##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended August 3, 2002

Commission file number: 1-8578

McRAE INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)

|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 56-0706710                          
|                        
|                        
|                        
|                        
|(State of Incorporation) |  | (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 þ No o

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. o

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 October
25, 2002 was approximately $10,666,000 and $2,321,000, respectively.
On October 25, 2002, 1,879,072 Class A shares and 889,427 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 19, 2002 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 16 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 and QuickLink bar code
readers. 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.
These products were well received in the market and provided 19%,
13%, and 10% of Compsee sales for fiscal 2002, 2001, and 2000,
respectively. During fiscal 2000 Compsee purchased an enterprise
integration software program that enhances and facilitates mobile bar
code applications. This software allows customers to develop wireless
system applications quickly and efficiently. During the last half of
fiscal 2001, Compsee introduced the APEX III portable data collector.
This product provides batch and wireless data collection capability.
The APEX IV portable data collection unit was introduced to the
market during the first quarter of fiscal 2003. This unit is a more
rugged, pistol grip version of the APEX III product. 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
in the industry include PSC, Unitech, and Handheld Products.

Net revenues derived from this unit in fiscal 2002, 2001, and 2000
were 15%, 22%, and 29% of the Companys consolidated net revenues,
respectively. QuickReader, QuickLink, and Turbowedge bar code readers
developed and marketed by Compsee accounted for 9%, 11%, and 11% of
Compsees net revenues for fiscal 2002, 2001, and 2000, respectively,
and for 1%, 3%, and 3% of the Companys consolidated net revenues
during fiscal 2002, 2001, and 2000, respectively.

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.

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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.

We currently provide military boots to the Government under a
contract dated April 15, 1997 (the Contract). In September 2001, the
Government awarded us a contract that required us to increase our
production levels of military combat boots as a result of the
anticipated deployment of troops in the war on terrorism. The
increased production levels represented a significant increase over
the quantities normally purchased by the Government under the
Contract.

The Contract, which was set to expire on April 15, 2002, has been
extended twice. The first extension extended the Contract ordering
period through July 19, 2002 and provided for a minimum order of
military combat boots of 103,676 pair consisting of the three current
styles of direct molded sole boots covered by the Contract. These
boots are scheduled for delivery during the first and second quarters
of fiscal 2003 and will have an approximate $6.3 million impact on
revenues. The second extension extended the Contract ordering period
through December 31, 2002 and provided for a minimum order quantity
of 45,000 pair and a maximum order quantity of 80,000 pair. Based on
orders received to date, we expect this Contract extension to have a
$5.1 million impact on revenues. The Government has issued two
solicitations for future military combat boot requirements. One
solicitation covers the three current styles of military combat
boots. The second solicitation covers the newly adopted infantry
combat boot, which incorporates a waterproof membrane construction.
This boot will replace the current vulcanized style of standard issue
combat boot that has historically accounted for the majority of the
Governments order under the Contract. We have submitted bids for
both solicitations and are awaiting the Governments award decisions,
which we expect to occur in November 2002. There are no assurances,
however, that we will be successful in obtaining either of these
contracts to produce boots for the Government.

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 $14.3 million, $11.7 million, and $7.2
million, for fiscal 2002, 2001, and 2000, respectively. Such sales
constituted 19%, 20%, and 13% of consolidated net revenues in fiscal
2002, 2001, and 2000, respectively. Sales of military boots to
foreign countries were $4.9 million, $4.6 million, and $4.7 million
for the past three fiscal years, respectively. For fiscal 2002, all
of our foreign country sales were to Israel as compared to 89% for
fiscal 2001.

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

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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, sells, and distributes 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 fiscal 2002 as compared to $520,000, and
$734,000 in fiscal 2001 and 2000, respectively.

During fiscal 2000, we expanded our western boot product line with
imported childrens boots from India and China. In addition, we
import western boots for adults from Brazil, Mexico, and China.

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 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 from several suppliers, both domestic and foreign.

The western and work boot markets are highly competitive. We are not
aware of any reliable statistics that would enable us to determine
our relevant position 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 $19.4 million, $9.4 million, and $7.9 million of
consolidated net revenues for fiscal 2002, 2001, and 2000,
respectively.

The Companys backlog of firm orders for military combat boots at
August 3, 2002 and July 28, 2001 totaled approximately $5.5 million
and $3 million, respectively. We expect to fill all of the backlog as
of August 3, 2002 during the current fiscal

4



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year. The backlog of firm orders for western and work boots at August
3, 2002 and July 28, 2001 totaled approximately $2.6 million and $1.4
million, respectively. We expect to fill all of the backlog as of
August 3, 2002 during the current fiscal year.

Net revenues derived from the military combat boot segment in fiscal
2002, 2001, and 2000 were 27%, 29%, and 21%, respectively, of the
Companys consolidated net revenues.

Net revenues derived from the western and work boot segment in fiscal
2002, 2001, and 2000 were 25%, 16%, and 14%, respectively, of the
Companys consolidated net revenues.

Office Products

McRae Office Solutions, Inc. (Office Solutions), formerly McRae
Graphics, Inc., a wholly owned subsidiary, is a non-exclusive
distributor of Toshiba photocopier and facsimile machines in 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 duplicators. 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 2002 are generally
available only from Toshiba, RISO and OKI.

Office Solutions has three primary channels of distribution for its
products. The first channel is providing equipment to North Carolina
state agencies by being a preferred vendor for the State of North
Carolina. The state contract business accounted for 6.1%, 6.1%, and
0.7% of Office Solutions net revenues for fiscal 2002, 2001, and
2000, respectively.

The second channel is the Special Markets Group, which focuses on
school systems throughout the 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 60.1%, 50.0%, and 43.7% of Office Solutions net revenues for
fiscal 2002, 2001, and 2000, 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 33.8%, 43.9%, and 55.6% of Office
Solutions net revenues for fiscal 2002, 2001, and 2000, 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. During fiscal 2001 and 2002 this software was
reformatted to conform with current technology. This product is
expected to be part of the product mix in fiscal 2003.

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
2002, 2001, and 2000 were 33%, 33%, and 36%, respectively, of the
Companys consolidated net revenues.

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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 $4.9 million (24.4% of total military boot sales), $4.6 million
(27.4%) and $4.7 million (37.9%) during fiscal 2002, 2001, and 2000,
respectively. In fiscal 2002, all of our foreign country sales were
to Israel as compared to 89% in fiscal 2001.

Other Investment Interests

We own approximately 13% of the outstanding Common Stock and all of
the outstanding 20% cumulative convertible preferred stock of
American Mortgage and Investment Company (AMIC). In addition, at
August 3, 2002 we had a total of $395,000 of notes and accounts
receivable due from AMIC. AMIC is located in Charleston, South
Carolina and is engaged in real estate development and sales,
primarily lots for single family dwellings, in the coastal region of
South Carolina. D. Gary McRae, President of the Company, is
President of AMIC. During fiscal 2002 we received payments of
approximately $107,000 from AMIC. At August 3, 2002, we had recorded
investments in and advances to AMIC of approximately $395,000. AMIC
has been operating under Chapter X of the United States Bankruptcy
Act since 1974.

Environmental 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 3, 2002, 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 relationship
with our employees to be good.

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
16 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 $1,045,000, $561,000,
and $538,000 for fiscal 2002, 2001, and 2000, respectively.

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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,       |  | 71,000 square feet
|                       
|                       
|                       
|                       
|Mt. Gilead, N.C.        |  | manufacturing, and sales      |  |                   
|                       
|                       
|                       
|                       
|                        |  |                               |  |                   
|                       
|                       
|                       
|                       
|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           |  | Footwear manufacturing and    |  | 35,000 square feet
|                       
|                       
|                       
|                       
|Troy, N.C.              |  | warehousing                   |  |                   
|                       
|                       
|                       
|                       
|                        |  |                               |  |                   
|                       
|                       
|                       
|                       
|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. We also own approximately 500
acres of undeveloped land located in North Carolina on August 3, 2002
that is being held for investment purposes.

The Waverly, Tennessee facility is encumbered by a deed of trust in
favor of The Fidelity Bank to secure a loan in the amount of
approximately $4.2 million.

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 25, 2002,
there were approximately 410 record holders of Class A Common Stock
and approximately 381 record holders of the 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 2002 |      | Fiscal 2001
|        |  |             |      |            
|        |  | Sales Price |      | Cash        |  | Sales Price |      | Cash     
|        |  |             |      | Dividends   |  |             |      | Dividends
|Quarter |  | High        |      | Low         |  | Declared    |      | High      |  | Low |     | Declared
|        |  |             |      |             |  |             |      |           |  |     |     |         
|First   |  | $           | 5.80 |             |  | $           | 3.50 |           |  | $   | .05 |          |  | $ | 5.63 |  |  | $ | 4.75 |  |  | $ | .09 | 
|       
|       
|       
|       
|Second  |  |             | 5.88 |             |  |             | 4.80 |           |  |     | .05 |          |  |   | 5.38 |  |  |   | 4.88 |  |  |   | .09 | 
|       
|       
|       
|       
|Third   |  |             | 5.98 |             |  |             | 5.30 |           |  |     | .05 |          |  |   | 5.24 |  |  |   | 3.95 |  |  |   | .05 | 
|       
|       
|       
|       
|Fourth  |  |             | 7.50 |             |  |             | 5.70 |           |  |     | .06 |          |  |   | 4.25 |  |  |   | 3.85 |  |  |   | .05 | 

CLASS B COMMON STOCK:

|        |  |             |      |             |  |      |      |     |  |   |      |  |  |   |      | 
|------- |  | ----------- | ---- | ----------- |  | ---- | ---- | --- |  | - | ---- |  |  | - | ---- | 
|        |  | Fiscal 2002 |      | Fiscal 2001
|        |  |             |      |            
|        |  | Sales Price |      | Sales Price
|        |  |             |      |            
|Quarter |  | High        |      | Low         |  | High |      | Low
|        |  |             |      |             |  |      |      |    
|First   |  | $           | 5.55 |             |  | $    | 3.80 |     |  | $ | 5.75 |  |  | $ | 5.00 | 
|       
|       
|       
|       
|Second  |  |             | 5.60 |             |  |      | 4.95 |     |  |   | 5.38 |  |  |   | 5.13 | 
|       
|       
|       
|       
|Third   |  |             | 5.95 |             |  |      | 5.40 |     |  |   | 5.30 |  |  |   | 4.10 | 
|       
|       
|       
|       
|Fourth  |  |             | 7.40 |             |  |      | 5.85 |     |  |   | 4.25 |  |  |   | 3.90 | 

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. 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.

8



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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.

|                                                                 |  |        |            |         |  |         |            |         |  |        |            |   |  |   |            |   |  |   |            | 
|---------------------------------------------------------------- |  | ------ | ---------- | ------- |  | ------- | ---------- | ------- |  | ------ | ---------- | - |  | - | ---------- | - |  | - | ---------- | 
|Fiscal Years Ended                                               |  | 8-3-02 |            | 7-28-01 |  | 7-29-00 |            | 7-31-99 |  | 8-1-98
|                                                                 |  |        |            |         |  |         |            |         |  |       
|Income Statement Data:                                           |  |        |            |         |  |         |            |         |  |        |            |   |  |   |            |   |  |   |            | 
|                                                                
|                                                                
|                                                                
|                                                                
|Net revenues                                                     |  | $      | 74,531,000 |         |  | $       | 57,145,000 |         |  | $      | 57,141,000 |   |  | $ | 48,289,000 |   |  | $ | 57,151,000 | 
|                                                                
|                                                                
|                                                                
|                                                                
|Net earnings (loss)
from continuing
operations                   |  |        | 2,585,000  |         |  |         | (571,000   | )       |  |        | 1,502,000  |   |  |   | 815,000    |   |  |   | 2,192,000  | 
|                                                                
|                                                                
|                                                                
|                                                                
|Net earnings (loss)
from discontinued
operations                 |  |        |           |         |  |         | (126,000   | )       |  |        | (145,000   | ) |  |   | (33,000    | ) |  |   | 73,000     | 
|                                                                
|                                                                
|                                                                
|                                                                
|Net earnings (loss)                                              |  |        | 2,585,000  |         |  |         | (697,000   | )       |  |        | 1,357,000  |   |  |   | 782,000    |   |  |   | 2,265,000  | 
|                                                                
|                                                                
|                                                                
|                                                                
|Net earnings (loss)
from continuing
operations per
common share: |  |        | 0.93       |         |  |         | (0.21      | )       |  |        | 0.54       |   |  |   | 0.29       |   |  |   | 0.79       | 
|                                                                 |  |        |            |         |  |         |            |         |  |        |            |   |  |   |            |   |  |   |            | 
|Balance Sheet Data:                                              |  |        |            |         |  |         |            |         |  |        |            |   |  |   |            |   |  |   |            | 
|                                                                
|                                                                
|                                                                
|                                                                
|Total assets                                                     |  | $      | 41,929,000 |         |  | $       | 38,977,000 |         |  | $      | 42,697,000 |   |  | $ | 39,951,000 |   |  | $ | 40,457,000 | 
|                                                                
|                                                                
|                                                                
|                                                                
|Long-term liabilities                                            |  |        | 3,900,000  |         |  |         | 4,598,000  |         |  |        | 5,057,000  |   |  |   | 5,280,000  |   |  |   | 5,594,000  | 
|                                                                
|                                                                
|                                                                
|                                                                
|Working capital                                                  |  |        | 23,829,000 |         |  |         | 21,202,000 |         |  |        | 22,520,000 |   |  |   | 20,962,000 |   |  |   | 21,408,000 | 
|                                                                
|                                                                
|                                                                
|                                                                
|Shareholders equity                                             |  |        | 29,581,000 |         |  |         | 27,371,000 |         |  |        | 28,589,000 |   |  |   | 27,901,000 |   |  |   | 27,784,000 | 
|                                                                
|                                                                
|                                                                
|                                                                
|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)                      |  | $      | 0.21       |         |  | $       | 0.28       |         |  | $      | 0.36       |   |  | $ | 0.36       |   |  | $ | 0.36       | 
|                                                                 |  |        |            |         |  |         |            |         |  |        |            |   |  |   |            |   |  |   |            | 

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

9



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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 deprecation
on rental equipment. On programs where the sum of the estimated future
costs exceeds the expected future revenue, we recognize a provision for
losses.

Intangible Assets

We determine the utility of goodwill and trademarks based on estimated
future cash flows and test for impairment in accordance with applicable
accounting pronouncements. Effective August 4, 2002 we have adopted
Statement of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets. Our intangible assets are not impaired under this
pronouncement.

Inventories

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

Revenue Recognition

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

10



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##### 



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

Income Taxes

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

11



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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 of our major business
units for fiscal years 2000 through 2002 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
|             |                    |  | 2002                   |        | 2001           |  | 2000        |        | over prior period       |  | 2002 |        | 2001 |  | 2000
|             |                    |  |                        |        |                |  |             |        |                         |  |      |        |      |  |     
|             |                    |  | Dollars (In thousands) |        | 2002           |  | 2001        |        | Percent of Net Revenues
|             |                    |  |                        |        |                |  |             |        |                        
|Net Revenues |                    |  |                        |        |                |  |             |        |                         |  |      |        |      |  |      |       |    |  |  |       |   |  |  |     |  |  |  |     |  |  |  |    
|            
|            
|            
|            
|             | Bar Code           |  | $                      | 10,881 |                |  | $           | 12,454 |                         |  | $    | 16,422 |      |  |      | (12.6 | )  |  |  | (24.2 | ) |  |  | 15  |  |  |  | 22  |  |  |  | 29  | 
|            
|            
|            
|            
|             | Office Products    |  |                        | 24,732 |                |  |             | 18,640 |                         |  |      | 20,678 |      |  |      | 32.7  |    |  |  | (9.9  | ) |  |  | 33  |  |  |  | 33  |  |  |  | 36  | 
|            
|            
|            
|            
|             | Military Boots     |  |                        | 20,030 |                |  |             | 16,792 |                         |  |      | 12,395 |      |  |      | 19.3  |    |  |  | 35.5  |   |  |  | 27  |  |  |  | 29  |  |  |  | 21  | 
|            
|            
|            
|            
|             | Western/Work Boots |  |                        | 19,360 |                |  |             | 9,371  |                         |  |      | 7,866  |      |  |      | 106.6 |    |  |  | 19.1  |   |  |  | 25  |  |  |  | 16  |  |  |  | 14  | 
|            
|            
|            
|            
|             | Eliminations/Other |  |                        | (472   | )              |  |             | (112   | )                       |  |      | (220   | )    |  | NM   |       | NM |  |  | 0     |   |  |  | 0   |  |  |  | 0   | 
|             |                    |  |                        |        |                |  |             |        |                         |  |      |        |      |  |      |       |    |  |  |       |   |  |  |     |  |  |  |     |  |  |  |     | 
|             | Consolidated       |  | $                      | 74,531 |                |  | $           | 57,145 |                         |  | $    | 57,141 |      |  |      | 30.4  |    |  |  | 0.0   |   |  |  | 100 |  |  |  | 100 |  |  |  | 100 | 

|             |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |                         |  |  |    |  |  |  |    |  |  |  |    | 
|------------ | ------------------ |  | - | ------ |  |  | - | ------ | - |  | - | ------ | - |  | -- | ----- | -- |  |  | ----- | ----------------------- |  |  | -- |  |  |  | -- |  |  |  | -- | 
|             |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |                         |  |  |    |  |  |  |    |  |  |  |    | 
|Gross Profit |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       | Gross Profit Percentage
|             |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |                         | 
|             | Bar Code           |  | $ | 3,124  |  |  | $ | 3,668  |   |  | $ | 5,319  |   |  |    | (14.8 | )  |  |  | (31.0 | )                       |  |  | 29 |  |  |  | 29 |  |  |  | 32 | 
|            
|            
|            
|            
|             | Office Products    |  |   | 6,260  |  |  |   | 3,492  |   |  |   | 5,726  |   |  |    | 79.3  |    |  |  | (39.0 | )                       |  |  | 25 |  |  |  | 19 |  |  |  | 28 | 
|            
|            
|            
|            
|             | Military Boots     |  |   | 5,517  |  |  |   | 4,034  |   |  |   | 2,786  |   |  |    | 36.8  |    |  |  | 44.8  |                         |  |  | 28 |  |  |  | 24 |  |  |  | 22 | 
|            
|            
|            
|            
|             | Western/Work Boots |  |   | 4,911  |  |  |   | 1,715  |   |  |   | 1,106  |   |  |    | 186.4 |    |  |  | 55.1  |                         |  |  | 25 |  |  |  | 18 |  |  |  | 14 | 
|            
|            
|            
|            
|             | Eliminations/Other |  |   | 3      |  |  |   | (27    | ) |  |   | (74    | ) |  | NM |       | NM |  |  | 0     |                         |  |  | 0  |  |  |  | 0  | 
|             |                    |  |   |        |  |  |   |        |   |  |   |        |   |  |    |       |    |  |  |       |                         |  |  |    |  |  |  |    |  |  |  |    | 
|             | Consolidated       |  | $ | 19,815 |  |  | $ | 12,882 |   |  | $ | 14,863 |   |  |    | 53.8  |    |  |  | (13.3 | )                       |  |  | 27 |  |  |  | 23 |  |  |  | 26 | 

|                                             |                    |  |   |        |   |  |   |        |   |                            |   |        |   |  |    |       |    |  |  |      |  |  |  |    |  |  |  |    |  |  |  |    | 
|-------------------------------------------- | ------------------ |  | - | ------ | - |  | - | ------ | - | -------------------------- | - | ------ | - |  | -- | ----- | -- |  |  | ---- |  |  |  | -- |  |  |  | -- |  |  |  | -- | 
|Selling, General and Administrative Expenses |                    |  |   |        |   |  |   |        |   | Percentage of Net Revenues
|                                             |                    |  |   |        |   |  |   |        |   |                           
|                                             | Bar Code           |  | $ | 4,971  |   |  | $ | 5,601  |   |                            | $ | 5,525  |   |  |    | (11.2 | )  |  |  | 1.4  |  |  |  | 46 |  |  |  | 45 |  |  |  | 34 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Office Products    |  |   | 5,631  |   |  |   | 5,520  |   |                            |   | 4,688  |   |  |    | 2.0   |    |  |  | 17.7 |  |  |  | 23 |  |  |  | 30 |  |  |  | 23 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Military Boots     |  |   | 800    |   |  |   | 628    |   |                            |   | 457    |   |  |    | 27.4  |    |  |  | 37.4 |  |  |  | 4  |  |  |  | 4  |  |  |  | 4  | 
|                                            
|                                            
|                                            
|                                            
|                                             | Western/Work Boots |  |   | 3,912  |   |  |   | 2,265  |   |                            |   | 1,648  |   |  |    | 72.7  |    |  |  | 37.4 |  |  |  | 20 |  |  |  | 24 |  |  |  | 21 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Eliminations/Other |  |   | (59    | ) |  |   | (84    | ) |                            |   | (22    | ) |  | NM |       | NM |  |  | 0    |  |  |  | 0  |  |  |  | 0  | 
|                                             |                    |  |   |        |   |  |   |        |   |                            |   |        |   |  |    |       |    |  |  |      |  |  |  |    |  |  |  |    |  |  |  |    | 
|                                             | Consolidated       |  | $ | 15,255 |   |  | $ | 13,930 |   |                            | $ | 12,296 |   |  |    | 9.5   |    |  |  | 13.3 |  |  |  | 21 |  |  |  | 25 |  |  |  | 22 | 

|                        |                    |  |   |        |   |  |   |        |   |  |   |       |   |  |    |       |    |                            |  |        |   |  |  |     |   |  |  |     |   |  |  |    |  
|----------------------- | ------------------ |  | - | ------ | - |  | - | ------ | - |  | - | ----- | - |  | -- | ----- | -- | -------------------------- |  | ------ | - |  |  | --- | - |  |  | --- | - |  |  | -- | -
|Operating Profit (Loss) |                    |  |   |        |   |  |   |        |   |  |   |       |   |  |    |       |    | Percentage of Net Revenues
|                        |                    |  |   |        |   |  |   |        |   |  |   |       |   |  |    |       |    |                           
|                        | Bar Code           |  | $ | (1,847 | ) |  | $ | (1,933 | ) |  | $ | (206  | ) |  |    | 4.4   |    |                            |  | (838.3 | ) |  |  | (17 | ) |  |  | (16 | ) |  |  | (2 | )
|                       
|                       
|                       
|                       
|                        | Office Products    |  |   | 629    |   |  |   | (2,028 | ) |  |   | 1,038 |   |  |    | 131.0 |    |                            |  | (295.4 | ) |  |  | 2   |   |  |  | (11 | ) |  |  | 5  |  
|                       
|                       
|                       
|                       
|                        | Military Boots     |  |   | 4,717  |   |  |   | 3,406  |   |  |   | 2,329 |   |  |    | 38.5  |    |                            |  | 46.2   |   |  |  | 24  |   |  |  | 20  |   |  |  | 18 |  
|                       
|                       
|                       
|                       
|                        | Western/Work Boots |  |   | 999    |   |  |   | (550   | ) |  |   | (542  | ) |  |    | 281.6 |    |                            |  | (1.5   | ) |  |  | 5   |   |  |  | (6  | ) |  |  | (7 | )
|                       
|                       
|                       
|                       
|                        | Eliminations/Other |  |   | 62     |   |  |   | 57     |   |  |   | (52   | ) |  | NM |       | NM |                            |  | 0      |   |  |  | 0   |   |  |  | 0   |  
|                        |                    |  |   |        |   |  |   |        |   |  |   |       |   |  |    |       |    |                            |  |        |   |  |  |     |   |  |  |     |   |  |  |    |  
|                        | Consolidated       |  | $ | 4,560  |   |  | $ | (1,048 | ) |  | $ | 2,567 |   |  |    | 535.1 |    |                            |  | (140.8 | ) |  |  | 6   |   |  |  | (2  | ) |  |  | 4  |  

12



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##### 



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 $12.8 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 2002 were not impacted by the
discontinuance of our commercial printing business that occurred in
fiscal 2001. Operating results for fiscal 2001 and fiscal 2000 have
been adjusted to reflect the discontinuance of the commercial printing
unit.

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

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 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

13



---



##### 



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.

The bar code business continues to be a very competitive market.
Success in this business is dependent on the introduction of new
market-driven products in a growing economy. While the economic issues
are beyond our control, continued spending on research and development
to develop new products is of great importance. As a result, we expect
to spend approximately $1.0 million in fiscal 2003 on research and
development to enhance our product mix and improve our ability to meet
the needs of our customers.

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

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

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 60 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.

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. Continued growth in this business will be dependent on our
ability to grow commercial market sales and to continue to
successfully renew the county-wide education system programs that we
currently service.

14



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##### 



FOOTWEAR UNIT RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO FISCAL 2001

Our footwear business unit manufactures and distributes military
combat boots, military dress shoes, military safety boots, western
boots and work boots. Our military footwear is sold primarily to the
U.S. Government and foreign governments, while our western and work
boot products are sold as dress and casual wear for consumers. This
business unit also imports western boots from several countries around
the world.

Net revenues for the military combat boot business 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 (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 the military combat boot business 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 the military combat
boot business for fiscal 2002 grew $1.3 million, to $4.7 million as
compared to $3.4 million for fiscal 2001.

We currently provide military boots to the Government under a contract
dated April 15, 1997 (the Contract). In September 2001, the Government
instructed us to increase our production levels of military combat
boots as a result of the anticipated deployment of troops in the war
on terrorism. The increased production levels represented a
significant increase over the quantities normally purchased by the
Government under the Contract. The Contract, which was set to expire
on April 15, 2002, has been extended twice. The first extension
extended the Contract ordering period through July 19, 2002 and
provided for a minimum order of military combat boots of 103,676 pair
consisting of the three current styles of direct molded sole boots
covered by the Contract. These boots are scheduled for delivery during
the first and second quarters of fiscal 2003 and will have an
approximate $6.3 million impact on revenues. The second extension
extended the Contract ordering period through December 31, 2002 and
provided for a minimum order quantity pair and a maximum order
quantity of 80,000 pair. Based on orders received to date, we expect
this Contract extension to have a $5.1 million impact on revenues.

The Government has issued two solicitations to replace its expiring
direct molded sole contracts, including the Contract. The first
solicitation covers the three direct molded sole styles of vulcanized
military combat boots. The second solicitation covers the newly
adopted waterproof membrane type of standard issue combat boot, which
will replace the current molded style standard issue combat boot that
has historically accounted for the majority of the Governments order
under the Contract. We have submitted bids for both solicitations and
are awaiting the Governments award decisions, which we expect to
occur in November 2002. There are no

15



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##### 



assurances, however, that we will be successful in obtaining either of
these contracts to produce boots for the Government. The Companys
operating results could be materially adversely affected if it is not
successful in obtaining either of these contracts to produce boots for
the Government.

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.

Net revenues for the western and work boot business 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.

Gross profit for the western and work boot business 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 the western and work
boot business for fiscal 2002 amounted to $1.0 million, as compared to
a $550,000 operating loss for fiscal 2001.

The western and work boot market continues to be highly competitive
and dynamic. Market consolidation and piqued interest in western
footwear by consumers gives us a guarded optimism about the future. We
believe that our diversified and branded product line has positioned
us to be a major player in the western boot market in the future.

CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 2001 COMPARED TO FISCAL 2000

Consolidated net revenues for fiscal 2001 amounted to $57.1 million
and were flat as compared to consolidated net revenues for fiscal
2000. The military combat boot business and the western and work boot
business posted increased net revenues of 35.5% and 19.1%,
respectively, over the net revenues reported for fiscal 2000. Net
revenues for the bar code business and office products business
declined 24.2% and 9.9%, respectively, as compared to the net revenues
reported for fiscal 2000.

Consolidated gross profit fell from $14.9 million reported for fiscal
2000 to $12.9 million for fiscal 2001 and as a percentage of
consolidated net revenues from 26% to 23% for the same comparative
fiscal periods. These declines were primarily attributable to
decreased product sales and competitive price pressures in the higher

16



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##### 



margined bar code and office products businesses, partially offset by
increased demand for footwear products.

Consolidated selling, general and administrative (SG&A) expenses
increased by approximately $1.6 million, or 13.3%, from the $12.3
million reported for fiscal 2000 to $13.9 million for fiscal 2001. The
increase in SG&A expenditures was primarily the result of higher
personnel related costs; advertising and promotional expenses; bad
debt charges; and impaired goodwill write-offs, partially offset by
lower professional fees, business insurance costs, and general
maintenance expenditures.

A consolidated operating loss of $1.0 million was reported for fiscal
2001 as compared to an operating profit of $2.6 million for fiscal
2000. The decrease in operating profit resulted from lower gross
margins and increased SG&A costs.

The Companys results of operations for fiscal 2001 and fiscal 2000
have been adjusted to reflect the discontinuance of the commercial
printing unit during fiscal 2001.

Bar Code Unit Results of Operations, Fiscal 2001 Compared to Fiscal 2000

Net revenues for fiscal 2001 amounted to $12.5 million, down 24.2%
from the $16.4 million reported for fiscal 2000. This decrease in net
revenues was primarily attributable to lower product demand resulting
from a soft economic climate, increased competition, and the delay in
bringing the new APEX III product to market.

Gross profit declined from $5.3 million for fiscal 2000 to $3.7
million for fiscal 2001 and as a percentage of net revenues from 32%
to 29%, respectively, for the same reporting periods. The lower gross
profit was the result of decreased sales, competitive price pressure
in the market, depressed software support business, and write-offs for
obsolete inventory.

SG&A expenses were up slightly, from $5.5 million for fiscal 2000 to
$5.6 million for fiscal 2001. This increase in SG&A costs was
primarily attributable to bad debt write-offs, impaired goodwill
write-offs, and new product development charges. Goodwill was
considered impaired based on the carrying value of the goodwill
exceeding the future cash flows of products incorporating the
purchased technology. These increased SG&A costs were partially offset
by cost containment programs that decreased sales personnel related
expenses, advertising and promotional costs, and professional fees.

Lower sales and depressed margins coupled with increased SG&A expenses
produced a $1.9 million operating loss for fiscal 2001 as compared to
an approximate $206,000 loss for fiscal 2000.

Office Products Unit Results of Operations, Fiscal 2001 Compared to Fiscal 2000

Net revenues decreased 9.9% to $18.6 million for fiscal 2001, down
from the $20.7 million reported for fiscal 2000. This decline in net
revenues was primarily attributable to lower commercial account sales
that resulted from a smaller, less experienced sales force; a
procurement freeze placed on North Carolina state contract purchases;
and competitive pressure in the county-wide educational system
program.

Gross profit amounted to $3.5 million for fiscal 2001, down 39.0% from
the $5.7 million reported for fiscal 2000. As a percentage of net
revenues, gross profit fell from 28% to 19% for fiscal 2000 and 2001,
respectively. The decline in gross profit resulted from lower sales
volume; a higher percentage of lower margined county-wide

17



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##### 



educational system sales in the overall sales mix; inventory
write-offs; and increased loss contingencies related to future costs
associated with the county-wide educational system programs.

SG&A expenses increased by approximately $832,000 or 17.7% from fiscal
2000 to fiscal 2001 and was primarily attributable to sales and
administrative personnel costs; office and equipment rental
expenditures; advertising and promotional costs; and bad debt
write-offs. Lower professional fees provided a partial offset to the
higher SG&A costs. The decrease in net revenues, decline in gross
profit, and higher SG&A costs resulted in an operating loss of
approximately $2.0 million for fiscal 2001 as compared to a $1.0
million operating profit for fiscal 2000.

Footwear Unit Results of Operations, Fiscal 2001 Compared to Fiscal 2000

Net revenues for the military combat boot business for fiscal 2001
amounted to approximately $16.8 million, an increase of 35.5% over the
$12.4 million reported for fiscal 2000. This increase in net revenues
was primarily attributable to higher boot requirements by the U.S.
Government. Demand for military boots by foreign governments remained
strong in fiscal 2001 as revenues remained consistent with fiscal
2000.

Gross profit increased 44.8% to $4.0 million for fiscal 2001, up from
the $2.8 million reported for fiscal 2000 primarily as a result of the
increase in net revenues. As a percentage of net revenues, gross
profit increased from 22% for fiscal 2000 to 24% for fiscal 2001. This
improvement in gross profit percentage was attributable to lower per
unit costs associated with higher production levels.

SG&A expenses grew from $457,000 in fiscal 2000 to $628,000 for fiscal
2001 and resulted from increased professional fees, employee benefit
costs, and higher corporate allocations.

The operating profit for the military combat boot business for fiscal
2001 amounted to $3.4 million, an increase of 46.2% over the $2.3
million reported for fiscal 2000.

Net revenues for the western and work boot business for fiscal 2001
amounted to approximately $9.4 million, an increase of $1.5 million or
19.1% over the amount reported for fiscal 2000. This growth in net
revenues is primarily attributable to increased market penetration by
the sales force and higher demand for imported western boots for women
and children.

Gross profit climbed to $1.8 million for fiscal 2001, up 55.1% from
the $1.1 million for fiscal 2000 and as a percentage of net revenues
was 18% for fiscal 2001 as compared to 14% for fiscal 2000. These
increases were primarily the result of higher net revenues, increase
sales prices on manufactured products, and higher margins on sales of
imported products.

SG&A expenses for fiscal 2001 amounted to $2.3 million, approximately
$600,000 greater than the amount reported for fiscal 2000. This
increase in SG&A expenditures was primarily attributable to additional
personnel and related costs, higher advertising and promotional
outlays, bad debt write-offs, and larger professional fee charges.

The operating loss of $550,000 for the western and work boot business
for fiscal 2001 was slightly higher than the $542,000 operating loss
for fiscal 2000 as the growth in SG&A expenses outpaced the growth in
net revenues and gross profit.

18



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Other Business Unit Results of Operations, Fiscal 2001 Compared to Fiscal 2000

In August 2000, we decided to phase out and discontinue the operations
of the printing and packaging business. Normal operations of this unit
ceased on April 28, 2001. Net revenues amounted to approximately $2.0
million and the loss from operations amounted to $41,000, net of
income tax benefit. The loss on disposal amounted to $85,000, net of
income tax benefit. The remaining assets had an estimated fair value
of $200,000.

FINANCIAL CONDITION AND LIQUIDITY

Our financial condition remained strong at August 3, 2002 as cash and
cash equivalents amounted to approximately $5.8 million. Working
capital equaled $23.8 million and the current ratio was 3.85 to 1.

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.

We have two lines of credit with a bank totaling $4.75 million, all of
which was available at August 3, 2002. One credit line totaling $1.75
million expires in June 2003. The other credit line totaling $3.0
million expires in November 2002. It is our belief that current cash
and cash equivalents ($5.8 million at August 3, 2002), cash generated
from operations, and the available lines of credit will be sufficient
to meet our capital requirements for fiscal 2003. We do not have any
off-balance sheet financing arrangements.

Below is a table detailing, by fiscal year maturity dates, our
contractual commitments as of August 3, 2002 (amounts in thousands):

|                 |       |      |     |      |  |      |     |      |  |      |     |            |  |   |     |     |  |   |     |     |  |   |       |       | 
|---------------- | ----- | ---- | --- | ---- |  | ---- | --- | ---- |  | ---- | --- | ---------- |  | - | --- | --- |  | - | --- | --- |  | - | ----- | ----- | 
|Commitment       |       | 2003 |     | 2004 |  | 2005 |     | 2006 |  | 2007 |     | Thereafter
|                 |       |      |     |      |  |      |     |      |  |      |     |           
|Bank loans       |       | $    | 527 |      |  | $    | 544 |      |  | $    | 568 |            |  | $ | 593 |     |  | $ | 619 |     |  | $ | 1,576 |      
|                
|                
|                
|                
|Operating leases |       |      | 308 |      |  |      | 115 |      |  |      | 59  |            |  |   | 9   |     |  |   | 4   |     |  |   | 0     |      
|                 |       |      |     |      |  |      |     |      |  |      |     |            |  |   |     |     |  |   |     |     |  |   |       |      
|                 | Total |      | $   | 835  |  |      | $   | 659  |  |      | $   | 627        |  |   | $   | 602 |  |   | $   | 623 |  |   | $     | 1,576 | 

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

|                                          |                                                         |                 |                |        |               |  |       |       |  
|----------------------------------------- | ------------------------------------------------------- | --------------- | -------------- | ------ | ------------- |  | ----- | ----- | -
|Source (Use) of Cash                      |                                                         | For Years Ended
|                                          |                                                         |                
|                                          |                                                         |                 | August 3, 2002 |        | July 28, 2001
|                                          |                                                         |                 |                |        |              
|Operating activities                      |                                                         |                 |                |        |               |  |       |      
|                                         
|                                         
|                                         
|                                         
|                                          | Net earnings adjusted for depreciation
and amortization |                 | $              | 4,421  |               |  | $     | 852   |  
|                                         
|                                         
|                                         
|                                         
|                                          | Accounts receivable                                     |                 |                | (4,394 | )             |  |       | 1,382 |  
|                                         
|                                         
|                                         
|                                         
|                                          | Inventories                                             |                 |                | (2,686 | )             |  |       | 1,635 |  
|                                         
|                                         
|                                         
|                                         
|Net cash provided by operating activities |                                                         |                 | 490            |        |               |  | 2,822 |      
|                                         
|                                         
|                                         
|                                         
|Investing activities                      |                                                         |                 |                |        |               |  |       |      
|                                         
|                                         
|                                         
|                                         
|                                          | Purchase of trademarks                                  |                 |                | (800   | )             |  |       | (250  | )
|                                         
|                                         
|                                         
|                                         
|                                          | Capital expenditures                                    |                 |                | (691   | )             |  |       | (318  | )
|                                         
|                                         
|                                         
|                                         
|Financing activities                      |                                                         |                 |                |        |               |  |       |      
|                                         
|                                         
|                                         
|                                         
|                                          | Principal repayment of long-term debt                   |                 |                | (579   | )             |  |       | (298  | )
|                                         
|                                         
|                                         
|                                         
|                                          | Dividends paid                                          |                 |                | (374   | )             |  |       | (521  | )

19



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Net cash generated by operating activities during fiscal 2002 amounted
to $239,000. In fiscal 2002, net earnings plus depreciation and
amortization totaled $4.4 million, a 419% increase as compared to
fiscal 2001 as a result of our increased sales and improved operating
performance. The increase in accounts receivable balances for fiscal
2002 used approximately $4.4 million of cash primarily attributable to
the growth in net revenues related to our military combat boot
business, western boot business and office products business.
Inventory levels in the military boot business and the western boot
business were increased to meet the Governments requirements for
military boots and to prepare for the higher demand for western boots
for the fall selling season. This increase in inventory used
approximately $2.7 million of cash.

In the first quarter of fiscal 2002, we used $800,000 to purchase the
Dan Post trademark. This acquisition played a key role in the success
of our western boot business for fiscal 2002. Capital expenditures
used approximately $691,000 of cash
primarily for computer equipment, office
equipment and manufacturing equipment for the footwear businesses.

Financing activities for fiscal 2002 used $953,000 for debt principal
payments and dividends. The increase in debt reduction resulted from
lower interest rates on our monthly loan payment of $59,000 and the
application of proceeds from the Tennessee warehouse sale to the
outstanding indebtedness.

Our western boot business experienced dramatic growth in fiscal 2002.
Our efforts to continue expanding this business in fiscal 2003 could
negatively impact our liquidity. Similarly, if our military boot
businesss sales fall, either because we are unable to win a new
contract to replace the current Contract which expires in December
2002 or because the Governments level of orders under a new contract
is reduced, our future liquidity could be significantly 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 June 2001, Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, was issued and
established the accounting and reporting for acquired goodwill and
other intangible assets. SFAS No. 142 is effective for us at the
beginning of fiscal 2003. The Company has adopted SFAS No. 142 and in
accordance with its rules, we have tested the purchased goodwill
related to the bar code business and do not believe that it is
impaired at this time.

In July 2001, SFAS No. 143, Accounting for Asset Retirement
Obligations, was issued and established the accounting and reporting
standards associated with the retirement of tangible long-lived
assets. SFAS No. 143 is effective for the Company for fiscal years
beginning after June 15, 2002. We currently have no assets subject to
the provisions of this statement.

In August 2001, SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, was issued and established the
accounting and reporting requirements associated with long-lived asset
impairment and disposal. SFAS No. 144 is effective for the Company for
fiscal 2003. We have adopted this standard with no impact on our
financial statements.

20



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##### 



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

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

FORWARD-LOOKING STATEMENTS

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

ITEM 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 3, 2002,
there was no outstanding indebtedness under the lines of credit and
$4.2 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 $19,000 (assuming that our aggregate
borrowings under the credit facilities averaged $3.9 million during a
fiscal year).

21



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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                                                                                                                                                          |  |  | 23    | 
|
|
|
|
| | 2. |  |  | McRae Industries, Inc. and Subsidiaries Consolidated Financial
Statements:                                                                                                            |  |  |       | 
|
|
|
|
| |    |  |  | Consolidated Balance Sheets as of August 3, 2002 and July 28, 2001                                                                                                                    |  |  | 24-25 | 
|
|
|
|
| |    |  |  | Consolidated Statements of Operations for the Years Ended August 3, 2002,
July 28, 2001, and July 29, 2000                                                                            |  |  | 26    | 
|
|
|
|
| |    |  |  | Consolidated Statements of Shareholders Equity for the Years Ended
August 3, 2002, July 28, 2001, and July 29, 2000                                                                  |  |  | 27    | 
|
|
|
|
| |    |  |  | Consolidated Statements of Cash Flows for the Years Ended August 3, 2002,
July 28, 2001, and July 29, 2000                                                                            |  |  | 28    | 
|
|
|
|
| |    |  |  | Notes to Consolidated Financial Statements                                                                                                                                            |  |  | 29-41 | 
|
|
|
|
| | 3. |  |  | Financial Statement Schedule:                                                                                                                                                         |  |  |       | 
|
|
|
|
| |    |  |  | Schedule II                                                                                                                                                                           |  |  | 42    | 
|
|
|
|
| |    |  |  | 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 |  |  |      

22



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##### 



Grant Thornton LLP

Report of Independent Certified Public Accountants

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

We have audited the accompanying consolidated balance sheets of McRae
Industries, Inc. and subsidiaries as of August 3, 2002, and July 28,
2001, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three years in
the period ended August 3, 2002. Our audit also included the
financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that
we plan and perform the audits to obtain reasonable assurance about
whether the financial statements and schedule are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements
and schedule. 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 3,
2002, and July 28, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended
August 3, 2002, in conformity with accounting principles generally
accepted in the United States. Further, in our opinion, the financial
statement schedule referred to above presents fairly, in all material
respects, the information stated therein, when considered in relation
to the financial statements taken as a whole.

/s/ Grant Thornton LLP

October 16, 2002

100 North Tryon Street, Suite 3800
Charlotte, North Carolina 28202
Telephone 704-377-0220 Telefax 704-337-2977
Certified Public Accountants

23



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##### 



CONSOLIDATED BALANCE SHEETS

McRae Industries, Inc. and Subsidiaries

|                                            |                                                                                                            |  |           |            |          |  |           |            | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------- |  | --------- | ---------- | -------- |  | --------- | ---------- | 
|                                            |                                                                                                            |  | August 3, |            | July 28,
|                                            |                                                                                                            |  | 2002      |            | 2001    
|                                            |                                                                                                            |  |           |            |         
|ASSETS                                      |                                                                                                            |  |           |            |          |  |           |           
|                                           
|                                           
|                                           
|                                           
|Current assets:                             |                                                                                                            |  |           |            |          |  |           |           
|                                           
|                                           
|                                           
|                                           
|                                            | Cash and cash equivalents                                                                                  |  | $         | 5,822,000  |          |  | $         | 7,341,000  | 
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts receivable, less allowances for
doubtful accounts of $374,000 and
$273,000, respectively (Note 5) |  |           | 9,442,000  |          |  |           | 5,048,000  | 
|                                           
|                                           
|                                           
|                                           
|                                            | Notes receivable, current portion                                                                          |  |           |            |          |  |           |            | 
|                                           
|                                           
|                                           
|                                           
|                                            | Employees                                                                                                  |  |           | 17,000     |          |  |           | 311,000    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Other                                                                                                      |  |           | 58,000     |          |  |           | 83,000     | 
|                                           
|                                           
|                                           
|                                           
|                                            | Inventories (Notes 2 and 5)                                                                                |  |           | 16,241,000 |          |  |           | 13,806,000 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Net investment in capitalized leases,
current portion (Note 3)                                             |  |           | 254,000    |          |  |           | 567,000    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Income tax receivable (Note 7)                                                                             |  |           | 242,000    |          |  |           | 881,000    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Prepaid expenses and other current assets                                                                  |  |           | 104,000    |          |  |           | 65,000     | 
|                                            |                                                                                                            |  |           |            |          |  |           |            | 
|                                            | Total current assets                                                                                       |  |           | 32,180,000 |          |  |           | 28,102,000 | 
|                                           
|                                           
|                                           
|                                           
|Property and equipment, net (Notes 4 and 5) |                                                                                                            |  | 4,458,000 |            |          |  | 5,204,000 |           
|                                           
|                                           
|                                           
|                                           
|Other assets:                               |                                                                                                            |  |           |            |          |  |           |           
|                                           
|                                           
|                                           
|                                           
|                                            | Notes and accounts receivable, related
entities (Notes 10 and 11)                                          |  |           | 395,000    |          |  |           | 527,000    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Net investment in capitalized leases,
net of current portion (Note 3)                                      |  |           | 441,000    |          |  |           | 960,000    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Notes receivable, net of current portion                                                                   |  |           |            |          |  |           |            | 
|                                           
|                                           
|                                           
|                                           
|                                            | Employees                                                                                                  |  |           | 3,000      |          |  |           | 4,000      | 
|                                           
|                                           
|                                           
|                                           
|                                            | Other                                                                                                      |  |           | 124,000    |          |  |           | 199,000    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Real estate held for investment                                                                            |  |           | 652,000    |          |  |           | 652,000    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Goodwill                                                                                                   |  |           | 362,000    |          |  |           | 392,000    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Cash surrender value life insurance (Note 12)                                                              |  |           | 2,251,000  |          |  |           | 2,041,000  | 
|                                           
|                                           
|                                           
|                                           
|                                            | Trademarks                                                                                                 |  |           | 1,049,000  |          |  |           | 249,000    | 
|                                           
|                                           
|                                           
|                                           
|                                            | Other                                                                                                      |  |           | 14,000     |          |  |           | 647,000    | 
|                                            |                                                                                                            |  |           |            |          |  |           |            | 
|                                            | Total other assets                                                                                         |  |           | 5,291,000  |          |  |           | 5,671,000  | 
|                                            |                                                                                                            |  |           |            |          |  |           |            | 
|                                            | Total assets                                                                                               |  | $         | 41,929,000 |          |  | $         | 38,977,000 | 
|                                            |                                                                                                            |  |           |            |          |  |           |            | 

See notes to consolidated financial statements

24



---



##### 



CONSOLIDATED BALANCE SHEETS

McRae Industries, Inc. and Subsidiaries

|                                                      |  |                                                                                                                        |                                            |   |           |            |            |   |           |            | 
|----------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | --------- | ---------- | ---------- | - | --------- | ---------- | 
|                                                      |  |                                                                                                                        |                                            |   | August 3, |            | July 28,  
|                                                      |  |                                                                                                                        |                                            |   | 2002      |            | 2001      
|                                                      |  |                                                                                                                        |                                            |   |           |            |           
|LIABILITIES AND SHAREHOLDERS EQUITY                  |  |                                                                                                                        |                                            |   |           |            |            |  
|                                                     
|                                                     
|                                                     
|                                                     
|Current liabilities:                                  |  |                                                                                                                        |                                            |   |           |            |            |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |  | Current portion of notes payable, banks (Note 5)                                                                       |                                            | $ | 527,000   |            |            | $ | 407,000   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |  | Accounts payable                                                                                                       |                                            |   | 4,361,000 |            |            |   | 3,545,000 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |  | Accrued employee benefits (Note 6)                                                                                     |                                            |   | 475,000   |            |            |   | 239,000   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |  | Deferred revenues                                                                                                      |                                            |   | 1,039,000 |            |            |   | 983,000   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |  | Accrued payroll and payroll taxes                                                                                      |                                            |   | 753,000   |            |            |   | 578,000   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |  | Contract contingencies                                                                                                 |                                            |   | 669,000   |            |            |   | 650,000   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |  | Other                                                                                                                  |                                            |   | 527,000   |            |            |   | 498,000   |           
|                                                      |  |                                                                                                                        |                                            |   |           |            |            |   |           |           
|                                                      |  | Total current liabilities                                                                                              |                                            |   | 8,351,000 |            |            |   | 6,900,000 |           
|                                                     
|                                                     
|                                                     
|                                                     
|Notes payable, banks, net of current portion (Note 5) |  |                                                                                                                        | 3,900,000                                  |   |           |            | 4,598,000  |  
|                                                     
|                                                     
|                                                     
|                                                     
|Minority interest (Note 8)                            |  |                                                                                                                        | 97,000                                     |   |           |            | 108,000    |  
|                                                     
|                                                     
|                                                     
|                                                     
|Commitments and contingencies (Note 8)                |  |                                                                                                                        |                                            |   |           |            |            |  
|                                                     
|                                                     
|                                                     
|                                                     
|Shareholders equity: (Note 9)                        |  |                                                                                                                        |                                            |   |           |            |            |  
|                                                     
|                                                     
|                                                     
|                                                     
|Common stock                                          |  |                                                                                                                        |                                            |   |           |            |            |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |  | Class A, $1 par value; authorized5,000,000 shares; issued and outstanding,1,879,072 and 1,861,817 shares, respectively |                                            |   | 1,879,000 |            |            |   | 1,862,000 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |  | Class B, $1 par value; authorized
2,500,000 shares; issued and outstanding,
889,427 and 906,682 shares, respectively   |                                            |   | 889,000   |            |            |   | 907,000   |           
|                                                     
|                                                     
|                                                     
|                                                     
|Additional paid-in capital                            |  |                                                                                                                        | 791,000                                    |   |           |            | 791,000    |  
|                                                     
|                                                     
|                                                     
|                                                     
|Retained earnings                                     |  |                                                                                                                        | 26,022,000                                 |   |           |            | 23,811,000 |  
|                                                      |  |                                                                                                                        |                                            |   |           |            |            |   |           |           
|Total shareholders equity                            |  |                                                                                                                        | 29,581,000                                 |   |           |            | 27,371,000 |  
|                                                      |  |                                                                                                                        |                                            |   |           |            |            |   |           |           
|                                                      |  |                                                                                                                        | Total liabilities and shareholders equity |   | $         | 41,929,000 |            |   | $         | 38,977,000 | 
|                                                      |  |                                                                                                                        |                                            |   |           |            |            |   |           |           

See notes to consolidated financial statements

25



---



##### 



CONSOLIDATED STATEMENTS OF OPERATIONS

McRae Industries, Inc. and Subsidiaries

|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |     |          |  
|------------------------------------------------------------------------------------ | ------------------------------------------ | ---------------------------------------------------------------------------------------------------------- | ---------- | --------- | - | -------- | ---------- | -------- | ------- | - | ---------- | --- | -------- | -
|                                                                                     |                                            |                                                                                                            |            | August 3, |   | July 28, |            | July 29,
|For the Years Ended                                                                  |                                            | 2002                                                                                                       |            | 2001      |   | 2000    
|                                                                                     |                                            |                                                                                                            |            |           |   |         
|Net revenues                                                                         |                                            | $                                                                                                          | 74,531,000 |           |   | $        | 57,145,000 |          |         | $ | 57,141,000 |    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cost of revenues                                                                     |                                            |                                                                                                            | 54,716,000 |           |   |          | 44,263,000 |          |         |   | 42,278,000 |    
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Gross profit                                                                         |                                            |                                                                                                            | 19,815,000 |           |   |          | 12,882,000 |          |         |   | 14,863,000 |    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Selling, general and
administrative expenses                                         |                                            |                                                                                                            | 15,255,000 |           |   |          | 13,930,000 |          |         |   | 12,296,000 |    
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Operating profit (loss) from
continuing operations                                   |                                            |                                                                                                            | 4,560,000  |           |   |          | (1,048,000 | )        |         |   | 2,567,000  |    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Other income (loss), net                                                             |                                            |                                                                                                            | (47,000    | )         |   |          | 502,000    |          |         |   | 312,000    |    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest expense (Note 5)                                                            |                                            |                                                                                                            | (246,000   | )         |   |          | (413,000   | )        |         |   | (391,000   | )  
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|Earnings (loss) from continuing
operations before income taxes
and minority interest |                                            |                                                                                                            | 4,267,000  |           |   |          | (959,000   | )        |         |   | 2,488,000  |    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Provision (benefit) for
income taxes (Note 7)                                        |                                            |                                                                                                            | 1,693,000  |           |   |          | (375,000   | )        |         |   | 979,000    |    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Minority interest (Note 8)                                                           |                                            |                                                                                                            | 11,000     |           |   |          | 13,000     |          |         |   | (7,000     | )  
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|Net earnings (loss)
from continuing operations                                       |                                            |                                                                                                            | 2,585,000  |           |   |          | (571,000   | )        |         |   | 1,502,000  |    
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|Discontinued
operations: (Note 14)                                                   |                                            |                                                                                                            |           |           |   |          | (41,000    | )        |         |   | (145,000   | )  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     |                                            | Loss
from discontinued operations, net of income tax benefits of $(19,000)
for 2001 and $(93,000) for 2000 |            |           |  |          |            |          | (41,000 | ) |            |     | (145,000 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     |                                            | Loss on disposal of business segment
net of income tax benefit of $39,000
for fiscal 2001                  |            |           |  |          |            |          | (85,000 | ) |            |     |         |  
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|Net earnings (loss)                                                                  |                                            | $                                                                                                          | 2,585,000  |           |   | $        | (697,000   | )        |         | $ | 1,357,000  |    
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|Earnings (loss) per common share:                                                    |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Earnings (loss) from continuing
operations |                                                                                                            | $          | .93       |   |          | $          | (.21     | )       |   | $          | .54 |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Loss from discontinued operations          |                                                                                                            |           |           |   |          | (.04       | )        |         |   | (.05       | )  
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|                                                                                     | Net earnings (loss)                        |                                                                                                            | $          | .93       |   |          | $          | (.25     | )       |   | $          | .49 |         
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    
|Weighted average number of
common shares outstanding                                 |                                            |                                                                                                            | 2,768,499  |           |   |          | 2,768,499  |          |         |   | 2,768,499  |    
|                                                                                     |                                            |                                                                                                            |            |           |   |          |            |          |         |   |            |    

See notes to consolidated financial statements

26



---



##### 



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

|                                              |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   |            |  
|--------------------------------------------- |  | -------------------------- | --------- | ------- |  | ---------- | --------- | -------- |  | --------------- | ------- | -------- |  | - | ------- | - |  | - | ------- |  |  | - | ---------- | -
|                                              |  | Common Stock, $1 par value |           |         |  |            |           |          |  |                
|                                              |  |                            |           |         |  |            |           |          |  |                
|                                              |  | Class A                    |           | Class B |  | Additional |           | Retained
|                                              |  | Shares                     |           | Amount  |  | Shares     |           | Amount   |  | Paid-in Capital |         | Earnings
|                                              |  |                            |           |         |  |            |           |          |  |                 |         |         
|Balance, July 31, 1999                        |  |                            | 1,857,774 |         |  | $          | 1,858,000 |          |  |                 | 910,725 |          |  | $ | 911,000 |   |  | $ | 791,000 |  |  | $ | 24,341,000 |  
|                                             
|                                             
|                                             
|                                             
|Conversion of Class B to
Class A stock        |  |                            | 1,918     |         |  |            | 2,000     |          |  |                 | (1,918  | )        |  |   | (2,000  | ) |  |   |         |  |  |   |            |  
|                                             
|                                             
|                                             
|                                             
|Cash dividend ($.36 per
Class A common stock) |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   | (669,000   | )
|                                             
|                                             
|                                             
|                                             
|Net earnings                                  |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   | 1,357,000  |  
|                                              |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   |            |  
|Balance, July 29, 2000                        |  |                            | 1,859,692 |         |  |            | 1,860,000 |          |  |                 | 908,807 |          |  |   | 909,000 |   |  |   | 791,000 |  |  |   | 25,029,000 |  
|                                             
|                                             
|                                             
|                                             
|Conversion of Class B to
Class A stock        |  |                            | 2,125     |         |  |            | 2,000     |          |  |                 | (2,125  | )        |  |   | (2,000  | ) |  |   |         |  |  |   |            |  
|                                             
|                                             
|                                             
|                                             
|Cash dividend ($.28 per
Class A common stock) |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   | (521,000   | )
|                                             
|                                             
|                                             
|                                             
|Net loss                                      |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   | (697,000   | )
|                                              |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   |            |  
|Balance, July 28, 2001                        |  |                            | 1,861,817 |         |  |            | 1,862,000 |          |  |                 | 906,682 |          |  |   | 907,000 |   |  |   | 791,000 |  |  |   | 23,811,000 |  
|                                             
|                                             
|                                             
|                                             
|Conversion of Class B to
Class A stock        |  |                            | 17,255    |         |  |            | 17,000    |          |  |                 | (17,255 | )        |  |   | (18,000 | ) |  |   |         |  |  |   |            |  
|                                             
|                                             
|                                             
|                                             
|Cash Dividend ($.20 per
Class A common stock) |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   | (374,000   | )
|                                             
|                                             
|                                             
|                                             
|Net earnings                                  |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   | 2,585,000  |  
|                                              |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   |            |  
|Balance, August 3, 2002                       |  |                            | 1,879,072 |         |  | $          | 1,879,000 |          |  |                 | 889,427 |          |  | $ | 889,000 |   |  | $ | 791,000 |  |  | $ | 26,022,000 |  
|                                              |  |                            |           |         |  |            |           |          |  |                 |         |          |  |   |         |   |  |   |         |  |  |   |            |  

See notes to consolidated financial statements

27



---



##### 



CONSOLIDATED STATEMENTS OF CASH FLOWSMcRae Industries, Inc. and Subsidiaries

|                                                                                    |                                                                  |      |            |            |          |      |           |            |   |   |           |            |  
|----------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---- | ---------- | ---------- | -------- | ---- | --------- | ---------- | - | - | --------- | ---------- | -
|                                                                                    |                                                                  |      | August 3,  |            | July 28, |      | July 29, 
|For the Years Ended                                                                 |                                                                  | 2002 |            | 2001       |          | 2000
|                                                                                    |                                                                  |      |            |            |          |      |          
|Cash Flows from Operating Activities:                                               |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Net earnings (loss)                                                                 |                                                                  | $    | 2,585,000  |            |          | $    | (697,000  | )          |   | $ | 1,357,000 |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Adjustments to reconcile net earnings
to net cash provided by operating activities: |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Depreciation and amortization                                    |      |            | 1,836,000  |          |      |           | 1,549,000  |   |   |           | 1,525,000  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Equity in net (income) loss of investee                          |      |            | 25,000     |          |      |           | (83,000    | ) |   |           | 40,000     |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Minority shareholders interest in earnings
(loss) of subsidiary |      |            | (11,000    | )        |      |           | (13,000    | ) |   |           | 7,000      |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Loss on sale of assets                                           |      |            | 122,000    |          |      |           | 39,000     |   |   |           | 59,000     |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Contract contingencies                                           |      |            | 19,000     |          |      |           | 224,000    |   |   |           | 426,000    |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Changes in operating assets and liabilities:                                        |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accounts receivable                                              |      |            | (4,394,000 | )        |      |           | 1,382,000  |   |   |           | 1,136,000  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Inventories                                                      |      |            | (2,686,000 | )        |      |           | 1,635,000  |   |   |           | (2,738,000 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Net investment in capitalized leases                             |      |            | 831,000    |          |      |           | 603,000    |   |   |           | 948,000    |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Prepaid expenses and other current assets                        |      |            | (39,000    | )        |      |           | 22,000     |   |   |           | 130,000    |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accounts payable                                                 |      |            | 816,000    |          |      |           | (1,131,000 | ) |   |           | 2,087,000  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accrued employee benefits                                        |      |            | 235,000    |          |      |           | (37,000    | ) |   |           | 26,000     |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Deferred revenues                                                |      |            | 56,000     |          |      |           | (56,000    | ) |   |           | (299,000   | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accrued payroll and payroll taxes                                |      |            | 176,000    |          |      |           | (36,000    | ) |   |           | (23,000    | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Income taxes                                                     |      |            | 639,000    |          |      |           | (1,359,000 | ) |   |           | 367,000    |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Other                                                            |      |            | 29,000     |          |      |           | (72,000    | ) |   |           | (258,000   | )
|                                                                                    |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|                                                                                    | Net cash provided by operating activities                        |      |            | 239,000    |          |      |           | 1,970,000  |   |   |           | 4,790,000  |  
|                                                                                    |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|Cash Flows from Investing Activities:                                               |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Proceeds from sale of property                                                      |                                                                  |      | 105,000    |            |          |      | 107,000   |            |   |   | 24,000    |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Proceeds from sale of short term investments                                        |                                                                  |      |           |            |          |      | 55,000    |            |   |   | 2,000     |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Purchase of land                                                                    |                                                                  |      |           |            |          |      | (16,000   | )          |   |   | (151,000  | )         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Purchase of other assets                                                            |                                                                  |      | 79,000     |            |          |      | (83,000   | )          |   |   | (963,000  | )         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Purchase of trademarks                                                              |                                                                  |      | (800,000   | )          |          |      | (250,000  | )          |   |   |          |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Purchase of minority interest                                                       |                                                                  |      |           |            |          |      | (605,000  | )          |   |   |          |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Capital expenditures                                                                |                                                                  |      | (691,000   | )          |          |      | (318,000  | )          |   |   | (854,000  | )         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Advances to related parties                                                         |                                                                  |      | (99,000    | )          |          |      | (206,000  | )          |   |   | (108,000  | )         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Collections from related parties                                                    |                                                                  |      | 206,000    |            |          |      | 414,000   |            |   |   | 357,000   |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Advances on notes receivable                                                        |                                                                  |      |           |            |          |      | (300,000  | )          |   |   |          |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Collections on notes receivable                                                     |                                                                  |      | 395,000    |            |          |      | 173,000   |            |   |   | 361,000   |           
|                                                                                    |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|                                                                                    | Net cash used in investing activities                            |      |            | (805,000   | )        |      |           | (1,029,000 | ) |   |           | (1,332,000 | )
|                                                                                    |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|Cash Flows from Financing Activities:                                               |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Principal repayments of long-term debt                                              |                                                                  |      | (579,000   | )          |          |      | (298,000  | )          |   |   | (271,000  | )         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Dividends paid                                                                      |                                                                  |      | (374,000   | )          |          |      | (521,000  | )          |   |   | (669,000  | )         
|                                                                                    |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|                                                                                    | Net cash used in financing activities                            |      |            | (953,000   | )        |      |           | (819,000   | ) |   |           | (940,000   | )
|                                                                                    |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|Net (Decrease) Increase in Cash and Cash
Equivalents                                |                                                                  |      | (1,519,000 | )          |          |      | 122,000   |            |   |   | 2,518,000 |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Cash and Cash Equivalents at Beginning of Year                                      |                                                                  |      | 7,341,000  |            |          |      | 7,219,000 |            |   |   | 4,701,000 |           
|                                                                                    |                                                                  |      |            |            |          |      |           |            |   |   |           |           
|Cash and Cash Equivalents at End of Year                                            |                                                                  | $    | 5,822,000  |            |          | $    | 7,341,000 |            |   | $ | 7,219,000 |           
|                                                                                    |                                                                  |      |            |            |          |      |           |            |   |   |           |           



|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 which amounted to $251,000, $852,000 and $95,000 in fiscal
2002, 2001 and 2000, respectively.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements

28



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSMcRae Industries, Inc. and
Subsidiaries

For the Years Ended August 3, 2002, July 28, 2001, and July 29, 2000

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. The investment in an investee (American
Mortgage & Investment Company as described in Note 11) is accounted
for on the equity method. 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
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.

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 3 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.

The Company sells equipment under sales-type equipment to third party
leasing companies. Sales of the equipment under cost per copy lease
agreements are recognized when third party or sales-type lease
agreements are signed and the equipment is installed. 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.

29



---



##### 



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. 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

Goodwill represents the excess of the purchase prices over the fair
value of the net assets acquired in business combinations in prior
years and is being amortized by the straight-line method over periods
ranging up to 20 years. On a periodic basis, the Company estimates
the future undiscounted cash flow of the businesses to which goodwill
relates to assess that the carrying value of such goodwill has not
been impaired. During fiscal 2001, the Company wrote-off
approximately $78,000 of impaired goodwill related to the bar code
business. This goodwill was considered impaired based on the future
cash flow of the products incorporating the purchased technology.

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.

Earnings Per Share

Earnings per share are based on the weighted average number of shares
of common stock outstanding during the year.

Recently Issued Accounting Standards

In June 2001, Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, was issued and
established the accounting and reporting for acquired goodwill and
other intangible assets. SFAS No. 142 is effective for us at the
beginning of fiscal 2003. The Company has adopted SFAS No. 142 and in
accordance with its rules, we have tested the purchased goodwill
related to the bar code business and do not believe that it is
impaired at this time.

30



---



##### 



In July 2001, SFAS No. 143, Accounting for Asset Retirement
Obligations, was issued and established the accounting and reporting
standards associated with the retirement of tangible long-lived
assets. SFAS No. 143 is effective for the Company for fiscal years
beginning after June 15, 2002. We currently have no assets subject to
the provisions of this statement.

In August 2001, SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, was issued and established the
accounting and reporting requirements associated with long-lived
asset impairment and disposal. SFAS No. 144 is effective for the
Company for fiscal 2003. We have adopted this standard with no impact
on our financial statements.

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

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

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 2002,  2001,  and 2000
were $1,045,000,  $561,000,  and $538,000,  respectively.

Advertising

The Company expenses advertising costs when incurred. Advertising
expense amounted to $505,000,  $406,000,  and $157,000 for fiscal 2002,
 2001,  and 2000,  respectively.

Reclassifications

Certain reclassifications have been made to the prior years
financial statements and notes thereto to conform with the current
year presentation. In particular, the prior years financial
statements and notes have been adjusted to reflect the discontinuance
of the commercial printing business in fiscal 2001.

31



---



##### 



2. INVENTORIES

Current costs exceed the LIFO value of inventories by approximately
$773,000 and $837,000 at August 3, 2002 and July 28, 2001,
respectively. Year-end inventories valued under the LIFO method were
$6,637,000 and $5,483,000 at August 3, 2002, and July 28, 2001,
respectively. A decrease in fiscal 2002 LIFO reserves was due to
changes in FIFO pricing which resulted in increased net earnings of
$39,000. The increase in fiscal 2001 LIFO reserves was due to changes
in FIFO pricing which resulted in decreased net earnings of $74,000.
The components of inventory at each year-end are as follows:

|                |  |      |            |      |  |   |            | 
|--------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                |  | 2002 |            | 2001
|                |  |      |            |     
|Raw materials   |  | $    | 3,332,000  |      |  | $ | 2,843,000  | 
|               
|               
|               
|               
|Work-in-process |  |      | 1,049,000  |      |  |   | 746,000    | 
|               
|               
|               
|               
|Finished goods  |  |      | 11,860,000 |      |  |   | 10,217,000 | 
|                |  |      |            |      |  |   |            | 
|                |  | $    | 16,241,000 |      |  | $ | 13,806,000 | 
|                |  |      |            |      |  |   |            | 

3. LEASES

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

|                                       |  |      |         |      |  |   |           |  
|-------------------------------------- |  | ---- | ------- | ---- |  | - | --------- | -
|                                       |  | 2002 |         | 2001
|                                       |  |      |         |     
|Minimum lease payments receivable      |  | $    | 770,000 |      |  | $ | 1,663,000 |  
|                                      
|                                      
|                                      
|                                      
|Estimated unguaranteed residual values |  |      | 68,000  |      |  |   | 116,000   |  
|                                      
|                                      
|                                      
|                                      
|Unearned income                        |  |      | (63,000 | )    |  |   | (172,000  | )
|                                      
|                                      
|                                      
|                                      
|Allowance for doubtful accounts        |  |      | (80,000 | )    |  |   | (80,000   | )
|                                       |  |      |         |      |  |   |           |  
|Net investment                         |  |      | 695,000 |      |  |   | 1,527,000 |  
|                                      
|                                      
|                                      
|                                      
|Less: Current portion                  |  |      | 254,000 |      |  |   | 567,000   |  
|                                       |  |      |         |      |  |   |           |  
|                                       |  | $    | 441,000 |      |  | $ | 960,000   |  
|                                       |  |      |         |      |  |   |           |  

The scheduled maturities for the above minimum lease payments
receivable at August 3, 2002 are as follows:

|                                        |  |   |         |  |  |  |  | 
|--------------------------------------- |  | - | ------- |  |  |  |  | 
|Fiscal Years Ending                     |  |   |         | 
|2003                                    |  | $ | 374,000 | 
|                                       
|                                       
|                                       
|                                       
|2004                                    |  |   | 223,000 | 
|                                       
|                                       
|                                       
|                                       
|2005                                    |  |   | 130,000 | 
|                                       
|                                       
|                                       
|                                       
|2006                                    |  |   | 40,000  | 
|                                       
|                                       
|                                       
|                                       
|2007 and thereafter                     |  |   | 3,000   | 
|                                        |  |   |         | 
|Total minimum lease payments receivable |  | $ | 770,000 | 
|                                        |  |   |         | 

4. PROPERTY AND EQUIPMENT

|                               |  |      |            |      |  |   |            | 
|------------------------------ |  | ---- | ---------- | ---- |  | - | ---------- | 
|                               |  | 2002 |            | 2001
|                               |  |      |            |     
|Land and improvements          |  | $    | 727,000    |      |  | $ | 762,000    | 
|                              
|                              
|                              
|                              
|Buildings                      |  |      | 4,009,000  |      |  |   | 4,279,000  | 
|                              
|                              
|                              
|                              
|Machinery and equipment        |  |      | 7,135,000  |      |  |   | 7,980,000  | 
|                              
|                              
|                              
|                              
|Furniture and fixtures         |  |      | 2,525,000  |      |  |   | 2,364,000  | 
|                               |  |      |            |      |  |   |            | 
|                               |  |      | 14,396,000 |      |  |   | 15,385,000 | 
|                              
|                              
|                              
|                              
|Less: Accumulated depreciation |  |      | 9,938,000  |      |  |   | 10,181,000 | 
|                               |  |      |            |      |  |   |            | 
|                               |  | $    | 4,458,000  |      |  | $ | 5,204,000  | 
|                               |  |      |            |      |  |   |            | 

Depreciation expense for fiscal 2002, 2001, and 2000 was $1,461,000,
$1,431,000, and $1,484,000, respectively.

32



---



##### 



5. NOTES PAYABLE AND LINES OF CREDIT

NOTES PAYABLE:

|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |           |               |  |   |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | ------------- |  | - | --------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  | August 3, 2002 |           | July 28, 2001
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |           |              
|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, which originally cost $8,991,000,
of the Companys Dan Post subsidiary
are pledged as collateral.                                                                                                                            |  | $              | 4,196,000 |               |  | $ | 4,755,000 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                         
|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, which
originally cost $847,000, of the Companys
Dan Post subsidiary, are pledged as collateral. |  |                | 231,000   |               |  |   | 250,000   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |           |               |  |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                | 4,427,000 |               |  |   | 5,005,000 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                         
|Less: Current portion                                                                                                                                                                                                                                                                                                                                                                                                     |  |                | 527,000   |               |  |   | 407,000   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |           |               |  |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  | $              | 3,900,000 |               |  | $ | 4,598,000 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |           |               |  |   |           | 

Annual maturities of long-term debt are as follows:

|                     |  |   |           |  |  |  |  | 
|-------------------- |  | - | --------- |  |  |  |  | 
|Fiscal Years Ending: |  |   |           | 
|2003                 |  | $ | 527,000   | 
|                    
|                    
|                    
|                    
|2004                 |  |   | 544,000   | 
|                    
|                    
|                    
|                    
|2005                 |  |   | 568,000   | 
|                    
|                    
|                    
|                    
|2006                 |  |   | 593,000   | 
|                    
|                    
|                    
|                    
|2007                 |  |   | 619,000   | 
|                    
|                    
|                    
|                    
|thereafter           |  |   | 1,576,000 | 
|                     |  |   |           | 
|                     |  | $ | 4,427,000 | 
|                     |  |   |           | 

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 3, 2002 and July 28, 2001. 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 2002 and is secured by
the inventory and accounts receivable of Dan Post.

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 3, 2002 and July 28, 2001. The line of credit
expires in June 2003 and provides for interest on outstanding balances to
be payable monthly at the prime rate.

Cash paid for interest during fiscal years 2002, 2001, and 2000 was
approximately $246,000, $403,000, and $430,000, respectively.

33



---



##### 



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.

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 $176,000, $184,000, and $191,000 for the fiscal
years ended August 3, 2002, July 28, 2001, and July 29, 2000,
respectively.

Employee benefit program expense amounted to $433,000, $239,000, and
$261,000 in 2002, 2001, and 2000, respectively. To the extent the
amounts of these benefits are not disbursed, the Board may, at its
sole discretion, reduce any remaining accruals.

7. INCOME TAXES

Significant components of the provision for income taxes are as follows:

|                           |         |   |           |           |      |   |          |          |   |   |           |          |  
|-------------------------- | ------- | - | --------- | --------- | ---- | - | -------- | -------- | - | - | --------- | -------- | -
|                           |         |   | 2002      |           | 2001 |   | 2000    
|                           |         |   |           |           |      |   |         
|Current expense (benefit)  |         |   |           |           |      |   |          |          |   |   |           |         
|                          
|                          
|                          
|                          
|                           | Federal |   | $         | 1,729,000 |      |   | $        | (23,000  | ) |   | $         | 929,000  |  
|                          
|                          
|                          
|                          
|                           | State   |   |           | 398,000   |      |   |          | 294,000  |   |   |           | 287,000  |  
|                           |         |   |           |           |      |   |          |          |   |   |           |          |  
|                           |         |   | 2,127,000 |           |      |   | 271,000  |          |   |   | 1,216,000 |         
|                           |         |   |           |           |      |   |          |          |   |   |           |          |  
|Deferred expense (benefit) |         |   |           |           |      |   |          |          |   |   |           |         
|                          
|                          
|                          
|                          
|                           | Federal |   |           | (369,000  | )    |   |          | (549,000 | ) |   |           | (201,000 | )
|                          
|                          
|                          
|                          
|                           | State   |   |           | (65,000   | )    |   |          | (97,000  | ) |   |           | (36,000  | )
|                           |         |   |           |           |      |   |          |          |   |   |           |          |  
|                           |         |   | (434,000  | )         |      |   | (646,000 | )        |   |   | (237,000  | )       
|                           |         |   |           |           |      |   |          |          |   |   |           |          |  
|                           |         | $ | 1,693,000 |           |      | $ | (375,000 | )        |   | $ | 979,000   |         
|                           |         |   |           |           |      |   |          |          |   |   |           |          |  

The components of the provision for deferred income taxes are as follows:

|                                       |                                          |   |          |          |      |   |          |          |   |   |          |          |  
|-------------------------------------- | ---------------------------------------- | - | -------- | -------- | ---- | - | -------- | -------- | - | - | -------- | -------- | -
|                                       |                                          |   | 2002     |          | 2001 |   | 2000    
|                                       |                                          |   |          |          |      |   |         
|Depreciation                           |                                          | $ | (84,000  | )        |      | $ | (73,000  | )        |   | $ | (115,000 | )       
|                                      
|                                      
|                                      
|                                      
|Leasing activities                     |                                          |   | (213,000 | )        |      |   | (173,000 | )        |   |   | (111,000 | )       
|                                      
|                                      
|                                      
|                                      
|Accrued employee benefits              |                                          |   | (92,000  | )        |      |   | 10,000   |          |   |   | (85,000  | )       
|                                      
|                                      
|                                      
|                                      
|Allowances for doubtful accounts       |                                          |   | (37,000  | )        |      |   | 37,000   |          |   |   | 50,000   |         
|                                      
|                                      
|                                      
|                                      
|Inventory                              |                                          |   | (3,000   | )        |      |   | (6,000   | )        |   |   | 24,000   |         
|                                      
|                                      
|                                      
|                                      
|Contract contingencies                 |                                          |   | (7,000   | )        |      |   | (255,000 | )        |   |   |         |         
|                                      
|                                      
|                                      
|                                      
|State net operating loss carry forward |                                          |   | 141,000  |          |      |   | (201,000 | )        |   |   |         |         
|                                      
|                                      
|                                      
|                                      
|Other                                  |                                          |   | (139,000 | )        |      |   | 15,000   |          |   |   |         |         
|                                       |                                          |   |          |          |      |   |          |          |   |   |          |         
|                                       | Deferred income taxes, expense
(benefit) |   | $        | (434,000 | )    |   | $        | (646,000 | ) |   | $        | (237,000 | )
|                                       |                                          |   |          |          |      |   |          |          |   |   |          |         

34



---



##### 



Deferred tax liabilities and assets at each year-end are as follows:

|                          |                        |                                        |   |         |           |   |   |         |          |  
|------------------------- | ---------------------- | -------------------------------------- | - | ------- | --------- | - | - | ------- | -------- | -
|Deferred tax liabilities: |                        |                                        |   |         |           |   |   |        
|                          |                        | 2002                                   |   | 2001   
|                          |                        |                                        |   |        
|                          |                        | Depreciation                           |   | $       | 0         |   |   | $       | (18,000  | )
|                         
|                         
|                         
|                         
|                          |                        | Leasing activities                     |   |         | (218,000  | ) |   |         | (430,000 | )
|                          |                        |                                        |   |         |           |   |   |         |          |  
|                          |                        | Total deferred tax liabilities         |   |         | (218,000  | ) |   |         | (448,000 | )
|                          |                        |                                        |   |         |           |   |   |         |          |  
|Deferred tax assets:      |                        |                                        |   |         |           |   |   |        
|                         
|                         
|                         
|                         
|                          |                        | Depreciation                           |   |         | 66,000    |   |   |         | 0        |  
|                         
|                         
|                         
|                         
|                          |                        | Accrued employee benefits              |   |         | 186,000   |   |   |         | 94,000   |  
|                         
|                         
|                         
|                         
|                          |                        | Allowances for doubtful accounts       |   |         | 192,000   |   |   |         | 155,000  |  
|                         
|                         
|                         
|                         
|                          |                        | Inventory                              |   |         | 249,000   |   |   |         | 159,000  |  
|                         
|                         
|                         
|                         
|                          |                        | Contract contingency                   |   |         | 263,000   |   |   |         | 255,000  |  
|                         
|                         
|                         
|                         
|                          |                        | State net operating loss carry
forward |   |         | 60,000    |   |   |         | 201,000  |  
|                         
|                         
|                         
|                         
|                          |                        | Other                                  |   |         | 88,000    |   |   |         | 32,000   |  
|                          |                        |                                        |   |         |           |   |   |         |          |  
|                          |                        | Total deferred tax assets              |   |         | 1,104,000 |   |   |         | 896,000  |  
|                          |                        |                                        |   |         |           |   |   |         |          |  
|                          | Net deferred tax asset |                                        | $ | 886,000 |           |   | $ | 448,000 |         
|                          |                        |                                        |   |         |           |   |   |         |          |  

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

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

|                                               |  |        |       |         |  |        |      |         |  |        |      |         |  |  |       |    |  |   |     |   |  |  |      |  
|---------------------------------------------- |  | ------ | ----- | ------- |  | ------ | ---- | ------- |  | ------ | ---- | ------- |  |  | ----- | -- |  | - | --- | - |  |  | ---- | -
|                                               |  | 2002   |       | 2001    |  | 2000  
|                                               |  | Amount |       | Percent |  | Amount |      | Percent |  | Amount |      | Percent
|                                               |  |        |       |         |  |        |      |         |  |        |      |        
|Tax at U.S. statutory rate                     |  | $      | 1,451 |         |  |        | 34.0 | %       |  | $      | (326 | )       |  |  | (34.0 | )% |  | $ | 849 |   |  |  | 34.0 | %
|                                              
|                                              
|                                              
|                                              
|State income taxes, net of
federal tax benefit |  |        | 269   |         |  |        | 6.3  |         |  |        | (60  | )       |  |  | (6.3  | )  |  |   | 157 |   |  |  | 6.3  |  
|                                              
|                                              
|                                              
|                                              
|Other  net                                    |  |        | (27   | )       |  |        | (0.6 | )       |  |        | 11   |         |  |  | 1.2   |    |  |   | (27 | ) |  |  | (0.9 | )
|                                               |  |        |       |         |  |        |      |         |  |        |      |         |  |  |       |    |  |   |     |   |  |  |      |  
|                                               |  | $      | 1,693 |         |  |        | 39.7 | %       |  | $      | (375 | )       |  |  | (39.1 | )% |  | $ | 979 |   |  |  | 39.4 | %
|                                               |  |        |       |         |  |        |      |         |  |        |      |         |  |  |       |    |  |   |     |   |  |  |      |  

Total income tax payments during fiscal years 2002, 2001, and 2000
were approximately $393,000, $965,000, and $671,000, respectively.

35



---



##### 



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 $791,000, $786,000, and $487,000 for fiscal 2002, 2001,
and 2000. The future minimum annual rental payments under
non-cancelable operating leases are as follows:

|                    |  |   |         |  |  |  |  | 
|------------------- |  | - | ------- |  |  |  |  | 
|Fiscal Years Ending |  |   |         | 
|2003                |  | $ | 308,000 | 
|                   
|                   
|                   
|                   
|2004                |  |   | 115,000 | 
|                   
|                   
|                   
|                   
|2005                |  |   | 59,000  | 
|                   
|                   
|                   
|                   
|2006                |  |   | 9,000   | 
|                   
|                   
|                   
|                   
|2007                |  |   | 4,000   | 
|                    |  |   |         | 
|                    |  | $ | 495,000 | 
|                    |  |   |         | 

Minority Interest

The Company has entered into a restrictive stock agreement with the
minority shareholder of its majority owned subsidiary. 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 3, 2002, thirteen
customers accounted for 41% of accounts receivable and five customers
accounted for 52% of the net investment in capitalized leases.

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 19%, 20%, and 13% of total
consolidated net revenues for fiscal 2002, 2001, and 2000,
respectively.

36



---



##### 



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 $24.6 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. As a
result of this contingency, the Company has provided approximately
$19,000 in fiscal 2002 and $224,000 in fiscal 2001 to offset possible losses on certain agreements.

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 3, 2002, there were
100,000 shares available for future grants under the Plan.

10. RELATED PARTY TRANSACTIONS

Notes and accounts receivable from related entities that are included
in the balance sheet are as follows:

|                                                      |  |      |         |      |  |   |         | 
|----------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                      |  | 2002 |         | 2001
|                                                      |  |      |         |     
|Investments in and advances to investee (see Note 11) |  | $    | 395,000 |      |  | $ | 527,000 | 
|                                                      |  |      |         |      |  |   |         | 

37



---



##### 



11. INVESTMENT IN AMIC

The Company has an investment in a real estate development company,
American Mortgage & Investment Company (AMIC). AMIC has been operating
under Chapter X of the United States Bankruptcy Act since 1974, and
the court has imposed certain restrictions under a Plan of
Reorganization. The President of the Company is also the President of
AMIC. The Company records its investment in AMIC by the equity method.
Summarized financial data of AMIC is as follows:

|                      |                          |  |      |           |      |  |      |           |   |  |   |           |  
|--------------------- | ------------------------ |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                      |                          |  | 2002 |           | 2001 |  | 2000
|                      |                          |  |      |           |      |  |     
|Balance Sheet         |                          |  |      |           |      |  |      |           |   |  |   |          
|                     
|                     
|                     
|                     
|                      | Assets                   |  | $    | 1,338,000 |      |  | $    | 1,457,000 |   |  | $ | 1,543,000 |  
|                     
|                     
|                     
|                     
|                      | Liabilities              |  |      | 1,465,000 |      |  |      | 1,559,000 |   |  |   | 1,728,000 |  
|                     
|                     
|                     
|                     
|                      | Shareholders deficiency |  |      | (127,000  | )    |  |      | (102,000  | ) |  |   | (185,000  | )
|                     
|                     
|                     
|                     
|Results of Operations |                          |  |      |           |      |  |      |           |   |  |   |          
|                     
|                     
|                     
|                     
|                      | Revenues                 |  | $    | 375,000   |      |  | $    | 573,000   |   |  | $ | 165,000   |  
|                     
|                     
|                     
|                     
|                      | Net income (loss)        |  |      | (25,000   | )    |  |      | 83,000    |   |  |   | (40,000   | )

The following table summarizes the activity of the Companys
investment in AMIC:

|                                    |  |      |          |      |  |      |          |   |  |   |         |  
|----------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                    |  | 2002 |          | 2001 |  | 2000
|                                    |  |      |          |      |  |     
|Beginning investment                |  | $    | 527,000  |      |  | $    | 652,000  |   |  | $ | 729,000 |  
|                                   
|                                   
|                                   
|                                   
|Equity in income (loss)             |  |      | (25,000  | )    |  |      | 83,000   |   |  |   | (40,000 | )
|                                   
|                                   
|                                   
|                                   
|Additional investments (repayments) |  |      | (107,000 | )    |  |      | (208,000 | ) |  |   | (37,000 | )
|                                    |  |      |          |      |  |      |          |   |  |   |         |  
|Ending investment                   |  | $    | 395,000  |      |  | $    | 527,000  |   |  | $ | 652,000 |  
|                                    |  |      |          |      |  |      |          |   |  |   |         |  

38



---



##### 



12. 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.

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.

|            |                                         |                          |   |           |           |      |   |           |           | 
|----------- | --------------------------------------- | ------------------------ | - | --------- | --------- | ---- | - | --------- | --------- | 
|            |                                         |                          |   | Carrying  |           | Fair
|Assets      |                                         | Amount                   |   | Value    
|            |                                         |                          |   |          
|            | Cash and cash equivalents               |                          | $ | 5,822,000 |           |      | $ | 5,822,000 |          
|           
|           
|           
|           
|            | Notes receivable, related entities      |                          |   | 395,000   |           |      |   | 395,000   |          
|           
|           
|           
|           
|            | Notes receivable, current and long-term |                          |   | 202,000   |           |      |   | 202,000   |          
|           
|           
|           
|           
|            | Cash surrender value life insurance     |                          |   | 2,251,000 |           |      |   | 2,251,000 |          
|           
|           
|           
|           
|Liabilities |                                         |                          |   |           |           |      |   |          
|           
|           
|           
|           
|            |                                         | Long and short-term debt |   |           | 4,427,000 |      |   |           | 4,427,000 | 

39



---



##### 



13. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

The following table sets forth unaudited quarterly financial information
for the years ended August 3, 2002 and July 28, 2001:

|                                                              |  |       |            |        |  |       |            |        |  |   |            |   |  |   |            |  
|------------------------------------------------------------- |  | ----- | ---------- | ------ |  | ----- | ---------- | ------ |  | - | ---------- | - |  | - | ---------- | -
|                                                              |  | First |            | Second |  | Third |            | Fourth
|August 3, 2002                                                |  |       |            |        |  |       |            |       
|Net revenues                                                  |  | $     | 14,553,000 |        |  | $     | 20,722,000 |        |  | $ | 18,477,000 |   |  | $ | 20,779,000 |  
|                                                             
|                                                             
|                                                             
|                                                             
|Gross profit                                                  |  |       | 3,718,000  |        |  |       | 5,342,000  |        |  |   | 4,875,000  |   |  |   | 5,880,000  |  
|                                                             
|                                                             
|                                                             
|                                                             
|Operating income (loss)                                       |  |       | 334,000    |        |  |       | 1,475,000  |        |  |   | 1,225,000  |   |  |   | 1,526,000  |  
|                                                             
|                                                             
|                                                             
|                                                             
|Net income (loss)                                             |  |       | 189,000    |        |  |       | 864,000    |        |  |   | 678,000    |   |  |   | 854,000    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Net income (loss) per
common share                            |  |       | .07        |        |  |       | .31        |        |  |   | .24        |   |  |   | .31        |  
|                                                             
|                                                             
|                                                             
|                                                             
|July 28, 2001                                                 |  |       |            |        |  |       |            |        |  |   |            |   |  |   |            |  
|                                                             
|                                                             
|                                                             
|                                                             
|Net revenues                                                  |  | $     | 16,525,000 |        |  | $     | 13,835,000 |        |  | $ | 12,786,000 |   |  | $ | 13,999,000 |  
|                                                             
|                                                             
|                                                             
|                                                             
|Gross profit                                                  |  |       | 3,896,000  |        |  |       | 3,345,000  |        |  |   | 2,951,000  |   |  |   | 2,690,000  |  
|                                                             
|                                                             
|                                                             
|                                                             
|Operating income (loss)                                       |  |       | 430,000    |        |  |       | (137,000   | )      |  |   | (497,000   | ) |  |   | (844,000   | )
|                                                             
|                                                             
|                                                             
|                                                             
|Income (loss) from continuing
operations                      |  |       | 267,000    |        |  |       | (143,000   | )      |  |   | (298,000   | ) |  |   | (397,000   | )
|                                                             
|                                                             
|                                                             
|                                                             
|Income (loss) from
discontinued operations,
net of income tax |  |       | (238,000   | )      |  |       | (26,000    | )      |  |   | (1,000     | ) |  |   | 139,000    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Net income (loss)                                             |  |       | 29,000     |        |  |       | (169,000   | )      |  |   | (299,000   | ) |  |   | (258,000   | )
|                                                             
|                                                             
|                                                             
|                                                             
|Net income (loss) per
common share                            |  |       | .01        |        |  |       | (.06       | )      |  |   | (.11       | ) |  |   | (.09       | )

Reclassifications affecting cost of sales for certain employee benefit
costs have been made to the prior quarters and prior year amounts to
conform with the current year presentation.

14. 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 $3.1
million and incurred operating losses of approximately $41,000 and
$145,000 in fiscal 2001 and 2000, respectively. 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.

15. SUBSEQUENT EVENTS

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

40



---



##### 



16. 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 2001. Total
consolidated revenues related to sales to the U.S. Government were 19%
in 2002, 20% in 2001, and 13% in 2000. There were no significant
inter-segment sales or transfers during 2002, 2001, and 2000.
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 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   | )
|                                 
|                                 
|                                 
|                                 
|For the Year Ended July 29, 2000  |                                       |       |          |        |      |          |          |          |   |          |        |         |   |              |   |        |           |  |   |       |   |  |   |       |   |  |   |       
|                                 
|                                 
|                                 
|                                 
|                                  | Net Revenues                          |       | $        | 12,395 |      |          | $        | 7,866    |   |          | $      | 16,422  |   |              | $ | 20,678 |           |  | $ | 3,071 |   |  | $ | (220  | ) |  | $ | 60,212 |  
|                                 
|                                 
|                                 
|                                 
|                                  | Earnings(loss)from
operations         |       |          | 2,329  |      |          |          | (542     | ) |          |        | (206    | ) |              |   | 1,038  |           |  |   | (215  | ) |  |   | (52   | ) |  |   | 2,352  |  
|                                 
|                                 
|                                 
|                                 
|                                  | Identifiable assets                   |       |          | 2,381  |      |          |          | 5,791    |   |          |        | 11,159  |   |              |   | 15,462 |           |  |   | 1,523 |   |  |   | 6,385 |   |  |   | 42,701 |  
|                                 
|                                 
|                                 
|                                 
|                                  | Capital expenditures                  |       |          | 122    |      |          |          | 0        |   |          |        | 256     |   |              |   | 120    |           |  |   | 141   |   |  |   | 215   |   |  |   | 854    |  
|                                 
|                                 
|                                 
|                                 
|                                  | Depreciation expense
and amortization |       |          | 108    |      |          |          | 213      |   |          |        | 168     |   |              |   | 751    |           |  |   | 29    |   |  |   | 256   |   |  |   | 1,525  |  
|                                 
|                                 
|                                 
|                                 
|                                  | Income tax provision (benefit)        |       |          | 878    |      |          |          | (204     | ) |          |        | (78     | ) |              |   | 391    |           |  |   | (81   | ) |  |   | 20    |   |  |   | 886    |  

41



---



##### 



McRAE INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                     |  |            |         |            |  |           |          |            |  |           |  |  |  |   |          |      |  |   |         | 
|------------------------------------ |  | ---------- | ------- | ---------- |  | --------- | -------- | ---------- |  | --------- |  |  |  | - | -------- | ---- |  | - | ------- | 
|                                     |  |            |         |            |  | ADDITIONS |          |            |  |           |  |  |  |  
|                                     |  |            |         |            |  | (1)       |          | (2)        |  |           |  |  |  |   |          |     
|DESCRIPTION                          |  | BALANCE AT |         | CHARGED TO |  | CHARGED   |          | DEDUCTION/ |  | BALANCE  
|                                     |  | BEGINNING  |         | COSTS AND  |  | TO OTHER  |          | WRITE-OFF  |  | AT END OF
|                                     |  | OF PERIOD  |         | EXPENSES   |  | ACCOUNTS  |          |            |  | PERIOD   
|                                     |  |            |         |            |  | DESCRIBE  |          |            |  |          
|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 | 
|                                    
|                                    
|                                    
|                                    
|Year ended July 29, 2000             |  |            |         |            |  |           |          |            |  |           |  |  |  |   |          |      |  |   |         | 
|                                    
|                                    
|                                    
|                                    
|Allowance for Doubtful Accounts      |  | $          | 561,000 |            |  | $         | (235,000 | )          |  |           |  |  |  | $ | 114,000  | (1)  |  | $ | 440,000 | 
|                                    
|                                    
|                                    
|                                    
|Allowance for Inventory Wrote-downs  |  |            | 153,000 |            |  |           |         |            |  |           |  |  |  |   | (37,000  | )(2) |  |   | 115,000 | 
|                                    
|                                    
|                                    
|                                    
|Employee Benefit Accrual             |  |            | 250,000 |            |  |           | 262,000  |            |  |           |  |  |  |   | (236,000 | )(2) |  |   | 276,000 | 
|                                    
|                                    
|                                    
|                                    
|Health Insurance Accrual             |  |            | 212,000 |            |  |           |         |            |  |           |  |  |  |   | 38,000   | (2)  |  |   | 250,000 | 
|                                    
|                                    
|                                    
|                                    
|Allowance for contract contingencies |  |            |        |            |  |           | 426,000  |            |  |           |  |  |  |   |         |      |  |   | 426,000 | 

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

42



---



##### 



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

The section captioned CHANGE IN CERTIFYING ACCOUNTANTS in the
Registrants Proxy Statement for the Annual Meeting of Stockholders
to be held December 19, 2002 is incorporated by reference into this
Item 9.

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, AND
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE in the
Registrants Proxy Statement for the Annual Meeting of Stockholders
to be held December 19, 2002.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90-day period prior to the date of this report, the
Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures and concluded that such
disclosure controls and procedures are effective. There have been no
significant changes in the Companys internal controls or in other
factors, which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.

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 3, 2002 and July 28,
2001.                                                  
| | --- |  | ---------------------------------------------------------------------------------------------------------------------
|
| |     |  | Consolidated Statements of Operations for the Years Ended August
3, 2002,
July 28, 2001, and July 29, 2000.          
|
| |     |  | Consolidated Statements of Shareholders Equity for the Years
Ended
August 3, 2002, July 28, 2001, and July 29, 2000.
|
| |     |  | Consolidated Statements of Cash Flows for the Years Ended August
3, 2002,
July 28, 2001, and July 29, 2000.          
|
| |     |  | Notes to Consolidated Financial Statements.                                                                          
|
| | (2) |  | Financial Statement Schedule:                                                                                        
|
| |     |  | Schedule II                                                                                                          

43



---



##### 





| | (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)
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                                                                                   
|     
|     
|     
|     
|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  |  | Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc. dated April 15, 1997 (Incorporated by reference
to Exhibit 10.8 to the Registrants Form 10-K for the fiscal year ended
August 2, 1997)                                                                                        
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                                                                                   
|     
|     
|     
|     
|10.8  |  | McRae Industries, Inc. Incentive Equity Plan (Incorporated by
reference to Exhibit 4 to the Registrants Form S-8 dated January 6,
1999). *                                                                                                                                                                       
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                                                                                   
|     
|     
|     
|     
|10.9  |  | Modification of Award/Contract between Defense Personnel Support
Center and McRae Industries, Inc. dated May 1, 2001.
(Incorporated by reference to Exhibit 10.9 to the
Registrants Form 10-K for the fiscal year ended July 28,
2001)                                                                           
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                                                                                   
|     
|     
|     
|     
|10.10 |  | Split Dollar Life Insurance Arrangement (Filed herein). Pages 51-54.                                                                                                                                                                                                                                              
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                                                                                   
|     
|     
|     
|     
|21    |  | Subsidiaries of the Registrant (Filed herein). Page 55.                                                                                                                                                                                                                                                           
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                                                                                   
|     
|     
|     
|     
|23    |  | Consent of Independent Auditors (Filed herein). Page 56.                                                                                                                                                                                                                                                          

44



---



##### 



|     |  |                                                                                                                                                                                                     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|99.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, for D. Gary McRae,
President and CEO (Filed herein). Page 57.               
|    
|    
|    
|    
|     |  |                                                                                                                                                                                                     
|    
|    
|    
|    
|99.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, for Marvin G. Kiser,
Sr., Vice President of Finance (Filed herein). Page 58.



---

|* |  | 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 2002.

45



---



##### 



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, 2002 |  | 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 McRaeD. Gary McRae
President, Treasurer, and Director
(Principal Executive Officer)                     |  | October 31, 2002
|                                                                                                                   
|/s/ William H. SwanWilliam H. Swan
Director                                                                         |  | October 31, 2002
|                                                                                                                   
|/s/ Hilton J. CochranHilton J. Cochran
Director                                                                     |  | October 31, 2002
|                                                                                                                   
|/s/ Brady W. DicksonBrady W. Dickson
Director                                                                       |  | October 31, 2002
|                                                                                                                   
|/s/ Victor A. KaramVictor A. Karam
President  McRae Footwear and Director                                          |  | October 31, 2002
|                                                                                                                   
|/s/ James W. McRaeJames W. McRae
Vice President, Secretary, and Director                                            |  | October 31, 2002
|                                                                                                                   
|/s/ Harold W. SmithHarold W. Smith
Vice President  McRae Office Solutions and Director                             |  | October 31, 2002
|                                                                                                                   
|/s/ Marvin G, Kiser, Sr.Marvin G. Kiser, Sr.
Vice President of Finance
(Principal Financial and Accounting Officer) |  | October 31, 2002

46



---



##### 



CERTIFICATIONS

I, D. Gary McRae, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of McRae Industries, Inc.;                                                                                                                                                                                                                                                  
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.                       
|  
|   |  | Date: October 31, 2002                                                                                                                                                                                                                                                                                                      

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

47



---



##### 



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



|1. |  | I have reviewed this annual report on Form 10-K of McRae Industries,
Inc.;                                                                                                                                                                                                                                                  
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.                       
|  
|   |  | Date: October 31, 2002                                                                                                                                                                                                                                                                                                      

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

48



---



##### 



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  |  | Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc. dated April 15, 1997 (Incorporated by reference
to Exhibit 10.8 to the Registrants Form 10-K for the fiscal year ended
August 2, 1997).                                                                                        
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                                                                                    
|     
|     
|     
|     
|10.8  |  | McRae Industries, Inc. Incentive Equity Plan (Incorporated by
reference to Exhibit 4 to the Registrants Form S-8 dated January 6,
1999).*                                                                                                                                                                         
|     
|     
|     
|     
|      |  |                                                                                                                                                                                                                                                                                                                    
|     
|     
|     
|     
|10.9  |  | Modification of Award/Contract between Defense Personnel Support
Center and McRae Industries, Inc. dated May 1, 2001.
(Incorporated by reference to Exhibit 10.9 to the
Registrants Form 10-K for the fiscal year ended July 28,
2001).                                                                           
|     
|     
|     
|     
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|10.10 |  | Split Dollar Life Insurance Arrangement (Filed herein). Pages 51-54.                                                                                                                                                                                                                                               
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|21    |  | Subsidiaries of the Registrant (Filed herein). Page 55.                                                                                                                                                                                                                                                            
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|23    |  | Consent of Independent Auditors (Filed herein). Page 56.                                                                                                                                                                                                                                                           

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##### 



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|99.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, for D. Gary McRae,
President and CEO (Filed herein). Page 57.               
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|99.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, for Marvin G. Kiser,
Sr., Vice President of Finance (Filed herein). Page 58.

50