Consolidated       |  | $                      | 77,042 |                |  | $           | 74,531 |                         |  | $    | 57,145 |      |  |      | 3.4   |    |  |  | 30.4  |   |  |  | 100 |  |  |  | 100 |  |  |  | 100 | 

|             |                    |  |   |        |  |  |   |        |  |  |   |        |   |  |    |       |    |  |  |       |   |                         |  |    |  |  |  |    |  |  |  |    | 
|------------ | ------------------ |  | - | ------ |  |  | - | ------ |  |  | - | ------ | - |  | -- | ----- | -- |  |  | ----- | - | ----------------------- |  | -- |  |  |  | -- |  |  |  | -- | 
|             |                    |  |   |        |  |  |   |        |  |  |   |        |   |  |    |       |    |  |  |       |   | Gross Profit Percentage
|             |                    |  |   |        |  |  |   |        |  |  |   |        |   |  |    |       |    |  |  |       |   |                        
|Gross Profit |                    |  |   |        |  |  |   |        |  |  |   |        |   |  |    |       |    |  |  |       |   |                        
|             | Bar Code           |  | $ | 2,619  |  |  | $ | 3,124  |  |  | $ | 3,668  |   |  |    | (16.2 | )  |  |  | (14.8 | ) |                         |  | 27 |  |  |  | 29 |  |  |  | 29 | 
|             | Office Products    |  |   | 6,008  |  |  |   | 6,260  |  |  |   | 3,492  |   |  |    | (4.0  | )  |  |  | 79.3  |   |                         |  | 27 |  |  |  | 25 |  |  |  | 19 | 
|             | Military Boots     |  |   | 4,772  |  |  |   | 5,517  |  |  |   | 4,034  |   |  |    | (13.5 | )  |  |  | 36.8  |   |                         |  | 21 |  |  |  | 28 |  |  |  | 24 | 
|             | Western/Work Boots |  |   | 5,743  |  |  |   | 4,911  |  |  |   | 1,715  |   |  |    | 16.9  |    |  |  | 186.4 |   |                         |  | 25 |  |  |  | 25 |  |  |  | 18 | 
|             | Eliminations/Other |  |   | 284    |  |  |   | 3      |  |  |   | (27    | ) |  | NM |       | NM |  |  | 0     |   |                         |  | 0  |  |  |  | 0  | 
|             |                    |  |   |        |  |  |   |        |  |  |   |        |   |  |    |       |    |  |  |       |   |                         |  |    |  |  |  |    |  |  |  |    | 
|             | Consolidated       |  | $ | 19,426 |  |  | $ | 19,815 |  |  | $ | 12,882 |   |  |    | (2.0  | )  |  |  | 53.8  |   |                         |  | 25 |  |  |  | 27 |  |  |  | 23 | 

|                                             |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |   |                            |  |    |  |  |  |    |  |  |  |    | 
|-------------------------------------------- | ------------------ |  | - | ------ |  |  | - | ------ | - |  | - | ------ | - |  | -- | ----- | -- |  |  | ----- | - | -------------------------- |  | -- |  |  |  | -- |  |  |  | -- | 
|                                             |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |   | Percentage of Net Revenues
|                                             |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |   |                           
|Selling, General and
Administrative Expenses |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |   |                           
|                                             | Bar Code           |  | $ | 4,155  |  |  | $ | 4,971  |   |  | $ | 5,601  |   |  |    | (16.4 | )  |  |  | (11.2 | ) |                            |  | 43 |  |  |  | 46 |  |  |  | 45 | 
|                                             | Office Products    |  |   | 5,777  |  |  |   | 5,631  |   |  |   | 5,520  |   |  |    | 2.6   |    |  |  | 2.0   |   |                            |  | 26 |  |  |  | 23 |  |  |  | 30 | 
|                                             | Military Boots     |  |   | 997    |  |  |   | 800    |   |  |   | 628    |   |  |    | 24.6  |    |  |  | 27.4  |   |                            |  | 4  |  |  |  | 4  |  |  |  | 4  | 
|                                             | Western/Work Boots |  |   | 4,550  |  |  |   | 3,912  |   |  |   | 2,265  |   |  |    | 16.3  |    |  |  | 72.7  |   |                            |  | 20 |  |  |  | 20 |  |  |  | 24 | 
|                                             | Eliminations/Other |  |   | 156    |  |  |   | (59    | ) |  |   | (84    | ) |  | NM |       | NM |  |  | 0     |   |                            |  | 0  |  |  |  | 0  | 
|                                             |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |   |                            |  |    |  |  |  |    |  |  |  |    | 
|                                             | Consolidated       |  | $ | 15,635 |  |  | $ | 15,255 |   |  | $ | 13,930 |   |  |    | 2.5   |    |  |  | 9.5   |   |                            |  | 20 |  |  |  | 21 |  |  |  | 25 | 

|                        |                    |  |   |        |   |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |  |                            |  |     |   |  |  |     |   |  |  |     |  
|----------------------- | ------------------ |  | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  | -- | ----- | -- |  |  | ----- |  | -------------------------- |  | --- | - |  |  | --- | - |  |  | --- | -
|                        |                    |  |   |        |   |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |  | Percentage of Net Revenues
|                        |                    |  |   |        |   |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |  |                           
|Operating Profit (Loss) |                    |  |   |        |   |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |  |                           
|                        | Bar Code           |  | $ | (1,536 | ) |  | $ | (1,847 | ) |  | $ | (1,933 | ) |  |    | 16.8  |    |  |  | 4.4   |  |                            |  | (16 | ) |  |  | (17 | ) |  |  | (16 | )
|                        | Office Products    |  |   | 231    |   |  |   | 629    |   |  |   | (2,028 | ) |  |    | (63.3 | )  |  |  | 131.0 |  |                            |  | 1   |   |  |  | 2   |   |  |  | (11 | )
|                        | Military Boots     |  |   | 3,775  |   |  |   | 4,717  |   |  |   | 3,406  |   |  |    | (20.0 | )  |  |  | 38.5  |  |                            |  | 17  |   |  |  | 24  |   |  |  | 20  |  
|                        | Western/Work Boots |  |   | 1,193  |   |  |   | 999    |   |  |   | (550   | ) |  |    | 19.4  |    |  |  | 281.6 |  |                            |  | 5   |   |  |  | 5   |   |  |  | (6  | )
|                        | Eliminations/Other |  |   | 128    |   |  |   | 62     |   |  |   | 57     |   |  | NM |       | NM |  |  | 0     |  |                            |  | 0   |   |  |  | 0   |  
|                        |                    |  |   |        |   |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |  |                            |  |     |   |  |  |     |   |  |  |     |  
|                        | Consolidated       |  | $ | 3,791  |   |  | $ | 4,560  |   |  | $ | (1,048 | ) |  |    | (16.9 | )  |  |  | 535.1 |  |                            |  | 5   |   |  |  | 6   |   |  |  | (2  | )

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CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 2003 COMPARED TO FISCAL 2002

Consolidated net revenues for fiscal 2003 reached a record $77.0 million, up
3.4% from $74.5 million record set for fiscal 2002. This growth in consolidated
net revenues was the result of significantly higher requirements for military
boots by the U.S. Government (the Government) and increased sales of our
branded western boot products. Lower net revenues in the bar code and office
products businesses partially offset the net revenue increases of the footwear
businesses.

Consolidated gross profit for fiscal 2003 amounted to $19.4 million as compared
to $19.8 million for fiscal 2002. Gross profit as a percentage of net revenues
decreased from 27% for fiscal 2002 to 25% for fiscal 2003. These declines in
consolidated gross profit were primarily the result of lower product sales
prices, higher per unit manufacturing costs, changing product sales mixes, and
depressed market conditions.

Consolidated selling, general and administrative (SG&A) expenses were
approximately $15.6 million for fiscal 2003, an increase of 2.5% over the $15.3
million reported for fiscal 2002. The additional SG&A costs were primarily
attributable to increased sales salaries and commissions, advertising and
marketing expenditures, group health insurance costs, and professional fees.

As a result of the lower gross profit and higher SG&A costs, consolidated
operating profit fell from $4.6 million for fiscal 2002 to $3.8 million for
fiscal 2003.

BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 2003 COMPARED TO FISCAL 2002

Compsee is a manufacturer and distributor of bar code reading and printing
devices, other peripheral equipment, and supplies related to optical data
collection. Compsee markets, sells, and services its products primarily
through sales centers located throughout the United States. Compsee continues
to explore new markets throughout the United States and other parts of the
world.

Net revenues for the bar code business fell nearly 10.2%, down from $10.9
million for fiscal 2002 to $9.8 million for fiscal 2003. This decline in net
revenues was primarily the result of competitive pressures in a depressed bar
code market, the maturation of the Apex II and III manufactured products, and
the delay in getting the Apex IV product to market. We expect revenue
performance to improve in fiscal 2004 as a result of a stronger economy,
increased APEX IV sales, and the launch of a new bar code product expected
during the second half of the year.

Gross profit for fiscal 2003 amounted to $2.6 million as compared to $3.1
million for fiscal 2002. Gross profit as a percentage of net revenues dropped
from 29% for fiscal 2002 to 27% for fiscal 2003. This decrease in gross profit
was primarily attributable to lower net revenues and a reduced proportion of
higher margin manufactured products in the sales mix.

SG&A expenses for fiscal 2003 were $4.2 million, down 16.4% from $5.0 million
for fiscal 2002. The decrease in SG&A costs were primarily the result of
effective cost containment strategies that lowered sales and administrative
salaries, advertising expenditures, telephone costs, and amortization charges.
These reduced SG&A costs were partially offset by higher research and
development expenditures that increased from $646,000 for fiscal 2002 to
$914,000 for fiscal 2003.

As a result of the above, the bar code business loss from operations amounted
to $1.5 million for fiscal 2003 as compared to a loss from operations of $1.8
million for fiscal 2002.

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OFFICE PRODUCTS UNIT RESULTS OF OPERATIONS, FISCAL 2003 COMPARED TO FISCAL 2002

McRae Office Solutions distributes Toshiba photocopiers, Toshiba facsimile
machines, RISO digital printing equipment, OKI color copiers and printers and
provides related service and supplies for these products throughout North
Carolina and parts of Virginia and South Carolina.

Net revenues for fiscal 2003 were $22.5 million, a decline from $24.7 million
for fiscal 2002. Our net revenue decreased as a result of lower sales to
county-wide educational systems. This was partly a result of our focus on
improving service to existing customers.

Gross profit amounted to $6.0 million for fiscal 2003 as compared to $6.3
million for fiscal 2002. As a percentage of net revenues, gross profit
increased from 25% for fiscal 2002 to 27% for fiscal 2003. The decrease in
gross profit dollars as a result of lower net revenues was partially offset by
increased contributions of higher margin commercial and state contract sales.

SG&A expenses for fiscal 2003 amounted to $5.8 million, up 2.6% from $5.6
million for fiscal 2002. This increase in SG&A expenses was primarily the
result of higher sales salaries and commissions, advertising costs, property
taxes, group health insurance, and professional fees. These expenses were
partially offset by reduced research and development costs.

As a result of the above, the operating profit decreased from $629,000 for
fiscal 2002 to $231,000 for fiscal 2003.

The office products business is an extremely competitive business. Our growth
for the past several years was the result of successfully placing large
quantities of office equipment in county-wide education systems. Growth in this
business will depend on our ability to expand our commercial market sales and
to continue to successfully renew the county-wide education system programs
that we currently service.

MILITARY BOOT UNIT RESULTS OF OPERATIONS, FISCAL 2003 COMPARED TO FISCAL 2002

Our military boot unit manufactures and distributes military combat boots
primarily to the U.S. Government (the Government), foreign governments, and
selected commercial surplus outlets.

Net revenues for fiscal 2003 totaled $22.3 million, up 11.2% from $20.0 million
for fiscal 2002. This growth in net revenues was the result of increased
requirements for military combat boots by the Government primarily attributable
to various conflicts associated with the war on terrorism. Military boot sales
to foreign governments for fiscal 2003 were $5.3 million as compared to $4.9
million for fiscal 2002.

Gross profit amounted to $4.8 million for fiscal 2003 as compared to $5.5
million for fiscal 2002. As a percentage of net revenues, gross profit fell
from 28% for fiscal 2002 to 21% for fiscal 2003. This decline in gross profit
was primarily the result of lower sales prices, higher levels of lower margin
desert boots in the overall sales mix, and increased per unit manufacturing
costs.

SG&A expenses for fiscal 2003 were $997,000 as compared to $800,000 for fiscal
2002. This increase in SG&A costs were primarily attributable to higher
administrative salaries, group health insurance costs, and professional fees.
These higher costs were partially offset by decreased sales salaries and
related expenses.

As a result of the above, the operating profit for fiscal 2003 fell to $3.8
million, down from $4.7 million for fiscal 2002.

For fiscal 2003, we operated under several extensions of our contract with the
Government dated April 15, 1997. The Government issued two solicitations for
future boot requirements to replace the original contract that was set to
expire on April 15, 2002. One solicitation covered the three current direct
molded sole (DMS) styles of military combat boots, including the standard

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issue all-leather combat boot that has historically accounted for the majority
of the Governments orders under the Contract. The second solicitation covered
the newly adopted infantry combat boot, which incorporates a waterproof
membrane construction. This boot replaces the previous all-leather boot as the
Armys standard issue combat boot. We submitted bids for both solicitations.

On March 11, 2003, we were advised that we did not win a contract to produce
the new infantry combat boot. On September 30, 2003, the Government notified
us that we had been awarded a new contract (the Contract) to produce direct
molded sole military combat boots. The Contract covers a base year and two
one-year option periods. The Contract base year provides for a minimum boot
requirement of 135,102 pair and a maximum boot requirement of 544,778 pair with
a minimum and maximum dollar value of approximately $7.4 million and $30.1
million, respectively. The first year option provides for a minimum and a
maximum boot requirement of 276,460 pair and 1,077,552 pair, respectively. The
second year option ranges from a minimum of 236,460 pair to a maximum of
852,552 pair.

As noted above, fiscal 2003 military boots sales to the Government were $15.7
million. Therefore, if in the first year of the Contract the Government were
only to order the minimum number of boots covered by the Contract, our fiscal
2004 military boot sales would be significantly lower than fiscal 2003 sales.
Based on current order volume we expect the Government to order significantly
more than the minimum during the first year of the Contract.

Our contracts with the Government are subject to partial or complete
termination under certain specified circumstances including, but not limited
to, the following: for the convenience of the Government, for the lack of
funding, and for our actual or anticipated failure to perform our contractual
obligations. If a contract is partially or completely terminated for its
convenience, the Government is required to negotiate a settlement with us to
cover costs already incurred. We have never had a contract either partially or
completely terminated. However, if any such contract were either partially or
completely terminated the Companys operating results could be materially
adversely affected.

In addition, the Israeli government has exercised an option in its current
contract with us under which we will provide approximately 60,000 pair of
vulcanized combat boots for delivery in the 2004 calendar year.

WESTERN AND WORK BOOT UNIT RESULTS OF OPERATIONS, FISCAL 2003 COMPARED TO
FISCAL 2002

Our western and work boot business manufactures, imports, and sells various
boot styles for men, women, and children for dress and casual wear.

Net revenues for fiscal 2003 increased 16.8%, up from $19.4 million for fiscal
2002 to $22.6 million for fiscal 2003. This increase was primarily attributable
to strong demand for our Dan Post and Dingo branded products.

Gross profit totaled $5.7 million for fiscal 2003, an increase of 16.9% over
the $4.9 million for fiscal 2002. Gross profit as a percentage of net revenues
was 25% for both fiscal 2003 and fiscal 2002. The increase in gross profit
resulted primarily from the increased revenue for fiscal 2003.

SG&A expenses for fiscal 2003 amounted to $4.6 million as compared to $3.9
million for fiscal 2002. The increase in SG&A costs resulted primarily from
higher sales commissions, sales and marketing expenses, group health insurance
costs, professional fees, and administrative salaries.

As a result of the above, operating profit increased from $999,000 for fiscal
2002 to $1.2 million for fiscal 2003.

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The western and work boot market continues to be highly competitive and
dynamic. While the sluggish economy has had an impact on the western and work
boot business and fourth quarter sales were down to $4.2 million as compared to
$5.1 million in the fourth quarter of fiscal 2002, we believe that our
diversified and branded product line has us well positioned to be a major
player in the western boot market in the future. Additionally, during fiscal
2004, we plan to expand importation from China to include Dingo and American
West Trading branded products, which should result in improved margins on these
products.

CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO FISCAL 2001

Consolidated net revenues for fiscal 2002 climbed to a record level of $74.5
million, up 30.4% from the $57.1 million reported for fiscal 2001. This
increase in consolidated net revenues was primarily the result of higher demand
for military combat boots, western boots, and office products, partially offset
by a 12.6% decrease in bar code business net revenues.

Consolidated gross profit grew to $19.8 million for fiscal 2002, up 53.8% from
$12.9 million for fiscal 2001. Gross profit as a percentage of net revenues
improved from 23% for fiscal 2001 to 27% for fiscal 2002. This increase in
gross profit performance was primarily the result of increased revenues, lower
per unit manufacturing costs, and the positive impact of increased high margin
import product sales.

Consolidated selling, general and administrative (SG&A) expenses for fiscal
2002 were $15.3 million, an increase of 9.5% over the $13.9 million reported
for fiscal 2001. This increase in SG&A expenses was primarily attributable to
higher expenditures for research and development, professional fees, office and
warehouse rentals, employee benefit costs, and write-offs associated with sales
related computer software. As a percentage of consolidated net revenues, SG&A
expenses for fiscal 2002 were 21% as compared to 25% for fiscal 2001.

As a result of the above, consolidated operating profit increased $5.6 million
to $4.6 million for fiscal 2002 as compared to an operating loss of $1.0
million for fiscal 2001.

Our results of operations for fiscal 2003 were not impacted by the
discontinuance of our commercial printing business that occurred in fiscal
2001. Operating results for fiscal 2001 have been adjusted to reflect the
discontinuance of the commercial printing unit.

BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO FISCAL 2001

Net revenues for fiscal 2002 were $10.9 million, a decrease of 12.6% from net
revenues of $12.5 million for fiscal 2001. This decrease was primarily due to
lower product demand resulting from a weak economy, increased competition, and
a delay in marketing the new APEX III product.

Primarily as a result of reduced net revenues, gross profit fell 14.8% to $3.1
million for fiscal 2002 as compared to $3.7 million for fiscal 2001. Gross
profit as a percentage of net revenue was consistent at 29% for both fiscal
2002 and 2001 indicating that demand for higher margin manufactured bar code
products continued to be depressed.

Selling, general and administrative (SG&A) expenses for fiscal 2002 were down
11.2%, to $5.0 million as compared to $5.6 million for fiscal 2001. The decline
in SG&A expenses resulted primarily from lower salary and related costs
associated with reduced sales, support and administrative staff. These
reductions in SG&A costs were partially offset by a 30% increase in research
and development expenditures included in SG&A, from $496,000 for fiscal 2001 to
$646,000 for fiscal 2002. In addition, SG&A expenses were impacted by our
write-off of our remaining $150,000 investment in software purchased in fiscal
2000 to enhance our system sales strategy. We considered this investment to
be impaired because it is no longer used in our operations.

As a result of the above, operating loss for fiscal 2002 amounted to $1.8
million as compared to the operating loss of $1.9 million for fiscal 2001.

16



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OFFICE PRODUCTS UNIT RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO FISCAL 2001

Net revenues for fiscal 2002 were $24.7 million, an increase of 32.7% over net
revenues of $18.6 million for fiscal 2001. This increase in net revenues
resulted from the continued expansion in the number of our county-wide
educational programs, the successful renewal of older county-wide programs
using a combination of both new and used equipment for an additional
sixty-month period, and higher supply and service revenues attributable to the
growth in the number of units in service.

Gross profit for fiscal 2002 amounted to $6.3 million, an increase of 79.3%
over the $3.5 million reported for fiscal 2001. This increase in gross profit
resulted from higher net revenues and improved gross margins. Gross profit as a
percentage of net revenues grew from 19% for fiscal 2001 to 25% for fiscal 2002
primarily as a result of the successful implementation of our renewal strategy
associated with county-wide educational programs and the increase in higher
margin supply and service revenues.

Selling, general and administrative (SG&A) expenses for fiscal 2002 were $5.6
million, up 2.0% from $5.5 million for fiscal 2001. This slight increase in
SG&A expenses was due to research and development costs of approximately
$399,000 related to the continued development of our imaging software. These
expenses were partially offset by lower sales salaries, rental equipment, and
advertising costs. As a percentage of net revenues, SG&A expenses were down
from 30% for fiscal 2001 to 23% for fiscal 2002.

As a result of the above, operating profit increased $2.7 million, or 131.0%,
to $629,000 for fiscal 2002 as compared to an operating loss of $2.0 million
for fiscal 2001.

MILITARY BOOT UNIT RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO FISCAL 2001

Net revenues for fiscal 2002 increased 19.3%, to $20.0 million as compared to
net revenues of $16.8 million for fiscal 2001. This growth in net revenues was
primarily the result of increased requirements for military combat boots by the
U.S. Government (the Government) primarily related to the deployment of troops
engaged in the war on terrorism. Military boot sales to foreign governments for
fiscal 2002 were $4.9 million as compared to $4.6 million for fiscal 2001.

Gross profit for fiscal 2002 grew to $5.5 million, up 36.8% from $4.0 million
for fiscal 2001. The increase in gross profit was due to higher military boot
sales and lower unit costs related to fixed manufacturing costs being spread
over higher production levels. Gross profit as a percentage of net revenues
increased from 24% for fiscal 2001 to 28% for fiscal 2002 as a result of these
lower unit costs.

Selling, general and administrative (SG&A) expenses for fiscal 2002 amounted to
$800,000, up 27.4% from $628,000 for fiscal 2001. The increase in SG&A expenses
was the result of additional selling expenses associated with the commercial
military boot business and higher employee benefit costs. As a percentage of
net revenues, SG&A expenses remained steady at 4% for fiscal 2002 and 2001,
respectively.

As a result of the above, operating profit for fiscal 2002 grew $1.3 million,
to $4.7 million as compared to $3.4 million for fiscal 2001.

WESTERN AND WORK BOOT UNIT RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO
FISCAL 2001

Net revenues increased to $19.4 million for fiscal 2002, up 106.6% from $9.4
million for fiscal 2001. This significant growth in net revenues was primarily
attributable to high demand for our Dan Post and Dingo branded products (driven
in part by the Companys acquisition of the Dingo and Dan Post brand names in
June and October, 2001, respectively), a slight resurgence in the western boot
market, and employment of successful sales and marketing strategies.

17



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Gross profit for fiscal 2002 grew 186.4%, from $1.7 million for fiscal 2001 to
$4.9 million for the current fiscal year. Gross profit as a percentage of net
revenues was 25% for fiscal 2002 as compared to 18% for fiscal 2001. This
improvement in gross profit was primarily due to higher net revenues, the
positive impact of increased sales of higher margin imported products, and
increased sales prices on our manufactured products.

Selling, general and administrative (SG&A) expenses were $1.7 million higher
for fiscal 2002 as compared to fiscal 2001 primarily as a result of
implementing a support structure to manage the significant increase in
business. Specifically, we spent more for sales related salaries, commissions,
warehousing costs, travel expenses, administrative salaries, employee related
benefits, professional fees, product advertising costs, and bad debt charges.
As a percentage of net revenues, SG&A expenses for fiscal 2002 were 20% as
compared to 24% for fiscal 2001.

As a result of the above, operating profit for fiscal 2002 amounted to $1.0
million, as compared to a $550,000 operating loss for fiscal 2001.

FINANCIAL CONDITION AND LIQUIDITY

We measure our liquidity by our ability to generate cash to fund our
operations, investment activities, and financing requirements. Our liquidity
position is sensitive to and dependent on cash generated from operations, the
level of capital expenditures, reductions in debt, payment of quarterly
dividends, and adequate bank financing arrangements.

At August 2, 2003 cash and cash equivalents amounted to approximately $6.2
million. Working capital equaled $25.2 million and the current ratio, defined
as current assets divided by current liabilities, was 3.63 to 1.

We have two lines of credit with a bank totaling $4.75 million, all of which
was available at August 2, 2003. One credit line totaling $1.75 million (which
is restricted to one hundred percent of the outstanding accounts receivable due
from the U.S. Government) expires in June 2004. The other credit line totaling
$3.0 million expires in November 2003. We believe that current cash and cash
equivalents ($6.2 million at August 2, 2003), cash generated from operations,
and the available lines of credit will be sufficient to meet our capital
requirements for fiscal 2004. We do not have any off-balance sheet financing
arrangements.

The table below details by fiscal year maturity dates our contractual
commitments as of August 2, 2003 (amounts in thousands):

|                 |       |      |     |      |  |      |     |      |  |      |     |            |  |   |     |     |  |   |     |     |  |   |     |     | 
|---------------- | ----- | ---- | --- | ---- |  | ---- | --- | ---- |  | ---- | --- | ---------- |  | - | --- | --- |  | - | --- | --- |  | - | --- | --- | 
|Commitment       |       | 2004 |     | 2005 |  | 2006 |     | 2007 |  | 2008 |     | Thereafter
|                 |       |      |     |      |  |      |     |      |  |      |     |           
|Bank loans       |       | $    | 577 |      |  | $    | 598 |      |  | $    | 619 |            |  | $ | 641 |     |  | $ | 663 |     |  | $ | 786 |    
|Operating leases |       |      | 256 |      |  |      | 149 |      |  |      | 62  |            |  |   | 49  |     |  |   | 20  |     |  |   | 0   |    
|                 |       |      |     |      |  |      |     |      |  |      |     |            |  |   |     |     |  |   |     |     |  |   |     |    
|                 | Total |      | $   | 833  |  |      | $   | 747  |  |      | $   | 681        |  |   | $   | 690 |  |   | $   | 683 |  |   | $   | 786 | 

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Selected cash flow data is presented below (in thousands):

|                     |                                           |                                                         |  |                |        |   |  |     |        |  
|-------------------- | ----------------------------------------- | ------------------------------------------------------- |  | -------------- | ------ | - |  | --- | ------ | -
|                     |                                           | For Years Ended                                        
|Source (Use) of Cash |                                           | August 2, 2003                                          |  | August 3, 2002
|                     |                                           |                                                         |  |                |        |  
|Operating activities |                                           |                                                         |  |                |        |   |  |    
|                     |                                           | Net earnings adjusted for depreciation
and amortization |  | $              | 3,675  |   |  | $   | 4,421  |  
|                     |                                           | Accounts receivable                                     |  |                | (439   | ) |  |     | (4,394 | )
|                     |                                           | Inventories                                             |  |                | (2,289 | ) |  |     | (2,686 | )
|                     | Net cash provided by operating activities |                                                         |  | 1,983          |        |   |  | 239 |       
|Investing activities |                                           |                                                         |  |                |        |   |  |    
|                     |                                           | Purchase of trademarks                                  |  |                | 0      |   |  |     | (800   | )
|                     |                                           | Capital expenditures                                    |  |                | (381   | ) |  |     | (691   | )
|Financing activities |                                           |                                                         |  |                |        |   |  |    
|                     |                                           | Principal repayment of long-term debt                   |  |                | (542   | ) |  |     | (579   | )
|                     |                                           | Dividends paid                                          |  |                | (456   | ) |  |     | (374   | )

Net cash provided by operating activities during fiscal 2003 totaled
approximately $2.0 million. Net earnings plus depreciation contributed a
positive cash flow of approximately $3.7 million. The trade accounts receivable
balance increased by almost $439,000 and was primarily attributable to expanded
sales of military combat boots to the Government. Inventory balances increased
by approximately $2.3 million as a result of increased demand for military
boots, overages caused by a sluggish western boot market for the fourth
quarter, and partially offset by the transfer of $971,000 of office equipment
to fixed assets for use in the cost per copy program.

Capital expenditures for fiscal 2003 amounted to approximately $381,000
primarily for manufacturing and computer equipment.

Our financing activities used approximately $1.0 million of cash to pay
dividends and reduce our debt principal amounts.

The continued growth of the western boot business could negatively impact our
liquidity. In addition, if sales to the Government under our new contract are
significantly reduced from fiscal 2003 levels (if the Government only ordered
the minimum under the contract, fiscal 2004 sales would be approximately $8.3
million less than fiscal 2003 sales), or the Government declines to exercise
its option to extend the contract period after completion of the first year of
the contract or terminates the contract, our liquidity could be adversely
impacted.

INFLATION

Management does not believe inflation has had a material impact on sales or
operating results for the periods covered in this discussion.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2002, FASB Interpretation 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to
guarantees the Company issues or modifies subsequent to December 31, 2002, but
has certain disclosure requirements effective for periods ending after December
15, 2002. The Company has adopted the provisions of FIN 45.

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In December 2002, Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosures, was
issued and established the accounting and disclosure requirements associated
with alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
is effective for fiscal 2003. Currently, our Incentive Equity Plan (Plan) is
inactive; therefore, we do not expect grants under this Plan.

On January 17, 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies existing
accounting for whether interest entities should be consolidated in financial
statements based upon the investees ability to finance its activities without
additional financial support and whether investors possess characteristics of a
controlling financial interest. FIN 46 applies to years or interim periods
beginning after December 15, 2003 with certain disclosure provisions required
for financial statements issued after January 31, 2003. Currently, we have no
financial statement adjustments required by FIN 46.

In April 2003, SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, was issued and amends and clarifies
financial accounting and reporting for derivative instruments as originally set
forth in SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Currently, we do not have any derivative instruments or hedging
activities.

In May 2003, SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued and established
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This statement
is effective for us beginning with the first quarter of fiscal 2004. We have no
financial instruments that fall under this statement.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual 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, our
expectations about future Government orders for military boots, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes related to the aggregate
$4.75 million lines of credit and a term loan through our wholly owned
subsidiary, Dan Post Boot Company. As of August 2, 2003, there was no
outstanding indebtedness under the lines of credit and $3.7 million was
outstanding on the term loan. We do not buy or sell derivative financial
instruments for trading purposes. Borrowings under these credit facilities
described above bear interest at rates based upon the Prime Rate or the
Prime Rate less a margin of one-half percent offered by the applicable
lender. We have 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 these credit facilities would increase
annual interest expense by approximately $12,000 (assuming that our aggregate
borrowings under the credit facilities averaged $3.5 million during a fiscal
year).

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following documents are filed as part of this report:

|   |  |                                                                                                                        |  |  |       | 
|-- |  | ---------------------------------------------------------------------------------------------------------------------- |  |  | ----- | 
|1. |  | Independent Auditors Report                                                                                           |  |  | 22    | 
|2. |  | McRae Industries, Inc. and Subsidiaries Consolidated Financial Statements:                                             |  |  |       | 
|   |  | Consolidated Balance Sheets as of August 2, 2003 and August 3, 2002.                                                   |  |  | 23-24 | 
|   |  | Consolidated Statements of Operations for the Years Ended August 2, 2003,
August 3, 2002, and July 28, 2001.           |  |  | 25    | 
|   |  | Consolidated Statements of Shareholders Equity for the Years Ended
August 2, 2003, August 3, 2002, and July 28, 2001. |  |  | 26    | 
|   |  | Consolidated Statements of Cash Flows for the Years Ended August 2, 2003,
August 3, 2002, and July 28, 2001.           |  |  | 27    | 
|   |  | Notes to Consolidated Financial Statements.                                                                            |  |  | 28-38 | 
|3. |  | Financial Statement Schedule:                                                                                          |  |  |       | 
|   |  | Schedule II                                                                                                            |  |  | 39    | 



| |  | Schedules other than those listed above have been omitted
because they are not applicable or the required information
is shown in the financial statements or the notes thereto.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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To the Board of Directors
and Shareholders of
McRae Industries, Inc.:

We have audited the accompanying consolidated balance sheets of McRae
Industries, Inc. (a Delaware Corporation) and subsidiaries as of August 2,
2003, and August 3, 2002, and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the three years in
the period ended August 2, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of McRae Industries,
Inc. and subsidiaries as of August 2, 2003, and August 3, 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended August 2, 2003, in conformity with accounting principles generally
accepted in the United States of America.

We have also audited Schedule II for each of the three years in the period
ended August 2, 2003. In our opinion, this schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information therein.

/s/ Grant Thornton LLP

October 16, 2003
Charlotte, North Carolina

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CONSOLIDATED BALANCE SHEETSMcRae Industries, Inc. and Subsidiaries

|                                            |                                                                                                            |           |                      |              |    |                |        |           |     |        |        | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | --------- | -------------------- | ------------ | -- | -------------- | ------ | --------- | --- | ------ | ------ | 
|                                            |                                                                                                            |           |                      |              |    | (In thousands)
|                                            |                                                                                                            |           |                      |              |    | August 2,      |        | August 3,
|                                            |                                                                                                            |           |                      |              |    | 2003           |        | 2002     
|                                            |                                                                                                            |           |                      |              |    |                |        |          
|ASSETS                                      |                                                                                                            |           |                      |              |    |                |        |          
|Current assets:                             |                                                                                                            |           |                      |              |    |                |        |          
|                                            | Cash and cash equivalents                                                                                  |           | $                    | 6,192        |    |                | $      | 5,822     |    
|                                            | Accounts receivable, less allowances for
doubtful accounts of $558,000 and
$374,000, respectively (Note 5) |           |                      | 10,276       |    |                |        | 9,442     |    
|                                            | Notes receivable, current portion                                                                          |           |                      |              |    |                |        |           |    
|                                            |                                                                                                            | Employees |                      |              | 2  |                |        |           | 17  |       
|                                            |                                                                                                            | Other     |                      |              | 56 |                |        |           | 58  |       
|                                            | Inventories (Notes 2 and 5)                                                                                |           |                      | 17,559       |    |                |        | 16,241    |    
|                                            | Net investment in capitalized leases,
current portion (Note 3)                                             |           |                      | 146          |    |                |        | 254       |    
|                                            | Income tax receivable (Note 7)                                                                             |           |                      | 314          |    |                |        | 242       |    
|                                            | Prepaid expenses and other current assets                                                                  |           |                      | 242          |    |                |        | 104       |    
|                                            |                                                                                                            |           |                      |              |    |                |        |           |    
|                                            |                                                                                                            |           | Total current assets |              |    | 34,787         |        |           |     | 32,180 |       
|Property and equipment, net (Notes 4 and 5) |                                                                                                            |           | 4,541                |              |    |                | 4,458  |          
|Other assets:                               |                                                                                                            |           |                      |              |    |                |        |          
|                                            | Notes and accounts receivable, related
entities                                                            |           |                      | 0            |    |                |        | 395       |    
|                                            | Net investment in capitalized leases,
net of current portion (Note 3)                                      |           |                      | 1,716        |    |                |        | 441       |    
|                                            | Notes receivable, net of current portion                                                                   |           |                      |              |    |                |        |           |    
|                                            |                                                                                                            | Employees |                      |              | 2  |                |        |           | 3   |       
|                                            |                                                                                                            | Other     |                      |              | 69 |                |        |           | 124 |       
|                                            | Real estate held for investment                                                                            |           |                      | 1,390        |    |                |        | 652       |    
|                                            | Goodwill                                                                                                   |           |                      | 362          |    |                |        | 362       |    
|                                            | Cash surrender value life insurance (Note 10)                                                              |           |                      | 2,220        |    |                |        | 2,251     |    
|                                            | Trademarks                                                                                                 |           |                      | 1,049        |    |                |        | 1,049     |    
|                                            | Other                                                                                                      |           |                      | 13           |    |                |        | 14        |    
|                                            |                                                                                                            |           |                      |              |    |                |        |           |    
|                                            |                                                                                                            |           | Total other assets   |              |    | 6,821          |        |           |     | 5,291  |       
|                                            |                                                                                                            |           |                      |              |    |                |        |           |    
|                                            |                                                                                                            |           |                      | Total assets |    | $              | 46,149 |           |     | $      | 41,929 | 
|                                            |                                                                                                            |           |                      |              |    |                |        |           |    

See notes to consolidated financial statements

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CONSOLIDATED BALANCE SHEETSMcRae Industries, Inc. and Subsidiaries

|                                                      |               |                                                                                                                          |        |                                            |        |                |        |           |        |   |        | 
|----------------------------------------------------- | ------------- | ------------------------------------------------------------------------------------------------------------------------ | ------ | ------------------------------------------ | ------ | -------------- | ------ | --------- | ------ | - | ------ | 
|                                                      |               |                                                                                                                          |        |                                            |        | (In thousands)
|                                                      |               |                                                                                                                          |        |                                            |        | August 2,      |        | August 3,
|                                                      |               |                                                                                                                          |        |                                            |        | 2003           |        | 2002     
|                                                      |               |                                                                                                                          |        |                                            |        |                |        |          
|LIABILITIES AND SHAREHOLDERS EQUITY                  |               |                                                                                                                          |        |                                            |        |                |        |          
|Current liabilities:                                  |               |                                                                                                                          |        |                                            |        |                |        |          
|                                                      |               | Current portion of notes payable, banks (Note 5)                                                                         |        | $                                          | 577    |                |        | $         | 527    |  
|                                                      |               | Accounts payable                                                                                                         |        |                                            | 5,211  |                |        |           | 4,361  |  
|                                                      |               | Accrued employee benefits (Note 6)                                                                                       |        |                                            | 427    |                |        |           | 475    |  
|                                                      |               | Deferred revenues                                                                                                        |        |                                            | 1,012  |                |        |           | 1,039  |  
|                                                      |               | Accrued payroll and payroll taxes                                                                                        |        |                                            | 913    |                |        |           | 753    |  
|                                                      |               | Contract contingencies                                                                                                   |        |                                            | 400    |                |        |           | 669    |  
|                                                      |               | Other                                                                                                                    |        |                                            | 1,044  |                |        |           | 527    |  
|                                                      |               |                                                                                                                          |        |                                            |        |                |        |           |        |  
|                                                      |               |                                                                                                                          |        | Total current liabilities                  |        |                | 9,584  |           |        |   | 8,351  | 
|Notes payable, banks, net of current portion (Note 5) |               |                                                                                                                          | 3,307  |                                            |        |                | 3,900  |          
|Lease guarantees                                      |               |                                                                                                                          | 1,568  |                                            |        |                |       |          
|Minority interest (Note 8)                            |               |                                                                                                                          | 88     |                                            |        |                | 97     |          
|Commitments and contingencies (Note 8)                |               |                                                                                                                          |        |                                            |        |                |        |          
|Shareholders equity: (Note 9)                        |               |                                                                                                                          |        |                                            |        |                |        |          
|                                                      | Common stock: |                                                                                                                          |        |                                            |        |                |        |           |       
|                                                      |               | Class A, $1 par value; authorized
5,000,000 shares; issued and outstanding,
1,914,972 and 1,879,072 shares, respectively |        |                                            | 1,915  |                |        |           | 1,879  |  
|                                                      |               | Class B, $1 par value; authorized
2,500,000 shares; issued and outstanding,
853,527 and 889,427 shares, respectively     |        |                                            | 853    |                |        |           | 889    |  
|Additional paid-in capital                            |               |                                                                                                                          | 791    |                                            |        |                | 791    |          
|Retained earnings                                     |               |                                                                                                                          | 28,043 |                                            |        |                | 26,022 |          
|                                                      |               |                                                                                                                          |        |                                            |        |                |        |           |        |  
|                                                      |               | Total shareholders equity                                                                                               |        |                                            | 31,602 |                |        |           | 29,581 |  
|                                                      |               |                                                                                                                          |        |                                            |        |                |        |           |        |  
|                                                      |               |                                                                                                                          |        | Total liabilities and shareholders equity |        | $              | 46,149 |           |        | $ | 41,929 | 
|                                                      |               |                                                                                                                          |        |                                            |        |                |        |           |        |  

See notes to consolidated financial statements

24



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CONSOLIDATED STATEMENTS OF OPERATIONSMcRae Industries, Inc. and Subsidiaries

|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |      |  
|------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | --------- | ----------------------------------------- | --------- |  | -------- | --------- | --- |  | - | --------- | ---- | -
|                                                                                     |                                                                                           |           | (In thousands, except for per share data)
|                                                                                     |                                                                                           | August 2, |                                           | August 3, |  | July 28,
|For the Years Ended                                                                  |                                                                                           | 2003      |                                           | 2002      |  | 2001    
|                                                                                     |                                                                                           |           |                                           |           |  |          |          
|Net revenues                                                                         |                                                                                           | $         | 77,042                                    |           |  | $        | 74,531    |     |  | $ | 57,145    |     
|Cost of revenues                                                                     |                                                                                           |           | 57,616                                    |           |  |          | 54,716    |     |  |   | 44,263    |     
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|Gross profit                                                                         |                                                                                           |           | 19,426                                    |           |  |          | 19,815    |     |  |   | 12,882    |     
|Selling, general and
administrative expenses                                         |                                                                                           |           | 15,635                                    |           |  |          | 15,255    |     |  |   | 13,930    |     
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|Operating profit (loss) from
continuing operations                                   |                                                                                           |           | 3,791                                     |           |  |          | 4,560     |     |  |   | (1,048    | )   
|Other income (loss), net                                                             |                                                                                           |           | 503                                       |           |  |          | (47       | )   |  |   | 502       |     
|Interest expense (Note 5)                                                            |                                                                                           |           | (186                                      | )         |  |          | (246      | )   |  |   | (413      | )   
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|Earnings (loss) from continuing
operations before income taxes
and minority interest |                                                                                           |           | 4,108                                     |           |  |          | 4,267     |     |  |   | (959      | )   
|Provision (benefit) for
income taxes (Note 7)                                        |                                                                                           |           | 1,640                                     |           |  |          | 1,693     |     |  |   | (375      | )   
|Minority interest (Note 8)                                                           |                                                                                           |           | 9                                         |           |  |          | 11        |     |  |   | 13        |     
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|Net earnings (loss)
from continuing operations                                       |                                                                                           |           | 2,477                                     |           |  |          | 2,585     |     |  |   | (571      | )   
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|Discontinued operations: (Note 12)                                                   |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|                                                                                     | Loss from discontinued operations,
net of income tax benefits of $(19,000)
for 2001.      |           |                                           |          |  |          |           |    |  |   |           | (41  | )
|                                                                                     | Loss on disposal of business segment
net of income tax benefit of $39,000
for fiscal 2001 |           |                                           |          |  |          |           |    |  |   |           | (85  | )
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|Net earnings (loss)                                                                  |                                                                                           | $         | 2,477                                     |           |  | $        | 2,585     |     |  | $ | (697      | )   
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|Earnings (loss) per common share:                                                    |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|                                                                                     | Earnings (loss) from continuing
operations                                                |           | $                                         | .89       |  |          | $         | .93 |  |   | $         | (.21 | )
|                                                                                     | Loss from discontinued operations                                                         |           |                                           |          |  |          |           |    |  |   |           | (.04 | )
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|                                                                                     | Net earnings (loss)                                                                       |           | $                                         | .89       |  |          | $         | .93 |  |   | $         | (.25 | )
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     
|Weighted average number of
common shares outstanding                                 |                                                                                           |           | 2,768,499                                 |           |  |          | 2,768,499 |     |  |   | 2,768,499 |     
|                                                                                     |                                                                                           |           |                                           |           |  |          |           |     |  |   |           |     

See notes to consolidated financial statements

25



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##### 



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYMcRae Industries, Inc. and Subsidiaries

|                                              |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   |        |  
|--------------------------------------------- |  | -------------------------- | --------- | ------- |  | ---------- | ----- | -------- |  | --------------- | ------- | -------- |  | - | --- | - |  | - | --- |  |  | - | ------ | -
|                                              |  | (Dollars in thousands)     |           |         |  |            |       |          |  |                
|                                              |  | Common Stock, $1 par value |           |         |  |            |       |          |  |                
|                                              |  | Class A                    |           | Class B |  | Additional |       | Retained
|                                              |  | Shares                     |           | Amount  |  | Shares     |       | Amount   |  | Paid-in Capital |         | Earnings
|                                              |  |                            |           |         |  |            |       |          |  |                 |         |         
|Balance, July 29, 2000                        |  |                            | 1,859,692 |         |  | $          | 1,860 |          |  |                 | 908,807 |          |  | $ | 909 |   |  | $ | 791 |  |  | $ | 25,029 |  
|Conversion of Class B to
Class A stock        |  |                            | 2,125     |         |  |            | 2     |          |  |                 | (2,125  | )        |  |   | (2  | ) |  |   |     |  |  |   |        |  
|Cash Dividend ($.28 per
Class A common stock) |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   | (521   | )
|Net loss                                      |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   | (697   | )
|                                              |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   |        |  
|Balance, July 28, 2001                        |  |                            | 1,861,817 |         |  |            | 1,862 |          |  |                 | 906,682 |          |  |   | 907 |   |  |   | 791 |  |  |   | 23,811 |  
|Conversion of Class B to
Class A stock        |  |                            | 17,255    |         |  |            | 17    |          |  |                 | (17,255 | )        |  |   | (18 | ) |  |   |     |  |  |   |        |  
|Cash Dividend ($.20 per
Class A common stock) |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   | (374   | )
|Net earnings                                  |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   | 2,585  |  
|                                              |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   |        |  
|Balance, August 3, 2002                       |  |                            | 1,879,072 |         |  |            | 1,879 |          |  |                 | 889,427 |          |  |   | 889 |   |  |   | 791 |  |  |   | 26,022 |  
|Conversion of Class B to
Class A stock        |  |                            | 35,900    |         |  |            | 36    |          |  |                 | (35,900 | )        |  |   | (36 | ) |  |   |     |  |  |   |        |  
|Cash Dividend ($.24 per
Class A common stock) |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   | (456   | )
|Net earnings                                  |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   | 2,477  |  
|                                              |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   |        |  
|Balance, August 2, 2003                       |  |                            | 1,914,972 |         |  | $          | 1,915 |          |  |                 | 853,527 |          |  | $ | 853 |   |  | $ | 791 |  |  | $ | 28,043 |  
|                                              |  |                            |           |         |  |            |       |          |  |                 |         |          |  |   |     |   |  |   |     |  |  |   |        |  

See notes to consolidated financial statements

26



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##### 



CONSOLIDATED STATEMENTS OF CASH FLOWSMcRae Industries, Inc. and Subsidiaries

|                                                                                    |                                                                  |      |          |        |           |      |                |        |   |   |        |        |  
|----------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---- | -------- | ------ | --------- | ---- | -------------- | ------ | - | - | ------ | ------ | -
|                                                                                    |                                                                  |      |          |        |           |      | (In thousands) |        |   |   |       
|                                                                                    |                                                                  |      | August 2 |        | August 3, |      | July 28,      
|For the Years Ended                                                                 |                                                                  | 2003 |          | 2002   |           | 2001
|                                                                                    |                                                                  |      |          |        |           |     
|Cash Flows from Operating Activities:                                               |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|Net earnings (loss)                                                                 |                                                                  | $    | 2,477    |        |           | $    | 2,585          |        |   | $ | (697   | )     
|Adjustments to reconcile net earnings
to net cash provided by operating activities: |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|                                                                                    | Depreciation and amortization                                    |      |          | 1,198  |           |      |                | 1,836  |   |   |        | 1,549  |  
|                                                                                    | Equity in net (income) loss of investee                          |      |          |       |           |      |                | 25     |   |   |        | (83    | )
|                                                                                    | Minority shareholders interest in earnings
(loss) of subsidiary |      |          | (9     | )         |      |                | (11    | ) |   |        | (13    | )
|                                                                                    | Loss (gain) on sale of assets                                    |      |          | (333   | )         |      |                | 122    |   |   |        | 39     |  
|                                                                                    | Contract contingencies                                           |      |          | (268   | )         |      |                | 19     |   |   |        | 224    |  
|                                                                                    | Changes in operating assets and liabilities:                     |      |          |        |           |      |                |        |   |   |        |        |  
|                                                                                    | Accounts receivable                                              |      |          | (439   | )         |      |                | (4,394 | ) |   |        | 1,382  |  
|                                                                                    | Inventories                                                      |      |          | (2,289 | )         |      |                | (2,686 | ) |   |        | 1,635  |  
|                                                                                    | Net investment in capitalized leases                             |      |          | 400    |           |      |                | 831    |   |   |        | 603    |  
|                                                                                    | Prepaid expenses and other current assets                        |      |          | (138   | )         |      |                | (39    | ) |   |        | 22     |  
|                                                                                    | Accounts payable                                                 |      |          | 850    |           |      |                | 816    |   |   |        | (1,131 | )
|                                                                                    | Accrued employee benefits                                        |      |          | (48    | )         |      |                | 235    |   |   |        | (37    | )
|                                                                                    | Deferred revenues                                                |      |          | (27    | )         |      |                | 56     |   |   |        | (56    | )
|                                                                                    | Accrued payroll and payroll taxes                                |      |          | 160    |           |      |                | 176    |   |   |        | (36    | )
|                                                                                    | Income taxes                                                     |      |          | (72    | )         |      |                | 639    |   |   |        | (1,359 | )
|                                                                                    | Other                                                            |      |          | 521    |           |      |                | 29     |   |   |        | (72    | )
|                                                                                    |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|                                                                                    | Net cash provided by operating activities                        |      |          | 1,983  |           |      |                | 239    |   |   |        | 1,970  |  
|                                                                                    |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|Cash Flows from Investing Activities:                                               |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|Proceeds from sale of property                                                      |                                                                  |      | 381      |        |           |      | 105            |        |   |   | 107    |       
|Proceeds from sale of short term investments                                        |                                                                  |      | 18       |        |           |      |               |        |   |   | 55     |       
|Purchase of land                                                                    |                                                                  |      |         |        |           |      |               |        |   |   | (16    | )     
|Conversion (purchase) of other assets                                               |                                                                  |      | (706     | )      |           |      | 79             |        |   |   | (83    | )     
|Purchase of trademarks                                                              |                                                                  |      |         |        |           |      | (800           | )      |   |   | (250   | )     
|Purchase of minority interest                                                       |                                                                  |      |         |        |           |      |               |        |   |   | (605   | )     
|Capital expenditures                                                                |                                                                  |      | (381     | )      |           |      | (691           | )      |   |   | (318   | )     
|Advances to related parties                                                         |                                                                  |      |         |        |           |      | (99            | )      |   |   | (206   | )     
|Collections from related parties                                                    |                                                                  |      |         |        |           |      | 206            |        |   |   | 414    |       
|Advances on notes receivable                                                        |                                                                  |      |         |        |           |      |               |        |   |   | (300   | )     
|Collections on notes receivable                                                     |                                                                  |      | 73       |        |           |      | 395            |        |   |   | 173    |       
|                                                                                    |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|Net cash used in investing activities                                               |                                                                  |      | (615     | )      |           |      | (805           | )      |   |   | (1,029 | )     
|                                                                                    |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|Cash Flows from Financing Activities:                                               |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|Principal repayments of long-term debt                                              |                                                                  |      | (542     | )      |           |      | (579           | )      |   |   | (298   | )     
|Dividends paid                                                                      |                                                                  |      | (456     | )      |           |      | (374           | )      |   |   | (521   | )     
|                                                                                    |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|                                                                                    | Net cash used in financing activities                            |      |          | (998   | )         |      |                | (953   | ) |   |        | (819   | )
|                                                                                    |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|Net (Decrease) Increase in Cash and Cash
Equivalents                                |                                                                  |      | 370      |        |           |      | (1,519         | )      |   |   | 122    |       
|Cash and Cash Equivalents at Beginning of Year                                      |                                                                  |      | 5,822    |        |           |      | 7,341          |        |   |   | 7,219  |       
|                                                                                    |                                                                  |      |          |        |           |      |                |        |   |   |        |       
|Cash and Cash Equivalents at End of Year                                            |                                                                  | $    | 6,192    |        |           | $    | 5,822          |        |   | $ | 7,341  |       
|                                                                                    |                                                                  |      |          |        |           |      |                |        |   |   |        |       

Note:Non-cash operating and investing activities excluded from this
statement of cash flows relate to the transfer of office equipment from
inventory to property and equipment amounted to $971,000, $251,000, and
$852,000 in fiscal 2003, 2002, and 2001, respectively.

See notes to consolidated financial statements

27



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMcRae Industries, Inc. and Subsidiaries

For the Years Ended August 2, 2003, August 3, 2002, and July 28, 2001.

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its subsidiaries. Minority interest represents the minority shareholders
proportionate share of the equity of a majority-owned subsidiary. Significant
inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

The timely preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Actual results could differ from those estimates.
Significant estimates expected to change in the near term include the allowance
for contract contingencies.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid debt instruments such as certificates
of deposit and commercial paper purchased with an original maturity date of
three months or less.

Accounts Receivable

Accounts receivable are stated at amounts expected to be collected from
outstanding balances. Probable uncollectible accounts are provided for by a
charge to earnings and a credit to a valuation allowance based on the
assessment of the current status of individual accounts. Balances that are
still outstanding after using reasonable collection efforts are written off
through a charge to the valuation allowance and a credit to accounts
receivable. The Company performs on-going credit evaluations of its customers
financial condition and establishes an allowance for losses on trade
receivables based upon factors surrounding the credit risk of specific
customers, historical trends, and other information.

Inventories

Inventories are stated at the lower of cost or market using the last-in,
first-out (LIFO) method for military boots and photocopier inventories and
using the first-in, first-out (FIFO) method for all other inventories.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line method for financial reporting purposes and by
accelerated methods for income tax purposes. Useful lives range from three
years for computer equipment to thirty-one and one-half years for buildings.

Revenue Recognition

Service maintenance agreements are sold for certain products. Revenues related
to these agreements are deferred and recognized over the term of the related
agreements.

28



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##### 



The Company sells equipment under sales-type leases to customers. Sales are
recognized when the equipment is installed and unearned income is recognized
over the term of the lease. Some of these leases are subsequently transferred
to third-party leasing companies and a gain or loss recognized at the time of
transfer. The leases generally have an unguaranteed residual value that is not
transferred to the third-party leasing company. Certain third-party leasing
companies require the Company to guarantee the residual value on the leases
transferred.

Revenue from copy usage is recognized when billed quarterly or monthly based on
the actual usage. Maintenance and supply expenses related to these cost per
copy lease agreements are recognized as incurred. Provision for losses are
recognized when determined.

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
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. At the end of the Contract term all remaining
inventory is sent to the Government. 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.

All other sales of the Company are recognized as revenues when title passes to
the buyer.

Intangible Assets

As of August 3, 2002, Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, was adopted. Under SFAS No. 142,
goodwill is no longer amortized but is treated for impairment using a fair
value approach at the reporting unit level. A reporting unit is the operating
segment, or a business one level below that operating segment (the component
level) if discrete financial information is prepared and regularly reviewed by
management at the component level. An impairment charge is recognized for any
amount by which the carrying amount of a reporting units goodwill exceeds its
fair value. Discounted cash flows are used to establish fair values. Intangible
assets with indefinite lives are tested for impairment and written down to fair
value as required.

Before August 3, 2002, goodwill was amortized over its estimated period of
benefit on a straight-line basis. Other intangible assets were amortized on
appropriate bases over their estimated lives. When an intangible assets
carrying value exceeded associated expected operating cash flows, it was
considered to be impaired and was written down to fair value, which was
determined based on either discounted future cash flows or appraised values.

Income Taxes

A deferred tax asset or liability is recorded for all temporary differences
between financial and tax-reporting using enacted tax rates. Deferred tax
expense (benefit) results from the change during the year of the deferred tax
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.

29



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##### 



Earnings Per Share

Earnings per share are based on the weighted average number of shares of common
stock outstanding during the year. The Company had no common stock equivalents
issued or outstanding for the three-year period ended August 2, 2003.

Recently Issued Accounting Standards

In November 2002, FASB Interpretation No. 45 (FIN 45), Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, was issued. FIN 45 requires a guarantor entity, at
the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to
guarantees the Company issues or modifies subsequent to December 31, 2002, but
has certain disclosure requirements effective for periods ending after December
15, 2002. We have adopted the provisions of FIN 45.

In December 2002, Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosures, was
issued and established the accounting and disclosure requirements associated
with alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
is effective for fiscal 2003. Currently, our Incentive Equity Plan (Plan) is
inactive; there are no outstanding grants under this Plan and we do not expect
grants under this Plan.

On January 17, 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies existing
accounting for whether certain entities known as variable interest entities
should be consolidated in financial statements based upon the investees
ability to finance its activities without additional financial support and
whether investors possess characteristics of a controlling financial interest.
FIN 46 applies to years or interim periods beginning after December 15, 2003
with certain disclosure provisions required for financial statements issued
after January 31, 2003. Currently, we are not aware of any financial statement
adjustments required by FIN 46.

In April 2003, SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, was issued and amends and clarifies
financial accounting and reporting for derivative instruments as originally set
forth in SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Currently, we do not have any derivative instruments or hedging
activities.

In May 2003, SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued and established
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This statement
is effective for us beginning with the first quarter of fiscal 2004. We have no
financial instruments that fall under this statement.

Research and Development

Research and development costs related to future products are expensed in the
year incurred and is included in SG&A expenses. Research and development
expenses for fiscal 2003, 2002, and 2001 were $1,010,000, $1,045,000, and
$561,000, respectively.

Advertising

The Company expenses advertising costs when incurred. Advertising expense
amounted to $386,000, $505,000, and $406,000 for fiscal 2003, 2002, and 2001,
respectively.

30



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##### 



Shipping and Handling

Shipping and handling costs that are charged to and reimbursed by the customer
are recognized as revenue, while the related expenses incurred by the Company
are recorded as cost of products sold in the consolidated statements of
operations.

Reclassifications

Certain reclassifications have been made to the prior years financial
statements and notes thereto to conform with the current year presentation.

2.     INVENTORIES

Current costs exceed the LIFO value of inventories by approximately $915,000
and $773,000 at August 2, 2003 and August 3, 2002, respectively. Year-end
inventories valued under the LIFO method were $7,383,000 and $6,637,000 at
August 2, 2003 and August 3, 2002, respectively. The increase in LIFO reserves
was due to changes in FIFO pricing which resulted in decreased net earnings of
$8,000 and $39,000 for fiscal 2003 and fiscal 2002, respectively. The
components of inventory at each year-end are as follows:

|                |  |                 |        |      |  |   |        | 
|--------------- |  | --------------- | ------ | ---- |  | - | ------ | 
|                |  | (In thousands) 
|                |  | Fiscal Year End
|                |  | 2003            |        | 2002
|                |  |                 |        |     
|Raw materials   |  | $               | 3,293  |      |  | $ | 3,332  | 
|Work-in-process |  |                 | 1,081  |      |  |   | 1,049  | 
|Finished goods  |  |                 | 13,185 |      |  |   | 11,860 | 
|                |  |                 |        |      |  |   |        | 
|                |  | $               | 17,559 |      |  | $ | 16,241 | 
|                |  |                 |        |      |  |   |        | 

3.     LEASES

The Company leases photocopier products under sales-type leases. The Companys
net investment in these leases is as follows:

|                                       |  |                 |       |      |  |   |     |  
|-------------------------------------- |  | --------------- | ----- | ---- |  | - | --- | -
|                                       |  | (In thousands) 
|                                       |  | Fiscal Year End
|                                       |  | 2003            |       | 2002
|                                       |  |                 |       |     
|Minimum lease payments receivable      |  | $               | 315   |      |  | $ | 770 |  
|Estimated unguaranteed residual values |  |                 | 1,598 |      |  |   | 68  |  
|Unearned income                        |  |                 | (35   | )    |  |   | (63 | )
|Allowance for doubtful accounts        |  |                 | (16   | )    |  |   | (80 | )
|                                       |  |                 |       |      |  |   |     |  
|Net investment                         |  |                 | 1,862 |      |  |   | 695 |  
|Less: Current portion                  |  |                 | 146   |      |  |   | 254 |  
|                                       |  |                 |       |      |  |   |     |  
|                                       |  | $               | 1,716 |      |  | $ | 441 |  
|                                       |  |                 |       |      |  |   |     |  

Estimated unguaranteed residual values include the unguaranteed residual values
from leases that have been transferred to third-party leasing companies. The
Company has guaranteed these residual values to the third-party leasing
companies and has recorded a liability of $1,568,000 related to these
guarantees.

31



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##### 



The scheduled maturities for the above minimum lease payments receivable at
August 2, 2003 are as follows (in thousands):

|                                        |  |   |     | 
|--------------------------------------- |  | - | --- | 
|Fiscal Year End:                        |  |   |     | 
|2004                                    |  | $ | 183 | 
|2005                                    |  |   | 86  | 
|2006                                    |  |   | 30  | 
|2007                                    |  |   | 13  | 
|2008 and thereafter                     |  |   | 3   | 
|                                        |  |   |     | 
|Total minimum lease payments receivable |  | $ | 315 | 
|                                        |  |   |     | 

4.     PROPERTY AND EQUIPMENT

|                               |  |                 |        |      |  |   |        | 
|------------------------------ |  | --------------- | ------ | ---- |  | - | ------ | 
|                               |  | (In thousands) 
|                               |  | Fiscal Year End
|                               |  | 2003            |        | 2002
|                               |  |                 |        |     
|Land and improvements          |  | $               | 665    |      |  | $ | 727    | 
|Buildings                      |  |                 | 3,787  |      |  |   | 4,009  | 
|Machinery and equipment        |  |                 | 7,900  |      |  |   | 7,135  | 
|Furniture and fixtures         |  |                 | 2,403  |      |  |   | 2,525  | 
|                               |  |                 |        |      |  |   |        | 
|                               |  |                 | 14,755 |      |  |   | 14,396 | 
|Less: Accumulated depreciation |  |                 | 10,214 |      |  |   | 9,938  | 
|                               |  |                 |        |      |  |   |        | 
|                               |  | $               | 4,541  |      |  | $ | 4,458  | 
|                               |  |                 |        |      |  |   |        | 

Depreciation expense for fiscal 2003, 2002, and 2001 was $1,198,000,
$1,461,000, and $1,431,000, respectively.

5.     NOTES PAYABLE AND LINES OF CREDIT

NOTES PAYABLE:

|                                                                                                                                                                                                                                                                                                                                                                                         |  |                 |       |                |  |   |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ----- | -------------- |  | - | ----- | 
|                                                                                                                                                                                                                                                                                                                                                                                         |  | (In thousands) 
|                                                                                                                                                                                                                                                                                                                                                                                         |  | Fiscal Year End
|                                                                                                                                                                                                                                                                                                                                                                                         |  | August 2, 2003  |       | August 3, 2002
|                                                                                                                                                                                                                                                                                                                                                                                         |  |                 |       |               
|Note payable, bank, due in monthly
installments of $56,477 including
interest at the prime rate less 0.5%
through July, 2011. All inventory,
accounts receivable and property
and equipment of the Companys Dan Post
subsidiary are pledged as collateral.                                                                                                                              |  | $               | 3,672 |                |  |   | 4,196 | 
|Note payable, State of Tennessee, due
March, 2013. Note is payable in 60 monthly
installments of $1,930 including interest at
1.5%, then 60 monthly installments of $2,073
including interest at 2.5% and then 120 monthly
installments of $2,175 including interest at 3.5%.
Land, buildings and building improvements of the
Companys Dan Post subsidiary, are pledged as
collateral. |  |                 | 212   |                |  |   | 231   | 
|                                                                                                                                                                                                                                                                                                                                                                                         |  |                 |       |                |  |   |       | 
|                                                                                                                                                                                                                                                                                                                                                                                         |  |                 | 3,884 |                |  |   | 4,427 | 
|Less: Current portion                                                                                                                                                                                                                                                                                                                                                                    |  |                 | 577   |                |  |   | 527   | 
|                                                                                                                                                                                                                                                                                                                                                                                         |  |                 |       |                |  |   |       | 
|                                                                                                                                                                                                                                                                                                                                                                                         |  | $               | 3,307 |                |  | $ | 3,900 | 
|                                                                                                                                                                                                                                                                                                                                                                                         |  |                 |       |                |  |   |       | 

32



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Annual maturities of long-term debt are as follows (in thousands):

|                 |  |   |       | 
|---------------- |  | - | ----- | 
|Fiscal Year End: |  |   |       | 
|2004             |  | $ | 577   | 
|2005             |  |   | 598   | 
|2006             |  |   | 619   | 
|2007             |  |   | 641   | 
|2008             |  |   | 663   | 
|thereafter       |  |   | 786   | 
|                 |  |   |       | 
|                 |  | $ | 3,884 | 
|                 |  |   |       | 

LINES OF CREDIT:

The Company has an unsecured $3,000,000 revolving line of credit with a bank.
The Company had no outstanding borrowings under the line of credit as of August
2, 2003 or August 3, 2002. This line of credit provides for interest on
outstanding balances to be payable monthly at the prime rate less 0.5%. This
line of credit expires in November 2003 and is secured by the inventory and
accounts receivable of the Companys Dan Post subsidiary.

The Company has an additional $1,750,000 line of credit with a bank. This
line is restricted to 100% of the outstanding accounts receivable due from the
U.S. Government. There were no outstanding borrowings under this line of credit
as of August 2, 2003 and August 3, 2002. The line of credit expires in June
2004 and provides for interest on outstanding balances to be payable monthly at
the prime rate.

Cash paid for interest during fiscal years 2003, 2002, and 2001 was
approximately $186,000, $246,000, and $413,000, respectively.

6.     EMPLOYEE BENEFIT PLANS

The Companys employee benefit program consists of an employee stock ownership
plan, a 401-K retirement plan, a cash bonus program, incentive awards, and
other specified employee benefits as approved by the Board of Directors. At its
sole discretion, the Board of Directors determines the amount and the timing of
payment for benefits under these plans.

The employee stock ownership plan (ESOP) covers substantially all employees.
Its principal investments include shares of Class A and B Common Stock of the
Company and collective funds consisting of short-term cash, fixed-income, and
equity investments. There have been no contributions to the ESOP in fiscal
years 2003, 2002, or 2001.

The Company has a 401-K retirement plan, which covers substantially all
employees. Employees can contribute up to 15% of their salary. At its sole
discretion, the Board of Directors determines the amount and timing of any
Company matching contribution. The Companys contribution was $184,000,
$176,000, and $184,000 for the fiscal years ended August 2, 2003, August 3,
2002, and July 28, 2001, respectively.

Employee benefit program expense amounted to $359,000, $433,000, and $240,000
in 2003, 2002, and 2001, respectively.

33



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7.     INCOME TAXES

Significant components of the provision for income taxes are as follows (in
thousands):

|                           |         |   |       |       |      |   |       |       |   |   |      |      |  
|-------------------------- | ------- | - | ----- | ----- | ---- | - | ----- | ----- | - | - | ---- | ---- | -
|                           |         |   | 2003  |       | 2002 |   | 2001 
|                           |         |   |       |       |      |   |      
|Current expense (benefit)  |         |   |       |       |      |   |       |       |   |   |      |     
|                           | Federal |   | $     | 1,454 |      |   | $     | 1,729 |   |   | $    | (23  | )
|                           | State   |   |       | 263   |      |   |       | 398   |   |   |      | 294  |  
|                           |         |   |       |       |      |   |       |       |   |   |      |      |  
|                           |         |   | 1,717 |       |      |   | 2,127 |       |   |   | 271  |     
|                           |         |   |       |       |      |   |       |       |   |   |      |      |  
|Deferred expense (benefit) |         |   |       |       |      |   |       |       |   |   |      |     
|                           | Federal |   |       | (65   | )    |   |       | (369  | ) |   |      | (549 | )
|                           | State   |   |       | (12   | )    |   |       | (65   | ) |   |      | (97  | )
|                           |         |   |       |       |      |   |       |       |   |   |      |      |  
|                           |         |   | (77   | )     |      |   | (434  | )     |   |   | (646 | )   
|                           |         |   |       |       |      |   |       |       |   |   |      |      |  
|                           |         | $ | 1,640 |       |      | $ | 1,693 |       |   | $ | (375 | )   
|                           |         |   |       |       |      |   |       |       |   |   |      |      |  

The components of the provision for deferred income taxes are as follows (in
thousands):

|                                       |                                          |   |      |     |      |   |      |      |   |   |      |      |  
|-------------------------------------- | ---------------------------------------- | - | ---- | --- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                                       |                                          |   | 2003 |     | 2002 |   | 2001
|                                       |                                          |   |      |     |      |   |     
|Depreciation                           |                                          | $ | 101  |     |      | $ | (84  | )    |   | $ | (73  | )   
|Leasing activities                     |                                          |   | (129 | )   |      |   | (213 | )    |   |   | (173 | )   
|Accrued employee benefits              |                                          |   | 18   |     |      |   | (92  | )    |   |   | 10   |     
|Allowances for doubtful accounts       |                                          |   | (46  | )   |      |   | (37  | )    |   |   | 37   |     
|Inventory                              |                                          |   | (197 | )   |      |   | (3   | )    |   |   | (6   | )   
|Contract contingencies                 |                                          |   | 102  |     |      |   | (7   | )    |   |   | (255 | )   
|State net operating loss carry forward |                                          |   | (115 | )   |      |   | 141  |      |   |   | (201 | )   
|Other                                  |                                          |   | 189  |     |      |   | (139 | )    |   |   | 15   |     
|                                       |                                          |   |      |     |      |   |      |      |   |   |      |     
|                                       | Deferred income taxes, expense
(benefit) |   | $    | (77 | )    |   | $    | (434 | ) |   | $    | (646 | )
|                                       |                                          |   |      |     |      |   |      |      |   |   |      |     

Deferred tax liabilities and assets at each year-end are as follows (in
thousands):

|                          |                                        |   |      |       |      |   |     |       |  
|------------------------- | -------------------------------------- | - | ---- | ----- | ---- | - | --- | ----- | -
|                          |                                        |   | 2003 |       | 2002
|                          |                                        |   |      |       |     
|Deferred tax liabilities: |                                        |   |      |       |      |   |     |      
|                          | Depreciation                           |   | $    | (150  | )    |   | $   | 0     |  
|                          | Leasing activities                     |   |      | (81   | )    |   |     | (218  | )
|                          |                                        |   |      |       |      |   |     |       |  
|                          | Total deferred tax liabilities         |   |      | (231  | )    |   |     | (218  | )
|                          |                                        |   |      |       |      |   |     |       |  
|Deferred tax assets:      |                                        |   |      |       |      |   |     |      
|                          | Depreciation                           |   |      | 0     |      |   |     | 66    |  
|                          | Accrued employee benefits              |   |      | 162   |      |   |     | 186   |  
|                          | Allowances for doubtful accounts       |   |      | 218   |      |   |     | 192   |  
|                          | Inventory                              |   |      | 438   |      |   |     | 249   |  
|                          | Contract contingency                   |   |      | 152   |      |   |     | 263   |  
|                          | State net operating loss carry
forward |   |      | 115   |      |   |     | 60    |  
|                          | Other                                  |   |      | 106   |      |   |     | 88    |  
|                          |                                        |   |      |       |      |   |     |       |  
|                          | Total deferred tax assets              |   |      | 1,191 |      |   |     | 1,104 |  
|                          |                                        |   |      |       |      |   |     |       |  
|Net deferred tax asset    |                                        | $ | 960  |       |      | $ | 886 |      
|                          |                                        |   |      |       |      |   |     |       |  

34



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State net operating loss carry forwards will expire through fiscal 2017.

The reconciliation of income tax computed at the U.S. federal statutory tax
rate to actual income tax expense are (in thousands):

|                                               |  |        |       |         |  |        |      |         |  |        |       |         |  |  |      |   |  |   |      |   |  |  |       |   
|---------------------------------------------- |  | ------ | ----- | ------- |  | ------ | ---- | ------- |  | ------ | ----- | ------- |  |  | ---- | - |  | - | ---- | - |  |  | ----- | --
|                                               |  | 2003   |       | 2002    |  | 2001  
|                                               |  | Amount |       | Percent |  | Amount |      | Percent |  | Amount |       | Percent
|                                               |  |        |       |         |  |        |      |         |  |        |       |        
|Tax at U.S. statutory rate                     |  | $      | 1,396 |         |  |        | 34.0 | %       |  | $      | 1,451 |         |  |  | 34.0 | % |  | $ | (326 | ) |  |  | (34.0 | )%
|State income taxes, net of
federal tax benefit |  |        | 259   |         |  |        | 6.3  |         |  |        | 269   |         |  |  | 6.3  |   |  |   | (60  | ) |  |  | (6.3  | ) 
|Other - net                                    |  |        | (15   | )       |  |        | (0.4 | )       |  |        | (27   | )       |  |  | (0.6 | ) |  |   | 11   |   |  |  | 1.2   |   
|                                               |  |        |       |         |  |        |      |         |  |        |       |         |  |  |      |   |  |   |      |   |  |  |       |   
|                                               |  | $      | 1,640 |         |  |        | 39.9 | %       |  | $      | 1,693 |         |  |  | 39.7 | % |  | $ | (375 | ) |  |  | (39.1 | )%
|                                               |  |        |       |         |  |        |      |         |  |        |       |         |  |  |      |   |  |   |      |   |  |  |       |   

Total income tax payments during fiscal years 2003, 2002, and 2001 were
approximately $1,927,000, $1,548,000, and $965,000, respectively.

8.     COMMITMENTS AND CONTINGENCIES

Lease Agreements

The Company leases certain sales offices and equipment under non-cancelable
operating leases. Rental expenses on all operating leases were $864,000,
$791,000, and $786,000 for fiscal 2003, 2002, and 2001. The future minimum
annual rental payments under non-cancelable operating leases are as follows (in
thousands):

|                 |  |   |     | 
|---------------- |  | - | --- | 
|Fiscal Year End: |  |   |     | 
|2004             |  | $ | 256 | 
|2005             |  |   | 149 | 
|2006             |  |   | 62  | 
|2007             |  |   | 49  | 
|2008             |  |   | 20  | 
|                 |  |   |     | 
|                 |  | $ | 536 | 
|                 |  |   |     | 

Minority Interest

The Company has entered into a restrictive stock agreement with the minority
shareholder of its 99% owned subsidiary, Compsee, Inc. Under the terms of the
agreement, the Company has the right of first refusal to purchase at any time
any shares representing the minority interest in the subsidiary at a defined
book value of said shares. The minority shareholder has the right to sell
twenty percent of his shares per year to the Company, at the defined book value
of such shares, provided the minority shareholder remains employed by the
subsidiary.

Concentrations

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments,
receivables, and capitalized leases. The Company maintains substantially all of
its cash and certificates of deposits with various financial institutions in
amounts that are in excess of the federally insured limits. Management performs
periodic evaluations of the relative credit standing of those financial
institutions.

Concentrations of credit risk with respect to receivables and capitalized
leases are limited due to the large number of entities comprising the Companys
customer base and their dispersion across many different industries. The
Company does not require collateral on trade accounts receivable. As of August
2, 2003, fifteen customers accounted for 55% of accounts receivable and five
customers accounted for 53% of the net investment in capitalized leases.

35



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Synthetic rubber is currently available and purchased from the only domestic
supplier. Synthetic rubber is available from foreign suppliers, however an
exemption would be required from the Government to purchase synthetic rubber in
the foreign market.

The Company purchases Toshiba, RISO, and OKI copiers, office machines, parts,
and supplies from Toshiba America Business Solutions, Inc., RISO, Inc., and OKI
Data Americas, Inc. These products are generally only available from these
suppliers. Purchases are made at the prevailing prices charged by these
suppliers in the United States market unless alternative pricing is negotiated
by the Company.

Sales to the U.S. Government amounted to 20%, 19%, and 20% of total
consolidated net revenues for fiscal 2003, 2002, and 2001, respectively.

Other

Under the terms of sale to the U.S. Government, the negotiated contract prices
of combat boots are subject to renegotiation if certain conditions are present.
Management is of the opinion that renegotiation, if any, will have no material
adverse effect on the Companys consolidated financial position or results of
operations.

The Company has committed to provide maintenance and supplies (excluding paper)
on $25.5 million of office products equipment under certain lease agreements.
Under these lease agreements, customers are charged on a cost per copy basis.
The terms of the lease agreements range from three to six years. The copy usage
over the lease term should cover the cost of the equipment, supplies, and
service. The average cost per copy rate in these lease agreements is
approximately $0.02. The Company estimates future revenues and expenses under
each agreement. The Company accrues estimated losses on programs where
estimated future expenses exceed estimated future revenues

9.     SHAREHOLDERS EQUITY

Common Stock

Each share of Class A Common Stock is entitled to one-tenth vote and each share
of Class B Common Stock is entitled to one full vote at meetings of
shareholders, except that Class A shareholders are entitled to elect 25% and
Class B shareholders are entitled to elect 75% of the directors. Each share of
Class B Common Stock can be converted to Class A Common Stock on a share for
share basis. All dividends paid on Class B Common Stock must also be paid on
Class A Common Stock in an equal amount.

During fiscal 1999, the Company adopted the McRae Industries, Inc. 1998
Incentive Equity Plan (the Plan). The Plan has reserved 100,000 shares of the
Companys Class A Common Stock for issuance to certain key employees of the
Company. At August 2, 2003, there were 100,000 shares available for future
grants under the Plan.

10.     FINANCIAL INSTRUMENTS

All financial instruments are held or issued for other than trading purposes.

Management used the following methods and assumptions to estimate the fair
value of financial instruments:

Cash and Cash Equivalents:Because of the close proximity to maturity, the
carrying value of cash and cash equivalents approximates fair value.

Notes Receivable:For notes receivable, fair value is estimated by
discounting future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.

36



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Cash Surrender Value Life Insurance:Represents split-dollar life insurance
policies recorded at premiums paid value, which approximates fair value.

Long and Short-term Debt:The carrying amounts of the borrowings under
short-term revolving credit agreements approximate its fair value. The fair
value of long-term debt was estimated using discounted cash flow analyses,
based on the Companys current incremental borrowing rates for similar types of
borrowing arrangements.

|            |                                         |  |                |       |       |  |   |       | 
|----------- | --------------------------------------- |  | -------------- | ----- | ----- |  | - | ----- | 
|            |                                         |  | (In thousands)
|            |                                         |  | Carrying       |       | Fair 
|            |                                         |  | Amount         |       | Value
|            |                                         |  |                |       |      
|Assets      |                                         |  |                |       |       |  |   |      
|            | Cash and cash equivalents               |  | $              | 6,192 |       |  | $ | 6,192 | 
|            | Notes receivable, current and long-term |  |                | 129   |       |  |   | 129   | 
|            | Cash surrender value life insurance     |  |                | 2,220 |       |  |   | 2,220 | 
|Liabilities |                                         |  |                |       |       |  |   |      
|            | Long and short-term debt                |  |                | 3,884 |       |  |   | 3,884 | 

11.     SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

The following table sets forth unaudited quarterly financial information for
the years ended August 2, 2003 and August 3, 2002 (in thousands):

|                            |  |       |        |        |  |       |        |        |  |   |        |  |  |   |        | 
|--------------------------- |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------ |  |  | - | ------ | 
|                            |  | First |        | Second |  | Third |        | Fourth
|                            |  |       |        |        |  |       |        |       
|August 2, 2003              |  |       |        |        |  |       |        |        |  |   |        |  |  |   |        | 
|Net revenues                |  | $     | 19,539 |        |  | $     | 17,337 |        |  | $ | 18,976 |  |  | $ | 21,190 | 
|Gross profit                |  |       | 4,741  |        |  |       | 4,248  |        |  |   | 4,700  |  |  |   | 5,737  | 
|Operating income            |  |       | 917    |        |  |       | 319    |        |  |   | 827    |  |  |   | 1,728  | 
|Net income                  |  |       | 539    |        |  |       | 372    |        |  |   | 568    |  |  |   | 998    | 
|Net income per
common share |  |       | .19    |        |  |       | .14    |        |  |   | .20    |  |  |   | .36    | 
|August 3, 2002              |  |       |        |        |  |       |        |        |  |   |        |  |  |   |        | 
|Net revenues                |  | $     | 14,553 |        |  | $     | 20,722 |        |  | $ | 18,477 |  |  | $ | 20,779 | 
|Gross profit                |  |       | 3,718  |        |  |       | 5,342  |        |  |   | 4,875  |  |  |   | 5,880  | 
|Operating income            |  |       | 334    |        |  |       | 1,475  |        |  |   | 1,225  |  |  |   | 1,526  | 
|Net income                  |  |       | 189    |        |  |       | 864    |        |  |   | 678    |  |  |   | 854    | 
|Net income per
common share |  |       | .07    |        |  |       | .31    |        |  |   | .24    |  |  |   | .31    | 

12.     DISCONTINUED OPERATIONS

In August 2000, the Company adopted a plan to discontinue the operations of
Rae-Print and operations ceased on April 28, 2001. This subsidiary generated
revenues of approximately $2.0 million and incurred an operating loss of
approximately $41,000 in fiscal 2001. At July 28, 2001, receivables, inventory,
and equipment with an estimated fair market value of $200,000 were included in
accounts receivable. These assets were converted to cash during fiscal 2002.

13.     SUBSEQUENT EVENTS

On September 16, 2003, the Company declared a cash dividend of $.06 cents per
share of its Class A Common Stock payable on October 3, 2003 to shareholders of
record on September 19, 2003.

37



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On September 30, 2003, the Company received a new contract to produce direct
molded sole military boots for the U.S. Government. The Contract
covers a base year and two one-year option periods. The Contract base
year provides for a minimum boot requirement of 135,102 pair and a
maximum boot requirement of 544,778 pair with a minimum and maximum
dollar value of approximately $7.4 million and $30.1 million,
respectively. The first year option provides for a minimum and a
maximum boot requirement of 276,460 pair and 1,077,552 pair,
respectively. The second year option ranges from a minimum of 236,460
pair and to a maximum of 852,552 pair.

14.     OPERATING SEGMENT INFORMATION

The Companys principal operations have been classified into four business
segments: bar code operations; office products; printing and packaging; and
footwear manufacturing. The bar code segment manufactures and sells bar code
reading and related printing devices and other products related to optical data
collection to customers throughout the United States. The office products
segment sells, provides maintenance, and leases Toshiba photocopiers, Toshiba
facsimile machines, RISO digital duplicators, and OKI color copiers principally
to customers in North Carolina and parts of Virginia and South Carolina.
Machines, components, and certain supplies sold by the office products segment
are generally available only from Toshiba, RISO, and OKI. The footwear segment
manufactures combat boots, military dress oxfords, and military safety boots
for the U.S. Government and foreign governments, and western and work boots for
customers throughout the United States. The printing and packaging segment
provided print materials and packaging services for commercial and industrial
customers, and was discontinued during fiscal 2002. Total consolidated revenues
related to sales to the U.S. Government were 20% in 2003, 19% in 2002, and 20%
in 2001. There were no significant inter-segment sales or transfers during
2003, 2002, and 2001. Operating profits by business segment exclude allocated
corporate interest income, income taxes, minority interest, and equity in net
loss of investee. Corporate assets consist principally of cash, short-term
investments, certain receivables, and real estate held for investment.

|                                  |                                       |       |          |        |      |          |          |          |   |          |        |         |   |              |   |        |           |  |   |       |   |  |   |       |   |  |   |        |  
|--------------------------------- | ------------------------------------- | ----- | -------- | ------ | ---- | -------- | -------- | -------- | - | -------- | ------ | ------- | - | ------------ | - | ------ | --------- |  | - | ----- | - |  | - | ----- | - |  | - | ------ | -
|                                  |                                       |       |          |        |      |          | Western/ |          |   |          |        |         |   |              |   |        |           |  |   |       |   |  |   |       |   |  |  
|                                  |                                       |       | Military |        | Work |          |          |          |   |          | Office |         |   |              |   |        | Corporate |  |   |       |  
|(In Thousands)                    |                                       | Boots |          | Boots  |      | Bar Code |          | Products |   | Printing |        | & Other |   | Consolidated
|                                  |                                       |       |          |        |      |          |          |          |   |          |        |         |   |             
|For the Year Ended August 2, 2003 |                                       |       |          |        |      |          |          |          |   |          |        |         |   |              |   |        |           |  |   |       |   |  |   |       |   |  |   |       
|                                  | Net Revenues                          |       | $        | 22,272 |      |          | $        | 22,618   |   |          | $      | 9,776   |   |              | $ | 22,541 |           |  | $ | 0     |   |  | $ | (165  | ) |  | $ | 77,042 |  
|                                  | Earnings
(loss) from
operations       |       |          | 3,775  |      |          |          | 1,193    |   |          |        | (1,536  | ) |              |   | 231    |           |  |   | 0     |   |  |   | 128   |   |  |   | 3,791  |  
|                                  | Identifiable assets                   |       |          | 6,328  |      |          |          | 14,214   |   |          |        | 4,987   |   |              |   | 13,074 |           |  |   | 0     |   |  |   | 7,232 |   |  |   | 45,835 |  
|                                  | Capital expenditures                  |       |          | 84     |      |          |          | 84       |   |          |        | 52      |   |              |   | 132    |           |  |   | 0     |   |  |   | 29    |   |  |   | 381    |  
|                                  | Depreciation expense
and amortization |       |          | 81     |      |          |          | 162      |   |          |        | 191     |   |              |   | 584    |           |  |   | 0     |   |  |   | 180   |   |  |   | 1,198  |  
|                                  | Income tax provision (benefit)        |       |          | 1,446  |      |          |          | 192      |   |          |        | (531    | ) |              |   | 88     |           |  |   | 0     |   |  |   | 445   |   |  |   | 1,640  |  
|For the Year Ended August 3, 2002 |                                       |       |          |        |      |          |          |          |   |          |        |         |   |              |   |        |           |  |   |       |   |  |   |       |   |  |   |       
|                                  | Net Revenues                          |       | $        | 20,030 |      |          | $        | 19,360   |   |          | $      | 10,881  |   |              | $ | 24,732 |           |  | $ | 0     |   |  | $ | (472  | ) |  | $ | 74,531 |  
|                                  | Earnings
(loss) from
operations       |       |          | 4,717  |      |          |          | 999      |   |          |        | (1,847  | ) |              |   | 629    |           |  |   | 0     |   |  |   | 62    |   |  |   | 4,560  |  
|                                  | Identifiable assets                   |       |          | 4,347  |      |          |          | 13,536   |   |          |        | 5,946   |   |              |   | 11,265 |           |  |   | 0     |   |  |   | 6,593 |   |  |   | 41,687 |  
|                                  | Capital expenditures                  |       |          | 107    |      |          |          | 380      |   |          |        | 27      |   |              |   | 140    |           |  |   | 0     |   |  |   | 37    |   |  |   | 691    |  
|                                  | Depreciation expense
and amortization |       |          | 88     |      |          |          | 134      |   |          |        | 533     |   |              |   | 874    |           |  |   | 0     |   |  |   | 207   |   |  |   | 1,836  |  
|                                  | Income tax provision (benefit)        |       |          | 1,750  |      |          |          | 370      |   |          |        | (685    | ) |              |   | 233    |           |  |   | 0     |   |  |   | 25    |   |  |   | 1,693  |  
|For the Year Ended July 28, 2001  |                                       |       |          |        |      |          |          |          |   |          |        |         |   |              |   |        |           |  |   |       |   |  |   |       |   |  |   |       
|                                  | Net Revenues                          |       | $        | 16,792 |      |          | $        | 9,371    |   |          | $      | 12,454  |   |              | $ | 18,640 |           |  | $ | 1,979 |   |  | $ | (112  | ) |  | $ | 59,124 |  
|                                  | Earnings
(loss) from
operations       |       |          | 3,406  |      |          |          | (550     | ) |          |        | (1,933  | ) |              |   | (2,028 | )         |  |   | (65   | ) |  |   | 57    |   |  |   | (1,113 | )
|                                  | Identifiable assets                   |       |          | 1,552  |      |          |          | 8,599    |   |          |        | 8,748   |   |              |   | 12,903 |           |  |   | 0     |   |  |   | 6,294 |   |  |   | 38,096 |  
|                                  | Capital expenditures                  |       |          | 25     |      |          |          | 118      |   |          |        | 47      |   |              |   | 116    |           |  |   | 0     |   |  |   | 12    |   |  |   | 318    |  
|                                  | Depreciation expense
and amortization |       |          | 103    |      |          |          | 214      |   |          |        | 224     |   |              |   | 748    |           |  |   | 32    |   |  |   | 228   |   |  |   | 1,549  |  
|                                  | Income tax provision (benefit)        |       |          | 1,325  |      |          |          | (214     | ) |          |        | (752    | ) |              |   | (789   | )         |  |   | (25   | ) |  |   | 22    |   |  |   | (433   | )

38



---



##### 



McRAE INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                     |  |            |         |            |  |           |          |            |  |           |  |         |  |   |          |      |  |   |         | 
|------------------------------------ |  | ---------- | ------- | ---------- |  | --------- | -------- | ---------- |  | --------- |  | ------- |  | - | -------- | ---- |  | - | ------- | 
|                                     |  |            |         |            |  | ADDITIONS |          |            |  |           |  |         |  |  
|                                     |  |            |         |            |  |           |          | (2)        |  |           |  |         |  |   |          |     
|                                     |  |            |         |            |  | (1)       |          | CHARGED    |  |           |  |         |  |   |          |     
|                                     |  | BALANCE AT |         | CHARGED TO |  | TO OTHER  |          |            |  |           |  | BALANCE
|                                     |  | BEGINNING  |         | COSTS AND  |  | ACCOUNTS  |          | DEDUCTION/ |  | AT END OF
|                                     |  | OF PERIOD  |         | EXPENSES   |  | DESCRIBE  |          | WRITE-OFF  |  | PERIOD   
|DESCRIPTION                          |  |            |         |            |  |           |          |            |  |          
|Year ended August 2, 2003            |  |            |         |            |  |           |          |            |  |           |  |         |  |   |          |      |  |   |         | 
|Allowance for Doubtful Accounts      |  | $          | 454,000 |            |  | $         | 170,000  |            |  |           |  |         |  | $ | (50,000  | )(1) |  | $ | 574,000 | 
|Allowance for Inventory Write-downs  |  |            | 262,000 |            |  |           | 499,000  |            |  |           |  |         |  |   |         |      |  |   | 761,000 | 
|Employee Benefit Accrual             |  |            | 474,000 |            |  |           | 359,000  |            |  |           |  |         |  |   | (406,000 | )(2) |  |   | 427,000 | 
|Health Insurance Accrual             |  |            | 225,000 |            |  |           | (25,000  | )          |  |           |  |         |  |   |         |      |  |   | 200,000 | 
|Allowance for contract contingencies |  |            | 669,000 |            |  |           | (269,000 | )          |  |           |  |         |  |   |         |      |  |   | 400,000 | 
|Year ended August 3, 2002            |  |            |         |            |  |           |          |            |  |           |  |         |  |   |          |      |  |   |         | 
|Allowance for Doubtful Accounts      |  | $          | 353,000 |            |  | $         | 325,000  |            |  |           |  |         |  | $ | (224,000 | )(1) |  | $ | 454,000 | 
|Allowance for Inventory Write-downs  |  |            | 40,000  |            |  |           | 222,000  |            |  |           |  |         |  |   |         |      |  |   | 262,000 | 
|Employee Benefit Accrual             |  |            | 239,000 |            |  |           | 433,000  |            |  |           |  |         |  |   | (198,000 | )(2) |  |   | 474,000 | 
|Health Insurance Accrual             |  |            | 250,000 |            |  |           | (25,000  | )          |  |           |  |         |  |   |         |      |  |   | 225,000 | 
|Allowance for contract contingencies |  |            | 650,000 |            |  |           | 19,000   |            |  |           |  |         |  |   |         |      |  |   | 669,000 | 
|Year ended July 28, 2001             |  |            |         |            |  |           |          |            |  |           |  |         |  |   |          |      |  |   |         | 
|Allowance for Doubtful Accounts      |  | $          | 440,000 |            |  | $         | (251,000 | )          |  |           |  |         |  | $ | 164,000  | (1)  |  | $ | 353,000 | 
|Allowance for Inventory Write-downs  |  |            | 115,000 |            |  |           |         |            |  |           |  |         |  |   | (75,000  | )(2) |  |   | 40,000  | 
|Employee Benefit Accrual             |  |            | 276,000 |            |  |           | 240,000  |            |  |           |  |         |  |   | (277,000 | )(2) |  |   | 239,000 | 
|Health Insurance Accrual             |  |            | 250,000 |            |  |           |         |            |  |           |  |         |  |   |         |      |  |   | 250,000 | 
|Allowance for contract contingencies |  |            | 426,000 |            |  |           | 224,000  |            |  |           |  |         |  |   |         |      |  |   | 650,000 | 



|(1) |  | Uncollectible accounts written off            
|--- |  | ----------------------------------------------
|   
|(2) |  | Payments and/or expenses charged to operations

39



---



##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participations of our management, including
the Chief Executive Officer and Vice President of Finance, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Vice President of Finance have
concluded that these disclosure controls and procedures are effective. There
were no changes in our internal control over financial reporting that occurred
during the fourth quarter of fiscal 2003 that have materially affected, or
reasonably likely to materially affect, our internal control over financial
reporting.

PART III

ITEMS 10-13.

Items 10 through 13 are incorporated herein by reference to the sections
captioned PRINCIPAL STOCKHOLDERS AND HOLDINGS OF MANAGEMENT, ELECTION OF
DIRECTORS, DIRECTOR COMPENSATION, EXECUTIVE OFFICERS, COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION, EQUITY PLAN COMPENSATION
INFORMATION, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, EXECUTIVE
COMPENSATION, STOCK PERFORMANCE GRAPH, COMPENSATION COMMITTEE REPORT,
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE and CODE OF ETHICS
in the Registrants Proxy Statement for the Annual Meeting of Stockholders to
be held December 18, 2003.

40



---



##### 



PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



| | (a) |  | (1)                                                                        |  | Independent auditors report
| | --- |  | -------------------------------------------------------------------------- |  | ----------------------------
|
| |     |  | McRae Industries,
Inc. and Subsidiaries consolidated financial statements:

| |  |                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------
| |  | Consolidated Balance Sheets as of August 2, 2003, and August 3, 2002.                                                 
| |  |                                                                                                                       
| |  | Consolidated Statements of Operations for the Years Ended August 2, 2003,
August 3, 2002, and July 28, 2001.          
| |  |                                                                                                                       
| |  | Consolidated Statements of Shareholders Equity for the Years Ended August 2, 2003,
August 3, 2002, and July 28, 2001.
| |  |                                                                                                                       
| |  | Consolidated Statements of Cash Flows for the Years Ended August 2, 2003,
August 3, 2002, and July 28, 2001.          
| |  |                                                                                                                       
| |  | Notes to Consolidated Financial Statements.                                                                           



| | (2) |  | Financial Statement Schedule:
| | --- |  | -----------------------------
|
| |     |  | Schedule II                  
|
| | (3) |  | Exhibits:                    

|     |  |                                                                                                                                                                                                                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Certificate of Incorporation (Incorporated by reference to Exhibit 3.1
to the Registrants Form S-14, Registration N. 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 fiscal
year ended July 28, 2001).                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.1 |  | 1985 McRae Industries, Inc. Non-Qualified Stock Option Plan
(Incorporated by reference to Exhibit 10 to the Registrants Form 10-K
for the fiscal year ended August 3, 1985).*                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.2 |  | Technical Assistance Agreement dated September 13, 1984 between the
Registrant and Ro-Search, Incorporated (Incorporated by reference to
Exhibit 10.4 to the Registrants Form 10-K for the fiscal year ended
July 28, 1984).                                                                                      
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.3 |  | Stock Purchase Agreement and Guaranty Agreement as of April 7, 1996
among Walter A. Dupuis, Kenneth O. Moore, William Glover, and McRae
Industries, Inc., was filed as Exhibit 2 to the Registrants current
report on Form 8-K filed May 11, 1996 and is incorporated herein by
reference.                        
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.4 |  | Promissory Note, Security Agreement and Guaranty Agreement dated July
25, 1996 among American West Trading Company, as borrower, The Fidelity
Bank, as lender, and the Registrant, as Guarantor (Incorporated by
reference to Exhibit 10.5 to the Registrants Form 10-K for the fiscal
year ended August 3, 1996).

41



---



##### 



|     |  |                                                                                                                                                                                                                                                                                   
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5 |  | Deed of Trust between American West Trading Company and The Fidelity
Bank dated July
25, 1996 (Incorporated by reference to Exhibit 10.6 to the Registrants
Form 10-K for the fiscal year ended August 3, 1996).                                                                 
|     |  |                                                                                                                                                                                                                                                                                   
|10.6 |  | Security Agreement pertaining to inventory, accounts receivable and
equipment between American West Trading Company and The Fidelity Bank,
dated July 25, 1996 (Incorporated by reference to Exhibit 10.7 to the
Registrants Form 10-K for the fiscal year ended August 3, 1996).
|     |  |                                                                                                                                                                                                                                                                                   
|10.7 |  | Split Dollar Life Insurance Arrangement (Incorporated by reference to
Exhibit 10.10 to the Registrants Form 10-K for the fiscal year ended
August 3, 2002).                                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                   
|10.8 |  | Award/Contract between Defense Supply Center Philadelphia and McRae
Industries, Inc. dated September 30, 2003. (Filed herein). Pages 45-51.                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                   
|21   |  | Subsidiaries of the Registrant (Filed herein). Page 52.                                                                                                                                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                   
|23   |  | Consent of Independent Auditors (Filed herein). Page 53.                                                                                                                                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                   
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President
and CEO (Filed herein). Page 54.                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                   
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice
President of Finance (Filed herein). Page 55.                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                   
|32.1 |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350), for D. Gary McRae, President and CEO
(Filed herein). Page 56.                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                   
|32.2 |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350), for Marvin G. Kiser, Sr., Vice President
of Finance (Filed herein). Page 57.                                                                                                    



---

|* | Denotes a management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------



| | (b) |  | Reports on Form 8-K:                                                           
| | --- |  | -------------------------------------------------------------------------------
|
| |     |  | We did not file any reports on Form 8-K during the last quarter
of fiscal 2003.

42



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

|                        |  |     |  |                  
|----------------------- |  | --- |  | -----------------
|Dated: October 31, 2003 |  | By: |  | /s/ D. Gary McRae
|                        |  |     |  |                  
|                        |  |     |  | D. Gary McRae    
|                        |  |     |  | President        

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

|                                                     |  |                 
|---------------------------------------------------- |  | ----------------
|SIGNATURE                                            |  | DATE            
|                                                     |  |                 
|/s/ D. Gary McRae                                    |  | October 31, 2003
|                                                     |  |                 
|D. Gary McRae                                        |  |                 
|President, Treasurer, and Director                   |  |                 
|(Principal Executive Officer)                        |  |                 
|                                                     |  |                 
|/s/ William H. Swan                                  |  | October 31, 2003
|                                                     |  |                 
|William H. Swan                                      |  |                 
|Director                                             |  |                 
|                                                     |  |                 
|/s/ Hilton J. Cochran                                |  | October 31, 2003
|                                                     |  |                 
|Hilton J. Cochran                                    |  |                 
|Director                                             |  |                 
|                                                     |  |                 
|/s/ Brady W. Dickson                                 |  | October 31, 2003
|                                                     |  |                 
|Brady W. Dickson                                     |  |                 
|Director                                             |  |                 
|                                                     |  |                 
|/s/ Victor A. Karam                                  |  | October 31, 2003
|                                                     |  |                 
|Victor A. Karam                                      |  |                 
|President - McRae Footwear and Director              |  |                 
|                                                     |  |                 
|/s/ James W. McRae                                   |  | October 31, 2003
|                                                     |  |                 
|James W. McRae                                       |  |                 
|Vice President, Secretary, and Director              |  |                 
|                                                     |  |                 
|/s/ Harold W. Smith                                  |  | October 31, 2003
|                                                     |  |                 
|Harold W. Smith                                      |  |                 
|Vice President - McRae Office Solutions and Director |  |                 
|                                                     |  |                 
|/s/ Marvin G, Kiser, Sr.                             |  | October 31, 2003
|                                                     |  |                 
|Marvin G. Kiser, Sr.                                 |  |                 
|Vice President of Finance                            |  |                 
|(Principal Financial and Accounting Officer)         |  |                 

43



---



##### 



EXHIBIT INDEX

|     |  |                                                                                                                                                                                                                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Certificate of Incorporation (Incorporated by reference to Exhibit 3.1
to the Registrants Form S-14, Registration N. 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 fiscal
year ended July 28, 2001).                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.1 |  | 1985 McRae Industries, Inc. Non-Qualified Stock Option Plan
(Incorporated by reference to Exhibit 10 to the Registrants Form 10-K
for the fiscal year ended August 3, 1985).*                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.2 |  | Technical Assistance Agreement dated September 13, 1984 between the
Registrant and Ro-Search, Incorporated (Incorporated by reference to
Exhibit 10.4 to the Registrants Form 10-K for the fiscal year ended
July 28, 1984).                                                                                      
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.3 |  | Stock Purchase Agreement and Guaranty Agreement as of April 7, 1996
among Walter A. Dupuis, Kenneth O. Moore, William Glover, and McRae
Industries, Inc., was filed as Exhibit 2 to the Registrants current
report on Form 8-K filed May 11, 1996 and is incorporated herein by
reference.                        
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.4 |  | Promissory Note, Security Agreement and Guaranty Agreement dated July
25, 1996 among American West Trading Company, as borrower, The Fidelity
Bank, as lender, and the Registrant, as Guarantor (Incorporated by
reference to Exhibit 10.5 to the Registrants Form 10-K for the fiscal
year ended August 3, 1996).
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.5 |  | Deed of Trust between American West Trading Company and The Fidelity
Bank dated July 25, 1996 (Incorporated by reference to Exhibit 10.6 to
the Registrants Form 10-K for the fiscal year ended August 3, 1996).                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.6 |  | Security Agreement pertaining to inventory, accounts receivable and
equipment between American West Trading Company and The Fidelity Bank,
dated July 25, 1996 (Incorporated by reference to Exhibit 10.7 to the
Registrants Form 10-K for the fiscal year ended August 3, 1996).                                 
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.7 |  | Split Dollar Life Insurance Arrangement (Incorporated by reference to
Exhibit 10.10 to the Registrants Form 10-K for the fiscal year ended
August 3, 2002).                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                    
|10.8 |  | Award/Contract between Defense Supply Center Philadelphia and McRae
Industries, Inc. dated September 30, 2003. (Filed herein). Pages 45-51.                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                    
|21   |  | Subsidiaries of the Registrant (Filed herein). Page 52.                                                                                                                                                                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                    
|23   |  | Consent of Independent Auditors (Filed herein). Page 53.                                                                                                                                                                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                                    
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President
and CEO (Filed herein). Page 54.                                                                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                    
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice
President of Finance (Filed herein). Page 55.                                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                                                    
|32.1 |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350), for D. Gary McRae, President and CEO
(Filed herein) Page 56.                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                    
|32.2 |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350), for Marvin G. Kiser, Sr., Vice
President of Finance (Filed herein). Page 57.                                                                                                                                     

44