UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. ~~20549~~25049

FORM 10-K

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


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

~~For~~o ~~the~~TRANSITION ~~fiscal~~REPORT ~~year~~PURSUANT ~~ended~~TO ~~August 2,~~SECTION ~~2003~~ 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 30, 2005

Commission file number: 1-8578

McRAE INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

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


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 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ~~[X]~~ 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~~ form 10-K. ~~[X]~~ o

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

~~The~~Indicate ~~aggregate~~by ~~market~~check ~~value~~mark ofwhether ~~shares of~~ the Registrant’s $1is ~~par~~a ~~value Class A~~shell ~~and~~company ~~Class B~~(as ~~Common~~defined ~~Stock~~in ~~held by non~~Rule 12b-~~affiliates~~2 as of ~~February 1,~~ ~~2003 was approximately $10,971,096 and $1,978,002,~~the ~~respectively~~Exchange Act). OnYes ~~October 24,~~o ~~2003,~~No ~~1,918,972 Class A shares and~~þ ~~847,027 Class B shares of the Registrant’s Common Stock were outstanding.~~

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 January 28, 2005 was approximately $18,254,618 and $2,825,563 respectively. On October 26, 2005, 2,240,841 Class A shares and 527,658 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 1815, ~~2003~~2005 are incorporated by reference ~~into Parts~~in ~~II and~~ Part III.

1Part I

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; and manufacturing and selling military combat boots, western and work ~~boots; and~~ ~~selling, leasing, and servicing office equipment~~boots. Our ~~commercial~~office ~~printing~~products ~~and packaging~~ business was ~~discontinued~~sold ~~during~~in ~~fiscal 2001~~September 2004. Additional financial ~~information~~ information about these lines of business can be found in Note 14 to the financial statements.

Bar Code Operations

Our bar code unit manufactures and sells bar code reading and printing devices and other items related to optical data collection, including licensing and selling computer software, through Compsee, Inc. (Compsee), a ~~99%~~wholly owned subsidiary as of June 2004 and a majority owned subsidiary prior to June 2004. Compsee markets, sells, and services its products directly through ~~sales~~ sales centers located throughout the United States.

Compsee designs and manufactures QuickReader, QuickLink, and Turbowedge stationary bar code readers, and APEX and MAT portable bar code scanners. Principal materials used in Compsee’s assembly operations consist of various electrical and electronic components that are readily available from a number of sources. Compsee’s portable bar code scanner equipment includes the APEX II, ~~which~~APEX III, APEX IV, the MAT 203, and MAT 204. The APEX II was introduced in fiscal 1996, and the APEX III, ~~which~~ was introduced in fiscal 2001. The APEX III ~~provides~~utilizes a DOS operating system and provides batch and wireless data collection capability. The APEX IV is a ~~more~~ ~~rugged,~~ pistol grip version of the APEX III product. The ~~APEX~~MAT ~~products~~portable ~~are generally~~product ~~well~~is ~~received~~a instate of the ~~market~~art ~~and~~ruggedized ~~provided~~product ~~15%,~~that ~~19%,~~utilizes ~~and~~the MicroSoft ~~13%~~ce.net ofoperating ~~Compsee sales~~system ~~for~~and ~~fiscal~~provides ~~2003,~~for ~~2002,~~batch and ~~2001,~~wireless ~~respectively~~data collection. ~~Compsee also purchases and~~This ~~sells~~product ~~bar~~was ~~code~~introduced ~~products~~in tothe ~~compliment~~3rd ~~their manufactured~~quarter ~~product~~of ~~lines~~fiscal 2005. The ~~markets~~APEX inand ~~which~~MAT ~~this~~products ~~business~~provided ~~unit~~14%, ~~operates~~17%, ~~are~~and ~~generally~~15% ~~highly~~of ~~competitive.~~Compsee Wesales ~~are~~for ~~not~~fiscal ~~aware~~2005, ~~of any~~2004, ~~reliable~~and ~~statistics~~2003, ~~that~~respectively. QuickReader, ~~would~~QuickLink, ~~enable~~and usTurbowedge tobar ~~determine~~code ~~the~~readers ~~relative~~developed ~~position of~~and ~~Compsee~~marketed orby ~~its~~Compsee ~~products~~accounted for ~~within~~10%, ~~the~~10%, ~~industry.~~and ~~Competition~~6% inof ~~the~~Compsee’s ~~industry~~net ~~is principally~~revenues ~~based~~for onfiscal ~~product features~~2005, ~~customer service~~2004, and ~~price~~2003, respectively. Compsee ~~Our~~also ~~major competitors~~purchases ~~for~~and ~~our~~re-sells ~~manufactured~~bar code products into ~~the~~supplement ~~industry,~~their ~~some~~manufactured ofproduct lines. ~~which~~Purchased ~~are larger~~bar ~~companies~~code ~~that~~products ~~have~~for ~~greater~~resale ~~financial,~~accounted ~~development~~for 74%, ~~marketing~~72%, and ~~distribution~~ ~~resources~~73% ~~than~~of weCompsee’s ~~do,~~net revenues ~~include~~for ~~PSC~~fiscal 2005, ~~Intermec~~2004, ~~Handheld~~and ~~Products~~2003, ~~and~~ ~~Symbol Technologies~~respectively.

~~Net~~The ~~revenues~~markets ~~derived~~in ~~from~~which this business unit inoperates ~~fiscal~~are ~~2003,~~generally ~~2002,~~highly ~~and~~competitive. ~~2001~~We ~~were~~are ~~13%, 15%,~~not ~~and 22%~~ aware of ~~the~~any ~~Company’s~~reliable ~~consolidated~~statistics ~~net~~that ~~revenues,~~would ~~respectively. QuickReader,~~enable ~~QuickLink,~~us ~~and~~to ~~Turbowedge~~determine ~~bar~~the ~~code~~relative ~~readers~~position ~~developed~~of ~~and~~Compsee ~~marketed~~or byits ~~Compsee~~products ~~accounted~~within ~~for~~the ~~6%,~~industry. ~~9%,~~Competition ~~and~~in ~~11%~~the ofindustry ~~Compsee’s~~is ~~net~~principally ~~revenues~~based ~~for~~on ~~fiscal~~product ~~2003~~features, ~~2002~~customer service, and ~~2001,~~price. ~~respectively,~~Our ~~and~~major competitors for ~~1%,~~our ~~1%,~~manufactured ~~and~~products 3%in of the ~~Company’s~~ ~~consolidated net revenues during fiscal 2003~~industry, ~~2002,~~some ~~and~~of ~~2001,~~which ~~respectively. Purchased~~are ~~bar~~larger ~~code~~companies ~~products~~that ~~for~~have ~~resale~~greater ~~accounted for 73%~~financial, ~~71%~~development, marketing, and ~~72%~~distribution ~~of Compsee’s~~resources ~~net~~than ~~revenues~~we ~~for~~do, ~~fiscal~~include ~~2003~~PSC, ~~2002~~Intermec, ~~and~~Handheld ~~2001~~Products, ~~respectively~~and Symbol Technologies.

~~Office~~Compsee’s ~~Products~~backlog of firm orders for bar code products at July 30, 2005 and July 31, 2004 totaled approximately $1,063,000 and $326,000, respectively. We expect to fill all of the backlog as of July 30, 2005 during the 2006 fiscal year except for approximately $325,000, which are primarily maintenance contracts to be invoiced in future years.

~~McRae~~Net ~~Office~~revenues ~~Solutions,~~derived ~~Inc.~~from ~~(Office~~this ~~Solutions),~~unit a wholly owned subsidiary, is a non-exclusive distributor of Toshiba photocopier and facsimile machines throughout North Carolina and parts of Virginia and South Carolina. Office Solutions operates eight district sales offices throughout the state of North Carolina. Office Solutions is also a distributor in ~~North Carolina of RISO digital printing equipment. During~~ fiscal ~~2002~~2005, ~~the~~2004, ~~OKI~~and ~~color~~2003 ~~copier~~were ~~line was added to the product mix. Machines~~19%, ~~components~~15%, and ~~certain~~18% ~~supplies~~of ~~sold by~~the ~~Office~~Company’s ~~Solutions~~consolidated ~~during~~net ~~fiscal~~revenues ~~2003 are generally available only~~ from ~~Toshiba~~continuing operations, ~~RISO,~~ ~~and OKI~~respectively.

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

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

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

~~The~~Our ~~third~~footwear ~~channel~~manufacturing isoperations include the ~~Commercial~~manufacture ~~Accounts Market. This group targets religious organizations~~ and ~~small~~sale toof ~~mid-size~~military ~~companies~~combat ~~and~~boots. ~~offers its~~We ~~customers~~have anmanufactured ~~efficient,~~direct ~~cost-effective~~molded ~~solution~~sole ~~for~~military ~~their~~combat ~~print~~boots ~~ministries~~for ~~and general~~the ~~office~~United ~~printing~~States ~~requirements.~~Government ~~The Commercial Accounts group provided~~(the ~~35.1%,~~Government) ~~33.8%,~~since ~~and 43~~1966.~~9% of Office Solutions net revenues for fiscal 2003, 2002,~~ ~~and 2001, respectively.~~

InWhenever ~~fiscal~~the ~~2000~~Government determines a need for combat boots, ~~Office~~it ~~Solutions~~solicits ~~purchased~~bid responses from U.S. boot manufacturers. The solicitation process typically includes the ~~rights~~evaluation toby athe ~~software~~Government ~~package~~of ~~designed~~written totechnical ~~scan,~~and ~~store,~~cost proposals. The Government awards contracts on negotiated per pair contract prices based on actual and ~~provide~~estimated ~~easy~~allowable ~~retrieval~~costs ofplus ~~various~~a ~~document~~reasonable ~~types~~profit margin. This Inprofit ~~fiscal~~margin ~~2003~~is ~~sales~~subject ofto ~~this~~the ~~product~~Government’s ~~were~~determination ~~minimal.~~that Wethe prices are ~~continuing~~“fair” and “reasonable”. From 1965 to ~~develop~~2002, the basic issue combat boots required vulcanized construction. ~~this~~Now, ~~product~~basic issue combat boots allow and ~~the~~accept ~~related~~a ~~marketing~~variety ~~strategies.~~of Wefootwear ~~expect~~constructions. ~~this~~As ~~product~~a toresult, as ~~have~~many aas ~~greater~~12 ~~contribution~~bidders have responded to ~~the~~military ~~overall~~boot ~~sales~~solicitations ~~mix~~with inawards ~~fiscal~~being ~~2004~~made to only two or three manufacturers, including us.

~~The~~On ~~office~~September 30, ~~products~~2003, ~~business~~the isGovernment ~~generally~~notified ~~highly~~us ~~competitive,~~that ~~with~~we ~~price~~had ~~and service~~been ~~being~~awarded a new contract (the Contract) ~~dominant~~to ~~factors~~produce direct molded sole military combat boots. WeOn ~~are~~September 30, ~~not~~2004, ~~aware~~the Government exercised the first year option covering the period from October 1, 2004 through September 30, 2005, which provided for a minimum and a maximum boot requirement of ~~any~~276,460 ~~reliable~~pair and ~~statistics~~1,077,552 ~~that~~pair, ~~would~~respectively. ~~indicate~~The ~~our~~second ~~relative~~year ~~position~~option, ~~within~~covering ~~this~~the ~~industry~~period infrom October 1, 2005 through September 30, 2006, was invoked by the ~~geographical~~Government ~~area~~on inSeptember 23, ~~which~~2005 wefor ~~compete~~a minimum of 48,067 pair.

~~Net~~During ~~revenues~~the ~~derived~~third quarter of fiscal 2004, the U.S. Army changed its Type I and Type II Black Desert hot weather boot specification from a single vulcanized outsole to a three-layer outsole design. This three-layer outsole design can be made with our vulcanizing equipment. Our current contract with the ~~office~~Government ~~products~~was ~~segment~~modified ~~during~~to ~~fiscal~~incorporate ~~2003,~~this ~~2002~~new three-layer outsole and since May 2004, we ~~and~~have ~~2001~~produced ~~were~~boots ~~29%,~~that ~~33%,~~meet ~~and~~the ~~33%~~new specifications. We have been advised that the future option quantities against this contract, ~~respectively~~if they are invoked, ofwill ~~the~~require ~~Company’s~~this ~~consolidated~~new design because this ~~net~~new ~~revenues~~three-layer outsole construction is well liked and accepted by our troops.

~~Footwear~~No one company dominates the Government military boot industry. Our major competitors in the direct molded sole vulcanized 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 $22.0 million, $36.0 million, and $15.7 million, for fiscal 2005, 2004, and 2003, respectively. Such sales constituted 35%, 51%, and 29% of consolidated net revenues from continuing operations in fiscal 2005, 2004, and 2003, respectively. Sales of military boots to foreign countries were $4.1 million, $3.1 million, and $5.3 million for the past three fiscal years, respectively. For the last three fiscal years, all of our foreign country sales were to Israel.

~~Our~~The ~~footwear~~Company’s ~~manufacturing~~backlog ~~operations~~of ~~include~~firm ~~the~~orders ~~manufacture~~for ~~and sale of~~ military combat boots. Weat ~~have~~July 30, ~~manufactured~~2005 ~~direct~~and ~~molded~~July 31, ~~sole military combat~~2004 ~~boots~~totaled ~~for~~approximately ~~the United States Government (the Government) since 1966~~$5.6 million Onand ~~April 30~~$12.9 million, ~~1996,~~respectively. weWe ~~acquired~~expect ~~American~~to ~~West~~fill ~~Trading~~all ~~Company~~of ~~(American West), which~~the ~~manufactures~~backlog ~~western~~as ~~and~~of ~~work boots~~July 30, ~~and~~2005 ~~has~~during ~~manufactured~~the ~~military~~2006 ~~dress oxfords~~fiscal ~~and military safety boots~~year.

~~Whenever~~Net ~~the~~revenues ~~Government~~derived ~~determines~~from athe ~~need~~military ~~for~~ combat ~~boots it solicits bid responses from U.S.~~ boot ~~manufacturers.~~segment ~~The~~in ~~solicitation~~fiscal ~~process~~2005, ~~typically includes~~2004, ~~the evaluation by the Government of written technical~~ and ~~cost proposals.~~2003 ~~The~~were ~~Government awards contracts on negotiated per pair contract~~43%, ~~prices~~57%, ~~based on actual~~ and ~~estimated~~41%, ~~allowable~~respectively, ~~costs~~of ~~plus a reasonable profit margin. This profit margin is subject to~~ the ~~Government~~Company’s ~~determination~~consolidated ~~that the~~net ~~prices~~revenues ~~are~~from ~~“fair”~~continuing ~~and “reasonable~~operations.~~” All recent Government contracts for~~ ~~vulcanized military boots have been awarded to four manufacturers including us.~~

~~For~~Our ~~fiscal~~contracts ~~2003, we operated under several extensions of our contract~~ with the ~~Government~~ ~~dated April 15, 1997. The~~ Government ~~issued~~are ~~two~~subject ~~solicitations for future boot requirements~~ to ~~replace~~partial ~~the~~or ~~original~~complete ~~contract~~termination ~~that~~under ~~was set to~~certain ~~expire~~specified oncircumstances ~~April 15~~including, ~~2002.~~but ~~One~~not ~~solicitation~~limited ~~covered the three current direct molded sole (DMS) styles of military combat boots~~to, ~~including~~ the ~~standard~~following: ~~issue all-leather combat boot that has historically accounted~~ for the ~~majority~~convenience of the Government’s, ~~orders~~for ~~under~~ the ~~Contract.~~lack ~~The~~of ~~second~~funding, ~~solicitation~~and ~~covered~~for ~~the newly~~our ~~adopted~~actual ~~infantry~~or ~~combat~~anticipated ~~boot,~~failure ~~which~~to ~~incorporates~~perform ~~a waterproof membrane~~our ~~construction~~contractual obligations. ~~This~~If ~~boot~~a ~~has~~contract ~~replaced~~is ~~the~~partially ~~previous~~or ~~all-leather~~completely ~~boot~~terminated ~~as the Army’s standard issue combat boot. We submitted bids~~ for ~~both solicitations.~~its

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

Noconvenience, ~~one company dominates~~ the Government ~~military~~is ~~boot~~required ~~industry.~~to ~~Our~~negotiate ~~major competitors~~a insettlement ~~the~~with ~~direct~~us ~~molded~~to ~~sole~~cover ~~military~~costs ~~boot market include Wellco,~~already ~~Inc~~incurred., ~~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~~have ~~sell~~never ~~boots~~had ~~to civilian~~a ~~and~~contract ~~other~~either ~~military~~partially ~~customers~~or ~~including~~completely ~~other~~terminated ~~countries.~~by ~~Military boot sales under~~ the Government ~~contract were $15~~.~~7 million, $14.3 million, and~~ $11.7 million, for fiscal 2003, 2002, and 2001, respectively. Such sales constituted 20%, 19%, and 20% of consolidated net revenues in fiscal 2003, 2002, and 2001, respectively. Sales of military boots to foreign countries were $5.3 million, $4.9 million, and $4.6 million for the past three fiscal years, respectively. For fiscal 2003, all of our foreign country sales were to Israel.

~~Our~~Leather, ~~contracts~~synthetic ~~with~~rubber, and the ~~Government~~specified ~~are~~rubber ~~subject~~Vibram tooutsoles ~~partial~~are orthe ~~complete~~principal material ~~termination~~components ~~under~~used ~~certain~~in ~~specified~~the ~~circumstances~~boot ~~including,~~manufacturing ~~but~~process. ~~not~~Pursuant ~~limited~~ to, ~~the~~Government ~~following:~~contract requirements for military ~~the~~combat ~~convenience~~boots, ofall ~~the~~materials ~~Government,~~used ~~for~~in ~~the~~manufacturing ~~lack~~these ~~of funding,~~boots must be and ~~for~~are ~~our~~produced ~~actual~~in the orUnited ~~anticipated~~States ~~failure~~and must be certified as conforming to ~~perform~~military ~~our~~specifications. ~~contractual~~The synthetic ~~obligations.~~rubber Ifwe ause ~~contract~~in our military combat boots is ~~partially~~available orfrom ~~completely~~one ~~terminated~~domestic ~~for~~supplier. ~~its convenience~~Therefore, ~~the~~if this ~~Government~~domestic supplier is ~~required~~not able to ~~negotiate~~provide aus ~~settlement~~ with synthetic rubber, it would be necessary for us to ~~cover~~ ~~costs~~get ~~already~~an ~~incurred~~exemption from the Government to purchase this material in the foreign market. WeThere is ~~have~~only ~~never~~one ~~had~~certified adomestic ~~contract~~supplier ~~either~~that ~~partially~~can orprovide the Vibram rubber outsoles required by our ~~completely~~Contract ~~terminated~~with the Government and we are dependent on its ability to supply our needs.

~~Leather~~We ~~and~~have ~~synthetic~~a ~~rubber~~technical ~~are~~assistance ~~the~~agreement ~~principal~~with ~~material~~Ro-Search, ~~components used in the boot manufacturing process~~Inc., ~~Pursuant~~a tosubsidiary ~~Government~~of ~~contracts for military combat boots~~Wellco, ~~all materials used in manufacturing these boots must be and are produced in the United States and must be certified as conforming to military specifications~~Inc., ~~The synthetic rubber we use in our military combat boots is~~a ~~available from only one domestic supplier. Therefore~~competitor, ~~if this domestic supplier is not able~~ to ~~provide~~whom uswe ~~with~~pay ~~synthetic~~a ~~rubber,~~fee ~~it would be necessary~~ for useach topair ~~get~~of andirect ~~exemption~~molded ~~from~~sole ~~the~~boots ~~Government~~we ~~to purchase this material in the foreign market~~produce.

WeWestern ~~have~~and aWork ~~technical assistance agreement with Ro-Search, Inc., a subsidiary of~~Boots ~~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~~ imports, and sells, western and work boots for men, women, and children. Dan Post utilizes seasoned and highly respected independent sales representatives to market and sell its boots nationwide to major retail ~~discount~~ 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~~December 2003, inour ~~fiscal 1997~~Waverly, ~~we began~~Tennessee ~~producing~~facility ~~two~~was ~~styles~~converted ofto ~~military~~a ~~footwear (~~military ~~dress~~combat ~~oxfords~~boot ~~and~~factory ~~military~~due ~~safety shoes) and can bid on future “welt” construction military solicitations~~ to ~~supplement~~ the ~~western~~high ~~boot~~demand ~~product~~for ~~lines. We had no sales of~~ military ~~footwear~~production ~~(excluding~~to ~~direct~~fight ~~molded~~terrorism, ~~sole~~and ~~boots)~~we inbegan ~~either~~importing ~~fiscal 2003 or~~our ~~fiscal~~western ~~2002~~boot asproducts ~~compared~~primarily tofrom ~~$520~~China,~~000~~ ~~for~~India, ~~fiscal~~Mexico, ~~2001~~and Brazil.

During fiscal 2000, we expanded our western boot product line with imported children’s boots we purchased ~~purchase~~ from India and China. InWith ~~addition,~~the weconversion ~~currently import~~of ~~western~~the ~~boots~~Waverly ~~for~~plant ~~adults~~in December 2003, all adult products are imported from Brazil, Mexico, and China. During fiscal ~~2004~~ 2005, we ~~plan~~continued to import ~~expand importation~~ from ~~China~~these countries to ~~include~~maintain ~~Dingo and American West Trading branded products with~~ higher margins. All of our imported boots are produced by contract manufacturers based on specifications that we provide.

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

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

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

Dan Post manages its ~~manufacturing and~~ inventory according to the seasonality of its business, which tends to have higher sales occurring generally in the fall and winter months. Dan Post contributed $2223.6 million, $1920.42 million, and $922.46 million of consolidated net revenues from continuing operations for fiscal ~~2003~~ 2005, ~~2002~~2004, and ~~2001~~2003, respectively.

The ~~Company’s~~ backlog of firm orders for military combat boots at August 2, 2003 and August 3, 2002 totaled approximately $6.8 million and $5.5 million, respectively. We expect to fill all of the backlog as of August 2, 2003 during the current fiscal year. The backlog of firm orders for western and work boots at ~~August~~July 230, ~~2003~~2005 and ~~August~~July 331, ~~2002~~2004 totaled approximately $13.20 million, and $2.60 million, respectively. We expect to fill all of the backlog as of ~~August 2~~July 30, ~~2003~~2005 during the ~~current~~2006 fiscal year.

~~Net revenues derived from the military combat boot segment in fiscal 2003,~~4 ~~2002, and 2001 were 29%, 27%, and 29%, respectively, of the Company’s consolidated net revenues.~~

Net revenues derived from the western and work boot segment in fiscal ~~2003~~2005, ~~2002~~ 2004, and ~~2001~~2003 were 29 38%, 2528%, and 1641%, respectively, of the Company’s consolidated net revenues from continuing operations.

~~Other~~On ~~Businesses~~June 28, 2005 we purchased accounts receivable, inventory and various trademarks, which included Laredo, Performair, and Code West, among others, from Texas Boot Company. During 2006, we will discontinue the American West Trading brand and market those products under the much stronger Laredo brand. We will also develop and sell a limited number of boot products under the other brand names. These products will not have a significant impact on sales or earnings.

~~The~~On August 17, 2005, we negotiated a license agreement with the John Deere Shared Services, Inc. a subsidiary of Deere and Company’s, ~~Financing~~to develop and ~~Leasing~~sell ~~Division~~work ~~manages~~shoes ~~our~~and ~~short-term~~boots ~~investments~~under the John Deere brand name. We anticipate that designing and ~~marketable~~developing ~~securities~~a manufacturing process for these work shoes will take approximately six to eight months. ~~This~~As ~~division~~a isresult, ~~also~~this ~~engaged~~product inline ~~equipment~~is ~~leasing~~not expected ~~and~~to ~~the~~have ~~financing~~a ofsignificant ~~receivables~~impact ~~for~~on ~~other~~operating ~~businesses~~results ~~and~~for ~~individuals~~fiscal 2006.

Discontinued Operations

On September 9, 2004, our wholly owned subsidiary, McRae Office Solutions, Inc., sold substantially all of its assets to Connected Office Products, Inc., a wholly owned subsidiary of TOPAC U.S.A., Inc., for $10,794,000. As a result, the office products business segment is shown as a disposal of a segment of business. In the first quarter of fiscal 2005, we recognized a gain of approximately $3.0 million on the sale. Accordingly, the operating results of the office products business segment have been classified as a discontinued operation for all periods presented in the Company’s consolidated financial statements included in this Report.

Other Business

The Company’s Financing and Leasing Division manages our short-term investments and marketable securities and a diminishing portfolio of other businesses and individuals notes receivable.

Foreign Sales

Our only business that experiences significant foreign sales is the military boot business. Sales of military boots to foreign countries were $54.31 million (2315.84% of total military boot sales), $43.9 1 million (247.47%), and $45.63 million (2723.48%), during fiscal ~~2003~~2005, ~~2002~~2004, and ~~2001~~2003, respectively. InFor ~~fiscal~~the last ~~2003~~three ~~and~~ fiscal ~~2002~~years, all of our foreign country sales were to Israel ~~as compared to 89% in fiscal 2001~~.

Other Investment Interests

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

Regulation

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

Employment

As of ~~August~~July 230, ~~2003~~2005, we employed approximately ~~615~~314 persons in all divisions and subsidiaries. None of our employees are represented by collective bargaining or a labor union. We consider our relations with our employees to be good.

Financial Information about Operating Segments

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

Research and Development

Research and development costs related to development of future bar code ~~and imaging software~~ products amounted to $1,~~010~~202,000, $1,~~045~~452,000, and $~~561~~914,000 for fiscal ~~2003~~2005, ~~2002~~2004, and ~~2001~~2003, respectively.

ITEM 2. PROPERTIES

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

Location	Principal Use	Size
400 North Main Street	Corporate headquarters, manufacturing, and sales	71,000 square feet
400 North Main Street Mt. Gilead, N.C.	Corporate headquarters, manufacturing, and sales	71,000 square feet
Mt. Gilead, N.C.
Highway 109 North Mt. Gilead, N.C.	Footwear manufacturing	57,600
Highway 109 North	Footwear manufacturing	57,600 square feet
2500 Port Malabar Blvd. Palm Bay, Florida	Compsee bar code sales office	5,250 square feet
Mt. Gilead, N.C.
Highway 109 North Mt. Gilead, N.C.	Footwear warehouse	3,500 square feet
2500 Port Malabar Blvd.	Compsee bar code sales office	5,250 square feet
Highway 109 Richmond County, N.C.	Footwear storage	11,200 square feet
Palm Bay, Florida
Highway 24-27 Troy, N.C.	Footwear manufacturing and warehousing	60,000 square feet
Highway 109 North	Footwear warehouse	3,500 square feet
Highway 109 North Mt. Gilead, N.C.	Footwear storage	4,800 square feet
Mt. Gilead, N.C.
601 E. Railroad Street Waverly, TN	Footwear manufacturing	71,520 square feet
Highway 109	Footwear storage	11,200 square feet
5576 Highway 70 West Waverly, TN	Footwear warehouse	77,000 square feet
Richmond County, N.C.
Highway 24-27 Troy, N.C.	Footwear manufacturing and warehousing	35,000 square feet
Highway 109 North	Footwear storage	4,800 square feet
Mt. Gilead, N.C.
601 E. Railroad Street	Footwear manufacturing	71,520 square feet
Waverly, TN
5576 Highway 70 West	Footwear warehouse	77,000 square feet
Waverly, TN

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

~~Our~~Under ~~Waverly,~~the ~~Tennessee~~terms ~~manufacturing~~of ~~facility~~a islease ~~encumbered~~agreement byentered ainto ~~deed~~in ofconnection ~~trust in~~with ~~favor~~the sale of ~~The~~our ~~Fidelity~~office products ~~Bank~~business, towe ~~secure~~lease a ~~loan~~portion inof ~~the~~our ~~amount~~corporate ofheadquarters ~~approximately~~facility to Connected Office $3Products, Inc.~~7 million.~~

WeDuring ~~believe that our current facilities are adequate for current and future operations. However, if~~ the ~~U.S.~~second ~~Government~~quarter ~~significantly~~of ~~increases~~fiscal ~~their military boots requirements under the new contract~~2006, itwe isexpect ~~possible~~to ~~that additional~~sell ~~footwear~~our manufacturing ~~and~~plant ~~storage~~in ~~facilities may be necessary~~Waverly, Tennessee.

We believe that our current facilities are adequate for current and future operations.

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.

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 2426, ~~2003~~2005, there were approximately ~~400~~368 record holders of Class A Common Stock and approximately ~~376~~ 370 record holders of Class B Common Stock. High and low stock prices and dividends declared per share for the last two fiscal years were:

CLASS A COMMON STOCK:

	Fiscal 2003						Fiscal 2002
	Fiscal 2005						Fiscal 2004
	Sales Price				~~Cash~~		Sales Price				~~Cash~~
					Cash						Cash
					Dividends						Dividends
Quarter	High		Low		Declared		High		Low		Declared
First	$	811.8090	$	78.0250	$	.06	$	59.8030	$	36.5036	$	.0506
Second		914.4525		710.1525		.0608		511.8800		48.8085		.0506
Third		813.2046		711.2026		.0608		511.9875		59.3049		.0506
Fourth		712.3885		611.0740		.0608		710.5030		59.7005		.06

CLASS B COMMON STOCK:

	Fiscal 2003				Fiscal 2002
	Fiscal 2005						Fiscal 2004
	Sales Price				~~Sales Price~~		Sales Price
Quarter	High		Low		High		Low
					Cash						Cash
First	$	8.90	$	6.95	$	5.55	$	3.80
					Dividends						Dividends
Second		9.35		7.50		5.60		4.95
Quarter	High		Low		Declared		High		Low		Declared
Third		8.05		7.20		5.95		5.40
First	$	11.85	$	8.90	$	.00	$	8.75	$	6.50	$	.00
Fourth		7.15		6.20		7.40		5.85
Second		14.05		10.20		.00		10.75		8.80		.00
Third		13.10		11.25		.00		11.50		9.60		.00
Fourth		13.07		11.70		.00		10.15		9.15		.00

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

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~~periods indicated has been derived from our audited and consolidated financial statements as adjusted to reflect the office products business as a discontinued operation. The Selected Consolidated Financial Data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”, and the other financial data included elsewhere herein.

	(In thousands, except for per share data)
Fiscal Years Ended	87-230-0305		87-331-0204			78-282-0103			78-293-0002			7-3128-9901
Income Statement Data:
Net revenues	$	7762,~~042~~404	$	7470,~~531~~496		$	5754,~~145~~501		$	5750,~~141~~745		$	4838,~~289~~505
Net earnings (loss) from continuing operations		2,477		2,585			(571	)		1,502			815
Net earnings from continuing operations		1,574		3,206			2,447			2,179			830
Net earnings (loss) from discontinued operations		—		—			(126	)		(145	)		(33	)
Net earnings (loss) from discontinued Operations		1,870		(197	)		30			406			(1,527	)
Net earnings (loss)		23,~~477~~444		23,~~585~~009			~~(697~~2,477	)		12,~~357~~585			~~782~~(697	)
Net earnings (loss) from continuing operations per common share:		0.89		0.93			(0.21	)		0.54			0.29
Net earnings from continuing operations per common share:
Basic Earnings per share (a):
Class A		1.09		1.90			1.53			1.37			.73
Class B		0		0			0			0			0
Diluted Earnings per share (b):
Class A		.79		1.33			1.05			.92			.49
Class B	NA		NA			NA			NA			NA
Balance Sheet Data:
Total assets	$	4643,~~149~~010	$	4149,~~929~~548		$	3846,~~977~~149		$	4241,~~697~~929		$	3938,~~951~~977
Long-term liabilities		~~4,875~~0		3,~~900~~082			43,~~598~~307			53,~~057~~900			54,~~280~~598
Working capital		25,203		23,829			21,202			22,520			20,962
Working Capital		27,017		28,794			27,377			23,829			21,202
Shareholders’ equity		3136,~~602~~986		2934,~~581~~148			2731,~~371~~602			2829,~~589~~581			27,~~901~~371
Weighted average number of common shares outstanding(a)		2,768,499		2,768,499			2,768,499			2,768,499			2,768,499
Weighted average number of common shares outstanding:
Cash dividends declared per common share(b)	$	0.24	$	0.21		$	0.28		$	0.36		$	0.36
Class A		1,993,172		1,929,965			1,898,908			1,869,173			1,860,684
Class B		775,327		838,534			869,591			899,326			907,815
Weighted average number of common shares outstanding(c)		2,768,499		2,768,499			2,768,499			2,768,499			2,768,499
Cash dividends declared per common share (d)	$	0.30	$	0.24		$	0.24		$	0.21		$	0.28

(a) This calculation uses the two-class method under which all undistributed earnings are allocated to Class A Common Stock in the earnings per share calculation; thus, no earnings are allocated to the holders of Class B Common Stock. See Note 1 to the consolidated financial statements included in this report. (b) This calculation uses the if-converted method which assumes all Class B Common Stock is converted into Class A Common Stock; thus, there are no holders of Class B Common Stock to participate in undistributed earnings. See Note 1 to the consolidated financial statements included in this report. (c) Includes both Class A and Class B Common Stock (bd) Dividends were paid only on Class A Common Stock

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~CRITICAL~~PROPOSED ~~ACCOUNTING~~REVERSE/FORWARD ~~ESTIMATES~~STOCK SPLIT

~~Our~~On ~~timely~~June 10, ~~preparation~~2005, ofour ~~financial~~Board ~~reports~~of ~~and~~Directors ~~related~~approved ~~disclosures requires~~a us1-for-200 toreverse ~~use~~stock ~~estimates~~split, ~~and assumptions that may cause actual results~~ to be ~~materially different from our estimated results.~~followed ~~Specifically,~~immediately weby ~~use~~a ~~estimates when accounting~~ 200-for-1 ~~depreciation, amortization,~~forward ~~cost~~stock ~~per copy contract contingencies~~split, ~~useful~~of ~~lives~~the ~~for intangible~~outstanding ~~assets,~~shares ~~and~~of ~~asset valuation allowances (including those for~~both ~~bad debts, inventory, and deferred income tax asset valuation allowances). Our most critical accounting estimates include the following:~~

~~Contract Contingencies~~8

~~Our~~classes ~~office~~of ~~products~~our ~~business~~common ~~leases~~stock ~~equipment~~ (~~usually~~Class A ~~for~~and ~~a sixty-month period~~Class B). toThe ~~county-wide~~purpose ~~education~~of ~~systems and sells~~ the ~~lease~~transaction is to ~~third party~~reduce ~~leasing companies. Under this program~~ the ~~school system is billed~~ onnumber aof ~~monthly,~~record ~~quarterly~~holders orof ~~annual basis at a specified rate for~~ each ~~copy they~~class ~~make.~~of ~~The~~our ~~cost~~common ~~per~~stock ~~copy charged to the school system is designed to cover the equipment cost, supplies~~ (~~except~~Class A ~~for paper~~ and ~~staples~~Class B)~~, service,~~ ~~and~~to afewer ~~finance~~than ~~charge. On a quarterly basis~~300, ~~on a~~ ~~program-by-program~~thereby ~~basis,~~enabling ~~we project an expected outcome over~~ the ~~life~~Company ~~of the program. We use historical copy usage~~ to ~~predict~~terminate ~~the~~registration ~~number~~ of ~~copies~~ ~~to be made over~~ the ~~remaining~~common ~~life~~stock ofunder the ~~program. We adjust this~~Securities ~~estimate~~Exchange ofAct ~~the number~~ of ~~expected~~1934 ~~future copies based on known factors that will influence copy rates in each program. We use historical service~~ and ~~supply~~eliminating ~~costs~~the ~~incurred~~significant onexpense ~~each~~required ~~program~~ to ~~estimate~~comply ~~future~~with ~~service~~the ~~and~~reporting ~~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~~requirements ~~expected to be incurred such as depreciation on rental equipment~~thereunder. ~~On programs where the sum of the~~ ~~estimated future costs exceeds the expected future revenue, we recognize a provision for 100% of the expected losses for these programs.~~

~~Intangible~~Pursuant ~~Assets~~to the transaction, stockholders holding fewer than 200 shares of the Company’s common stock of a particular class immediately before the transaction would have such shares cancelled and converted into the right to receive from the Company a cash payment of $14.25 for each such share owned before the reverse stock split. Stockholders holding 200 or more shares of the Company’s common stock of a particular class immediately before the transaction would continue to hold the same number of shares of that class after completion of the transaction and would not receive any cash payment for their shares of that class.

WeThe ~~determine~~Board ~~the~~of ~~utility~~Directors ofcreated ~~goodwill~~a ~~and~~special ~~trademarks~~committee ~~based~~of onnon-employee, ~~estimated~~independent directors to review ~~future~~the ~~cash~~proposed ~~flows~~transaction. ~~and~~The ~~test~~special ~~for~~committee ~~impairment~~received inan ~~accordance~~opinion ~~with~~from ~~applicable~~its financial advisor, ~~accounting~~Oxford ~~pronouncements.~~Advisors, WeLLC, ~~estimate~~that ~~future~~the cash ~~flows~~consideration ~~based~~to ~~on historical~~be ~~performance~~paid ~~and~~in ~~our~~the ~~knowledge~~proposed oftransaction ~~known~~is ~~factors~~fair, from ~~likely~~a financial point of view, to ~~impact~~ ~~future~~the ~~cash~~Company’s ~~flows~~stockholders.

The proposed transaction is subject to approval by the holders of a majority of the issued and outstanding shares of each class of the Company’s common stock. Stockholders will be asked to approve the transaction at a special meeting of stockholders to be held on November 17, 2005. If the stockholders approve the transaction, we anticipate effecting the transaction as soon as practicable after the Special Meeting. However, even if the stockholders approve the transaction, the Board of Directors reserves the right to defer or not to implement the transaction.

INTERNAL CONTROL OVER FINANCIAL REPORTING

In connection with the audit of our consolidated financial statements for the fiscal years ended July 31, 2004 and July 30, 2005, our independent auditors informed us that they had discovered certain material weaknesses and significant deficiencies in our internal control over financial reporting under standards established by the Public Company Accounting Oversight Board. The material weaknesses and significant deficiencies initially identified in connection with the audit for the fiscal year ended July 31, 2004 continued for the fiscal year ended July 30, 2005. These identified material weaknesses generally related to lack of segregation of duties while the identified significant deficiencies included the lack of an internal audit function. These weaknesses and deficiencies in internal control have been present since the Company’s inception. Additionally, the discovery of compilation errors in the military boot operation’s fiscal 2004 year-end inventory required us to restate our financial statements as of July 31, 2004 and for the fiscal year then ended included in our Annual Report on Form 10-K originally filed by us on October 29, 2004. Upon completion by our independent auditors of their review of the accounting for inventory in our financial statements as previously reported for fiscal 2004, our independent auditors informed us that in their view there were material internal control weaknesses related to the compilation of the Company’s inventory.

We have performed substantial additional procedures including, but not limited to, documentation of our procedures, identification of key control weaknesses, and initiation of an appropriate remediation process in an effort to ensure that these internal control deficiencies do not lead to further material misstatements in our consolidated financial statements and to enable the completion of the independent auditor’s audit of our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

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, 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 policies include the following:

Inventories

Inventories are ~~recorded~~stated at the lower of cost or market value. Weusing the last-in, first-out (LIFO) method for military boots and using the first-in first-out (FIFO) method for all other inventories. 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 as a result of technological changes in the bar code business products, fashion cycles and trends in the western boot business, and the overall financial condition of competitors in the western and work boot business. A percentage point error in our inventory allowances would approximate $2,000 for the fiscal year ended July 30, 2005.

Goodwill, Intangible Assets, and Long-Lived Assets

On an annual or a more frequent basis as circumstances or events might indicate, we evaluate our goodwill and trade names under the provision of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. We use a discounted cash flow methodology to test for impairment based on estimated future cash flows derived from historical performance and our knowledge of known factors likely to impact future cash flows. Historically, we have generated sufficient returns to recover the cost of goodwill and trade names. If future cash flows related to these assets decline as a result of market factors, competition or otherwise, a write down to fair value may be required which could have a material adverse impact on earnings.

We have evaluated our building and manufacturing equipment related to the closure of our Waverly, Tennessee plant operations in March 2005 for impairment. Our assessment indicated that the plant facility was not impaired at the end of fiscal 2005 because we have received a contract to sell the property in the amount of $525,000. The related manufacturing equipment was either scrapped, sold, or transferred to the Mount Gilead boot manufacturing plant to be used in military boot production. There was no impairment associated with the manufacturing equipment because the items scrapped had no book value and those that were sold were sold at a gain.

Revenue Recognition

Our contract with the Government is a fixed bid price agreement. We recognize revenue under our current boot contract when the boots are inspected and accepted by the Government’s Quality ~~Assurance~~ Assurance Representative (QAR), thereby transferring ownership to the Government. Pursuant to the contract, the boots become “Government-owned property” after inspection and acceptance by the QAR. The boots are transferred and stored in our warehouse, which is a designated storage facility ~~approved~~ approved by the Government, and accounted for as “bill and hold” sales in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. ~~101~~104, “Revenue Recognition in Financial Statements.”

We recognize revenues associated with the economic price adjustment (EPA) clause in our military boot contracts. This clause allows us to bill the Government after the contract expires to recover the changes in our leather cost over the life of the contract.

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~~ 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~~ 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. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities in the future. It is possible that the Internal Revenue Service could disagree with management’s timing of deductions or revenue recognition, which would affect recorded tax assets and liabilities. Management believes that changes in these estimates would not result in a material effect on the Company’s results of operations, cash flows, or financial position.

DESCRIPTION OF BUSINESS SEGMENTS

We have ~~four~~three 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~~office ~~printing~~products ~~unit~~business, which ~~was~~we ~~discontinued~~sold in ~~fiscal~~September 2004 ~~2001,~~to Connected Office Products, Inc., operated under the name ~~Rae-Print~~McRae Office Solutions, Inc. We also operate other smaller businesses.

~~A summary of net revenues; gross profits; selling, general and administrative~~11 expenses; and operating profits (loss) of our major business units for fiscal years 2001 through 2003 is presented in the following table. Certain reclassifications have been made to the prior year amounts to conform with the current year presentation. In particular, the prior year amounts have been adjusted to reflect the discontinuance of the commercial printing unit in fiscal 2001.

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

A summary of net revenues; gross profit; selling, general and administrative expense; and operating profit (loss) of our major business units for fiscal 2003 through 2005 is presented in the following table. Certain reclassifications have been made to the prior year amounts to conform with the current year presentation. Some columns do not sum as a result of rounding.

																					Gross Profit Percentage
		Fiscal Year										Percent Change
Gross Profit
		2005			2004			2003				Over prior period								Fiscal Year
	Bar Code		$	2,619		$	3,124		$	3,668				(16.2	)			(14.8	)			27			29			29
		(In thousands)										2005				2004				2005			2004			2003
	Office Products			6,008			6,260			3,492				(4.0	)			79.3				27			25			19
																				Percentage of Net Revenues
	Military Boots			4,772			5,517			4,034				(13.5	)			36.8				21			28			24
Net Revenues
	Western/Work Boots			5,743			4,911			1,715				16.9				186.4				25			25			18
Bar Code		$	11,633		$	10,875		$	9,776				7.0	%			11.2	%			19	%		15	%		18	%
	Eliminations/Other			284			3			(27	)		NM				NM					0			0			0
Military Boots			26,827			40,104			22,272				(33.1	)%			80.0	%			43	%		57	%		41	%
	Consolidated		$	19,426		$	19,815		$	12,882				(2.0	)			53.8				25			27			23
Western/Work Boots			23,618			20,169			22,618				17.1	%			(10.8	)%			38	%		28	%		41	%
Eliminations/Other			326			(652	)		(165	)		NM				NM					0	%		0	%		0	%
Consolidated		$	62,404		$	70,496		$	54,501				(11.5	)%			29.3	%			100	%		100	%		100	%
																				Gross Profit Percentage
Gross Profit
Bar Code		$	3,079		$	3,225		$	2,619				(4.6	)%			23.2	%			26	%		30	%		27	%
Military Boots			3,444			6,632			4,772				(48.1	)%			39.0	%			13	%		16	%		21	%
Western/Work Boots			7,894			4,961			5,743				59.1	%			(13.6	)%			33	%		25	%		25	%
Eliminations/Other			306			166			285			NM				NM					0	%		0	%		0	%
Consolidated		$	14,723		$	14,984		$	13,419				(1.7	)%			11.7	%			24	%		21	%		25	%
																				Percentage of Net Revenues
Selling, General and Administrative expense
Bar Code		$	4,666		$	4,322		$	4,155				8.0	%			4.0	%			40	%		40	%		43	%
Military Boots			2,181			1,485			997				46.9	%			48.9	%			8	%		4	%		4	%
Western/Work Boots			5,254			4,612			4,550				13.9	%			1.4	%			22	%		23	%		20	%
Eliminations/Other			165			194			156			NM				NM					0	%		0	%		0	%
Consolidated		$	12,266		$	10,613		$	9,858				15.6	%			7.7	%			20	%		15	%		18	%
																				Percentage of Net Revenues
Operating Profit (Loss)
Bar Code		$	(1,587	)	$	(1,097	)	$	(1,536	)			(44.7	)%			28.6	%			(14	)%		(10	)%		(16	)%
Military Boots			1,263			5,147			3,775				(75.5	)%			36.3	%			5	%		13	%		17	%
Western/Work Boots			2,640			349			1,193				656.4	%			(70.8	)%			11	%		2	%		5	%
Eliminations/Other			141			(28	)		129			NM				NM					0	%		0	%		0	%
Consolidated		$	2,457		$	4,371		$	3,561				(43.8	)%			22.7	%			4	%		6	%		7	%

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

CONSOLIDATED RESULTS OF CONTINUING OPERATIONS, FISCAL 2005 COMPARED TO FISCAL 2004

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

Consolidated net revenues from continuing operations for fiscal 2005 totaled $62.4 million as compared to $70.5 million for fiscal 2004. This 11.5% decrease in consolidated net revenues was attributable to reduced demand for military combat boots for the U. S. Government (Government), partially offset by increased sales of western boots and bar code products.

Consolidated gross profit from continuing operations fell by 1.7%, from $15.0 million for fiscal 2004 to $14.7 million for fiscal 2005. Declining gross profit in the military boot and bar code businesses were partially offset by improved gross profit in the western boot business. As a percentage of net revenues, gross profit improved from 21.3% to 23.6% primarily attributable to higher margins in the western boot business.

~~CONSOLIDATED~~Consolidated ~~RESULTS~~selling, OFgeneral ~~OPERATIONS~~and administrative expenses (SG&A) from continuing operations, including ~~FISCAL~~research ~~2003~~and ~~COMPARED~~development TO(R&D) ~~FISCAL~~costs, ~~2002~~amounted to $12.3 million for fiscal 2005, an increase of 15.6% over $10.6 million for fiscal 2004 as higher expenditures for sales commissions, advertising and marketing costs, administrative salaries, professional fees, and business insurance were partially offset by lower expenditures for R&D, group health insurance, and reduced bad debt charges.

~~Consolidated~~As ~~net~~a ~~revenues~~result ~~for~~of ~~fiscal~~the ~~2003~~above, ~~reached~~consolidated aoperating ~~record~~profit ~~$77.0 million, up 3.4%~~ from ~~$74.5 million~~continuing ~~record~~operations ~~set~~ for fiscal ~~2002. This growth in consolidated~~2005 ~~net~~totaled ~~revenues was the result of significantly higher requirements for military boots by the U~~$2.S.5 million ~~Government~~as ~~(the~~compared ~~Government)~~to ~~and increased sales of our branded western boot products~~$4.4 million ~~Lower~~for ~~net~~fiscal ~~revenues in the bar code and office products businesses partially offset the net revenue increases of the footwear businesses~~2004.

~~Consolidated~~BAR ~~gross~~CODE ~~profit~~UNIT ~~for~~RESULTS ~~fiscal~~OF 2003 amounted to $19.4 million as compared to $19.8 million for fiscal 2002. Gross profit as a percentage of net revenues decreased from 27% for fiscal 2002 to 25% for fiscal 2003. These declines in consolidated gross profit were primarily the result of lower product sales pricesOPERATIONS, ~~higher~~FISCAL ~~per~~2005 ~~unit~~COMPARED ~~manufacturing~~TO ~~costs,~~FISCAL ~~changing product sales mixes, and~~2004 ~~depressed market conditions.~~

~~Consolidated~~Compsee ~~selling,~~is ~~general~~a manufacturer and ~~administrative~~distributor ~~(SG&A)~~of ~~expenses~~bar ~~were approximately~~code ~~$15.6 million~~reading ~~for~~and ~~fiscal~~printing ~~2003~~devices, another peripheral ~~increase~~equipment, ofand ~~2.5%~~supplies ~~over~~related ~~the~~to ~~$15.3 million~~optical ~~reported~~data ~~for~~collection. ~~fiscal~~Compsee ~~2002.~~markets, ~~The~~sells, ~~additional~~and services ~~SG&A~~its ~~costs~~products ~~were~~through ~~primarily attributable~~sales tocenters ~~increased~~located ~~sales~~throughout ~~salaries~~the ~~and~~United ~~commissions,~~States. ~~advertising~~Compsee ~~and~~continues ~~marketing~~to ~~expenditures,~~explore ~~group~~new ~~health~~markets ~~insurance~~throughout ~~costs,~~the United States and ~~professional~~other ~~fees~~parts of the world.

AsNet arevenues ~~result~~for of the ~~lower~~bar ~~gross~~code ~~profit~~business ~~and~~for ~~higher~~fiscal ~~SG&A~~2005 ~~costs~~grew to $11.6 million, ~~consolidated operating~~up ~~profit~~nearly ~~fell~~7% from $410.69 million for fiscal ~~2002~~2004 primarily attributable to ~~$3.8 million~~improvement in the market for bar code products. The sales contribution from the launch of our new mobile application terminal (MAT) product was minimal as a result of a combination of software issues related to the unit itself and slow development of application software programs. During the first quarter of fiscal ~~2003~~2006, these software issues were resolved. As a result, we expect MAT product sales to increase for fiscal 2006. In addition, we expect to launch a “pistol grip” version of the MAT product, which is better suited for warehouse applications, during the third quarter of fiscal 2006.

~~BAR~~Gross ~~CODE~~profit ~~UNIT~~for ~~RESULTS~~the OFbar ~~OPERATIONS,~~code ~~FISCAL~~business ~~2003~~fell ~~COMPARED~~from TO$3.2 million ~~FISCAL~~for ~~2002~~fiscal 2004 to $3.1 million for fiscal 2005 and gross profit as a percentage of net revenues also fell from 30% for fiscal 2004 to 26% for fiscal 2005. These declines in gross profit were primarily attributable to the shift in sales mix from higher margin manufactured products to lower margin purchased product sales.

~~Compsee~~SG&A isand aR&D ~~manufacturer~~were ~~and~~up ~~distributor~~nearly of8%, ~~bar~~growing ~~code~~from ~~reading~~$4.3 million ~~and~~for ~~printing devices,~~fiscal ~~other~~2004 ~~peripheral~~to ~~equipment,~~$4.7 million ~~and~~for fiscal ~~supplies~~2005 ~~related~~primarily attributable to ~~optical~~increased ~~data collection.~~expenditures ~~Compsee~~for ~~markets,~~sales ~~sells~~salaries, product advertising and ~~services~~marketing ~~its~~costs, ~~products~~group ~~primarily through~~health ~~sales~~insurance ~~centers~~expenses, ~~located~~and ~~throughout~~higher ~~the~~corporate ~~United States~~expense allocation. ~~Compsee~~These ~~continues to~~increased ~~explore~~expenses ~~new~~were ~~markets~~partially ~~throughout~~offset ~~the~~by ~~United~~lower ~~States~~charges ~~and~~for ~~other~~R&D, ~~parts~~travel ~~of the~~related ~~world~~costs, and professional fees.

~~Net~~As ~~revenues~~a ~~for~~result of the above, the bar code business ~~fell~~operating ~~nearly~~loss ~~10.2%,~~widened ~~down~~ from $101.9 1 million for fiscal 2004 ~~2002~~ to $91.86 million for fiscal ~~2003~~2005. ~~This decline in net~~ revenues was primarily the result of competitive pressures in a depressed bar code market, the maturation of the Apex II and III manufactured products, and the delay in getting the Apex IV product to market. We expect revenue performance to improve in fiscal 2004 as a result of a stronger economy, increased APEX IV sales, and the launch of a new bar code product expected during the second half of the year.

~~Gross~~MILITARY ~~profit~~BOOT ~~for~~UNIT ~~fiscal~~RESULTS ~~2003~~OF ~~amounted~~OPERATIONS, toFISCAL ~~$2.6 million~~2005 asCOMPARED ~~compared~~TO toFISCAL ~~$3.1~~2004 million for fiscal 2002. Gross profit as a percentage of net revenues dropped from 29% for fiscal 2002 to 27% for fiscal 2003. This decrease in gross profit was primarily attributable to lower net revenues and a reduced proportion of higher margin manufactured products in the sales mix.

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

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

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

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

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

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

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

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

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

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

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

Net revenues for the military boot business for fiscal ~~2003~~2005 ~~totaled~~amounted to $2226.39 million, updown ~~11.2~~nearly 33% from $2040.01 million for fiscal ~~2002~~2004. This ~~growth~~decline in net revenues was ~~the~~primarily ~~result~~attributable ~~of increased~~to reduced military boot requirements ~~for~~as ~~military~~a ~~combat~~result ~~boots~~of bythe completion of the ~~Government~~“surge” ~~primarily~~requirement ~~attributable~~under toour ~~various~~military ~~conflicts~~boot ~~associated~~contract with the ~~war~~U.S. onGovernment ~~terrorism~~in the first quarter of fiscal 2005. Military boot sales to ~~foreign~~Israel ~~governments~~increased ~~for~~from ~~fiscal 2003 were~~ $5.3.1 million asfor ~~compared~~fiscal 2004 to $4.9 1 million for fiscal ~~2002~~2005, partially offsetting the decline in sales to the Government. The market for commercial and defect military boots continued to become more competitive as sales declined year over year by approximately $300,000.

~~Gross profit amounted to $4.8 million for fiscal 2003 as compared to $5.5~~13 million for fiscal 2002. As a percentage of net revenues, gross profit fell from 28% for fiscal 2002 to 21% for fiscal 2003. This decline in gross profit was primarily the result of lower sales prices, higher levels of lower margin desert boots in the overall sales mix, and increased per unit manufacturing costs.

~~SG&A~~Gross ~~expenses~~profit ~~for~~fell ~~fiscal~~from ~~2003 were~~ $~~997,000~~6.6 million asfor ~~compared~~fiscal 2004 to $~~800,000~~3.4 million for fiscal 2005 primarily ~~2002.~~attributable ~~This~~to ~~increase~~reduced inrevenues, ~~SG&A~~plant closing costs ~~were~~of ~~primarily~~approximately ~~attributable~~$110,000 related to ~~higher~~our ~~administrative~~Waverly, ~~salaries~~Tennessee location, ~~group~~a ~~health~~LIFO ~~insurance~~inventory ~~costs~~adjustment of approximately $136,000, and ~~professional~~higher ~~fees.~~per ~~These~~unit ~~higher~~manufacturing costs ~~were~~associated ~~partially~~with ~~offset~~lower byproduction ~~decreased sales salaries and related expenses~~levels.

AsSG&A aexpenses ~~result~~increased offrom ~~the~~$1.5 million ~~above,~~for ~~the~~fiscal ~~operating~~2004 ~~profit~~to $2.2 million for fiscal ~~2003~~2005 ~~fell~~primarily the result of higher allocated corporate expenses due to ~~$3.8~~the sale of our McRae Office Solutions ~~million~~business, ~~down~~which ~~from~~were ~~$4.7 million~~partially ~~for~~offset ~~fiscal~~by ~~2002~~lower employee benefit costs.

~~For~~As ~~fiscal~~a ~~2003,~~result ~~we operated under several extensions~~ of ~~our contract with~~ the ~~Government~~ ~~dated April 15~~above, ~~1997.~~operating ~~The~~profit ~~Government issued two solicitations~~ for ~~future~~ ~~boot requirements to replace~~ the ~~original~~military ~~contract~~boot ~~that~~business ~~was~~fell ~~set~~from to$5.1 million ~~expire~~for onfiscal ~~April 15,~~2004 ~~2002.~~to ~~One solicitation covered the three current direct molded sole (DMS)~~$1.3 ~~styles~~million offor ~~military~~fiscal ~~combat boots, including the standard~~2005.

On September 23, 2005, the Government exercised the second year option of the contract (the Contract) awarded on September 30, 2003. This option covers the period from October 1, 2005 to September 30, 2006 and provides for the purchase of a minimum quantity of military boots totaling 48,067 pair with a minimum dollar value of approximately $2,998,896. While the Government is only obligated to this minimum quantity, we expect the actual boot requirements for fiscal 2006 to be substantially larger than the stated minimum level based on unofficial governmental scheduling guidance.

During fiscal 2006 we expect to submit bids to obtain one or more contracts to supply additional boots to the Government so that we may continue to supply boots to the Government after the extension of our current Contract expires in September 2006. There are no assurances, however, that we will be successful in obtaining any further contracts to produce boots for the Government. The Company’s operating results could be materially adversely affected if it is not successful in obtaining further 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.

WESTERN AND WORK BOOT UNIT RESULTS OF OPERATIONS, FISCAL 2005 COMPARED TO FISCAL 2004

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

Net revenues for the western and work boot business grew to $23.7 million for fiscal 2005, an increase of approximately 17% over $20.2 million for fiscal 2004. This growth in net revenues was primarily attributable to higher demand for fashion related western footwear products. Fashion trends in the western boot business are highly cyclical and historically have typically lasted approximately two to three years.

Gross profit amounted to $7.9 million and $5.0 million for fiscal 2005 and fiscal 2004, respectively. As a percentage of net revenues, gross profit grew from 25% for fiscal 2004 to 33% for fiscal 2005. This improvement in gross profit was primarily the result of increased net revenues and lower unit costs associated with imported products.

SG&A expenses for fiscal 2005 totaled approximately $5.3 million as compared to $4.6 million for fiscal 2004 primarily attributable to increased expenditures for sales commissions, product advertising and promotion, travel related costs, administrative salaries, and employee benefit costs. These expenditures were partially offset by lower bad debt charges resulting from recoveries from prior write-offs.

~~issue~~As ~~all-leather~~a ~~combat~~result ~~boot that has historically accounted for the majority~~ of the ~~Government’s~~above, ~~orders under~~ the ~~Contract.~~western ~~The~~and ~~second~~work ~~solicitation~~boot ~~covered the~~business ~~newly~~operating ~~adopted~~profit ~~infantry~~for ~~combat~~fiscal ~~boot, which incorporates a waterproof~~2005 ~~membrane~~reached ~~construction~~$2.6 million ~~This boot replaces the previous all-leather boot~~ as ~~the Army’s~~compared ~~standard~~to ~~issue~~$349,000 ~~combat boot. We submitted bids~~ for ~~both~~fiscal ~~solicitations~~2004.

OnIn ~~March~~May 112005, ~~2003,~~ we ~~were~~negotiated ~~advised~~the ~~that~~terms weof ~~did~~an ~~not~~asset ~~win~~purchase aagreement ~~contract~~(the to“Purchase ~~produce~~Agreement”) providing for the ~~new~~purchase ~~infantry~~by ~~combat~~us ~~boot.~~of Oncertain ~~September 30,~~assets ~~2003~~from Texas Boot, ~~the~~Inc. ~~Government~~(“Texas ~~notified~~Boot”) including usits ~~that~~trademarks we(including ~~had~~the ~~been~~marks ~~awarded~~Laredo, aJ. ~~new~~Chisolm, ~~contract~~Code ~~(the~~West, ~~Contract~~and Performair), toits ~~produce direct~~outstanding ~~molded~~accounts ~~sole~~receivable ~~military~~and ~~combat~~certain ~~boots~~inventory. ~~The~~Texas ~~Contract~~Boot ~~covers~~was aoperating ~~base~~as ~~year~~a ~~and~~debtor-in-possession ~~two~~in a ~~one-year~~case ~~option~~under ~~periods.~~Chapter 11 ~~The~~of ~~Contract~~the ~~base~~United ~~year~~States ~~provides~~Bankruptcy ~~for~~Code. aIn ~~minimum~~accordance ~~boot~~with applicable ~~requirement~~bankruptcy ofcourt ~~135~~procedures,~~102~~ ~~pair~~an ~~and~~auction afor ~~maximum~~the ~~boot~~assets ~~requirement~~was ofconducted ~~544~~on June 23,~~778~~ ~~pair~~2005. ~~with~~We won the aauction ~~minimum~~by ~~and~~agreeing ~~maximum~~to ~~dollar~~increase ~~value~~the oftotal purchase price payable under the Purchase Agreement to approximately $72.416 million. ~~and~~Based on the fair market value of the assets purchased, $~~30.~~1 ~~million~~,775,000 ~~respectively.~~was allocated ~~The~~to ~~first~~the ~~year~~acquired ~~option~~trademarks, ~~provides~~$317,807 ~~for~~was aallocated ~~minimum~~to ~~and~~the aacquired accounts receivable ~~maximum~~and ~~boot~~$67,500 ~~requirement~~was ofallocated ~~276,460~~to ~~pair~~the ~~and~~acquired 1inventory. On June 24,~~077,552~~ ~~pair~~2005, ~~respectively.~~the ~~The second~~United ~~year~~States ~~option~~Bankruptcy Court ~~ranges~~for ~~from~~the aMiddle ~~minimum~~District of ~~236,460~~Tennessee ~~pair~~approved tothe aPurchase ~~maximum~~Agreement ofas modified by the ~~852~~increased purchase price and the Purchase Agreement became effective. The transaction closed on June 28,~~552~~ ~~pair~~2005.

AsOn ~~noted~~August 17, ~~above~~2005, ~~fiscal~~we ~~2003~~negotiated ~~military~~a ~~boots~~license ~~sales~~agreement towith the ~~Government~~John ~~were~~Deere ~~$15.7 million.~~Shared ~~Therefore~~Services, ifInc., ina subsidiary ~~the~~of ~~first~~Deere ~~year~~and ofCompany, ~~the~~to ~~Contract~~develop ~~the~~and ~~Government~~sell ~~were only~~work toshoes ~~order~~and boots under the ~~minimum~~John ~~number~~Deere brand ofname. ~~boots~~We ~~covered~~anticipate bythat ~~the~~designing ~~Contract,~~and ~~our~~developing ~~fiscal 2004~~a ~~military~~manufacturing ~~boot~~process ~~sales~~for ~~would~~these bework shoes ~~significantly~~will ~~lower~~take ~~than~~approximately ~~fiscal~~six ~~2003~~to ~~sales~~eight months. ~~Based~~ onAs ~~current~~a ~~order~~result, ~~volume~~this weproduct ~~expect~~line ~~the~~is ~~Government~~not expected to ~~order~~have ~~significantly more~~a ~~than~~significant ~~the~~impact ~~minimum~~on ~~during~~operating ~~the~~results ~~first~~for ~~year~~fiscal ~~of the Contract~~2006.

~~Our~~DISCONTINUED ~~contracts with the Government are subject to partial or complete termination under certain specified circumstances including~~OPERATIONS, ~~but~~FISCAL ~~not~~2005 ~~limited to,~~COMPARED ~~the~~TO ~~following:~~FISCAL ~~for the convenience of the Government, for the lack of~~2004 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.

InMcRae ~~addition,~~Office ~~the~~Solutions ~~Israeli~~distributed ~~government~~Toshiba ~~has~~photocopiers, ~~exercised~~Toshiba anfacsimile ~~option~~machines, inRISO ~~its current~~digital ~~contract~~printing ~~with~~equipment, usOKI ~~under~~color ~~which~~copiers weand ~~will~~printers ~~provide~~and ~~approximately~~provided ~~60,000~~related ~~pair~~service ofand supplies for ~~vulcanized~~these ~~combat~~products ~~boots~~throughout ~~for~~North ~~delivery~~Carolina inand ~~the~~parts ~~2004~~of ~~calendar~~Virginia ~~year~~and South Carolina.

~~WESTERN~~On ~~AND~~September 9, ~~WORK~~2004, ~~BOOT~~we ~~UNIT~~entered ~~RESULTS~~into OFa ~~OPERATIONS~~definitive agreement under which we sold substantially all the assets of our McRae Office Solutions, ~~FISCAL~~Inc. ~~2003~~subsidiary ~~COMPARED~~to TOConnected Office Products, Inc. ~~FISCAL~~(COPI). ~~2002~~COPI is a subsidiary of TOPAC U.S.A., Inc., which is headquartered in Irvine, California, and operates a network of wholly owned subsidiaries involved in the sales, service, and distribution of office products. Under the terms of the Asset Purchase Agreement, COPI purchased substantially all of the assets of McRae Office Solutions, Inc. for $10,794,000. On September 9, 2005, the Company received a payment in the amount of $912,000, which was comprised of the balance due of $894,000 and the addition of accrued interest of $18,000. The operating results of the office products business segment have been classified as a discontinued operation for all periods presented in the Company’s consolidated financial statements included in this Report.

~~Our~~Discontinued ~~western~~operations ~~and~~net ~~work~~revenues ~~boot~~for ~~business~~fiscal ~~manufactures~~2005, ~~imports~~which consisted of only one month of operations, ~~and~~amounted ~~sells~~to ~~various~~$1.3 million as compared to $23.9 million for fiscal 2004. The net loss ~~boot~~from ~~styles~~discontinued operations for ~~men,~~fiscal ~~women,~~2005 and ~~children~~fiscal ~~for~~2004 ~~dress~~amounted to $251,000 and ~~casual~~$90,000, respectively, ~~wear~~net of income tax benefit.

~~Net~~The estimated ~~revenues~~gain ~~for~~on ~~fiscal~~the ~~2003~~sale ~~increased~~of ~~16.8%,~~the upoffice ~~from~~products business assets totaled approximately $192.4 1 million ~~for~~net ~~fiscal 2002~~of toa $221.63 million ~~for~~tax ~~fiscal 2003~~provision. ~~This increase was primarily attributable~~ ~~to strong demand for our Dan Post and Dingo branded products.~~

~~Gross~~CONSOLIDATED ~~profit~~RESULTS ~~totaled~~OF ~~$5.7 million~~CONTINUING ~~for fiscal 2003~~OPERATIONS, anFISCAL ~~increase~~2004 ofCOMPARED ~~16.9%~~TO ~~over the~~FISCAL ~~$4.9 million for fiscal 2002. Gross profit as a percentage of net revenues was 25% for both fiscal~~ 2003 ~~and fiscal 2002. The increase in gross profit~~ ~~resulted primarily from the increased revenue for fiscal 2003.~~

~~SG&A~~Consolidated ~~expenses~~net ~~for~~revenues ~~fiscal~~from ~~2003~~continuing ~~amounted~~operations tototaled $470.65 million asfor fiscal 2004 as compared to $354.9 5 million for fiscal ~~2002~~2003. ~~The~~This 29% increase in ~~SG&A~~consolidated ~~costs~~net ~~resulted~~revenues from continuing operations was primarily ~~from~~attributable to significant demand for military combat boots by ~~higher~~the ~~sales~~U.S. ~~commissions,~~Government ~~sales~~(Government) ~~and~~to ~~marketing~~support ~~expenses,~~our ~~group~~troops ~~health~~engaged ~~insurance~~in the fight against terrorism ~~costs,~~throughout ~~professional~~the ~~fees,~~world. Weak demand for western and ~~administrative~~work ~~salaries.~~boots partially offset this

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

~~The~~surge ~~western~~in ~~and~~net ~~work~~revenues ~~boot~~as ~~market~~net ~~continues~~revenues tofor bethis ~~highly competitive and dynamic. While the sluggish economy has had an impact on the western and work boot~~ business ~~and~~declined ~~fourth~~by ~~quarter~~approximately ~~sales were down to~~ $4.2 ~~million as compared to $5~~.14 million ~~in the fourth quarter of fiscal 2002, we believe that our~~over ~~diversified and branded product line has us well positioned to be a major player in~~ the ~~western~~results ~~boot~~posted ~~market~~for ~~in the future. Additionally, during~~ fiscal ~~2004,~~ ~~we plan to expand importation from China to include Dingo and American West Trading branded products, which should result in improved margins on these products~~2003.

~~CONSOLIDATED~~Consolidated ~~RESULTS~~gross OFprofit ~~OPERATIONS~~from continuing operations for fiscal 2004 amounted to $15.0 million, ~~FISCAL~~up 12% ~~2002~~from ~~COMPARED~~$13.4 million TOfor ~~FISCAL~~fiscal ~~2001~~2003. This growth in gross profit was primarily the result of increased net revenues. As a percentage of net revenues, gross profit decreased from 25% for fiscal 2003 to 21% for fiscal 2004 primarily attributable to lower margins in the military boot business, which accounted for approximately 57% of the overall sales mix.

Consolidated ~~net~~selling, ~~revenues~~general ~~for~~and ~~fiscal~~administrative ~~2002~~(SG&A), ~~climbed~~and toresearch aand ~~record~~development ~~level~~(R&D) expenses offrom continuing operations were $7410.5 6 million, upfor ~~30.4%~~fiscal ~~from~~2004 ~~the~~as compared to $579.19 million ~~reported~~ for fiscal ~~2001~~2003. ~~This~~ The increase in ~~consolidated~~SG&A ~~net~~expenses ~~revenues~~ was primarily the result of higher ~~demand~~ expenditures for R&D, ~~military~~group ~~combat~~health ~~boots~~insurance, ~~western~~professional ~~boots~~fees, marketing activities and ~~office~~bad ~~products~~debt charges, which were partially offset by adecreased ~~12.6%~~expenditures ~~decrease~~for insales ~~bar~~related ~~code~~compensation, ~~business~~travel, and office rentals. As a percentage of net revenues, SG&A expenses decreased from 18% for fiscal 2003 to 15% for fiscal 2004.

~~Consolidated~~As ~~gross~~a ~~profit~~result ~~grew~~of tothe ~~$19.8 million for fiscal 2002~~above, ~~up 53.8% from $12.9 million for~~ fiscal ~~2001.~~2004 ~~Gross~~operating profit asfrom acontinuing ~~percentage~~operations oftotaled ~~net revenues~~$4.4 ~~improved~~million ~~from~~as ~~23%~~compared ~~for fiscal 2001~~ to ~~27%~~$3.6 million for fiscal ~~2002~~2003. ~~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~~BAR ~~selling,~~CODE ~~general~~UNIT ~~and~~RESULTS ~~administrative~~OF ~~(SG&A) expenses for fiscal 2002 were $15.3 million~~OPERATIONS, anFISCAL ~~increase~~2004 ofCOMPARED ~~9.5%~~TO ~~over~~FISCAL ~~the $13.9 million reported~~2003 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.

AsNet arevenues ~~result~~for of the ~~above,~~bar ~~consolidated~~code ~~operating~~business ~~profit~~ increased from $59.68 million for fiscal 2003 to $410.69 million for fiscal ~~2002~~2004 primarily as ~~compared~~a toresult anof ~~operating~~improvement ~~loss~~in ofthe ~~$1.0 million~~market for ~~fiscal~~bar ~~2001~~code products.

~~Our~~Gross ~~results~~profit offor ~~operations~~the bar code business grew from $2.6 million for fiscal 2003 ~~were~~to ~~not~~$3.2 million ~~impacted~~for fiscal by2004 ~~the discontinuance~~as a result of ~~our~~increased ~~commercial~~sales ~~printing~~and ~~business~~improved ~~that~~profit ~~occurred~~margin. inGross ~~fiscal~~profit as a percentage ~~2001.~~of ~~Operating~~net ~~results~~revenues was 30% for fiscal ~~2001~~2004 ~~have~~as ~~been~~compared ~~adjusted~~ to ~~reflect~~27% ~~the~~for fiscal 2003. This improvement in ~~discontinuance~~gross profit percentage was primarily the result of increased sales of higher margin manufactured products in the ~~commercial~~overall ~~printing~~bar ~~unit~~code sales mix.

~~BAR~~SG&A ~~CODE~~and ~~UNIT~~R&D ~~RESULTS~~expenditures OFamounted ~~OPERATIONS~~to $4.3 million for fiscal 2004 as compared to $4.2 million for fiscal 2003. R&D costs were up approximately $500,000 ~~FISCAL~~as ~~2002~~efforts ~~COMPARED~~to TOcomplete ~~FISCAL~~development ~~2001~~of the new bar code product intensified. SG&A expenses for sales salaries and commissions, marketing activities, travel costs, postage, and depreciation were lower as a result of effective cost containment measures.

~~Net~~As ~~revenues~~a ~~for~~result ~~fiscal~~of ~~2002~~the ~~were $10.9 million~~above, athe ~~decrease~~bar ofcode ~~12.6%~~business ~~from~~operating ~~net revenues~~loss offell from $121.5 million for fiscal 2003 ~~2001. This decrease was primarily due~~ to ~~lower~~ ~~product~~$1.1 million ~~demand~~for ~~resulting~~fiscal ~~from a weak economy, increased competition, and a delay in marketing the new APEX III product~~2004.

~~Primarily~~MILITARY asBOOT aUNIT ~~result~~RESULTS ofOF ~~reduced net revenues~~OPERATIONS, ~~gross~~FISCAL ~~profit~~2004 ~~fell~~COMPARED ~~14.8%~~TO toFISCAL ~~$3.1~~2003 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,~~Net ~~general~~revenues ~~and~~for ~~administrative~~the ~~(SG&A)~~military ~~expenses~~boot business for fiscal ~~2002~~2004 ~~were~~totaled ~~down 11.2%, to~~ $540.01 million as compared to $522.63 million for fiscal ~~2001~~2003. ~~The~~This ~~decline~~ growth in ~~SG&A~~net ~~expenses~~revenues ~~resulted~~was ~~primarily~~the ~~from~~result ~~lower~~of ~~salary and related costs~~significantly ~~associated~~increased ~~with~~demand ~~reduced~~for ~~sales,~~military ~~support~~combat ~~and~~boots ~~administrative~~by ~~staff~~the Government. ~~These reductions~~Military inboot ~~SG&A~~sales ~~costs~~to ~~were~~the ~~partially offset by a 30% increase in research~~Government ~~and~~were ~~development expenditures included in SG&A, from~~ $~~496,000~~36.0 million for fiscal ~~2001~~2004 as compared to $~~646,000~~15.7 million for fiscal ~~2002~~2003. InThe ~~addition,~~increase ~~SG&A expenses were impacted by our~~in ~~write-off~~net ofrevenues ~~our~~for ~~remaining $150,000 investment in software purchased in~~ fiscal ~~2000~~ to2004 ~~enhance~~was ~~our~~partially ~~“system”~~offset ~~sales~~by ~~strategy.~~reduced Weforeign ~~considered~~and ~~this~~commercial ~~investment~~military toboot ~~be impaired because it is no longer used in our operations~~sales.

AsGross aprofit ~~result~~grew offrom ~~the~~$4.8 million ~~above,~~for ~~operating~~fiscal ~~loss~~2003 to $6.6 million for fiscal ~~2002~~2004 ~~amounted~~primarily due to $1the increase in net revenues.8 In August 2004, the Government approved an economic price ~~million~~adjustment asfor ~~compared~~increased material costs based on a change in cost estimate from a contract in prior years, which contributed approximately $490,000 to the ~~operating~~increase ~~loss~~in ofgross $1profit.~~9 million~~ As a percentage of net revenues, gross profit fell from 21% for fiscal ~~2001~~2003 to 16% for fiscal 2004. This decline in gross profit percentage was primarily the result of lower per unit selling prices and higher per unit manufacturing costs associated with training new production workers,

~~OFFICE~~higher ~~PRODUCTS~~subcontract ~~UNIT~~costs, ~~RESULTS~~and OFdifficulties ~~OPERATIONS,~~encountered ~~FISCAL~~in ~~2002~~producing ~~COMPARED~~multiple TOboot ~~FISCAL 2001~~constructions.

~~Net~~SG&A ~~revenues~~expenses for fiscal ~~2002~~2004 ~~were~~amounted to $241.75 million, anas ~~increase~~compared ofto ~~32.7% over net revenues of~~ $181.60 million for fiscal ~~2001~~2003. This increase in ~~net~~SG&A ~~revenues resulted~~expenses ~~from~~was ~~the~~primarily ~~continued expansion in~~ the ~~number~~result of ~~our~~higher ~~county-wide educational~~group ~~programs,~~health ~~the~~insurance ~~successful renewal of older county-wide programs~~costs, ~~using~~professional ~~a combination of both new and used equipment for an additional sixty-month period~~fees, and ~~higher~~employee ~~supply~~benefit ~~and service revenues attributable to the growth in the number of units in service~~expenses.

~~Gross~~As ~~profit~~a ~~for~~result ~~fiscal~~of ~~2002~~the ~~amounted to $6.3 million~~above, anoperating ~~increase~~profit offor ~~79.3% over~~fiscal ~~the~~2004 totaled $3.5.1 million ~~reported~~as ~~for~~compared ~~fiscal~~to ~~2001~~$3. ~~This increase in gross profit~~8 ~~resulted~~million ~~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 revenues2003.

~~Selling,~~WESTERN ~~general~~AND ~~and~~WORK ~~administrative~~BOOT ~~(SG&A)~~UNIT ~~expenses~~RESULTS ~~for~~OF ~~fiscal 2002 were $5.6 million~~OPERATIONS, upFISCAL ~~2.0%~~2004 ~~from~~COMPARED ~~$5.5 million~~TO ~~for~~FISCAL ~~fiscal 2001. This slight increase in~~2003 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.

AsNet arevenues ~~result~~for of the ~~above,~~western ~~operating~~and ~~profit~~work ~~increased~~boot business totaled $20.2 million for fiscal 2004 as compared to $22.76 million, orfor ~~131~~fiscal 2003.0% This decrease in net revenues resulted primarily from a soft market for western and work boots, partially offset by increased military boot sales to our military boot unit, which amounted to approximately $~~629~~836,000 for fiscal ~~2002~~2004 as compared to ~~an operating loss of $2.0 million~~ $563,000 for fiscal ~~2001~~2003.

~~MILITARY~~Gross ~~BOOT~~profit ~~UNIT~~for ~~RESULTS~~fiscal OF2004 ~~OPERATIONS,~~amounted ~~FISCAL~~to ~~2002~~$5.0 million ~~COMPARED~~as TOcompared ~~FISCAL~~to ~~2001~~$5.7 million for fiscal 2003. This decrease in gross profit resulted primarily from the decline in net revenues. Gross profit as a percentage of net revenues held steady at 25% for both fiscal 2004 and 2003. Manufacturing inefficiencies associated with military boot production for the first six months of fiscal 2004 and inventory write-offs related to discontinuing western boot manufacturing were offset by higher margins on imported western and work boot products.

~~Net~~SG&A ~~revenues~~expenses ~~for~~were ~~fiscal 2002 increased 19.3%, to~~ $204.06 million asfor ~~compared~~both ~~to net~~fiscal ~~revenues~~2004 ofand ~~$16~~2003.~~8 million~~ ~~for~~Higher ~~fiscal~~bad ~~2001.~~debt ~~This~~expenses ~~growth~~for ~~in net revenues was~~fiscal ~~primarily~~2004 ~~the~~were ~~result~~offset ofby ~~increased~~lower ~~requirements~~expenditures for ~~military combat boots by the U.S. Government (the Government) primarily related to the deployment of troops engaged in the war on terrorism. Military boot~~ sales tocommissions, ~~foreign~~travel, ~~governments~~and ~~for fiscal 2002 were $4~~advertising.~~9 million as compared to $4.6 million for fiscal 2001.~~

~~Gross~~As ~~profit~~a ~~for~~result ~~fiscal~~of ~~2002~~the ~~grew to $5.5 million~~above, upoperating ~~36.8%~~profit ~~from~~totaled $~~4.0 million~~ 349,000 for fiscal ~~2001.~~2004 ~~The~~as ~~increase~~compared ~~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~~$1. ~~Gross profit as a percentage of net revenues~~2 ~~increased~~million ~~from 24%~~ for fiscal ~~2001 to 28% for fiscal 2002 as a result of these lower unit costs~~2003.

~~Selling,~~DISCONTINUED ~~general and administrative (SG&A) expenses for fiscal 2002 amounted to $800~~OPERATIONS,~~000,~~ upFISCAL ~~27.4%~~2004 ~~from~~COMPARED ~~$628,000~~TO ~~for~~FISCAL ~~fiscal 2001. The increase in SG&A expenses~~2003 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.

AsNet arevenues ~~result~~for of the ~~above,~~discontinued ~~operating~~office ~~profit~~products ~~for~~business ~~fiscal~~amounted ~~2002 grew $1.3 million,~~ to $423.79 million for fiscal 2004 as compared to $322.45 million for fiscal ~~2001~~2003. The increase was primarily due to the higher service and supply revenues related to growth of machines in service.

~~WESTERN~~Gross ~~AND~~profit ~~WORK~~totaled ~~BOOT~~approximately ~~UNIT~~$6.0 million ~~RESULTS~~for OFboth ~~OPERATIONS~~fiscal 2004 and 2003. As a percentage of net revenues, ~~FISCAL~~gross ~~2002~~profit ~~COMPARED~~declined TOfrom 26.7% for fiscal 2003 to 25.1% for fiscal 2004 primarily ~~FISCAL~~attributable ~~2001~~to lower commercial sales that normally have higher margins and decreased seasonal school billings.

~~Net~~SG&A ~~revenues~~expenses ~~increased~~were to $196.41 million for fiscal ~~2002,~~2004 upas ~~106.6%~~compared ~~from~~to $95.4 8 million for fiscal ~~2001.~~2003 ~~This~~as ~~significant growth in net revenues was primarily~~a ~~attributable~~result toof ~~high~~increased ~~demand~~costs for ~~our~~sales ~~Dan Post~~ and ~~Dingo~~administrative ~~branded~~salaries, ~~products~~professional ~~(driven in~~fees ~~part~~and bygroup ~~the~~health insurance, ~~Company’s~~which ~~acquisition~~were ofpartially ~~the~~offset ~~Dingo~~by ~~and~~reduced ~~Dan~~costs ~~Post~~for ~~brand names in June and October~~advertising, ~~2001,~~equipment ~~respectively)~~rental, ~~a slight resurgence in the western boot~~property ~~market~~taxes, and ~~employment~~bad ~~of successful sales and marketing strategies~~debt.

17As a result of the above, the operating loss for fiscal 2004 amounted to $111,000 as compared to an operating profit of $231,000 for fiscal 2003.

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

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

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

FINANCIAL CONDITION AND LIQUIDITY

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

~~At August 2, 2003 cash and cash equivalents amounted to approximately $6.2~~17 ~~million. Working capital equaled $25.2 million and the current ratio, defined as current assets divided by current liabilities, was 3.63 to 1.~~

WeAt ~~have~~July 30, ~~two~~2005, ~~lines~~cash ofand ~~credit~~cash ~~with~~equivalents aamounted ~~bank~~to ~~totaling~~approximately $49.752 million,. ~~all~~Working ~~of which~~capital ~~was~~equaled ~~available~~$27.0 million atand ~~August 2~~the current ratio, ~~2003.~~defined ~~One~~as ~~credit~~current ~~line~~assets ~~totaling~~divided ~~$1.75 million~~by ~~(which~~current isliabilities, ~~restricted~~was 5.5 to ~~one~~1. ~~hundred~~Under ~~percent~~the terms of the ~~outstanding~~Asset ~~accounts~~Purchase ~~receivable~~Agreement ~~due~~pursuant to which we ~~from~~sold ~~the~~our ~~U.S.~~office ~~Government)~~products ~~expires~~business in ~~June~~ September 2004., ~~The~~we ~~other~~received ~~credit line totaling~~ $39.09 million ~~expires~~on inSeptember 9, ~~November~~2004 and ~~2003.~~on WeSeptember 9, ~~believe~~2005 ~~that~~we ~~current~~received ~~cash~~an ~~and~~additional ~~cash equivalents (~~$~~6.2 million~~912,000 atas ~~August 2,~~payment ~~2003),~~of ~~cash~~the ~~generated~~remainder ~~from~~of ~~operations,~~the ~~and~~purchase ~~the~~price. ~~available~~The ~~lines~~proceeds offrom ~~credit~~the ~~will~~sale beprovided ~~sufficient~~a tototal ~~meet~~of ~~our~~approximately ~~capital~~$7.0 million of cash ~~requirements~~after ~~for~~income ~~fiscal~~taxes. In September 2004., Wewe doused ~~not~~approximately ~~have~~$3.1 million ~~any~~to pay off~~-balance~~ ~~sheet~~the ~~financing~~long-term ~~arrangements~~note related to our western and work boot business.

~~The~~On ~~table~~June 10, ~~below~~2005, ~~details~~our Board of Directors approved a 1-for-200 reverse stock split, to be followed immediately by ~~fiscal~~a ~~year~~200-for-1 ~~maturity~~forward ~~dates~~stock split, of the outstanding shares of both classes of our common ~~contractual~~stock (Class A and Class B). The purpose of the transaction is to reduce the number of ~~commitments~~record asholders of ~~August 2,~~each ~~2003~~class of our common stock (~~amounts~~Class A inand ~~thousands~~Class B): to fewer than 300, thereby enabling the Company to terminate registration of the common stock under the Securities Exchange Act of 1934 and eliminating the significant expense required to comply with the reporting and other requirements thereunder.

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

Pursuant to the transaction, stockholders holding fewer than 200 shares of the Company’s common stock of a particular class immediately before the transaction would have such shares cancelled and converted into the right to receive from the Company a cash payment of $14.25 for each such share owned before the reverse stock split. If the proposed transaction is approved by the stockholders and implemented, we estimate that we will use approximately $800,000 to purchase fractional share interests that will be cashed out.

We have two lines of credit with a bank totaling $4.75 million, all of which was available at July 30, 2005. One credit line totaling $1.75 million (which is restricted to one hundred percent of the outstanding accounts receivable due from the U.S. Government) expires in January 2006. The other credit line totaling $3.0 million expires in November 2005. We intend to renew these credit lines before their respective expiration dates. We believe that current cash and cash equivalents ($9.2 million at July 30, 2005), cash generated from operations, and the available lines of credit will be sufficient to meet our capital requirements for fiscal 2006.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet financing arrangements.

CONTRACTUAL OBLIGATIONS

The table below details by fiscal year maturity dates for our contractual commitments as of July 30, 2005 (amounts in thousands):


Commitment	2006		2007		2008		2009		2010		Thereafter

Bank Loans – Fixed rate	$	180	$	0	$	0	$	0	$	0	$	0
Operating leases		8		4		0		0				0

Total	$	188	$	4	$	0	$	0	$	0	$	0

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

		For Years Ended		~~For Years Ended~~
Source (Use) of Cash				August 2, 2003				August 3, 2002
		July 30, 2005				July 31, 2004
Operating activities
Source (Use) of Cash
		Net earnings adjusted for depreciation and amortization		$	3,675			$	4,421
Operating activities
		Accounts receivable			(439	)			(4,394	)
Net earnings adjusted for depreciation and amortization		$	4,013			$	3,539
		Inventories			(2,289	)			(2,686	)
Accounts receivable			1,101				(3,472	)
	Net cash provided by operating activities				1,983				239
Inventories			2,089				(1,893	)
Investing activities
Discontinued operations			(2,864	)			433
		Purchase of trademarks			0				(800	)
Net cash provided by operating activities			3,410				517
		Capital expenditures			(381	)			(691	)
Investing activities
Financing activities
Purchase of trademarks			(1,775	)			—
		Principal repayment of long-term debt			(542	)			(579	)
Proceeds from sale of business			9,900				—
		Dividends paid			(456	)			(374	)
Capital expenditures			(193	)			(1,370	)
Financing activities
Proceeds from bank loan			—				401
Principal repayment of long-term debt			3,529				(583	)
Dividends paid			606				(463	)

Net cash provided by operating activities ~~during~~for fiscal ~~2003~~2006 ~~totaled~~ amounted to approximately $23.04 million. Net earnings ~~plus~~as adjusted for depreciation contributed a positive cash flow of ~~approximately~~nearly $34.70 million. Trade ~~The trade~~ accounts receivable ~~balance~~ ~~increased~~decreased by ~~almost~~ $~~439,000~~1.1 million ~~and~~primarily ~~was~~the ~~primarily~~result ~~attributable~~of tolower ~~expanded~~military boot sales during the fourth quarter of ~~military~~fiscal ~~combat~~2005 ~~boots~~as compared to the ~~Government~~fourth quarter of fiscal 2004. Increased ~~Inventory~~sales ~~balances~~of ~~increased~~western boot products for the comparative fourth quarters partially offset the bydecline in the accounts receivable balance. Reduced inventory levels in the military boot business provided approximately $24.3 million asof acash, ~~result~~which ofwas ~~increased~~partially ~~demand~~offset ~~for~~by ~~military~~increased inventory ~~boots,~~levels ~~overages~~in ~~caused~~the bywestern aboot ~~sluggish~~business ~~western~~necessary ~~boot~~to ~~market~~support the current demand for ~~the~~western ~~fourth~~boot ~~quarter,~~products. ~~and~~The ~~partially~~timing ~~offset~~of byinventory payments primarily related to the ~~transfer~~military ofboot business used approximately $~~971~~900,000 of ~~office~~cash. ~~equipment to~~Operating ~~fixed~~activities ~~assets~~associated ~~for~~with ~~use~~the indiscontinued ~~the~~office products ~~cost~~business ~~per~~used ~~copy~~approximately ~~program~~$2.9 million of cash .

The purchase of trademarks from Texas Boot Company used $1,775,000. Capital expenditures for fiscal ~~2003~~2005 amounted to approximately $~~381~~193,000 , primarily for manufacturing equipment, warehouse equipment, and computer equipment upgrades. Proceeds from the sale of our office products business provided $9.9 million of cash.

Our financing activities in fiscal 2005 used approximately $14.01 million of cash to pay ~~dividends~~ dividends and reduce our variable rate debt ~~principal~~associated ~~amounts~~with our footwear businesses.

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

INFLATION

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

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In November ~~2002~~ 2004, ~~FASB~~Statement ~~Interpretation~~of 45Financial ~~(FIN~~Accounting 45Standards (SFAS) No. 151, “~~Guarantor’s~~Inventory ~~Accounting~~Costs, ~~and~~an ~~Disclosure~~amendment ~~Requirements~~of ~~for~~ARB ~~Guarantees~~No. 43, ~~Including Indirect Guarantees of Indebtedness of Others~~Chapter 4”, was issued. ~~FIN~~to 45clarify ~~requires a guarantor entity, at~~ the ~~inception~~ ofaccounting afor ~~guarantee~~abnormal ~~covered~~amounts ~~by the measurement provisions~~ of ~~the~~ ~~interpretation~~facility expense, tofreight, ~~record~~handling acosts, ~~liability~~and ~~for~~wasted ~~the~~material ~~fair~~(spoilage). ~~value~~We ofare ~~the obligation~~currently ~~undertaken~~evaluating inhow ~~issuing~~this ~~the~~standard ~~guarantee. FIN 45~~ applies ~~prospectively~~ to ~~guarantees~~ ~~the~~our ~~Company~~business. ~~issues~~SFAS ~~or modifies subsequent to December~~No. ~~31,~~151 ~~2002,~~will ~~but has~~be ~~certain disclosure requirements~~ effective ~~for~~in ~~periods ending after December~~fiscal ~~15, 2002~~2006. ~~The Company has adopted the provisions of FIN 45.~~

In December 2004, SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions” was issued to amend several components of FASB Statements No. 66 and No. 67. This standard is not applicable to our business.

In December ~~2002~~ 2004, ~~Statement of Financial Accounting Standards (~~SFAS) No. ~~148~~153, “~~Accounting~~Exchange ~~for~~of ~~Stock~~Non-~~Based~~Monetary ~~Compensation – Transition and Disclosures~~Assets”, was issued ~~and~~to ~~established~~amend ~~the~~APB ~~accounting and disclosure requirements associated~~Opinion ~~with~~No. 29 ~~alternative~~to ~~methods~~eliminate ofthe ~~transition~~exception for anon-monetary ~~voluntary~~exchanges ~~change~~of tosimilar ~~the~~productive ~~fair~~assets ~~value~~and ~~based~~replaces ~~method~~it ofwith ~~accounting~~a general exception for ~~stock-based~~exchanges ~~employee~~of ~~compensation.~~non-monetary ~~SFAS~~assets ~~No. 148 is~~that ~~effective~~do ~~for~~not ~~fiscal~~have commercial ~~2003~~substance. ~~Currently,~~We ~~our~~are ~~Incentive~~currently ~~Equity~~evaluating ~~Plan~~how ~~(Plan)~~this ~~is inactive;~~standard ~~therefore,~~applies weto doour ~~not~~business. ~~expect~~SFAS No. 153 ~~grants~~will ~~under~~be ~~this~~effective ~~Plan~~in fiscal 2006.

OnIn ~~January~~December 172004, ~~2003,~~SFAS ~~the FASB issued FASB Interpretation~~ No. 46123 (~~FIN~~revised 462004), “~~Consolidation~~Share-Based ~~of Variable Interest Entities~~Payment,”. ~~FIN~~was 46issued ~~clarifies~~to ~~existing~~establish ~~accounting~~standards for ~~whether~~the ~~interest~~accounting ~~entities~~for ~~should~~transactions ~~be consolidated~~ in ~~financial statements~~which ~~based~~an ~~upon~~entity ~~the~~exchanges ~~investees’ ability to finance~~ its ~~activities~~equity ~~without~~instruments ~~additional~~for ~~financial~~goods ~~support~~or ~~and~~services. ~~whether~~We ~~investors~~currently ~~possess~~have ~~characteristics~~no ofplans ~~a controlling financial interest. FIN 46 applies~~ to ~~years~~participate orin ~~interim~~transactions ~~periods beginning~~of ~~after~~this ~~December 15,~~type. ~~2003 with certain disclosure provisions required~~SFAS ~~for financial statements issued after January~~No. ~~31,~~123 ~~2003.~~(revised ~~Currently,~~2004) wewill ~~have~~be ~~no financial~~effective ~~statement~~in ~~adjustments~~fiscal ~~required by FIN 46~~2006.

In ~~April 2003~~June 2005, SFAS No. ~~149~~154, “~~Amendment~~Accounting ofChanges ~~Statement 133 on Derivative Instruments~~ and ~~Hedging~~Error ~~Activities~~Corrections”, was issued ~~and~~as ~~amends~~a ~~and clarifies~~replacement ~~financial~~of ~~accounting~~APB Opinion No. 20 and ~~reporting~~FASB ~~for~~Statement ~~derivative~~No. 3. ~~instruments~~The asStatement ~~originally~~applies ~~set forth~~to inall ~~SFAS~~voluntary ~~No. 133~~changes in accounting principle, ~~“Accounting~~and changes the requirements for ~~Derivative~~accounting ~~Instruments~~for and ~~Hedging~~reporting of a change in ~~Activities”~~accounting principle. ~~Currently,~~We weare docurrently ~~not~~evaluating ~~have~~how ~~any~~this ~~derivative~~standard ~~instruments~~applies orto ~~hedging~~our business. SFAS ~~activities~~No. 154 will be effective after December 15, 2005.

In ~~May 2003~~March 2005, SFAS Interpretation No. ~~150~~47, “Accounting for ~~Certain~~Conditional ~~Financial~~Asset ~~Instruments~~Retirement Obligations” ~~with~~was issued. This Interpretation of FASB Statement No. 143 will result in (a) more ~~Characteristics~~consistent recognitions of ~~both~~liabilities ~~Liabilities~~relating ~~and~~to ~~Equity”~~asset retirement obligations, ~~was~~(b) more information ~~issued~~about ~~and~~expected ~~established standards~~future ~~for~~cash ~~how~~outflows anassociated ~~issuer~~with ~~classifies~~those obligations, and ~~measures~~(c) more information ~~certain~~about ~~financial instruments~~investments ~~with~~in ~~characteristics~~long-lived ofassets ~~both~~because ~~liabilities~~additional ~~and~~asset ~~equity.~~retirement ~~This~~costs ~~statement~~will isbe ~~effective~~recognized ~~for~~as uspart ~~beginning~~of ~~with~~ the ~~first~~carrying ~~quarter~~amounts of ~~fiscal~~the ~~2004~~assets. We ~~have~~are nocurrently evaluating how this ~~financial~~standard ~~instruments~~applies ~~that~~to ~~fall~~our ~~under~~business. ~~this~~This ~~statement~~Interpretation will be effective after December 15, 2005.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report includes certain forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Important factors that could cause actual results or events to ~~differ~~ differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements include: the proposed reverse/forward stock split transaction and subsequent termination of SEC registration are each subject to various conditions and may not occur; the effect of competitive products and pricing, risks unique to selling goods to the Government (including variation in the Government’s requirements for our products and the Government’s ability to terminate its contracts with vendors), loss of key customers, acquisitions, supply interruptions, additional financing requirements, our ~~expectations~~ expectations about future Government orders for military boots, loss of key management personnel, our ability to successfully develop new products and services, and the effect of general economic conditions in our markets.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes related to the aggregate $4.75 million lines of credit ~~and a term loan through our wholly owned subsidiary, Dan Post Boot Company~~. As of ~~August~~July 230, ~~2003~~2005, there was no outstanding indebtedness under the lines of credit ~~and $3~~.~~7 million~~ ~~was outstanding on the term loan.~~ We do not buy or sell derivative financial instruments for trading purposes. Borrowings under these credit facilities described above bear interest at rates based upon the “Prime Rate” or ~~the~~ the “Prime Rate” less a margin of one-half percent offered by the applicable lender. We have not entered into any swap agreements or engaged in any other hedging activities with respect to this variable rate indebtedness. ~~A 10%~~ increase in the interest rates under these credit facilities would increase annual interest expense by approximately $12,000 (assuming that our aggregate borrowings under the credit facilities averaged $3.5 million during a fiscal year).

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following documents are ~~filed~~field as part of this report:

1.	Report of Independent Registered Public Accounting Firm	~~Independent Auditor’s Report~~	22	22
2.	McRae Industries, Inc. and Subsidiaries Consolidated Financial Statements:	~~McRae Industries, Inc. and Subsidiaries Consolidated Financial Statements:~~
		Consolidated Balance Sheets as of August 2, 2003 and August 3, 2002.		23-24
	Consolidated Balance Sheets as of July 30, 2005 and July 31, 2004		23-24
		Consolidated Statements of Operations for the Years Ended August 2, 2003, August 3, 2002, and July 28, 2001.		25
	Consolidated Statements of Operations for the Years Ended July 30, 2005, July 31, 2004, and August 2, 2003		25
		Consolidated Statements of Shareholders’ Equity for the Years Ended August 2, 2003, August 3, 2002, and July 28, 2001.		26
	Consolidated Statements of Shareholders’ Equity for Years Ended July 30, 2005, July 31, 2004, and August 2, 2003		26
		Consolidated Statements of Cash Flows for the Years Ended August 2, 2003, August 3, 2002, and July 28, 2001.		27
	Consolidated Statements of Cash Flows for the Years Ended July 30, 2005, July 31, 2004, and August 2, 2003		27
		Notes to Consolidated Financial Statements.		28-38
	Notes to Consolidated Financial Statements		28-42
3.		Financial Statement Schedule:
2.	Financial Statement Schedule:
	Schedule II	~~Schedule II~~	43	39

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

ToReport ~~the Board~~ of ~~Directors and~~Independent ~~Shareholders~~Registered ~~of McRae~~Public ~~Industries,~~Accounting ~~Inc.:~~Firm

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

We ~~conducted~~have ~~our~~audited ~~audits~~the inaccompanying ~~accordance~~consolidated ~~with~~balance ~~auditing~~sheets ~~standards~~of ~~generally accepted~~McRae inIndustries, ~~the United States of America~~Inc. (a ~~Those~~Delaware ~~standards~~corporation) ~~require that we plan~~ and ~~perform~~Subsidiaries ~~the~~as ~~audit~~of toJuly 30, ~~obtain~~2005 ~~reasonable~~and ~~assurance~~July 31, ~~about~~2004, ~~whether~~and the ~~financial~~related consolidated statements ~~are free~~ of ~~material~~operations, ~~misstatement.~~shareholders’ ~~An audit includes examining~~equity, onand acash ~~test~~flows ~~basis,~~for each ~~evidence~~of ~~supporting~~ the ~~amounts~~three ~~and~~years ~~disclosures~~ in the ~~financial~~period ~~statements.~~ended AnJuly 30, ~~audit~~2005. ~~also~~These ~~includes~~consolidated ~~assessing the accounting~~financial ~~principles~~statements ~~used~~are ~~and~~the ~~significant~~responsibility ~~estimates~~of ~~made~~the byCompany’s management,. asOur ~~well~~responsibility asis to ~~evaluating~~express ~~the~~an ~~overall~~opinion ~~financial~~on ~~statement~~these ~~presentation.~~consolidated Wefinancial ~~believe~~statements ~~that~~based ~~our audits~~on ~~provide a reasonable basis for~~ our ~~opinion~~audits.

InWe conducted our ~~opinion,~~audits in accordance with the ~~consolidated~~standards ~~financial~~of ~~statements~~the ~~referred~~Public toCompany Accounting ~~above~~Oversight ~~present~~Board (United States). Those standards require that we plan and ~~fairly,~~perform inthe ~~all~~audit ~~material~~to ~~respects,~~obtain reasonable assurance about whether the consolidated financial ~~position~~statements are free of ~~McRae~~material ~~Industries~~misstatement. The Company is not required to have, nor were ~~Inc~~we engaged to perform an audit of its internal control over financial reporting. ~~and~~Our ~~subsidiaries~~audit asincluded consideration of ~~August 2,~~internal ~~2003,~~controls ~~and~~over financial ~~August 3,~~reporting ~~2002,~~as ~~and~~a ~~the~~basis ~~results~~for designing audit procedures that ofare ~~their~~appropriate ~~operations~~in ~~and~~the ~~their~~circumstances, ~~cash~~but ~~flows~~not for ~~each~~the purpose of expressing ~~the~~an ~~three~~opinion ~~years~~on inthe effectiveness of the Company’s ~~period~~internal ~~ended~~control ~~August 2~~over financial reporting. Accordingly, ~~2003~~we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in ~~conformity~~the ~~with~~consolidated financial statements. An audit also includes assessing the accounting principles ~~generally~~used ~~accepted~~and insignificant estimates made by management, as well as evaluating the ~~United~~overall financial ~~States~~statement ofpresentation. ~~America~~We believe that our audits provide a reasonable basis for our opinion.

WeIn ~~have~~our ~~also~~opinion, ~~audited~~the ~~Schedule II~~consolidated ~~for~~financial ~~each~~statements ofreferred ~~the~~to ~~three~~above ~~years~~present fairly, in all material respects, the ~~period ended~~financial ~~August 2~~position of McRae Industries, ~~2003~~Inc. Inand Subsidiaries ~~our~~as ~~opinion~~of July 30, ~~this~~2005, ~~schedule~~and July 31, ~~when~~2004 ~~considered~~and inthe results of their operations ~~relation~~and totheir cash flows for each of the ~~basic~~three ~~financial~~years ~~statements~~in ~~taken~~the asperiod aended ~~whole~~July 30, ~~presents fairly~~2005, in conformity ~~all~~with ~~material~~accounting ~~respects,~~principles generally accepted in the ~~information~~United ~~therein~~States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

As discussed in Note 15, the consolidated financial statements as of July 31, 2004, and for the year then ended have been restated to reflect adjustments related to an overstatement of the Company’s inventory, income tax accrual and shareholders’ equity and an understatement of cost of revenues.

/s/ Grant Thornton LLP

~~October 16, 2003~~ Charlotte, North Carolina October 21, 2005

CONSOLIDATED BALANCE SHEETS
McRae Industries, Inc. and Subsidiaries

					(In thousands)
		(In Thousands)
					August 2,		August 3,
		July 30,			July 31,
					2003		2002
		2005			2004
ASSETS
Current assets:
Cash and cash equivalents	~~Cash and cash equivalents~~	$	9,238		$	62,~~192~~463	$	~~5,822~~
	Accounts receivable, less allowances for doubtful accounts of $558,000 and $374,000, respectively (Note 5)					10,276		9,442
Accounts receivable, less allowances of $734,000 and $339,000, respectively			9,749			11,245
Notes receivable, current portion	~~Notes receivable, current portion~~		9			25
		Employees				2		17
Inventories			12,721			14,810
		Other				56		58
Income tax receivable			840			676
	Inventories (Notes 2 and 5)					17,559		16,241
Prepaid expenses and other current assets			159			271
	Net investment in capitalized leases, current portion (Note 3)					146		254
Asset held for sale – Waverly Plant			325			0
	Income tax receivable (Note 7)					314		242
Assets held for sale from discontinued operations			0			11,622
	Prepaid expenses and other current assets					242		104
Total current assets			33,041			41,112
			Total current assets			34,787		32,180
Property and equipment, net			2,640			3,342
Property and equipment, net (Notes 4 and 5)						4,541		4,458
Other assets:
Other assets:
Notes receivable, net of current portion			36			36
	Notes and accounts receivable, related entities					0		395
Real estate held for investment			1,882			1,422
	Net investment in capitalized leases, net of current portion (Note 3)					1,716		441
Goodwill			362			362
	Notes receivable, net of current portion
Amount due from split-dollar life insurance			2,220			2,220
		Employees				2		3
Trademarks			2,824			1,049
Other		~~Other~~	5			695		~~124~~
	Real estate held for investment					1,390		652
Total other assets			7,329			5,094
	Goodwill					362		362
Total assets		$	43,010		$	49,548
	Cash surrender value life insurance (Note 10)					2,220		2,251
	Trademarks					1,049		1,049
	Other					13		14
			Total other assets			6,821		5,291
				Total assets	$	46,149	$	41,929

See notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS
McRae Industries, Inc. and Subsidiaries

					(In thousands)
		(In Thousands)
					August 2,		August 3,
		July 30,			July 31,
					2003		2002
		2005			2004
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
		Current portion of notes payable, banks (Note 5)			$	577	$	527
Current portion of notes payable, banks		$	174		$	621
Accounts payable		~~Accounts payable~~	3,793			54,~~211~~672		~~4,361~~
		Accrued employee benefits (Note 6)				427		475
Accrued employee benefits			480			524
		Deferred revenues				1,012		1,039
Accrued payroll and payroll taxes			683			865
		Accrued payroll and payroll taxes				913		753
Liabilities associated with discontinued operations			0			4,587
		Contract contingencies				400		669
Other			894			1,049
		Other				1,044		527
Total current liabilities			6,024			12,318
				Total current liabilities		9,584		8,351
Notes payable, banks, net of current portion			0			3,082
Notes payable, banks, net of current portion (Note 5)						3,307		3,900
Shareholders’ equity:
Lease guarantees						1,568		—
Common Stock:
Minority interest (Note 8)						88		97
Class A, $1 par value; authorized 5,000,000 shares; issued and outstanding, 2,240,841 and 1,943,543 shares, respectively			2,241			1,943
Commitments and contingencies (Note 8)
Class B, $1 par value; authorized 2,500,000 shares; issued and outstanding, 527,658 and 824,956 shares, respectively			527			825
Shareholders’ equity: (Note 9)
Additional paid-in capital			791			791
	Common stock:
Retained earnings			33,427			30,589
		Class A, $1 par value; authorized 5,000,000 shares; issued and outstanding, 1,914,972 and 1,879,072 shares, respectively				1,915		1,879
Total shareholders’ equity			36,986			34,148
		Class B, $1 par value; authorized 2,500,000 shares; issued and outstanding, 853,527 and 889,427 shares, respectively				853		889
Total liabilities and shareholders’ equity		$	43,010		$	49,548
Additional paid-in capital						791		791
Retained earnings						28,043		26,022
		Total shareholders’ equity				31,602		29,581
				Total liabilities and shareholders’ equity	$	46,149	$	41,929

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF OPERATIONS
McRae Industries, Inc. and Subsidiaries

			(In thousands, except for per share data)
		July 30,				July 31,				August 2,
			August 2,				August 3,				July 28,
For years Ended		2005				2004				2003
For the Years Ended			2003				2002				2001
Net revenues		$	62,404			$	70,496			$	54,501
Net revenues			$	77,042			$	74,531			$	57,145
Cost of revenues			47,681				55,512				41,101
Cost of revenues				57,616				54,716				44,263
Gross profit			14,723				14,984				13,400
Gross profit				19,426				19,815				12,882
Selling, general and administrative expenses			12,266				10,613				9,839
Selling, general and administrative expenses				15,635				15,255				13,930
Operating profit from continuing operations			2,457				4,371				3,561
Operating profit (loss) from continuing operations				3,791				4,560				(1,048	)
Other income, net			78				329				604
Other income (loss), net				503				(47	)			502
Interest expense			(44	)			(144	)			(175	)
Interest expense (Note 5)				(186	)			(246	)			(413	)
Earnings from continuing operations before income Taxes and minority interest			2,491				4,556				3,990
Earnings (loss) from continuing operations before income taxes and minority interest				4,108				4,267				(959	)
Provision for income taxes			917				1,352				1,552
Provision (benefit) for income taxes (Note 7)				1,640				1,693				(375	)
Minority interest			0				2				9
Minority interest (Note 8)				9				11				13
Net earnings from continuing operations			1,574				3,206				2,447
Net earnings (loss) from continuing operations				2,477				2,585				(571	)
Discontinued operations:
Discontinued operations: (Note 12)
Earnings (loss) from discontinued operations, net of income tax (benefit) provision of $(161,000), $(72,000), and $88,000 for 2005, 2004, and 2003.			(274	)			(197	)			30
	Loss from discontinued operations, net of income tax benefits of $(19,000) for 2001.			—				—				(41	)
Gain on sale of business, net of income tax provision of $1,341,000			2,144				0				0
	Loss on disposal of business segment net of income tax benefit of $39,000 for fiscal 2001			—				—				(85	)
Net earnings		$	3,444			$	3,009			$	2,477
Net earnings (loss)			$	2,477			$	2,585			$	(697	)
Earnings per common share:
Earnings (loss) per common share:
Earnings per common share from continuing operations:
	Earnings (loss) from continuing operations		$	.89			$	.93			$	(.21	)
Basic earnings per share:
	Loss from discontinued operations			—				—				(.04	)
Class A			1.09				1.90				1.53
	Net earnings (loss)		$	.89			$	.93			$	(.25	)
Class B			0				0				0
Weighted average number of common shares outstanding				2,768,499				2,768,499				2,768,499
Diluted earnings per share:
Class A			.79				1.32				1.05
Class B		NA				NA				NA
Earnings per common share from discontinued operations:
Basic earnings per share:
Class A			.94				(.10	)			.01
Class B			0				0				0
Diluted earnings per share:
Class A			.67				(.07	)			.01
Class B		NA				NA				NA
Net earnings per common share:
Basic earnings per share:
Class A			2.03				1.80				1.54
Class B			0				0				0
Diluted earnings per share:
Class A			1.46				1.25				1.06
Class B		NA				NA				NA
Weighted average number of common shares outstanding:
Class A			1,993,172				1,929,965				1,898,908
Class B			775,327				838,534				869,591
Total			2,768,499				2,768,499				2,768,499

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY McRae Industries, Inc. and Subsidiaries

	(Dollars in thousands)
	Common Stock, $1 par value
	Class A				Class B						Additional		Retained
	Shares		Amount		Shares			Amount			Paid-in Capital		Earnings
Balance, July 29, 2000		1,859,692	$	1,860		908,807		$	909		$	791	$	25,029
Balance, August 3, 2002		1,879,072	$	1,879		889,427		$	889		$	791	$	26,022
Conversion of Class B to Class A stock		2,125		2		(2,125	)		(2	)
Conversion of Class B to Class A Stock		35,900		36		(35,900	)		(36	)
Cash Dividend ($.28 per Class A common stock)														(521	)
Net loss														(697	)
Balance, July 28, 2001		1,861,817		1,862		906,682			907			791		23,811
Conversion of Class B to Class A stock		17,255		17		(17,255	)		(18	)
Cash Dividend ($.20 per Class A common stock)														(374	)
Net earnings														2,585
Balance, August 3, 2002		1,879,072		1,879		889,427			889			791		26,022
Conversion of Class B to Class A stock		35,900		36		(35,900	)		(36	)
Cash Dividend ($.24 per Class A common stock)														(456	)
Net earnings														2,477
Balance, August 2, 2003		1,914,972	$	1,915		853,527		$	853		$	791	$	28,043
Conversion of Class B to Class A stock		28,571		28		(28,571	)		(28	)
Cash Dividend ($.24 per Class A common stock)														(463	)
Net earnings														3,009
As restated (Note 15)
Balance, July 31, 2004		1,943,543		1,943		824,956			825			791	$	30,589
Conversion of Class B to Class A Stock		297,298		298		(297,298	)		(298	)
Cash Dividend ($.30 per Class A common stock)														(606	)
Net earnings														3,444
Balance, July 30, 2005		2,240,841	$	2,241		527,658		$	527		$	791	$	33,427

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS
McRae Industries, Inc. and Subsidiaries

		(In thousands)					~~(In thousands)~~
			August 2				August 3,				July 28,
		July 30,				July 31,				August 2,
For the Years Ended			2003				2002				2001
For years Ended		2005				2004				2003
Cash Flows from Operating Activities:
Net earnings (loss)			$	2,477			$	2,585			$	(697	)
Net earnings		$	3,444			$	3,009			$	2,477
Adjustments to reconcile net earnings to net cash provided by operating activities:
	Depreciation and amortization			1,198				1,836				1,549
Net earnings from discontinued operations			(1,870	)			197				(30	)
	Equity in net (income) loss of investee			—				25				(83	)
Depreciation and amortization			569				530				614
	Minority shareholder’s interest in earnings (loss) of subsidiary			(9	)			(11	)			(13	)
Minority shareholders’ interest in earnings (loss) of Subsidiary			—				(2	)			(9	)
	Loss (gain) on sale of assets			(333	)			122				39
Gain on sale of assets			138				(73	)			(326	)
	Contract contingencies			(268	)			19				224
Changes in operating assets and liabilities:
	Changes in operating assets and liabilities:
Accounts receivable			1,101				(3,472	)			(665	)
	Accounts receivable			(439	)			(4,394	)			1,382
Accounts receivable valuation allowances			395				(92	)			82
Inventories	~~Inventories~~		2,089	~~(2,289~~	)		(1,893	~~(2,686~~)	)		(1,306	~~1,635~~)
	Net investment in capitalized leases			400				831				603
Prepaid expenses and other current assets			(38	)			(139	)			72
	Prepaid expenses and other current assets			(138	)			(39	)			22
Accounts payable			(879	)			2,093				273
	Accounts payable			850				816				(1,131	)
Accrued employee benefits			(44	)			97				(48	)
	Accrued employee benefits			(48	)			235				(37	)
Accrued payroll and payroll taxes			(182	)			(38	)			160
	Deferred revenues			(27	)			56				(56	)
Income taxes			(164	)			41				(57	)
	Accrued payroll and payroll taxes			160				176				(36	)
Working capital changes associated with discontinued Operations			(994	)			236				(26	)
	Income taxes			(72	)			639				(1,359	)
Other			(155	)			23				(42	)
	Other			521				29				(72	)
Net cash provided by operating activities			3,410				517				1,169
	Net cash provided by operating activities			1,983				239				1,970
Cash Flows from Investing Activities:
Cash Flows from Investing Activities:
Proceeds from sale of business			9,900				—				—
Proceeds from sale of property			12	~~381~~			142	~~105~~			377	~~107~~
Proceeds from sale of short term investments			—	18			—	—			18	55
Purchase of land				—				—				(16	)
Purchase of other assets			(460	)			—				(150	)
Conversion (purchase) of other assets				(706	)			79				(83	)
Purchase of trademarks			(1,775	)			—				—
Purchase of trademarks				—				(800	)			(250	)
Purchase of minority interest			—				(85	)			—
Purchase of minority interest				—				—				(605	)
Capital expenditures			(193	)			(1,370	)			(249	)
Capital expenditures				(381	)			(691	)			(318	)
Collections on notes receivable			16				68				73
Advances to related parties				—				(99	)			(206	)
Net cash provided by (used in) investing activities			7,500				(1,245	)			69
Collections from related parties				—				206				414
Cash Flows from Financing Activities:
Advances on notes receivable				—				—				(300	)
Proceeds from bank loan			—				401				—
Collections on notes receivable				73				395				173
Principal repayments of long-term debt			(3,529	)			(582	)			(542	)
Net cash used in investing activities				(615	)			(805	)			(1,029	)
Dividends paid			(606	)			(463	)			(456	)
Cash Flows from Financing Activities:
Net cash used in financing activities			(4,135	)			(644	)			(998	)
Principal repayments of long-term debt				(542	)			(579	)			(298	)
Net Increase (Decrease) in Cash and Cash Equivalents			6,775				(1,372	)			240
Dividends paid				(456	)			(374	)			(521	)
Cash and Cash Equivalents at Beginning of Year			2,463				3,835				3,595
	Net cash used in financing activities			(998	)			(953	)			(819	)
Cash and Cash Equivalents at End of Year		$	9,238			$	2,463			$	3,835
Net (Decrease) Increase in Cash and Cash Equivalents				370				(1,519	)			122
Cash and Cash Equivalents at Beginning of Year				5,822				7,341				7,219
Cash and Cash Equivalents at End of Year			$	6,192			$	5,822			$	7,341

Note: ~~Non-cash~~Accounts ~~operating~~receivable ~~and~~for ~~investing~~fiscal ~~activities~~2005 ~~excluded~~contains ~~from~~a ~~this statement of~~ non-cash ~~flows~~activity ~~relate~~in to the ~~transfer~~amount of ~~office equipment from inventory to property and equipment amounted to~~ $~~971~~894,000, ~~$251,000,~~related ~~and $852,000~~to inthe ~~fiscal~~sale ~~2003,~~of ~~2002,~~our ~~and~~office ~~2001,~~products ~~respectively~~business.

See notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS McRae Industries, Inc. and Subsidiaries For the Years Ended July 30, 2005, July 31, 2004 and August 2, 2003

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of all of the Company’s wholly owned subsidiaries and other businesses over which we exercise significant control in accordance with ~~its~~FASB ~~subsidiaries~~Statement No. 94, “Consolidation of All Majority-Owned Subsidiaries” and FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities.” Minority interest for ~~represents~~prior periods represented the minority shareholder’s proportionate share of the equity of a former majority- owned subsidiary. ~~Significant inter-company~~All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The timely preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. ~~Significant~~The ~~estimates~~economic ~~expected~~price adjustment related to ~~change~~our inmilitary ~~the~~combat ~~near~~boot ~~term~~contract ~~include~~is ~~the~~subject ~~allowance~~to certain ~~for~~price ~~contract~~variations ~~contingencies~~for leather.

Cash and Cash Equivalents

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

Accounts Receivable

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

Inventories

Inventories are stated at the lower of cost or market value 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. 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 as a result of technological changes in the bar code business products and fashion cycles and trends and the overall financial condition of competitors in the western and work boot business. A percentage point error in our inventory allowances would approximate $2,000 for the fiscal year ended July 30, 2005.

Property and Equipment

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

Revenue Recognition

~~Service~~Our ~~maintenance~~western ~~agreements~~and ~~are~~work ~~sold~~boot ~~for~~business ~~certain~~records ~~products.~~an ~~Revenues~~allowance ~~related to~~for ~~these~~sales ~~agreements~~returns. ~~are~~This ~~deferred~~is ~~and~~calculated applying ~~recognized~~historical ~~over~~return ~~the~~data ~~term~~to ofsales ~~the~~subject ~~related agreements~~to potential returns.

28McRae Office Solutions, Inc., our discontinued operation that was sold to Connected Office Products, Inc. (COPI) on September 9, 2004, sold equipment under sales-type leases to customers. Sales were recognized when the equipment was installed and unearned income was recognized over the term of the lease. Compsee does not engage in equipment leasing.

The Company’s ~~sells~~trade ~~equipment~~receivables ~~under sales-type leases to customers. Sales~~ are ~~recognized~~ ~~when~~not ~~the equipment is installed and unearned income is recognized over the term of the lease~~financed. ~~Some~~The ofCompany ~~these~~has ~~leases are subsequently transferred to third-party leasing companies and~~ a ~~gain~~small oramount ~~loss recognized at the time~~ of ~~transfer.~~ ~~The leases generally have an unguaranteed residual value that is not~~receivables ~~transferred~~from tofinancing ~~the~~of ~~third-party~~real ~~leasing~~estate ~~company~~mortgages. ~~Certain~~These ~~third-party~~are ~~leasing companies~~being ~~require~~paid ~~the~~down ~~Company~~and tono ~~guarantee~~additional ~~the~~financings ~~residual value on the leases~~are ~~transferred~~anticipated.

~~Revenue~~Compsee ~~from~~enters ~~copy~~into ~~usage~~maintenance isagreements ~~recognized~~on ~~when~~bar ~~billed~~code ~~quarterly~~equipment orand ~~monthly~~revenues ~~based~~are onrecognized over the ~~actual~~term ~~usage.~~of ~~Maintenance~~the ~~and~~maintenance ~~supply~~contract, ~~expenses~~usually ~~related~~one toyear. ~~these~~McRae ~~cost~~Office ~~per~~Solution, Inc., our ~~copy~~discontinued ~~lease~~operation, ~~agreements~~also ~~are~~entered ~~recognized~~into asmaintenance ~~incurred~~agreements. ~~Provision~~The ~~for~~revenues ~~losses~~from ~~are~~these agreements was deferred and recognized ~~when~~over ~~determined~~the term of the related agreements.

~~The~~Revenues ~~Government~~recognized 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~~past ~~Assurance Representative~~three ~~(QAR),~~years 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~~as ~~packaging and labeling. The bill and hold procedure requires physical~~follows: segregation and specific identification of Government-owned boots and, because they are owned by the Government, the Company cannot use them to fill any other customers’ order. The Company has certain custodial responsibilities for these boots, including loss or damage, which the Company insures. The related insurance policies specifically provide that loss payment on finished stock and sold personal property completed and awaiting delivery is based on the Company’s selling price. At the end of the Contract term all remaining inventory is sent to the Government. In accordance with guidance issued under Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, revenues from bill and hold transactions are recognized at the time of acceptance by the QAR.

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


	2005		2004		2003

Lease Income	$	3,000	$	251,000	$	415,000
Financing of Receivables		17,000		26,000		38,000
Maintenance Contracts		155,000		1,180,000		1,365,000

The Company’s current boot contract requires a bill and hold procedure. 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 to the extent of the selling price to the Government. The related insurance policies specifically provide that loss payment on finished stock and sold personal property completed and awaiting delivery is based on the Company’s selling price. At the end of the Contract term all remaining inventory is sent to the Government. In accordance with guidance issued under Securities and Exchange Commission Staff Accounting Bulletin No. 104, “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 goods are shipped and title passes to the buyer.

Intangible Assets

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

~~Before~~In ~~August~~June 32005, ~~2002,~~we ~~goodwill~~purchased ~~was~~certain ~~amortized~~trademarks ~~over~~from ~~its~~Texas ~~estimated~~Boot ~~period~~Company ~~of benefit~~in onthe aamount ~~straight-line~~of ~~basis. Other intangible assets were amortized on appropriate bases over their estimated lives. When an intangible asset’s carrying value exceeded associated expected operating cash flows~~$1, ~~it was~~775,000, ~~considered~~which ~~to be impaired and~~ was ~~written~~their ~~down to~~ fair ~~value,~~market ~~which was determined based on either discounted future cash flows or appraised values~~value.

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.

29Earnings per Share

~~Earnings~~Under ~~Per~~our Articles of Incorporation, we may pay dividends on our Class A Common Stock in excess of the dividends we pay on our Class B Common Stock. As a result, we have computed our earnings per share in compliance with Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share”. This guidance requires companies that have multiple classes of equity securities to use the “two class” or “if converted method” in computing earnings per share.

~~Earnings~~For our primary or basic earnings per share ~~are~~calculation, ~~based~~we onuse the ~~weighted~~two-class ~~average~~method, ~~number~~which ofimplies a ~~shares~~different ofdividend ~~common~~rate for our Class B Common Stock. Consequently, all undistributed earnings ~~stock~~are ~~outstanding~~allocated ~~during~~to Class A Common Stock in the ~~year~~earnings per share calculation. The ~~Company~~result ~~had~~of nothis calculation ~~common~~allocates ~~stock~~no ~~equivalents issued~~earnings orper ~~outstanding~~share ~~for~~to the ~~three-year~~holders ~~period~~of ~~ended August~~Class 2,B ~~2003~~Common Stock.

For our diluted earnings per share calculation, we use the if-converted method. This calculation assumes that all Class B Common Stock is converted into Class A Common Stock. As a result, there are no holders of Class B Common Stock to participate in undistributed earnings.

While we have presented our earnings per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, we believe that the holders of Class A and Class B Common Stock have equal rights to the Company’s undistributed earnings. Consequently, we believe that the calculation that best expresses economic reality is to calculate earnings per share using the total Class A and Class B Common Stock outstanding.

The Company had no common stock equivalents issued or outstanding for the three-year period ended July 30, 2005.

Recently Issued Accounting Standards

In November ~~2002~~ 2004, ~~FASB~~Statement ~~Interpretation~~of ~~No. 45~~Financial ~~(FIN~~Accounting 45Standards (SFAS) No. 151, “~~Guarantor’s~~Inventory ~~Accounting and Disclosure Requirements for Guarantees~~Costs, ~~Including Indirect Guarantees of~~an ~~Indebtedness~~amendment of ~~Others”,~~ARB ~~was issued~~No. ~~FIN 45 requires a guarantor entity~~ 43, ~~at the~~Chapter 4” ~~inception~~was ofissued ato ~~guarantee~~clarify ~~covered by~~ the ~~measurement~~accounting ~~provisions of the interpretation, to record a liability~~ for ~~the~~abnormal ~~fair~~amounts ~~value~~ of ~~the obligation~~ ~~undertaken~~facility ~~in issuing the guarantee. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31~~expense, ~~2002~~freight, ~~but has~~handling ~~certain~~costs, ~~disclosure~~and ~~requirements~~wasted ~~effective~~material ~~for~~(spoilage). ~~periods~~SFAS ~~ending~~No. 151 ~~after December~~is ~~15,~~applicable ~~2002.~~to Weus ~~have~~in ~~adopted~~fiscal ~~the provisions of FIN 45~~2006.

~~In December 2002, Statement of Financial Accounting Standards (SFAS) No. 148,~~30 “Accounting for Stock-Based Compensation – Transition and Disclosures”, was issued and established the accounting and disclosure requirements associated with alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 is effective for fiscal 2003. Currently, our Incentive Equity Plan (Plan) is inactive; there are no outstanding grants under this Plan and we do not expect grants under this Plan.

OnIn ~~January~~December 172004, ~~2003,~~SFAS ~~the FASB issued FASB Interpretation~~ No. ~~46 (FIN 46)~~152, “~~Consolidation~~Accounting ~~of Variable Interest Entities”. FIN 46 clarifies existing accounting~~ for ~~whether~~Real ~~certain~~Estate ~~entities~~Time-Sharing ~~known~~Transactions” aswas ~~variable interest entities~~issued ~~should be consolidated in financial statements based upon the investees’ ability~~ to ~~finance~~amend ~~its~~several ~~activities~~components ~~without additional financial support and whether investors possess characteristics~~ of aFASB ~~controlling~~Statements ~~financial interest~~No. ~~FIN 46 applies to years or interim periods beginning after December~~ ~~15,~~66 ~~2003 with~~and ~~certain disclosure provisions required for financial statements issued after January~~No. ~~31, 2003~~67. ~~Currently,~~This westandard ~~are~~is not ~~aware of any financial statement~~applicable ~~adjustments~~to ~~required~~our ~~by FIN 46~~business.

In ~~April 2003~~December 2004, SFAS No. ~~149~~153, “~~Amendment~~Exchange of ~~Statement~~Non-Monetary ~~133 on Derivative Instruments and Hedging Activities~~Assets”, was issued ~~and~~to ~~amends~~amend ~~and~~APB ~~clarifies~~Opinion ~~financial~~No. 29 ~~accounting~~to ~~and~~eliminate ~~reporting~~the exception for ~~derivative~~non-monetary ~~instruments~~exchanges asof ~~originally~~similar ~~set~~productive assets and ~~forth~~replaces init ~~SFAS~~with ~~No. 133,~~a ~~“Accounting~~general exception for ~~Derivative~~exchanges ~~Instruments~~of ~~and~~non-monetary ~~Hedging Activities”.~~assets ~~Currently,~~that we do not have commercial ~~any~~substance. ~~derivative~~SFAS ~~instruments~~No. 153 oris ~~hedging activities~~applicable to us in fiscal 2006.

In ~~May 2003~~December 2004, SFAS No. ~~150~~123 (revised 2004), “~~Accounting~~Share-Based ~~for Certain Financial Instruments with Characteristics of both Liabilities and Equity”~~Payment,” was issued ~~and~~to ~~established~~establish standards for ~~how~~the anaccounting ~~issuer~~for ~~classifies~~transactions ~~and~~in ~~measures~~which ~~certain~~an ~~financial instruments~~entity ~~with~~exchanges ~~characteristics~~its ofequity ~~both~~instruments for ~~liabilities~~goods ~~and~~or ~~equity~~services. ~~This~~We ~~statement is~~currently ~~effective~~have ~~for~~no usplans ~~beginning~~to ~~with~~participate ~~the~~in ~~first~~transactions ~~quarter~~ of ~~fiscal~~this ~~2004~~type. WeSFAS No. 123 ~~have~~(revised ~~no financial~~2004) ~~instruments~~will ~~that~~be ~~fall~~effective ~~under~~in ~~this~~fiscal ~~statement~~2006.

In June 2005, SFAS No. 154, “Accounting Changes and Error Corrections” was issued as a replacement of APB Opinion No. 20 and FASB Statement No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. We are currently evaluating how this standard applies to our business. SFAS No. 154 will be effective after December 15, 2005.

In March 2005, SFAS Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” was issued. This Interpretation of FASB Statement No. 143 will result in (a) more consistent recognitions of liabilities relating to asset retirement obligations, (b) more information about expected future cash outflows associated with those obligations, and (c) more information about investments in long-lived assets because additional asset retirement costs will be recognized as part of the carrying amounts of the assets. We are currently evaluating how this standard applies to our business. This Interpretation will be effective after December 15, 2005.

Research and Development

Research and development costs related to future products are expensed in the year incurred and is are included in SG&A expenses. Research and development expenses for fiscal ~~2003~~2005, ~~2002~~2004, and ~~2001~~2003 were $1,~~010~~202,000, $1,~~045~~452,000, and $~~561~~914,000, respectively.

Advertising

The Company expenses advertising costs when incurred. Advertising expense amounted to $~~386~~465,000, $~~505~~244,000, and $~~406~~259,000 for fiscal ~~2003~~2005, ~~2002~~2004, and ~~2001~~2003, respectively.

Shipping and Handling

Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenue, while the related expenses, including buying, postage, external distribution and warehousing costs incurred by the Company are recorded as components of cost of ~~products~~goods sold in the consolidated statements of operations.

~~Reclassifications~~Reclassification

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

2. INVENTORIES

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

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

3. LEASES

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

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

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

~~The~~Split-Dollar ~~scheduled~~Life ~~maturities for the above minimum lease payments receivable at~~Insurance ~~August 2, 2003 are as follows (in thousands):~~

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

The Company is party to a split-dollar arrangement with respect to certain life insurance policies. We record an amount that is to be realized under the split dollar agreement. This amount is the actual premiums paid by the Company or the actual cash surrender value of the policy, whichever is less.

~~4. PROPERTY~~Real ~~AND~~Estate ~~EQUIPMENT~~Held for Investment

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

Real estate held for investment is land recorded at cost plus the cost of any improvements. Land is analyzed for impairment annually with any impairment expensed during the current period.

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

5The Company applies the provisions of FASB statement No. ~~NOTES~~ 57, ~~PAYABLE~~“Related ~~AND~~Party ~~LINES~~Disclosures”, OFto determine ~~CREDIT~~whether or not a related party transaction has occurred. If a related party transaction has taken place we make the necessary disclosures.

~~NOTES~~Assets ~~PAYABLE:~~Subject to Liens

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

We currently have a loan with the State of Tennessee with an outstanding balance of $174,000 at July 30, 2005. Land, buildings, and building improvements of the Company’s Dan Post subsidiary are pledged as collateral.

2. INVENTORIES

Current costs exceeded the LIFO value of inventories by approximately $816,000 and $680,000 at July 30, 2005 and July 31, 2004, respectively. Year-end inventories valued under the LIFO method were $1,453,000 and $5,749,000 at July 30, 2005 and July 31, 2004, respectively. For fiscal 2005, higher FIFO pricing and lower inventory levels increased the LIFO reserve, which decreased net earnings by approximately $136,000 as compared to a $43,000 increase in net earnings for fiscal 2004. The components of inventory at each year-end are as follows:


	(In Thousands)
	Fiscal Year Ended
			2004
			As Restated
	2005		(Note 15)

Raw materials	$	2,217	$	3,883
Work-in-process		446		2,385
Finished goods		10,058		8,542

	$	12,721	$	14,810

~~Annual~~3. ~~maturities~~PROPERTY ofAND ~~long-term debt are as follows (in thousands):~~EQUIPMENT

Fiscal Year End:
	(In Thousands)
2004	$	577
	Fiscal Year Ended
~~2005~~	2005	~~598~~	2004
2006		619
Land and improvements	$	664	$	679
2007		641
Buildings		3,796		4,297
2008		663
Machinery and equipment		3,877		4,159
thereafter		786
Furniture and fixtures		1,457		1,638
	$	3,884
		9,794		10,773
Less: Accumulated depreciation		7,154		7,431
	$	2,640	$	3,342

Depreciation expense for fiscal 2005, 2004, and 2003 was $569,000, $530,000, and $614,000, respectively.

4. NOTES PAYABLE AND LINES OF CREDIT

NOTES PAYABLE:


	(In Thousands)
	Fiscal Year Ended
	July 30, 2005		July 31, 2004

Note payable, bank, due in monthly installments of $56,477 including interest at the prime rate less 0.5% (3.75% as of July 31, 2004) through July 2011. Repaid in fiscal 2005.	$	0	$	3,114
Note payable, State of Tennessee, due March 2013. Note is payable in 60 monthly installments of $1,930 including interest at 1.5%, then 60 monthly installments of $2,073 including interest at 2.5% and then 120 monthly installments of $2,175 including interest at 3.5%. Land, buildings and building improvements of the Company’s Dan Post subsidiary, are pledged as collateral.		174		193
Note payable, bank, due in 59 monthly installments of $4,460 including interest at the prime rate less 0.5% (3.75% as of July 31, 2004) commencing on July 2, 2004 and 1 final payment of all unpaid principal and interest due on June 2, 2009. Repaid in fiscal 2005.		0		396

Current portion		174		3,703
		174		621

	$	0	$	3,082

We intend to payoff the remaining note payable to the State of Tennessee during fiscal 2006. Consequently, the long-term portion of this note has been re-classified as current.

LINES OF CREDIT:

The Company has an unsecured $3,000,000 revolving line of credit with a bank. The Company had no outstanding borrowings under the line of credit as of ~~August 2~~July 30, ~~2003~~2005 or ~~August~~July 331, ~~2002~~2004. This line of credit provides for interest on outstanding balances to be ~~payable~~paid monthly at the prime rate less 0.5%. This line of credit expires in November 2005 ~~2003~~ and is secured by the inventory and ~~accounts~~ accounts receivable of the Company’s Dan Post subsidiary.

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

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

6. EMPLOYEE BENEFIT PLANS

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

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

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

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

7outstanding borrowings under this line of credit as of July 30, 2005 and July 31, 2004. ~~INCOME~~ ~~TAXES~~The line of credit expires in January 2006 and provides for interest on outstanding balances to be paid monthly at the prime rate.

Cash paid for interest during fiscal 2005, 2004, and 2003 was approximately $44,000, $144,000, and $186,000, respectively.

5. EMPLOYEE BENEFIT PLANS

The employee stock ownership plan (ESOP) covers substantially all employees. Its principal investments include shares of Class A Common Stock and Class B Common Stock of the Company and collective funds consisting of short-term cash, fixed-income, and equity investments. There have been no contributions to the ESOP in fiscal years 2005, 2004, or 2003.

The Company has a 401-K retirement plan, which covers substantially all employees. Employees can contribute up to 25% of their annual salary to the plan. At its sole discretion, the Board of Directors determines the amount and timing of any Company matching contribution. The Company’s contribution was $105,000, $152,000, and $131,000 for the fiscal years ended July 30, 2005, July 31, 2004, and August 2, 2003, respectively.

Employee benefit program expense amounted to $417,000, $463,000, and $359,000 in 2005, 2004, and 2003, respectively.

6. INCOME TAXES

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

			2003				2002				2001
		2005				2004				2003
Current expense (benefit)
Federal	~~Federal~~	$	$732	~~1,454~~		$	$971	~~1,729~~		$	$1,399	~~(23~~	)
State	~~State~~		83	~~263~~			227	~~398~~			218	~~294~~
				1,717				2,127				271
			815				1,198				1,617
Deferred expense (benefit)
Federal	~~Federal~~		87	~~(65~~	)		131	~~(369~~	)		(55	~~(549~~)	)
State	~~State~~		15	~~(12~~	)		23	~~(65~~	)		(10	~~(97~~)	)
				(77	)			(434	)			(646	)
		$	917			$	1,352			$	1,552
			$	1,640			$	1,693			$	(375	)

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

			2003				2002				2001
		2005				2004				2003
Depreciation		$	$(16	~~101~~)		$	$201	~~(84~~	)	$	$(39	~~(73~~)	)
Leasing activities				(129	)			(213	)			(173	)
Accrued employee benefits			17				(37	)			18
Accrued employee benefits				18				(92	)			10
Allowances for doubtful accounts			(22	)			35				(31	)
Allowances for doubtful accounts				(46	)			(37	)			37
Inventory			47				(29	)			(29	)
Inventory				(197	)			(3	)			(6	)
State net operating loss carry forward			(6	)			(12	)			(115	)
Contract contingencies				102				(7	)			(255	)
Other			82				(4	)			131
State net operating loss carry forward				(115	)			141				(201	)
Deferred income taxes, expense (benefit)		$	102			$	154			$	(65	)
Other				189				(139	)			15
	Deferred income taxes, expense (benefit)		$	(77	)		$	(434	)		$	(646	)

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

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

~~State~~Deferred ~~net~~tax ~~operating~~liabilities ~~loss~~and ~~carry~~assets ~~forwards~~at ~~will~~each ~~expire~~year-end ~~through~~are ~~fiscal~~as ~~2017.~~follows (in thousands):


	2005			2004
Deferred tax liabilities
Depreciation	$	(98	)	$	(41	)


Total deferred tax liabilities	$	(98	)	$	(41	)


Deferred tax assets
Depreciation		0			0
Accrued employee benefits		182			199
Allowances for doubtful accounts		150			129
Inventory		76			124
State net operating loss carry forward		133			127
Other		208			84

Total deferred tax asset		749			663


Net deferred tax asset	$	651		$	622

State net operating loss carry forwards will expire through fiscal 2019.

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

	2003						2002						2001
	2005						2004						2003
	Amount			Percent			Amount			Percent			Amount			Percent
Tax at U.S. statutory rate	$	~~1,396~~847			34.0	%	$	1,~~451~~549			34.0	%	$	~~(326~~1,356	)		(34.0	)%
State income taxes, net of federal tax benefit		~~259~~157			6.3			~~269~~287			6.3			~~(60~~251	)		(6.3	)
Other - net		(15	)		(0.4	)		(27	)		(0.6	)		11			1.2
Other – net		(87	)		(3.5	)		(484	)		(9.5	)		(55	)		(1.4	)
	$	~~1,640~~917			3936.98	%	$	1,~~693~~352			3930.78	%	$	~~(375~~1,552	)		~~(39~~38.19	)%

Total income tax payments during fiscal years ~~2003~~2005, ~~2002~~2004, and ~~2001~~2003 were approximately $12,~~927~~751,000, $1,~~548~~657,000, and $~~965~~1,861,000, respectively.

87. COMMITMENTS AND CONTINGENCIES

Lease Agreements

The Company leases certain ~~sales~~ offices and equipment under non-cancelable operating leases. Rental expenses on all operating leases were $~~864~~288,000, $~~791~~302,000, and $~~786~~340,000 for fiscal ~~2003~~2005, ~~2002~~2004, and ~~2001~~ 2003. The future minimum annual rental payments under non-cancelable operating leases are as follows (in thousands):

Fiscal Year End:
2004	$	256
2006	$	8
2005		149
2007		4
2006		62
2008		0
2007		49
2009		0
2008		20
2010		0
	$	536
Thereafter
	$	12

The Company leases approximately 34,000 square feet of office and warehouse space to Connected Office Products, Inc. The lease covers a base year period and two one-year option periods. The future minimum lease and facility charge payments are as follows:


	Fiscal
	2006		2007		2008

Lease Payments	$	50,000	$	83,333	$	7,500
Facility Charges	$	56,291	$	56,291	$	4,691

Minority Interest

~~The~~In ~~Company~~connection ~~has entered into a restrictive stock agreement~~ with the ~~minority shareholder~~acquisition of ~~its 99% owned subsidiary,~~ Compsee, Inc. ~~Under~~in ~~the terms of the agreement~~May 1985, the Company ~~has~~entered ~~the~~into ~~right of first refusal to purchase at any time any shares representing the minority interest in the subsidiary at~~ a ~~defined~~ ~~book~~restrictive ~~value~~stock ofagreement ~~said~~with ~~shares.~~Compsee’s ~~The~~1% ~~minority~~ shareholder. ~~has~~Under the ~~right~~terms ~~to sell twenty percent~~ of ~~his~~the ~~shares~~agreement, ~~per~~in June 2004, ~~year to~~ the Company, atpurchased the ~~defined~~remaining ~~book value of such~~ shares, ~~provided~~from the minority shareholder ~~remains employed by the~~for ~~subsidiary~~approximately $85,000.

Concentrations

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments~~, receivables,~~ and ~~capitalized leases~~receivables. 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~~minimal 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~~July 30, 22005, ~~2003,~~12 ~~fifteen~~ customers accounted for 5539% of accounts receivable ~~and five customers accounted for 53% of the net investment in capitalized leases~~.

35Synthetic rubber used in our military boot operations 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. There is only one certified supplier currently that can provide the Vibram rubber outsoles and we are dependent on its ability to supply our needs.

~~Synthetic~~Sales ~~rubber~~to ~~is currently available and purchased from~~ the ~~only domestic supplier~~U.S. ~~Synthetic~~Government ~~rubber~~amounted isto ~~available~~35%, ~~from~~51%, ~~foreign~~and ~~suppliers,~~29% ~~however~~of ~~an exemption~~total ~~would~~consolidated benet ~~required~~revenues from continuing ~~the~~operations ~~Government~~for tofiscal ~~purchase~~2005, ~~synthetic~~2004, ~~rubber~~and ~~in the~~2003, ~~foreign market~~respectively.

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

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

Other

Under the terms of sale to the U.S. Government, the negotiated contract prices of combat boots are subject to renegotiation if certain conditions are present. Management isdoes ofnot ~~the~~currently ~~opinion that~~ expect renegotiation, if any, ~~will~~to have noa material adverse effect on the Company’s consolidated financial position or results of operations.

~~The Company has committed to provide maintenance and supplies (excluding paper) on $25~~8.~~5 million~~ ofSHAREHOLDERS’ ~~office products equipment under certain lease agreements.~~EQUITY Under these lease agreements, customers are charged on a cost per copy basis. The terms of the lease agreements range from three to six years. The copy usage over the lease term should cover the cost of the equipment, supplies, and service. The average cost per copy rate in these lease agreements is approximately $0.02. The Company estimates future revenues and expenses under each agreement. The Company accrues estimated losses on programs where estimated future expenses exceed estimated future revenues

9. SHAREHOLDERS’ EQUITY

Common Stock

~~Each~~The ~~share~~Company’s Bylaws provide for seven directors, two of whom are elected by the holders of the Class A Common Stock isvoting ~~entitled~~as toa ~~one-tenth~~separate ~~vote~~class, and ~~each~~five ~~share~~ of whom are elected by the holders of the Class B Common Stock isvoting ~~entitled~~as toa ~~one~~separate ~~full~~class. ~~vote~~On atall ~~meetings~~other ~~of shareholders,~~matters (except ~~that~~matters ~~Class A~~required ~~shareholders~~by law ~~are~~or ~~entitled~~the toCompany’s ~~elect~~Certificate ~~25%~~of ~~and Class B~~Incorporation ~~shareholders~~or ~~are~~Bylaws ~~entitled~~ to ~~elect~~be ~~75%~~approved ofby ~~the~~a ~~directors.~~different ~~Each~~vote), the ~~share~~holders of Class A Common Stock and Class B Common Stock ~~can~~vote betogether ~~converted~~as toa single class with each share of Class A Common Stock onentitled ato ~~share~~one-tenth ~~for share~~vote ~~basis.~~and ~~All~~each ~~dividends~~share ~~paid~~of on Class B Common Stock ~~must~~entitled ~~also~~to beone ~~paid~~vote. on Each share of Class AB Common Stock incan ~~an equal amount.~~be

~~During fiscal 1999, the Company adopted the McRae Industries, Inc. 1998~~36 Incentive Equity Plan (the Plan). The Plan has reserved 100,000 shares of the Company’s Class A Common Stock for issuance to certain key employees of the Company. At August 2, 2003, there were 100,000 shares available for future grants under the Plan.

10converted to Class A Common Stock on a share for share basis. ~~FINANCIAL~~ ~~INSTRUMENTS~~All dividends are paid on Class B Common Stock must also be paid on Class A Common Stock in an equal amount.

~~All~~During ~~financial~~fiscal ~~instruments~~1999, the Company adopted the McRae Industries, Inc. 1998 Incentive Equity Plan (the Plan). Under the Plan, 100,000 shares of the Company’s Class A Common Stock are ~~held~~reserved orfor issuance ~~issued~~to certain key employees of the Company. At July 30, 2005, there were 100,000 shares available for ~~other~~future ~~than~~grants ~~trading~~under ~~purposes~~the Plan.

9. FINANCIAL INSTRUMENTS

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.

36Split-Dollar Life Insurance: Represents value of the Company’s rights under split-dollar arrangements. Under these arrangements, the Company is entitled to be repaid cumulative premiums paid, or if less, the net cash surrender value of the policies.

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

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

		(In thousands)	~~(In thousands)~~
		Carrying	~~Carrying~~		Fair	~~Fair~~
		Amount	~~Amount~~		Value	~~Value~~
Assets
Cash and cash equivalents	~~Cash and cash equivalents~~	$	$9,238	~~6,192~~	$	$9,238	~~6,192~~
Notes receivable, current and long-term	~~Notes receivable, current and long-term~~		45	~~129~~		45	~~129~~
	Cash surrender value life insurance			2,220			2,220
Amount due from split-dollar life insurance			2,220			2,220
Liabilities
Long and short-term debt	~~Long and short-term debt~~		174	~~3,884~~		174	~~3,884~~

11. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

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

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

12. DISCONTINUED OPERATIONS

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

13. SUBSEQUENT EVENTS

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

~~On September 30, 2003, the Company received a new contract to produce direct molded sole military boots for the U~~10.S. ~~Government.~~SELECTED ~~The~~QUARTERLY ~~Contract covers~~FINANCIAL aDATA ~~base year and two one-year option periods. The Contract base~~(Unaudited) year provides for a minimum boot requirement of 135,102 pair and a maximum boot requirement of 544,778 pair with a minimum and maximum dollar value of approximately $7.4 million and $30.1 million, respectively. The first year option provides for a minimum and a maximum boot requirement of 276,460 pair and 1,077,552 pair, respectively. The second year option ranges from a minimum of 236,460 pair and to a maximum of 852,552 pair.

~~14. OPERATING~~The ~~SEGMENT~~following ~~INFORMATION~~table sets forth quarterly financial information from continuing operations for the years ended July 30, 2005 and July 31, 2004 (in thousands):

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


	First		Second		Third		Fourth
July 30, 2005

Net revenues		20,434		15,525		12,768		13,677
Gross profit		4,592		3,763		3,011		3,357
Operating income from continuing operations		1,212		663		294		288
Net earnings from continuing operations		807		484		143		140
Net earnings per common share
Basic – Class A		.48		.33		.15		.15
Basic – Class B		0		0		0		0
Diluted – Class A		.33		.23		.11		.11
Diluted – Class B	NA		NA		NA		NA

July 31, 2004

Net revenues	$	16,023	$	14,896	$	17,584	$	21,993
Gross profit		4,016		2,941		3,105		4,922
Operating income from continuing operations		1,265		172		704		2,230
Net earnings from continuing operations		823		126		479		1,778
Net earnings per common share:
Basic – Class A		.49		.13		.31		.97
Basic – Class B		0		0		0		0
Diluted – Class A		.34		.09		.21		.68
Diluted – Class B	NA		NA		NA		NA

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

11. DISCOUNTINUED OPERATIONS

On September 9, 2004, McRae Industries, Inc. entered into a definitive agreement under which it sold substantially all the assets of its McRae Office Solutions, Inc. subsidiary to Connected Office Products, Inc. (COPI). Under the terms of the Asset Purchase Agreement, COPI purchased substantially all of the assets of McRae Office Solutions, Inc. for $10,794,000. On September 9, 2004, we received $9.9 million of the purchase price and on September 9, 2005, we received a payment in the amount of $912,000 which was comprised of the balance due of $894,000 and the addition of accrued interest of $18,000.

As of July 31, 2004, McRae Industries, Inc. met the criteria for reporting the pending sale of the assets of McRae Office Solutions, Inc. subsidiary as an asset held for sale and discontinued operations per Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), and has accounted for the discontinued operations as such.

The assets and liabilities of discontinued operations included in assets held for sale and liabilities held for sale at July 31, 2004, represent the assets and liabilities of the Company’s McRae Office Solutions, Inc. business and are as follows:

McRAE INDUSTRIES, INC. AND SUBSIDIARIES


	(In thousands)
	July 30,		July 31,
	2005		2004
ASSETS

Current assets:

Cash and cash equivalents		—	$	1,371

Accounts and note receivable		—		1,358

Inventories (net)		—		4,602

Current portion of lease receivable		—		61

Prepaid expenses		—		70


Total current assets		—		7,462

Property and equipment, net		—		2,272

Long term portion of net lease receivable and guaranteed Residuals		—		1,881

Other assets		—		7


Assets held for sale		—	$	11,622

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS


	(In thousands)
	July 30,		July 31,
	2005		2004
LIABILITIES

Current liabilities:

Accounts payable		—	$	1,584
Contract contingencies		—		291

Accrued payroll and payroll taxes		—		10
Other accrued liabilities		—		139


Total current liabilities		—		2,024

Lease guarantees		—		1,817

Deferred service revenue		—		746


Liabilities held for sale		—	$	4,587

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

Net revenues for McRae Office Solutions, Inc. for the fiscal year ended July 30, 2005, July 31, 2004, and August 2, 2003, were $1.3 million, $23.9 million, and $22.5 million, respectively. Earnings (loss) from operations for these same periods totaled ($491,000), ($111,000), and $231,000, respectively.

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


	(In thousands)
	Fiscal Year Ended
	2005			2004			2003

Net revenues	$	1,293		$	23,873		$	22,541
Gross profit		141			6,023			5,982
Selling, general and administrative expense		632			6,134			5,751
Operating loss (profit)		(491	)		(111	)		231

12. SUBSEQUENT EVENTS

On June 10, 2005, our Board of Directors approved a 1-for-200 reverse stock split, to be followed immediately by a 200-for-1 forward stock split, of the outstanding shares of both classes of our common stock (Class A and Class B). The purpose of the transaction is to reduce the number of record holders of each class of our common stock (Class A and Class B) to fewer than 300, thereby enabling the Company to terminate registration of the common stock under the Securities Exchange Act of 1934 and eliminating the significant expense required to comply with the reporting and other requirements thereunder.

Pursuant to the transaction, stockholders holding fewer than 200 shares of the Company’s common stock of a particular class immediately before the transaction would have such shares cancelled and converted into the right to receive from the Company a cash payment of $14.25 for each such share owned before the reverse stock split. Stockholders holding 200 or more shares of the Company’s common stock of a particular class immediately before the transaction would continue to hold the same number of shares of that class after completion of the transaction and would not receive any cash payment for their shares of that class.

The Board of Directors created a special committee of non-employee, independent directors to review the proposed transaction. The special committee received an opinion from its financial advisor, Oxford Advisors, LLC, that the cash consideration to be paid in the proposed transaction is fair, from a financial point of view, to the Company’s stockholders.

On August 17, 2005, our western boot business, Dan Post Boot Company, entered into a license agreement with John Deere Shared Services, Inc., a subsidiary of Deere and Company. The initial term of the agreement terminates on April 30, 2009, but provides for successive two-year periods. The agreement grants us the non-exclusive right to distribute and sell footwear products utilizing the “Deere” name and marks.

On September 9, 2005, the Company declared a cash dividend of $.08 per share of its Class A Common Stock payable on September 30, 2005 to shareholders of record on September 19, 2005.

On September 9, 2005 we received the hold back amount due from Connected Office Products, Inc. (COPI), a subsidiary of TOPAC U.S.A., Inc. for the sale of our office products business. The Company received a payment in the amount of $912,000, which was comprised of the balance due of $894,000 and the addition of accrued interest of $18,000. The operating results of the office products business segment have been classified as a discontinued operation for all periods presented in the Company’s consolidated financial statements included in this Report.

On September 23, 2005, the Government exercised the second year option of the contract (the Contract) awarded on September 30, 2003. This option provides for the purchase of a minimum quantity of military boots totaling 48,067 pair. While the Government is only obligated to this minimum quantity, we expect the actual boot requirements for fiscal 2006 to be substantially larger than the stated minimum level based on unofficial governmental scheduling guidance.

13. RELATED PARTY TRANSACTIONS

The Company leases administrative and sales office space in Clarksville, Tennessee for the western boot business from Ken O. Moore, who is the President of Dan Post Boot Company. The annual rental is $52,800 per year, which is comparable to other similar properties in that area.

14. OPERATING SEGMENT INFORMATION

The Company’s principal operations have been classified into three business segments: bar code operations, military boot operations, and western and work boot operations. The bar code operation 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 military boot operation manufactures combat boots for the U.S. Government and foreign governments. The western and work boot operation imports products for customers throughout the United States. Total consolidated revenues related to sales to the U.S. Government were 35% in 2005, 51% in 2004, and 29% in 2003 of total consolidated revenues from continuing operations. There were no significant inter-segment sales or transfers during 2005, 2004, and 2003. Operating profits by business segment exclude allocated corporate interest income, income taxes, minority interest, and equity in net loss of investee, which are reported as part of the corporate and other segments. Corporate assets consist principally of cash, short-term investments, certain receivables, and real estate held for investment.

Our office products operation was sold on September 9, 2004. As a result, this segment is reported as a discontinued operation and is not included in this table.


			Western/
	Military		Work			Bar			Corporate
	Boots		Boots			Code			& Other			Consolidated
For the year Ended July 30, 2005

Net revenues	$	26,827	$	23,618		$	11,633		$	326		$	62,404
Operating profit (loss) from continuing Operations		1,263		2,640			(1,587	)		141			2,457
Identifiable assets		4,577		18,305			5,584			14,707			43,173
Capital Expenditures		24		68			87			14			193
Depreciation expense and amortization		247		100			103			119			569
Income tax provision (benefit)		455		750			(558	)		270			917

For the Year Ended July 31, 2004

Net revenues	$	40,104	$	20,169		$	10,875		$	(652	)	$	70,496
Operating profit (loss) from continuing Operations		5,147		349			(1,097	)		(28	)		4,371
Identifiable assets		12,902		13,396			4,810			18,440			49,548
Capital Expenditures		1,097		101			120			52			1,370
Depreciation expense and amortization		161		154			59			156			530
Income tax provision (benefit)		1,978		(96	)		(379	)		(151	)		1,352

For the Year Ended August 2, 2003

Net revenues	$	22,272	$	22,618		$	9,776		$	(165	)	$	54,501
Operating profit (loss) from continuing Operations		3,775		1,193			(1,536	)		129			3,561
Identifiable assets		6,328		14,214			4,987			20,620			46,149
Capital Expenditures		84		84			52			29			249
Depreciation expense and amortization		81		162			191			180			614
Income tax provision (benefit)		1,446		192			(531	)		445			1,552

15. RESTATEMENT OF FINANCIAL STATEMENTS

The financial statements for the year ended July 31, 2004 have been restated to correct compilation errors in the military boot operations year-end physical inventory. The effect of the compilation errors resulted in the following changes as of July 31, 2004:


	As
	Previously		As
	Reported		Restated

Balance Sheet

Inventories	$	15,739	$	14,810
Income tax receivable		364		676
Accrued employee benefits		607		524
Retained earnings		31,123		30,589
Statement of Operations:

Cost of revenues		54,563		55,512
Gross profit		15,933		14,984
Selling, general & administrative expenses		10,716		10,613
Earnings from continuing operations before income taxes And minority interest		5,402		4,556
Provision for income taxes		1,664		1,352
Net earnings from continuing operations		3,740		3,206
Net earnings		3,543		3,009
Earnings per share:
Earnings per common share from continuing operations:
Basic earnings per share:
Class A		2.18		1.90
Class B		0		0
Diluted earnings per share:
Class A		1.52		1.32
Class B		NA		NA
Net earnings per common share:
Basic earnings per share:
Class A		2.07		1.80
Class B		0		0
Diluted earnings per share:
Class A		1.45		1.25
Class B		NA		NA

McRAE INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS


			ADDITIONS
			CHARGED			CHARGED TO
	BALANCE AT		TO COSTS			OTHER						BALANCE AT
	BEGINNING		AND			ACCOUNTS –			DEDUCTIONS –			END OF
DESCRIPTION	OF PERIOD		EXPENSES			DESCRIBE			DESCRIBE			PERIOD
Year ended July 30, 2005
Allowance for Doubtful Accounts		339,000		33,000			570,000	(4)		(208,000	)(1)		734,000
Allowance for Inventory Write- downs		325,000		(124,000	)								201,000
Employee Benefit Accrual		524,000		417,000			13,000	(3)		(474,000	)(2)		480,000
Health Insurance Accrual		270,000		(43,000	)								227,000
Year ended July 31, 2004
Allowance for Doubtful Accounts	$	431,000	$	314,000					$	(406,000	)(1)	$	339,000
Allowance for Inventory Write- downs		250,000		75,000						—			325,000
Employee Benefit Accrual		427,000		463,000		$	10,000	(3)		(376,000	)(2)		524,000
Health Insurance Accrual		200,000		70,000									270,000
Year ended August 2, 2003
Allowance for Doubtful Accounts	$	349,000	$	87,000					$	(5,000	)(1)	$	431,000
Allowance for Inventory Write- downs		175,000		75,000						—			250,000
Employee Benefit Accrual		474,000		359,000		$	(55,000	)(3)		(351,000	)(2)		427,000
Health Insurance Accrual		225,000		(25,000	)					—			200,000


(1)		Uncollectible accounts written off

(2)		Payments and/or expenses charged to operations

(3)		Changes related to discontinued operations

(4)		Includes an allowance for purchased accounts receivable ($338,000) and an allowance for sales returns ($232,000)

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

Not applicable.

ITEM 9A. ~~DISCLOSURE~~ CONTROLS AND PROCEDURES

~~Under~~We ~~the~~maintain ~~supervision~~disclosure controls and ~~with~~procedures ~~the~~designed ~~participations~~to ofprovide ~~our~~reasonable ~~management,~~assurance ~~including~~that ~~the~~information ~~Chief~~required ~~Executive~~to ~~Officer~~be ~~and~~disclosed ~~Vice~~by ~~President~~us ofin ~~Finance,~~reports that we ~~have~~file ~~evaluated~~ under the ~~effectiveness~~Securities and Exchange Act of 1934 (the ~~design~~“Exchange Act”) is recorded, processed, summarized, and ~~operation~~reported, ofwithin the ~~our~~time ~~disclosure~~periods ~~controls~~specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures, as ofdefined ~~the~~in ~~end~~Rules 13a-15(e) ofand 15d-15(e) under the ~~period~~Exchange ~~covered~~Act, include bycontrols ~~this~~and ~~report.~~procedures ~~Based~~designed onto ensure that information required to be disclosed by the ~~evaluation,~~Company in the ~~Chief~~reports ~~Executive~~we ~~Officer~~file ~~and~~or ~~Vice~~submit ~~President~~under ofthe ~~Finance~~Exchange ~~have~~Act is accumulated and communicated to ~~concluded~~our ~~that~~Company’s ~~these~~management, ~~disclosure~~including ~~controls~~our Chief Executive Officer and ~~procedures~~Vice ~~are~~President ~~effective.~~of ~~There~~Finance, as ~~were~~appropriate, noto ~~changes~~allow intimely ~~our~~decisions ~~internal~~regarding ~~control~~required ~~over~~disclosure. ~~financial~~It ~~reporting~~should be noted that ~~occurred~~any ~~during~~system ~~the~~of ~~fourth~~controls, ~~quarter~~however ofwell ~~fiscal~~designed ~~2003~~and ~~that~~operated, ~~have~~can ~~materially~~provide ~~affected~~only reasonable, orand not ~~reasonably~~absolute, ~~likely~~assurance tothat ~~materially~~the ~~affect,~~objectives ~~our~~of ~~internal~~the ~~control~~system ~~over~~are ~~financial reporting~~met.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Vice President of Finance, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, for the reasons discussed below, the Chief Executive Office and Vice President of Finance concluded that these disclosure controls and procedures were not effective at the reasonable assurance level at such time.

We have performed substantial additional procedures in an effort to ensure that these internal control deficiencies do not lead to further material misstatements in our consolidated financial statements and to enable the completion of the independent auditor’s audit of our consolidated financial statements. We have initiated corrective actions to address these internal control deficiencies, and will continue to evaluate the effectiveness of our disclosure controls and internal controls and procedures on an ongoing basis, taking corrective action as appropriate.

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEMS 10-1314.

Items 10 through 1314 are incorporated herein by reference to the sections captioned “PRINCIPAL STOCKHOLDERS AND ~~HOLDINGS~~HOLDING OF MANAGEMENT,” “ELECTION OF DIRECTORS,” “DIRECTOR COMPENSATION,” “EXECUTIVE OFFICERS,” “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION,” “EQUITY PLAN ~~COMPENSATION~~ COMPENSATION INFORMATION,” “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,” “EXECUTIVE COMPENSATION,” “STOCK PERFORMANCE GRAPH,” “COMPENSATION COMMITTEE REPORT,” “SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,” ~~and~~ “~~CODE~~CODES OF ETHICS” and “RATIFICATION OF APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS” in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held December 1815, ~~2003~~2005.

4045

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:

(a) (1) Report of Independent Registered Public Accounting Firm McRae Industries, Inc. and Subsidiaries consolidated financial statements:

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

		Consolidated Balance Sheets as of July 30, 2005 and July 31, 2004.

		Consolidated Statements of Operations for the Years Ended July 30, 2005, July 31, 2004, and August 2, 2003.

		Consolidated Statements of Shareholders’ Equity for the Years Ended July 30, 2005, July 31, 2004, and August 2, 2003.

		Consolidated Statements Cash Flows for the Years Ended July 30, 2005, July 31, 2004, and August 2, 2003.

		Notes to Consolidated Financial Statements.

(2)		Financial Statement Schedule:

		Schedule II

(3)		Exhibits:

3.1		Certificate of Incorporation (Filed as Exhibit 3.1 to the Registrant’s Form S-14, Registration N.2-85908).

3.2		Amendment to the Certificate of Incorporation (Filed as 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 (Filed as 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 (Filed as 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 (Filed as 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, Williams Glover, and McRae Industries, Inc., (Filed as Exhibit 2 to the Registrant’s current report on Form 8-K field May 11, 1996).

10.4		Split Dollar Life Insurance Arrangement (Filed as Exhibit 10.10 to the Registrant’s Form 10-K for the fiscal year ended August 3, 2002).*

10.5		Award/Contract between Defense Personnel Support Center and McRae Industries, Inc., dated April 15, 1997 (Filed as Exhibit 10.8 to the Registrant’s Form 10-K for the fiscal year ended August 2, 1997).

10.6		Asset Purchase Agreement among the Company, McRae Office Solutions, Inc., TOPAC U.S.A., Inc., and Connected Office Products, Inc. dated September 9, 2004 (Filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed September 9, 2004).

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

3.1		Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form S-14, Registration N. 2-85908).
10.7		Award/Contract between Defense Supply Center Philadelphia and McRae Industries, Inc. dated September 30, 2003. (Filed as Exhibit 10.8 to the Registrant’s Form 10-K for the fiscal year ended August 2, 2003).
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).
10.8		Asset Purchase Agreement between McRae Industries, Inc. and Texas Boot, Inc. (Filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed June 29, 2005).
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).
21.		Subsidiaries of the Registrant (Filed herein). Page 50.
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).*
23.		Consent of Independent Registered Public Accounting Firm (Filed herein). Page 51.
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).
31.1		Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President and CEO (Filed herein). Page 52.
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.
31.2		Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice President of Finance (Filed herein). Page 53.
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).
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), for D. Gary McRae, President and CEO (Filed herein). Page 54.
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), for Marvin G. Kiser, Sr., Vice President of Finance (Filed herein). Page 55.

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


*		Denotes a management contract or compensatory plan or arrangement.

~~(b) Reports on Form 8-K: We did not file any reports on Form 8-K during the last quarter of fiscal 2003.~~47

SIGNATURES

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


	McRAE INDUSTRIES, INC.
Dated: October 28, 2005	By:	/s/ D. Gary McRae
		D. Gary McRae
		President

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

Pursuant to the requirements of the Securities and 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:

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


SIGNATURE		DATE

/s/ D. Gary McRae President, Treasurer, and Director (Principal Executive Officer)		October 28, 2005
/s/ William H. Swan William H. Swan Director		October 28, 2005
/s/ Hilton J. Cochran Hilton J. Cochran Director		October 28, 2005
/s/ Brady W. Dickson Brady W. Dickson Director		October 28, 2005
/s/ Victor A. Karam Victor A. Karam President – McRae Footwear and Director		October 28, 2005
/s/ James W. McRae James W. McRae Vice President, Secretary, and Director		October 28, 2005
/s/ Marvin G. Kiser, Sr. Marvin G. Kiser, Sr. Vice President of Finance and Director (Principal Financial and Accounting Officer)		October 28, 2005

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

EXHIBIT INDEX

3.1		Certificate of Incorporation (~~Incorporated~~Filed byas ~~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~~Filed byas ~~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~~Filed byas ~~reference to~~ Exhibit 3.3 to the Registrant’s ~~Form~~For 10-K for the fiscal year ended July 28, 2001).
10.1		1985 McRae Industries, Inc. Non-Qualified Stock Option Plan (~~Incorporated~~Field byas ~~reference to~~ Exhibit 10 to the Registrant’s Form 10-K for the fiscal year ended ~~August~~July 328, ~~1985~~2001).*
10.2		Technical Assistance Agreement dated September 13, 1984 between the Registrant and Ro-Search, Incorporated (~~Incorporated~~Filed byas ~~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~~Williams Glover, and McRae Industries, Inc., ~~was~~(Filed ~~filed~~ as Exhibit 2 to the Registrant’s current report on Form 8-K ~~filed~~field May 11, 1996 ~~and is incorporated herein by reference~~).
10.4		~~Promissory~~Split ~~Note,~~Dollar ~~Security~~Life ~~Agreement~~Insurance ~~and~~Arrangement ~~Guaranty~~(Filed ~~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 10.510 to the Registrant’s Form 10-K for the fiscal year ended August 3, ~~1996~~2002).*
10.5		~~Deed~~Award/Contract ~~of Trust~~ between ~~American~~Defense ~~West~~Personnel ~~Trading~~Support ~~Company~~Center and ~~The~~McRae ~~Fidelity~~Industries, ~~Bank~~Inc., dated ~~July~~April 2515, ~~1996~~1997 (~~Incorporated~~Filed byas ~~reference to~~ Exhibit 10.68 to the Registrant’s Form 10-K for the fiscal year ended August 32, ~~1996~~1997).
10.6		~~Security~~Asset Purchase Agreement ~~pertaining~~among tothe ~~inventory~~Company, ~~accounts~~McRae ~~receivable~~Office ~~and~~Solutions, ~~equipment~~Inc., ~~between~~TOPAC ~~American~~U.S.A., ~~West~~Inc., ~~Trading Company~~ and ~~The~~Connected ~~Fidelity~~Office ~~Bank~~Products, Inc. dated ~~July~~September 259, ~~1996~~2004 (~~Incorporated~~Filed byas ~~reference to~~ Exhibit 102.71 to the Registrant’s Current Report on Form 108-K ~~for~~filed ~~the~~September ~~fiscal year ended August 3~~9, ~~1996~~2004).
10.7		~~Split~~Award/Contract ~~Dollar~~between ~~Life~~Defense ~~Insurance~~Supply ~~Arrangement~~Center ~~(Incorporated~~Philadelphia byand ~~reference~~McRae toIndustries, Inc. dated September 30, 2003. (Filed as Exhibit 10.108 to the Registrant’s Form 10-K for the fiscal year ended August 32, ~~2002~~2003).
10.8		~~Award/Contract~~Asset ~~between~~Purchase ~~Defense~~Agreement ~~Supply~~between ~~Center Philadelphia and~~ McRae Industries, Inc. ~~dated~~and ~~September~~Texas 30Boot, ~~2003~~Inc. (Filed ~~herein)~~as Exhibit 2.1 ~~Pages~~to 45the Registrant’s Current Report on Form 8-51K filed June 29, 2005).
21		Subsidiaries of the Registrant (Filed herein). Page 52.
21.		Subsidiaries of the Registrant (Filed herein). Page 50.
23		Consent of Independent Auditors (Filed herein). Page 53.
23.		Consent of Independent Registered Public Accounting Firm (Filed herein). Page 51.
31.1		Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President and CEO (Filed herein). Page 54.
31.3		Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President and CEO (Filed herein). Page 52.
31.2		Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice President of Finance (Filed herein). Page 55.
31.4		Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice President of Finance (Filed herein). Page 53.
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), for D. Gary McRae, President and CEO (Filed herein) Page 56.
32.3		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), for D. Gary McRae, President and CEO (Filed herein). Page 54.
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), for Marvin G. Kiser, Sr., Vice President of Finance (Filed herein). Page 57.
32.4		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), for Marvin G. Kiser, Sr., Vice President of Finance (Filed herein). Page 55.

44 * Denotes a management contract or compensatory plan or arrangement.

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