UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1)

McRAE INDUSTRIES, INC.

Payment of Filing Fee (Check the appropriate box):

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McRAE INDUSTRIES, INC.
400 North Main Street
Mount Gilead, North Carolina 27306

August __, 2005

Dear Stockholder:

     You are cordially invited to attend a Special Meeting of Stockholders of McRae Industries, Inc. (the “Company”) on September ___, 2005, at ___:___a.m., at our corporate office at 400 North Main Street, Mount Gilead, North Carolina. We look forward to greeting those stockholders who are able to attend. Enclosed herewith are the Notice of Special Meeting and the Proxy Statement addressing the purposes of the Special Meeting and soliciting, on behalf of the board of directors, proxies from holders of the Company’ s Class A and Class B common stock in respect of a proposed reverse/forward stock split.

     At this meeting or by your proxies, you will be asked to vote on a proposal that, if approved, would amend the Company’s Certificate of Incorporation to provide for a 200-for-1 reverse stock split immediately followed by a 200-for-1 forward stock split, as a result of which stockholders owning less than 200 shares of a class of common stock (Class A or Class B) would have such shares cancelled and converted into the right receive $14.25 in cash for each such share owned before the reverse stock split. Stockholders owning 200 or more shares of a class of common stock would continue to hold the same number of shares of such class after the transaction. 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 federal Securities Exchange Act of 1934 and eliminating the significant expense required to comply with the reporting and other requirements thereunder. In connection with the deregistration, the common stock would be delisted from the American Stock Exchange, although we believe the common stock would be quoted on the “pink sheets” and our remaining stockholders would continue to be able to trade their shares in the over-the-counter markets or private transactions.

     After careful consideration, the board of directors has concluded that in view of the common stock’s limited trading activity and the relatively small stockholder base holding more than 200 shares of a class of the common stock, the benefits of being an SEC reporting company do not justify the associated costs, especially in light of the additional costs associated with compliance with the Sarbanes-Oxley Act of 2002. We estimate the transaction would save approximately $636,000 annually. We believe that these cost-savings would be in the best interests of the Company and its continuing stockholders. In addition, the transaction would allow our stockholders who hold fewer than 200 shares of a particular class of common stock immediately before the transaction the opportunity to receive cash consideration of $14.25 for each share of such class of common stock held before the transaction, representing a premium to the common stock’s trading price prior to announcement of the transaction, without having to pay brokerage commissions and other transaction costs.

     A special committee of the board of directors and the board of directors both have reviewed the proposed transaction and considered its fairness to stockholders who hold fewer than 200 shares of a particular class of common stock as well as those holding 200 or more shares of a particular class of common stock, and have received an opinion from their financial advisor with regard to the fairness of the proposed transaction from a financial point of view.

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS: APPROVED OR DISAPPROVED OF THE TRANSACTION; PASSED UPON THE MERITS OR FAIRNESS OF THE TRANSACTION; OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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     After considering the recommendation of the special committee and conducting its own deliberations of the issues it deemed pertinent, including alternatives to the transaction, the cost and benefits of remaining an SEC reporting company and the fairness of the transaction to stockholders, your board of directors believes this transaction is in the best interests of the Company and its stockholders and unanimously recommends that you vote “FOR” the proposal.

     The enclosed Proxy Statement includes a discussion of the alternatives and factors considered by the special committee and the board of directors in connection with their approval of the transaction. See “Special Factors — Background of the Transaction,” “Special Factors - Recommendation of the Special Committee” and “Special Factors — Recommendation of the Board of Directors.”

     Consummation of the transaction is subject to certain conditions, including the affirmative vote of holders of a majority of the outstanding shares of each class of common stock entitled to vote at the Special Meeting. If approved, it is anticipated that the transaction will become effective soon after the Special Meeting. However, the board of directors has reserved the right to defer or abandon (and not implement) the transaction, even if the stockholders have approved and authorized the transaction, if the board of directors determines that the transaction is not then in the best interests of the Company and its stockholders. The authority to implement the transaction, if not previously implemented, will expire on December 31, 2005. Details of the proposed transaction are set forth in the accompanying proxy statement, which we urge you to read carefully in its entirety.

     IT IS VERY IMPORTANT THAT YOUR SHARES ARE REPRESENTED AND VOTED AT THE MEETING, WHETHER OR NOT YOU PLAN TO ATTEND. ACCORDINGLY, PLEASE SIGN, DATE AND RETURN YOUR PROXY FOR EACH CLASS OF SHARES YOU OWN IN THE ENCLOSED ENVELOPE AT YOUR EARLIEST CONVENIENCE.

     Your interest and participation in the affairs of the Company are greatly appreciated. Thank you for your continued support.

Sincerely,

/s/ D. Gary McRae
D. Gary McRae
Chairman of the Board and President

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McRAE INDUSTRIES, INC.
400 North Main Street
Mount Gilead, North Carolina 27306

NOTICE TO STOCKHOLDERS OF SPECIAL MEETING
TO BE HELD SEPTEMBER __, 2005

To the Stockholders of McRae Industries, Inc.:

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the “Special Meeting”) of McRae Industries, Inc. (the “Company”) will be held on September __, 2005, at __:__ a.m., local time, at the offices of the Company located at 400 North Main Street, Mount Gilead, North Carolina, for the following purposes:

     The Board of Directors has fixed the close of business on July 11, 2005 as the record date for the stockholders entitled to notice of and to vote at the meeting or any adjournment thereof and only holders of Class A or Class B shares of record at such date are entitled to notice of and to vote at the Special Meeting. If your shares are held in the name of a broker, trust or other nominee (often referred to as held in “street name”), you must instruct them on how to vote your shares.

By Order of the Board of Directors

/s/ James W. McRae

James W. McRae
Secretary

August __, 2005

IMPORTANT

WHETHER YOU EXPECT TO ATTEND THE MEETING OR NOT, PLEASE VOTE, SIGN, DATE, AND RETURN THE ENCLOSED PROXIES, AS APPLICABLE, IN THE ENCLOSED SELF-ADDRESSED ENVELOPE AS PROMPTLY AS POSSIBLE. IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON, EVEN THOUGH YOU PREVIOUSLY SIGNED AND RETURNED A PROXY.

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McRAE INDUSTRIES, INC.
400 North Main Street
Mount Gilead, North Carolina 27306

PROXY STATEMENT FOR
2005 SPECIAL MEETING OF STOCKHOLDERS

INTRODUCTION

     This Proxy Statement is furnished to the stockholders of McRae Industries, Inc. (the “Company”) in connection with the solicitation by the board of directors of the Company of the accompanying proxies to be used at a Special Meeting of Stockholders (the “Special Meeting”) to be held on September ___, 2005, at ___:___a.m., Eastern Time at the Company’s principal office, 400 North Main Street, Mount Gilead, North Carolina. This document provides you with detailed information about the proposed transaction. Please see “Where You Can Find More Information” for additional information about the Company on file with the Securities and Exchange Commission.

     The cost of preparing, assembling and mailing the enclosed proxy material and of reimbursing brokers, nominees, and fiduciaries for the out-of-pocket and clerical expenses of transmitting copies of the proxy material to the beneficial owners of shares held of record by such persons will be borne by the Company. The Company does not intend to solicit proxies otherwise than by use of the mail, but certain officers and regular employees of the Company or its subsidiaries, without additional compensation, may use their personal efforts, by telephone or otherwise, to obtain proxies.

     A stockholder signing and returning a proxy on one of the enclosed forms has the power to revoke it, at any time before the shares subject to it are voted, by filing with the Secretary of the Company an instrument revoking it, by filing a duly executed proxy bearing a later date with the Secretary of the Company, or by attending the meeting and voting in person.

     All shares represented by properly executed proxies received by the board of directors pursuant to this solicitation will be voted in accordance with the stockholder’s directions specified on the proxy or, in the absence of specific instructions to the contrary, will be voted in accordance with the board of directors’ unanimous recommendation, which is:

FOR amendments to the Company’s Certificate of Incorporation to effect a 1-for-200 reverse stock split of the Company’s outstanding common stock, immediately followed by a 200-for-1 forward stock split of the Company’s then outstanding common stock, with stockholders holding less than 200 shares of a particular class of common stock before the reverse stock split having their resulting fractional share interests cancelled and converted into the right to receive $14.25 in cash for each of such pre-split shares of that class, (the “transaction”); and

FOR authorization of the adjournment of the Special Meeting to a later date, if in the discretion of the Board of Directors such adjournment is necessary to allow additional time to solicit sufficient proxies to obtain stockholder approval of the transaction.

     This Proxy Statement and the accompanying proxies were first mailed to stockholders on or about August ___, 2005.

TABLE OF CONTENTS

SUMMARY TERM SHEET

THIS SUMMARY TERM SHEET HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT, INCLUDING THE MATERIAL TERMS OF THE PROPOSED TRANSACTION. FOR A MORE COMPLETE DESCRIPTION YOU SHOULD CAREFULLY READ THIS PROXY STATEMENT AND ALL OF ITS APPENDICES BEFORE YOU VOTE.

AS USED IN THIS PROXY STATEMENT, THE “COMPANY,” “WE,” “OUR,” “OURS” AND “US” REFER TO McRAE INDUSTRIES, INC., A DELAWARE CORPORATION, AND THE “TRANSACTION” REFERS TO THE 1-FOR-200 REVERSE STOCK SPLIT AND THE 200-FOR-1 FORWARD STOCK SPLIT, TOGETHER WITH THE RELATED CASH PAYMENTS TO STOCKHOLDERS HOLDING FEWER THAN 200 SHARES OF A PARTICULAR CLASS IMMEDIATELY PRIOR TO THE REVERSE STOCK SPLIT. UNLESS OTHERWISE NOTED TO THE CONTRARY, REFERENCES TO “COMMON STOCK” OR “SHARES” MEANS SHARES OF THE COMPANY’S CLASS A COMMON STOCK AND CLASS B COMMON STOCK, AND REFERENCES TO “CLASS” MEAN EITHER CLASS A OR CLASS B SHARES.

The Transaction

     If the transaction is approved and completed:

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Vote Required

Interests of D. Gary McRae and James W. McRae in the Transaction

     The transaction requires the affirmative vote of holders of a majority of the outstanding shares of each class of common stock. As of the record date, D. Gary McRae and James W. McRae, each of whom is a director and executive officer of the Company, collectively beneficially own, directly and indirectly, 802,244 Class A shares, or approximately 35.8% of the outstanding Class A shares entitled to vote at the Special Meeting, and 323,711 Class B shares, or approximately 61.3% of the outstanding Class B shares entitled to vote at the Special Meeting. As a result, at the Special Meeting D. Gary McRae and James W. McRae will control a

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significant portion of the Class A vote and a majority of the Class B vote. D. Gary McRae and James W. McRae have indicated that they intend to vote “FOR” the approval of the transaction.

No Appraisal or Dissenters’ Rights

     Stockholders do not have appraisal or dissenters’ rights under Delaware state law or our Certificate of Incorporation or Bylaws in connection with the transaction.

Purpose and Reasons for the Transaction

     If approved, the transaction will enable us to terminate our registration as a Securities and Exchange Commission (“SEC”) reporting company and our obligations to file annual and periodic reports and make other filings with the SEC. The reasons for the proposed transaction and subsequent termination of SEC registration include:

     Please see “Special Factors — Purpose and Reasons for the Transaction” for further discussion of this topic.

Disadvantages of the Transaction

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Recommendations of the Special Committee and the Board of Directors

Fairness Opinion of the Financial Advisor

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Conditions to Completion of the Transaction

Source of Funds; Financing of the Transaction

     We estimate that the total funds required to pay the consideration to stockholders entitled to receive cash for their shares and to pay the costs of the transaction would be approximately $950,000. We would expect to pay these amounts out of our existing cash reserves. Please refer to the section below entitled “Special Factors — Source of Funds; Financing of the Transaction” for a further description of our financing of the transaction.

Conflicts of Interest of Directors and Management

     Our directors and executive officers may have interests in the transaction that are different from your interests as a stockholder, and have relationships that may present conflicts of interest, including the following:

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          See “Special Factors — Interests of Executive Officers and Directors,” “Security Ownership of Principal Stockholders” and “Security Ownership of Directors and Executive Officers” for further description.

Treatment of Shares Held in “Street Name”

Exchange of Certificates; Payment of Cash Consideration

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U.S. Federal Income Tax Consequences

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QUESTION AND ANSWERS ABOUT THE SPECIAL MEETING AND TRANSACTION

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SPECIAL FACTORS

Background of the Transaction

Board Deliberations

     In the fall of 2004, in connection with their consideration of the costs and burdens of complying with our year-end reporting requirements, D. Gary McRae and Marvin Kiser, the Company’s President and Vice President of Finance, respectively, decided to make an assessment of the relative costs and benefits of being a public company subject to SEC reporting and other requirements, and to investigate with our outside counsel, Kennedy Covington Lobdell & Hickman, L.L.P., the possible implementation of a “going private” transaction. Having then recently completed the Company’s fiscal year-end auditing and reporting process, D. Gary McRae and Marvin Kiser observed that the benefits of being a public company might not justify the associated costs and burdens, including the considerable burdens associated with the Sarbanes-Oxley Act of 2002, in light of the relatively small trading volume of our common stock and the relatively small stockholder base holding more than 200 shares of a class of the common stock.

     At a board meeting on December 14, 2004, at which all members of the board were present, D. Gary McRae and Marvin Kiser and outside counsel discussed with the board the costs and benefits of remaining a public company, various structures for “going private” and ceasing to be subject to the reporting and other requirements of a public reporting company, and the advantages and disadvantages of those various alternatives, including the matters discussed below under “Special Factors – Purpose and Reasons for the Transaction.” For various reasons discussed in more detail under “Special Factors – Alternatives Considered” below, the board focused on the possibility of a reverse stock split and asked D. Gary McRae and Marvin Kiser to further explore this alternative and to make further investigation of both the cost savings that might be achieved by “going private” and the effect of “going private” on the liquidity of the common stock.

     During early 2005, D. Gary McRae discussed with various stockbrokers the relative liquidity that would be provided for shares of common stock were they traded as non-public company securities in the over-the-counter market and quoted in the “pink sheets,” rather than traded on the American Stock Exchange. Marvin Kiser, Vice President of Finance, also began to refine his estimates of the potential cost savings of “going private.” D. Gary McRae and Marvin Kiser obtained from counsel information about transactions by other companies involving going private reverse stock splits, and particularly reviewed transactions using the technique of a reverse stock split followed immediately by a forward stock split, in which only share holdings below a certain number were converted to cash, as upheld by the Delaware Supreme Court in a 2002 decision. That technique is the technique proposed in this transaction.

     At a board meeting on March 7, 2005, at which all members of the board were present, the board discussed with D. Gary McRae and Marvin Kiser their further investigations and findings, including refined cost estimates for conducting a “going private” transaction, potential market liquidity for our common stock after such a transaction, and potential post-transaction savings to us. Subsequently, the board unanimously authorized D. Gary McRae and Marvin Kiser to develop one or more proposals for a “going private” transaction to be presented to and considered by the board.

     After consulting with counsel and developing a timetable for a “going private” transaction, D. Gary McRae and Marvin Kiser proposed to the board that a special committee of independent non-management directors be formed to consider the proposed transaction and make a recommendation to the full board, and that the special committee be authorized to engage a financial advisor to assist the special committee and the board in determining the consideration to be paid for fractional share interests that would be cashed out in the transaction. Although D. Gary McRae and Marvin Kiser did not believe that the

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interests of any of the directors, including management directors, were in conflict with the interests of any other stockholders in connection with the transaction, other than the fact that all but one director held sufficient shares so that they would not be cashed out, it was noted that, in most of the other “going private” transactions reviewed, a special committee of independent directors was established. It was also noted that in most of such transactions, a financial advisor provided an opinion as to the fairness of the consideration paid for fractional share interests, even though the aggregated amounts paid for fractional share interests were relatively small.

     On April 25, 2005, acting by unanimous written consent, the board established and appointed a special committee of directors, consisting of Hilton J. Cochran, Brady W. Dickson and William H. Swan (collectively, the “special committee”), to review and evaluate such proposed transaction and make recommendations to the full board.

     On April 25, 2005, the special committee approved the engagement of Oxford Advisors, LLC (“Oxford Advisors” or, the “financial advisor”) as financial advisor to the Company, acting through the special committee and the board, in connection with the transaction. The special committee chose Oxford Advisors as the financial advisor because of Oxford Advisors’ experience and credentials in the valuation area and its ability and willingness to perform the engagement on the timetable requested by the special committee and at a fee the special committee deemed reasonable under the circumstances.

     On May 26, 2005, D. Gary McRae and Marvin Kiser and the special committee met with counsel and a representative of Oxford Advisors to review and discuss the proposed transaction and to consider the basic structure of the proposed transaction, including the ratio to be used for the reverse/forward stock split and the price to be paid for shares that would be cashed out in the transaction. At this meeting, Oxford Advisors delivered its report concerning its analysis of the fairness of the cash consideration of $14.25 per share payable to holders who would be cashed out by the transaction and to the remaining stockholders who would not be cashed out. In addition, at this meeting the special committee compared the benefits of the transaction with various disadvantages of the transaction as discussed in more detail under “Purpose and Reasons for the Transaction” below and considered the transaction’s effects on both the stockholders who would be cashed out in the transaction and those who would remain following the transaction as discussed in more detail under “Recommendation of the Special Committee” below.

     On May 31, 2005, the full board of directors met with counsel and a representative of Oxford Advisors to consider the proposed transaction. At this meeting, Oxford Advisors delivered its report concerning its analysis of the fairness of the cash consideration of $14.25 per share payable to holders who would be cashed out by the transaction and to the remaining stockholders who would not be cashed out and received a report from the special committee concerning its consideration of the proposed transaction. In addition, at this meeting the board compared the benefits of the transaction with various disadvantages of the transaction as discussed in more detail under “Purpose and Reasons for the Transaction” below, and considered the transaction’s effects on both the stockholders who would be cashed out in the transaction and those who would remain following the transaction. No action was taken, pending the receipt of additional information about the distribution of ownership of common stock held in street name.

     On June 10, 2005, the special committee met with counsel and a representative of Oxford Advisors to review and discuss the proposed transaction and the report and opinion of Oxford Advisors. After full discussion, and for the reasons discussed below under “Recommendation of the Special Committee,” the special committee unanimously recommended the proposed transaction to the full board of directors, including a recommendation that (a) the reverse/forward stock split ratios of 200-to-1 and 1-to-200, respectively, be used and (b) the consideration for fractional share interests that would be cashed out be set at $14.25 per pre-split share. The special committee recommended this stock split ratio after reviewing the distribution of ownership of common stock held of record and in street name and determining that, in light of the purpose the transaction, this ratio was optimal. In determining the price to be paid for shares that would be cashed out, as discussed further under “Special Factors – Recommendation of the Special Committee” below, the special committee reviewed the high and low sales prices for the common stock from August 4, 2002 to June 9, 2005, and the report and opinion of

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Oxford Advisors, and determined that the highest price at which the Class A shares traded during such time period (which was also the highest price at which the common stock traded during such period) was fair and appropriate consideration. The special committee noted that although the Class A shares have historically traded at a slight premium to the Class B shares, the Class B shares are convertible on a one-for-one basis into Class A shares.

     On June 10, 2005, immediately after the meeting of the special committee, the full board of directors met, with counsel and a representative of Oxford Advisors present and participating, to discuss and consider the special committee’s recommendations as to the proposed transaction. The board unanimously voted to approve the transaction as described in this proxy statement, including payment of $14.25 per pre-split share to those stockholders who will be cashed out, if the transaction is approved by the stockholders and the board determines to implement the transaction. The board then directed that the transaction be submitted to stockholders for their approval, with its recommendation that it be approved, and called the Special Meeting of Stockholders for that purpose.

Stockholder Information

     As of May 19, 2005, we had approximately 360 record holders of Class A shares, of which approximately 238 record holders owned fewer than 200 Class A shares. As of such date, these record holders owning fewer than 200 Class A shares owned, in the aggregate, approximately 11,158 or approximately 0.7% of the outstanding Class A shares.

     As of May 19, 2005, we had approximately 368 record holders of Class B shares, of which approximately 307 record holders owned fewer than 200 Class B shares. As of such date, these record holders owning fewer than 200 Class B shares owned, in the aggregate, approximately 13,437 or approximately 1.6% of the outstanding Class B shares.

     While we have limited direct knowledge of the number of shares of common stock owned beneficially (but not of record) by persons who hold such shares in street name, based upon information obtained from our transfer agent and from the securities depositary which holds most of such shares, we believe there are, in addition to the shares identified above, approximately 40,000 Class A shares and 16,500 Class B shares held by beneficial owners who would be cashed out in the transaction.

     Consequently, we expect that the number of record holders of each class of the common stock would be reduced to fewer than 300, and we would be able to deregister the common stock under the Exchange Act and no longer be subject to the SEC filing and reporting requirements imposed on SEC reporting companies. We also expect that the total number of each shares of both classes that would be cashed out in the transaction at $14.25 per share would be approximately 56,140 shares, for a total cash payment of approximately $800,000. It should be noted, however, that changes in share ownership prior to the effective time of the transaction, as well as the actual distribution of shares held in street name and the extent to which beneficial owners of those shares participate in the transaction, would affect those estimates, perhaps materially.

Purpose and Reasons for the Transaction

     The purpose of the transaction is to cash out the shares of stockholders which, at the effective time of the transaction, total fewer than 200 of a particular class at a price of $14.25, for each of such shares owned immediately before the effective time, in order to enable us to deregister the common stock under the Exchange Act and thus terminate our obligation to file annual and periodic reports and make other filings with the SEC.

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     The board of directors has no present intention to raise capital through sales of securities in a public offering in the future or to acquire other business entities using our stock as the consideration for any acquisition, and we are therefore unlikely to have the opportunity to take advantage of our current status as an SEC reporting company for these purposes. If for any reason the board of directors decides in the future to access the public capital markets, we could do so by filing a registration statement for such securities.

     The reasons for the transaction and subsequent deregistration can be summarized as:

     We incur direct and indirect costs associated with the filing and reporting requirements imposed on SEC reporting companies. As an SEC reporting company, we are required to prepare and file with the SEC, among other items, the following:

     In addition, we pay for the costs of preparing our directors’ and officers’ Section 16(a) reports (Forms 3, 4 and 5) and Section 13(d) reports (Schedule 13D or Schedule 13G) (for directors or officers that are 5% stockholders).

     The costs associated with these reports and other filing obligations are a significant overhead expense, including professional fees for our auditors and legal counsel, printing and mailing costs, internal compliance costs, listing fees and transfer agent costs. These related costs have been increasing over recent years, and we believe that they will continue to increase, particularly as a result of the additional reporting and disclosure obligations imposed on SEC reporting companies by the recently enacted Sarbanes-Oxley Act of 2002. The annual savings that we expect to realize as a result of the transaction are estimated as follows:

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     Estimates of the annual savings expected to be realized if the transaction is implemented are based upon the actual costs to us of the services and disbursements in each of the above categories that were reflected in our recent historical financial statements and the allocation to each category of management’s estimates of the portion of the expenses and disbursements in such category believed to be solely or primarily attributed to the Company’s SEC reporting company status.

     In addition, our management estimates there will be a reduction in auditing fees if we cease to be an SEC reporting company and there will not be any fees for the auditor to attest to our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. In addition, there will be more limited needs for legal counsel for SEC matters. Other savings estimates include: savings in transfer agent’s fees that could be expected because of the estimated reduction in the number of accounts to be handled by the Transfer Agent, the lower printing and mailing costs attributable to such reduction and the less complicated disclosure required by our non-SEC reporting status; and the consequent reduction in associated expenses (e.g., word processing, edgarizing, telephone and fax charges associated with SEC filings).

     The amounts set forth above are only estimates, and the actual savings to be realized may be greater or less than such estimates. In addition, we expect the various costs associated with remaining an SEC reporting company will continue to increase as a result of the Sarbanes-Oxley Act of 2002 and regulations adopted pursuant to that legislation. Based on our size and resources, the board does not believe the costs associated with remaining an SEC reporting company are justified.

     During the 12-month period prior to announcement of the proposed transaction, from June 10, 2004 to June 9, 2005, the average daily trading volume on the American Stock Exchange of Class A shares was approximately 2,100 shares and of Class B shares was approximately 125 shares.

     The board also compared the benefits of the transaction with various disadvantages of the transaction, including:

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     The board believes that the benefits of the transaction outweighed the disadvantages of the transaction.

     In light of the foregoing, the board believes that it is in the best interests of the Company and our stockholders, including unaffiliated stockholders, to change our status to a non-SEC reporting company at this time and to delist our shares from the American Stock Exchange.

Alternatives Considered

     The board considered several other alternatives to accomplish the reduction in the number of record holders of each class of common stock to fewer than 300, but ultimately rejected these alternatives because the board believed that the proposed transaction consisting of a reverse stock split followed by a forward stock split structure would be the simplest, most certain and least costly method. The other alternatives considered were:

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Recommendation of the Special Committee

     The special committee consisted of three non-employee directors, Hilton J. Cochran, Brady W. Dickson and William H. Swan. Each of these directors has been deemed “independent” by the board of directors, as such term is defined under Section 121A of the American Stock Exchange Rules and Rule 10A-3 of the Exchange Act. The special committee retained Oxford Advisors, LLC (“Oxford Advisors”) as its financial advisor.

     In evaluating the proposed transaction and the cash consideration, the special committee relied on its knowledge of our business, financial condition and prospects, as well as the advice of its financial advisor and legal counsel. In view of the wide variety of factors considered in connection with the evaluation of the transaction and cash consideration, the special committee did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors it considered it reaching its determinations.

     The discussion herein of the information and factors considered by the special committee is not intended to be exhaustive, but is believed to include all material factors considered by the special committee.

Effects on Stockholders Who Would Be Cashed Out

     In determining that the special committee would recommend the transaction and the cash consideration to the board of directors, the special committee considered the following substantive factors related to the transaction’s effects on the unaffiliated stockholders who would be cashed out in the transaction which, in the view of the special committee, in the aggregate supported such determination.

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Effects on Stockholders Who Would Remain

     In determining that the special committee would recommend the transaction and the cash consideration to the board of directors, the special committee considered the following substantive factors related to the transaction’s effects on both affiliated and unaffiliated stockholder who will remain following the transaction which, in the view of the special committee, in the aggregate supported such determination.

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     Based on the foregoing analyses, the special committee believes that the transaction is procedurally and substantively fair to all holders of Class A shares and all holders of Class B shares, including the unaffiliated stockholders, regardless of whether a stockholder receives cash or continues to be a stockholder following the transaction, and believes the proposed cash amount to be fair consideration for those stockholders holding less than 200 shares of a particular class of common stock. The transaction was unanimously recommended by the special committee to the full board of directors.

Recommendation of the Board of Directors

     The board unanimously determined that the transaction, taken as a whole, is fair to and in the best interest of the Company and our stockholders, including unaffiliated stockholders, as discussed below, regardless of whether a stockholder receives cash in lieu of fractional share interests or remains a holder of common stock. The board recommends that stockholders vote for approval of the transaction.

     The board has retained for itself the absolute authority to defer or abandon (and not implement) the transaction, even if the stockholders have approved and authorized the transaction and without further action or authorization by the stockholders, if the board of directors determines at any time before the transaction’s consummation, that the transaction is not then in the best interests of the Company and our stockholders. Please see “Special Factors — Reservation of Rights” for further discussion on this.

     At the board’s meeting on May 31, 2005, the board reviewed with the special committee its anticipated recommendations and the reasons therefore, as discussed above under “Recommendation of the Special Committee,” and reviewed with Oxford Advisors in its report and proposed fairness opinion. The board had an opportunity to ask questions and discuss each of the analyses presented by Oxford Advisors. After considerable discussion and deliberation, the board of directors concurred in the recommendations of the special committee and its reasoning in reaching those recommendations, subject to obtaining further information about the distribution of holdings of shares held beneficially in street name, in order to better assess the potential costs of the transaction at different exchange ratios.

     On June 10, 2005 the full board again met, following a meeting of the special committee. After considering information obtained about the distribution of shares held in street name, the board concurred in the special committee’s recommendation of a 1-for-200 ratio for the reverse stock split and 200-for-1

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ratio for the forward stock split, and, adopting the reasoning and recommendations of the special committee, approved the transaction as described in this proxy statement.

     Based on the foregoing analysis and the recommendation of the special committee, the board believes that the transaction is procedurally and substantively fair to all holders of Class A shares and all holders of Class B shares, including the unaffiliated stockholders, regardless of whether a stockholder receives cash or continues to be a stockholder following the transaction. The transaction was unanimously approved by the board, including by all non-employee directors, and recommended to the stockholders for their approval.

Fairness of the Transaction

     As described above under “Recommendation of the Board of Directors,” the Company’s board reasonably believes that the transaction is procedurally and substantively fair to all unaffiliated holders of Class A shares and all unaffiliated holders of Class B shares, including both the unaffiliated stockholders who will receive cash for their shares of common stock in the transaction and those who will continue to be stockholders following the transaction. D. Gary McRae and James W. McRae, each of whom is a member of the board, have indicated that they reasonably believe the transaction is procedurally and substantively fair to all unaffiliated holders of Class A shares and all unaffiliated holders of Class B shares, including both the unaffiliated stockholders who will receive cash for their shares of common stock in the transaction and those who will continue to be stockholders following the transaction, based upon the same factors considered by the board, and they each specifically adopt the analysis and conclusions of the board as set forth above under “Recommendation of the Board of Directors.”

     In reaching these determinations none of the board, D. Gary McRae or James W. McRae assigned specific weights to particular factors, and considered all factors as a whole.

     Neither D. Gary McRae nor James W. McRae received any reports, opinions or appraisals from any outside party relating to the transaction other than the fairness opinion of Oxford Advisors they received in their capacity as directors of the Company.

     See “Special Factors–Interests of Certain Persons in the Merger.”

Opinion of the Financial Advisor

     The special committee of the board of directors retained Oxford Advisors on April 25, 2005 to act as financial advisor to the Company in connection with the proposed transaction for a fee of $35,000. Prior to its retention, Oxford Advisors had no material relationship with us.

     On June 10, 2005, Oxford Advisors delivered an opinion to the special committee and the board of directors that, as of such date, the cash consideration of $14.25 per share payable to holders who would be cashed out by the transaction was fair, from a financial point of view, to those stockholders who would receive the cash consideration, including unaffiliated stockholders, and to the remaining stockholders who would not be cashed out. The full text of Oxford Advisors’ opinion is attached to this proxy statement as Appendix B.

     In connection with its opinion, Oxford Advisors has, among other things:

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     With respect to the data and discussions relating to the business prospects and financial condition of the Company, Oxford Advisors assumed that such data was reasonably prepared on a basis reflecting the best currently available estimates and judgment of our management as to our future financial performance. Oxford Advisors further relied on the assurances of our senior management that they are unaware of any facts that would make such business prospects and financial outlook incomplete or misleading.

     In rendering its opinion, Oxford Advisors relied upon and assumed the accuracy and completeness of the financial, legal, tax, operating and other information provided to Oxford Advisors by us (including our financial statements and related notes thereto), and did not assume responsibility for independently verifying and did not independently verify such information. Oxford Advisors did not assume any responsibility to perform, and has not performed, an independent evaluation or appraisal of our assets or liabilities, and was not furnished with any such valuations or appraisals. Additionally, Oxford Advisors was not asked and did not consider the possible effects of any litigation or other legal claims. Oxford Advisors assumed that the transaction will be consummated in a timely manner and in accordance with the terms set forth in this proxy statement.

     While Oxford Advisors rendered its opinion and provided certain financial analyses to the special committee and board of directors, its opinion was only one of many factors taken into consideration by the special committee in making its recommendation to the board of directors and by the board of directors in recommending the transaction to the stockholders. Oxford Advisors did not recommend to the special committee or the board of directors the specific amount of consideration that should be paid in the proposed transaction. The decisions to recommend and pursue the proposed transaction and the determination of the amount of consideration to be paid in connection with the reverse stock split were solely those of the special committee and the board of directors.

     In preparing its opinion, Oxford Advisors performed a variety of analyses, which are described below, and considered the results of all such analyses as a whole and did not attribute any particular weight to any specific analysis or factor. As such, consideration of only a portion of the analyses could create an incomplete view of the processes underlying Oxford Advisors’ opinion. The following paragraphs summarize the quantitative and qualitative analyses performed by Oxford Advisors in arriving at the opinion delivered to the special committee.

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Analysis of Similar Consideration to Class A Shares and Class B Shares Cashed Out

     Oxford Advisors discussed the different legal rights associated with our Class A shares and Class B shares under our certificate of incorporation with our counsel and reviewed historical trading prices for both classes of common stock. The financial advisor noted that although the Class A shares have historically traded at a slight premium to the Class B shares, the Class B shares are convertible on a one-for-one basis into Class A shares. In consideration of the foregoing, Oxford Advisors determined that our paying the same consideration to Class A stockholders and to Class B stockholders who would be cashed out in the transaction would be both fair and appropriate.

Discounted Cash Flow Analysis

     Due to the cyclical nature of our business units, management was unable to provide Oxford Advisors with projections beyond fiscal 2005. As a result, Oxford Advisors concluded that a discounted cash flow analysis of the Company was not possible.

Comparable Company Analysis

     In connection with its opinion, Oxford Advisors compared certain financial information, including the market values and trading multiples, of the Company with similar information for five publicly traded footwear companies which Oxford Advisors believed had operations most comparable to ours. Oxford Advisors noted that none of the companies used in this analysis were identical to the Company. The companies used in the comparison were:

     In performing its analysis below and determining the multiples for the comparable companies, Oxford Advisors made the following assumptions:

     Oxford Advisors excluded our bar code business, Compsee, from its analysis. Since 1999, Compsee has generated, and currently generates, negative operating profit and has no immediate prospect of profitability. In Oxford Advisors’ view, inclusion of Compsee would have improperly skewed its analysis.

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     Based on the market values of the companies listed above, Oxford Advisors analyzed their respective shareholders’ equity, revenues and EBITDA (earnings before interest, taxes, depreciation and amortization) to determine multiples for each of these valuation categories for each comparable company. Oxford Advisors used these three categories in its analysis due to their general acceptance and use in the financial community as metrics representative of a company’s enterprise value and Oxford Advisors’ own belief that they are the three most relevant and accurate indicators of our value. Oxford Advisors then averaged the multiples of the comparable companies for each of the three valuation categories (shareholders’ equity, revenues and EBITDA) to derive a single average multiple for each of the three categories.

     Discounting for our substantially smaller size than those of the comparable companies, Oxford Advisors used the three multiples to determine the following data (dollars in thousands):

     Oxford Advisors, using the average multiples, determined that our implied enterprise value ranged from approximately $27.7 million to approximately $50.5 million and that the implied value per share based on the market values of the comparable companies was approximately $9.81 per share based on revenue analysis, approximately $12.80 per share based on EBITDA analysis and approximately $18.07 per share based on stockholders’ equity analysis. Consequently, the range of implied value per share was $9.81 to $18.07, and the average implied value per share of the three different analyses used was $13.56. The proposed cash out consideration of $14.25 per share represents a premium of approximately 5% to this average implied value per share.

Market Analysis

     Oxford Advisors reviewed and analyzed the common stock’s current and historical market prices and trading activity and certain other relevant historical information relating to us made available by published sources and from our internal records. Observing our common stock price over the past three fiscal years, Oxford Advisors noted that the highest price per share has been $14.25.

Comparable Transactional Analysis

     To the extent possible, Oxford Advisors reviewed the principal financial terms of selected transactions that it deemed generally comparable to the transaction. In connection with such analysis, Oxford Advisors searched SEC filings for the past 24 months for selected transactions involving reverse stock splits with the stated purpose of “going private.” In each of the precedent transactions considered, Oxford Advisors analyzed the implied valuation premiums paid. This premium amount was calculated by Oxford Advisors by comparing the closing price of the relevant stock on the day prior to the announcement of the proposed transaction versus the highest closing price of the relevant stock in the 12-months prior to the announcement of such transaction. On average, although there was a premium paid

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based on the proposed cash out price versus the closing price of the relevant stock on the day prior to the announcement of the transaction, there was no premium paid over the highest closing price of the relevant stock in the 12-months prior to the announcement of the transaction, which is the case here.

Fairness to Remaining Stockholders

     Oxford Advisors noted that implementation of the transaction will require the Company to use its cash reserves to pay for the shares to be cashed out and to pay estimated transaction costs of $150,000. Based on expected annual cost savings of approximately $600,000, Oxford Advisors believed this to be an appropriate use of cash and beneficial to the remaining stockholders.

Conclusion

     Based upon the above analyses, Oxford Advisors determined that $14.25 per share is fair, from a financial point of view, to all holders of Class A shares and all holders of Class B shares who would be cashed out and to all holders of Class A shares and all holders of Class B shares who would remain stockholders after the transaction. Only the special committee and the board of directors are entitled to rely on the opinion and advisory services of Oxford Advisors.

     We have agreed to indemnify Oxford Advisors against certain liabilities, including liabilities arising under the federal securities laws.

Certain Effects of the Transaction

     The transaction will have various effects on us, the affiliated stockholders and the unaffiliated stockholders, which are described in the sections immediately below:

Effects on the Company

     If approved at the Special Meeting, the transaction will have various effects on us, as described below:

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Effects on Stockholders

     As used in this proxy statement, the term “affiliated stockholder” means any stockholder who is one of our directors or executive officers, and the term “unaffiliated stockholder” means any stockholder other than an affiliated stockholder. Although the transaction will generally affect all stockholders the same, all but one affiliated stockholders own 200 or more shares of a class of common stock. As a result, we expect that the percentage ownership of our officers and directors as a group would increase from approximately 36.3% of our Class A common stock and 61.4% of our Class B common stock before the transaction to approximately 37.0% of our Class A common stock and 63.5% of our Class B common stock after the transaction. For more information on our officers’ and directors’ security interests, please refer to the section below entitled “Security Ownership of Directors and Executive Officers.”

     The effects of the transaction to a stockholder would vary based on whether or not all or any portion of the stockholder’s shares would be cashed out in the transaction. The determination of whether or not any particular shares of common stock would be cashed out in the transaction would be based on whether the holder of those shares holds fewer than 200 shares of a particular class of common stock and whether such shares are held of record or in street name with a broker or other nominee. Because a stockholder may hold 200 or more shares of one class of common stock and less than 200 shares of the other class of

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common stock, a stockholder may have a portion of such stockholders’ shares cashed out and a portion may remain outstanding after the transaction. Similarly, because a stockholder may hold a portion of his shares of record and a portion of his shares in street name, a stockholder may have a portion of his shares subject to the terms of the transaction and a portion not subject to the transaction depending on the procedures and determination of his broker or other nominee.

Interests of Executive Officers and Directors in the Transaction

     If implemented, the transaction will not have any effect on compensation to be received by our directors or executive officers or on our employment arrangements with our executive officers. We refer you to the information under the heading “Security Ownership of Directors and Executive Officers” for information regarding our current officers and directors and their stock ownership. As a result of the transaction, we expect that the percentage of common stock beneficially owned by our current executive officers and directors as a group would increase from approximately 36.3% of our Class A common stock and 61.4% of our Class B common stock before the transaction to approximately 37.0% of our Class A common stock and 63.5% of our Class B common stock after the transaction. Similarly, as a result of the transaction, we expect that the percentage of common stock collectively beneficially owned, directly and indirectly, by D. Gary McRae and James W. McRae would increase from approximately 35.8% of our Class A common stock and 61.4% of our Class B common stock before the transaction to approximately 36.5% of our Class A common stock and 63.4% of our Class B common stock after the transaction.

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Conduct of the Company’s Business after the Transaction

     Following the transaction, we would continue to conduct our existing operations in the same manner as now conducted. Our directors and executive officers immediately prior to the transaction are expected to remain the directors and executive officers after the transaction. The shares of common stock that would be cashed out by the transaction would be cancelled after the transaction, included in the authorized but unissued shares and would be available for issuance in the future. We have no plans to issue additional shares of common stock.

Conditions to the Completion of the Transaction

     The transaction will not be effected unless and until our stockholders approve the transaction and the board of directors determines to implement the transaction.

     If the stockholders approve the transaction, we anticipate filing the amendments to our Certificate of Incorporation with the Delaware Secretary of State, and thereby effecting the transaction, as soon as practicable after the Special Meeting. However, the board of directors may decide to defer or abandon (and not implement) the transaction, even if the stockholders have approved and authorized the transaction and without further action or authorization by the stockholders, if the board of directors determines at any time prior to the transaction’s consummation, that the transaction is not then in the best interests of the Company and its stockholders. In addition, authorization of the transaction by the stockholders will expire on December 31, 2005 if the transaction is not implemented by that time. See the section below entitled “Special Factors — Reservation of Rights.” By voting in favor of the transaction, you are expressly authorizing the board of directors to determine to defer the transaction until as late as December 31, 2005, or abandon (and not implement) the transaction if the board of directors should so decide.

Source of Funds and Financing of the Transaction

     We expect to use approximately $950,000 to complete the transaction, including fees and expenses, and that this use of cash would not have any materially adverse effect on our liquidity, results of operation, or cash flow. Because we do not know the exact amount of shares that would be cashed out, we can only estimate that the total amount to be paid to stockholders in the transaction would be approximately $800,000. Based upon these estimates, we have sufficient cash and short term cash equivalents to fund the transaction.

     We estimate that the transaction related fees and expenses, consisting primarily of financial advisory fees, filing fees, fees and expenses of attorneys and accountants, and other related charges will total approximately $150,000 assuming the transaction is completed. This amount consists of the following estimated fees:

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Anticipated Accounting Treatment

     We anticipate to account for the purchase of the outstanding common stock in the transaction from stockholders as retired stock.

U.S. Federal Income Tax Consequences

     Summarized below are the material federal income tax consequences to us and our stockholders resulting from the transaction. This summary is based on existing federal income tax law, which may change, even retroactively. This summary does not discuss all aspects of federal income taxation that may be important to you in light of your individual circumstances. Many types of stockholders (such as financial institutions, insurance companies, broker-dealers, tax-exempt organizations, and foreign persons) may be subject to special tax rules. Other stockholders may also be subject to special tax rules including, but not limited to, stockholders who received the common stock as compensation for services or pursuant to the exercise of an employee stock option, or stockholders who have held, or will hold, stock as part of a straddle, hedging, or conversion transaction for federal income tax purposes. In addition, this summary does not discuss any state, local, foreign, or other tax considerations.

     This summary assumes that you have held and will continue to hold your shares as capital assets and that you are one of the following:

NO RULING FROM THE INTERNAL REVENUE SERVICE OR OPINION OF COUNSEL WILL BE OBTAINED REGARDING THE FEDERAL INCOME TAX CONSEQUENCES TO THE STOCKHOLDERS OF THE COMPANY IN CONNECTION WITH THE TRANSACTION. ACCORDINGLY, EACH STOCKHOLDER IS ENCOURAGED TO CONSULT THEIR OWN TAX

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ADVISOR AS TO THE PARTICULAR FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES, IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES.

The Transaction

     We believe that the transaction would be treated as a tax-free “recapitalization” for federal income tax purposes. This would result in no material federal income tax consequences to the Company.

Federal Income Tax Consequences to Stockholders, Including Affiliates, Who Are Not Cashed out in the Transaction

     If you continue to hold the Company’s common stock immediately after the transaction, and you receive no cash as a result of the transaction, you would not recognize any gain or loss in the transaction and would have the same adjusted tax basis and holding period in your the Company’s common stock as you had in such stock immediately before the transaction.

Federal Income Tax Consequences to Stockholders, Including Affiliates, Who Both Receive Cash and Own, or Are Considered to Own for Federal Income Tax Purposes, Common Stock After the Transaction

     In some instances you may be entitled to receive cash in the transaction for shares you hold in one capacity, but continue to hold shares in another capacity. For example, you may own less than 200 shares of a particular class of common stock in your own name (for which you will receive cash) and own more than 200 shares of a particular class of common stock that are held in your brokerage account in street name. Alternatively, you may own more than 200 shares of one class of common stock, but less than 200 shares of the other class. In addition, for federal income tax purposes you may be deemed to own shares held by others. For instance, if you own less than 200 shares of a particular class of common stock in your own name (for which you will receive cash) and your spouse owns more than 200 shares of a particular class of common stock (which will continue to be held following the completion of the transaction), the shares owned by your spouse would be attributable to you for federal income tax purposes. As a result, in some instances the shares you own in another capacity, or which are attributed to you, may remain outstanding. In determining whether you are deemed to continue to hold stock immediately after the transaction, you would be treated as owning shares actually or constructively owned by certain family members and entities in which you have an interest (such as trusts and estates of which you are a beneficiary and corporations and partnerships of which you are an owner, and shares you have an option to acquire).

     If you both receive cash as a result of the transaction and continue to hold the common stock, either directly or through attribution, you would recognize gain, if any, in an amount not to exceed the amount of cash received. Generally no loss would be recognized. The receipt of cash would be characterized as either a dividend or as a payment received in exchange for the stock. The transaction would be taxed as a dividend unless the payment:

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     If you satisfy one of these tests, you would recognize gain in an amount equal to the excess of the cash received for your shares over your adjusted basis in those shares, and this income would be characterized as capital gain.

     If you fail to satisfy one of these tests, then the cash received would be treated as a dividend to you to the extent of your ratable share of our undistributed earnings and profits, then as a tax-free return of capital to the extent of your aggregate adjusted tax basis in your shares, and any remaining amount would be treated as capital gain.

     If you receive cash in the transaction and you, or a person or entity whose ownership of the Company’s shares would be attributed to you for federal income tax purposes, would continue to hold common stock of either class immediately after the transaction, you are urged to consult with your tax advisor as to the particular federal, state, local, foreign, and other tax consequences of the transaction, in light of your specific circumstances.

Federal Income Tax Consequences to Cashed out Stockholders, Including Affiliates, Who do not Own, and Are Not Deemed to Own, Common Stock After the Transaction

     If you receive cash as a result of the transaction and do not own, and for federal income tax purposes are not deemed to own the common stock immediately after the transaction, you would recognize capital gain or loss. The amount of capital gain or loss you would recognize would equal the difference between the cash you receive for your cashed out stock and your adjusted tax basis in such stock.

Capital Gain and Loss

     For individuals, capital gain recognized on the sale of capital assets that have been held for more than 12 months (to the extent they exceed capital losses) generally would be subject to tax at a federal income tax rate not to exceed 15%. Net capital gain recognized from the sale of capital assets that have been held for 12 months or less would be subject to tax at ordinary income tax rates. In addition, capital gain recognized by a corporate taxpayer would be subject to tax at the ordinary income tax rates applicable to corporations. In general, the capital losses of individuals may only be deducted to the extent of the individual’s capital gains plus $3,000 each year. Any capital loss of an individual which is not deductible by reason of the foregoing limitation may be carried forward to subsequent years. In the case of corporations, capital losses may only be deducted to the extent of capital gains. Any capital loss of a corporation which is not deductible by reason of the foregoing limitation may be carried back three years and carried forward five years.

Dividend

     For individuals, if any portion of the cash received is treated as a dividend under the rules described above, the dividend generally would be subject to tax at a federal income tax rate not to exceed 15%.

Backup Withholding

     Stockholders would be required to provide their social security or other taxpayer identification numbers (or, in some instances, additional information) in connection with the transaction to avoid backup withholding requirements that might otherwise apply. The letter of transmittal will require each stockholder to deliver such information when the common stock certificates are surrendered following the effective time of the transaction. Failure to provide such information may result in backup withholding.

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     As explained above, the amounts paid to you as a result of the transaction may result in dividend income, capital gain income, or some combination of dividend and capital gain income to you depending on your individual circumstances.

Regulatory Approvals

     We are not aware of any material governmental or regulatory approval required for completion of the transaction, other than compliance with the relevant federal and state securities laws and the corporate laws of the state of Delaware.

No Appraisal or Dissenters’ Rights

     Stockholders do not have appraisal or dissenters’ rights under Delaware state law or the Company’s Certificate of Incorporation or Bylaws in connection with the transaction.

Reservation of Rights

     The board of directors expressly reserves the right to defer the transaction until as late as December 31, 2005 or to abandon (and not implement) the transaction, even if the stockholders have approved and authorized the transaction and without further action or authorization by the stockholders, if the board of directors determines at any time before the transaction’s consummation that the transaction is not then in the best interests of the Company and our stockholders. The board has reserved this right to ensure that it may abandon the transaction in the event that currently unforeseen changes in circumstances (for example, a change in the anticipated costs of the transaction as a result of a change in the estimated number of shares that would be cashed out in the transaction) cause the transaction to no longer be in the best interests of the Company and our stockholders. Currently, no such changes in circumstances are expected and the board intends to implement the transaction if it is approved by the stockholders.

     By voting in favor of the transaction, you are expressly authorizing the board to determine to defer the transaction until as late as December 31, 2005 or to abandon (and not implement) the transaction if the board should so decide.

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THE SPECIAL MEETING

General

     We are providing this proxy statement to our stockholders of record as of July 11, 2005, along with a form of proxy that our board of directors is soliciting for use at the Special Meeting to be held on September ___, 2005 at ___:___a.m., Eastern Time, at our corporate office at 400 North Main Street, Mount Gilead, North Carolina. At the Special Meeting, the stockholders will consider and vote upon proposals to:

     All shares of common stock represented by properly executed proxies received by the board of directors pursuant to this solicitation will be voted in accordance with the directions specified on the proxy or, in the absence of specific instructions to the contrary, will be voted in accordance with the board of directors’ unanimous recommendation “FOR” the proposals.

     If the proposed transaction is approved in accordance with Delaware law, stockholders whose shares are converted into less than one whole share of a particular class in the reverse split (meaning they held fewer than 200 shares of a particular class at the effective time of the reverse split) will receive a cash payment from us for such fractional share interests equal to $14.25 for each such share held immediately before the effective time of the transaction.

     Stockholders who own 200 or more shares of a particular class at the effective time of the transaction will not be entitled to receive any cash for their fractional share interests of such class resulting from the reverse stock split. The forward split that will immediately follow the reverse split will reconvert their whole share and fractional share interests of such class back into the same number of shares of common stock of such class that they held immediately before the effective time of the transaction. As a result, the total number of such shares of a particular class held by any such stockholder would not change after completion of the transaction.

     After the transaction, we anticipate that we will have fewer than 300 stockholders of record of each class of common stock, in which event we intend to file a Form 15 with the Securities and Exchange Commission (the “SEC”) to terminate registration of the common stock under the federal Securities Exchange Act of 1934 (the “Exchange Act”). As a result, we would no longer be subject to the annual and periodic reporting requirements under the Exchange Act. In connection with the deregistration, the common stock would be delisted from the American Stock Exchange, although we believe the common

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stock would be quoted on the “pink sheets” and our remaining stockholders would continue to be able to trade their shares in the over-the-counter markets or private transactions

     This transaction cannot occur unless the holders of a majority of the issued and outstanding shares of each class of common stock approve the proposed certificates of amendment to our Certificate of Incorporation, which are attached as Appendix A to this proxy statement.

Who Can Vote at the Special Meeting

     Only holders of Class A shares and holders of Class B shares of record at the close of business on July 11, 2005 (the “record date”) are entitled to vote at the Special Meeting. On that date, there were 2,240,841 Class A shares and 527,658 Class B shares outstanding. Each Class B share is freely convertible into one Class A share at the election of the holder.

     You may vote all of the common stock that you own as of the close of business on the record date, which includes shares held directly in your name as the “stockholder of record” and shares held for you as the “beneficial owner” either through a broker, bank or other nominee. Many of our stockholders hold their shares through a broker, bank or other nominee rather than directly in their own name. As summarized below, there are some important distinctions between shares held of record and those owned beneficially.

Stockholder of Record. If your shares are registered directly in your name with our transfer agent, Wachovia Bank, N.A. (the “Transfer Agent”), you are considered, with respect to those shares, the stockholder of record, and these proxy materials are being sent to you by us. As the stockholder of record, you have the right to vote by proxy or to vote in person at the Special Meeting. We have enclosed proxy cards for you to use.

Beneficial Owner. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial owner” of shares held in “street name” with respect to those shares, and the proxy materials are being forwarded to you by your broker or other nominee. Your broker or other nominee is considered, with respect to those shares, the stockholder of record. As the beneficial owner, you have the right to direct your broker or other nominee how to vote and are also invited to attend the Special Meeting. As a beneficial owner, however, you are not the stockholder of record, and you may not vote these shares in person at the Special Meeting unless you obtain a signed proxy appointment form from the stockholder of record giving you the right to vote the shares. To vote shares held in “street name” by proxy, you must follow the voting instructions provided by your broker, bank or other nominee.

     All holders of common stock may attend the Special Meeting in person. If you are a beneficial owner of common stock held by a broker, bank or other nominee (i.e., in “street name”), you will need proof of ownership to be admitted to the Special Meeting. A recent brokerage statement or letter from a bank or broker are examples of proof of ownership. Only holders of record of common stock as of the record date or their duly appointed proxies may cast their votes in person at the Special Meeting.

     Whether you hold your shares directly as stockholder of record or beneficially in street name, you may direct your vote without attending the Special Meeting. You may vote shares registered in your name by signing your proxy card and shares held in street name by following the voting instructions provided by your broker, bank or nominee. If you provide specific voting instructions, your shares will be voted as you instruct. If you sign and return a proxy card without specifying your voting instructions, your shares will be voted as described above in “Questions and Answers About the Special Meeting and Transaction — How are my votes counted?”

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Annual Report and Quarterly Report

     Copies of our Annual Report on Form 10-K for the fiscal year ended July 31, 2004, as amended, and our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2005 are being mailed with this Proxy Statement.

Vote Required

     The proposal to approve the transaction requires the affirmative vote of holders of a majority of the outstanding shares of each class of common stock. The proposal to approve the transaction is a “non-discretionary” item, meaning that brokerage firms cannot vote shares in their discretion on behalf of a client if the client has not given voting instructions. Accordingly, shares held in street name that have been designated by brokers on proxy cards as not voted with respect to that proposal (“broker non-vote shares”) will not be counted as votes cast will have the same effect as shares voted against the proposal.

     Action on the proposal to authorize the adjournment of the Special Meeting in the discretion of the board of directors, and on any other matters, if any, that are properly presented at the meeting for consideration of the stockholders, will be approved if a quorum is present and the votes cast favoring the action exceed the votes cast opposing the action, with each Class A share having one-tenth of a vote and each Class B share having one vote. The Company’s Bylaws provide that where a class vote is required, a quorum consists of the presence, in person or by proxy, of the holders of a majority of the outstanding shares of a particular class entitled to vote as a class at the meeting, and that where a class vote is not required (such as the vote on the proposal to authorize adjournment), a quorum consists of the presence, in person or by proxy, of the holders of a majority of the outstanding shares of all classes of stock entitled to vote at the meeting (with each Class A share being counted as one-tenth of a share and each Class B share being counted as one share). Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum.

     As of the record date, our directors and executive officers held a total of approximately 36.3% of the outstanding Class A shares, approximately 61.4% of the outstanding Class B shares entitled to vote at the Special Meeting and 53.2% of the votes entitled to be cast by the holders of the Class A shares and Class B shares together as a single class. Our directors and executive officers have indicated that they will vote “FOR” the proposal at the Special Meeting.

Voting and Revocation of Proxies

     The shares of common stock represented by properly completed proxies received at or before the time for the Special Meeting will be voted as directed by the respective stockholders unless the proxies are revoked as described below. If no instructions are given, executed proxies will be voted “FOR” approval of the proposals to approve the transaction and to authorize adjournment of the Special Meeting.

     The proxies will be voted in the discretion of the proxy holders on other matters, if any, that are properly presented at the Special Meeting and voted upon. The board of directors is not aware of any other business to be presented at the meeting other than matters incidental to the conduct of the Special Meeting.

     You may revoke your proxy at any time before the vote is taken at the Special Meeting. To revoke your proxy, you must either (i) notify the Secretary in writing at our principal office, (ii) submit a later dated proxy to the Secretary or (iii) attend the Special Meeting and vote your shares in person. Your attendance at the Special Meeting will not automatically revoke your proxy. If you hold your shares in street name, please contact your broker, bank or other nominee for voting information.

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Recommendation of the Board of Directors

     Our board of directors has approved the transaction and believes that it is fair to and in the best interests of the Company and the Class A stockholders and Class B stockholders, including both those stockholders who would be cashed out and those who would remain stockholders. The board of directors unanimously recommends that our stockholders vote “FOR” approval of the proposals. For further discussion on the board’s recommendation, please see “Special Factors – Recommendation of the Special Committee” and “Special Factors – Recommendation of the Board of Directors” above.

SUMMARY FINANCIAL INFORMATION

Summary Historical Financial Information

     The following summary of historical consolidated financial data was derived from our audited consolidated financial statements as of and for each of the fiscal years ended July 31, 2004 and August 2, 2003 and from our unaudited consolidated financial statements as of and for the nine months ended April 30, 2005 and May 1, 2004. This financial information is only a summary and should be read in conjunction with the consolidated financial statements of the Company and other financial information, including the notes thereto, contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2004, as amended, and our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2005, copies of which are being mailed with this Proxy Statement.

McRae Industries, Inc. and Subsidiaries

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McRae Industries, Inc. and Subsidiaries
Condensed Statements of Income

Summary Pro-Forma Financial Information

     The following pro forma condensed statements of income and pro forma balance sheet are based on historical data, adjusted to give effect to the cash payment for fractional shares resulting from the transaction and to cost-savings anticipated to be realized as a result of the transaction. The pro forma condensed statements of income and pro forma balance sheet are based on the assumptions that (1) an aggregate of 56,140 shares of common stock will result in fractional share interests and will be purchased by the Company for $800,000 with $150,000 in costs incurred in connection with the transaction, and (2) $636,000 in annual cost savings will be realized from effecting the transaction. See the section below entitled “Special Factors – Purpose and Reasons for the Transaction” for further discussion of the estimated cost savings expected to result from the transaction.

     Pro forma adjustments to the pro forma balance sheet are computed as if the transaction had occurred on April 30, 2005, while the pro forma statements of income are computed as if the transaction had occurred at the beginning of the period. The pro forma information set forth below is not necessarily indicative of what our actual financial results and financial position would have been had the transaction been consummated as of the above referenced date or of the financial results and financial position that may be reported by the Company in the future.

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McRae Industries, Inc. and Subsidiaries

As of April 30, 2005

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McRae Industries, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
For the Nine Months Ended April 30, 2005
(Dollars in thousands, except per share data)
(Unaudited)

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McRae Industries, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
For the Year Ended July 31, 2004
(Dollars in thousands, except per share data)
(Unaudited)

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MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     As of July 11, 2005, there were 2,240,841 Class A shares outstanding held by approximately 360 stockholders of record, and 527,658 Class B shares outstanding held by approximately 370 stockholders of record.

     Class A and Class B shares trade on the American Stock Exchange under the symbols “MRI.A” and “MRI.B,” respectively. The following table shows the quarterly high and low sales prices for the common stock during fiscal 2004 and 2003 for the periods indicated, and to date in fiscal year 2005, as reported by the American Stock Exchange.

     On June 9, 2005, the last trading day prior to the announcement of the board’s approval of the transaction, the closing prices of the common stock were $11.48 per Class A share and $11.70 per Class B share.

     For each quarter during fiscal 2003 and 2004, we paid a dividend of $.06 per share on our Class A shares and no dividends on our Class B shares. During fiscal 2005, we paid a dividend of $.06 per Class A share in the first quarter and dividends of $.08 per Class A share in each of the second and third quarters, and no dividends on our Class B shares. While we have no formal policy with respect to payment of dividends, we expect to continue paying regular cash dividends on our Class A shares. Dividends paid on Class A shares are not also required to be paid on Class B shares, although dividends paid on Class B shares, if any, must also be paid on Class A shares in an equal amount. There can be no assurance as to future dividends on either class of common stock, as the payment of any dividends is dependent on future actions of the board and our earnings, capital requirements and financial condition.

     Since April 1, 2005, neither we nor any of our directors or executive officers has purchased, sold or effected any other transaction in our common stock, except that on June 9, 2005, McRae B Investment Company, LLC, of which D. Gary McRae and James W. McRae are managers, converted 219,000 Class B shares into an equal number of Class A shares, D. Gary McRae converted 28,202 Class B shares into an equal number of Class A shares and James W. McRae converted 20,388 Class B shares into an equal number of Class A shares.

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     As of June 9, 2005, McRae A Investment Company, LLC (“A Investment Co.”), of which Daniel Gary McRae and James William McRae are the managers (the “Managers”), owned 649,734 shares of the Company’s Class A common stock, and McRae B Investment Company, LLC (“B Investment Co.”), of which the Managers are the managers, owned 323,711 shares of the Company’s Class B common stock and 290,000 shares of the Company’s Class A common stock. The Managers, A Investment Co., Lorraine Hamilton McRae and the estate of Branson J. McRae (the “Estate”) are party to A Investment Co.’s Operating Agreement, which provides, subject to certain limited exceptions, that the management, operation and control of A Investment Co. is vested exclusively with its managers as a result of which the Managers have voting and dispositive power over the shares of the Company’s common stock owned by A Investment Co. The Managers, B Investment Co., Lorraine Hamilton McRae and the Estate are party to B Investment Co.’s Operating Agreement, which provides, subject to certain limited exceptions, that the management, operation and control of B. Investment Co. is vested exclusively with its managers as a result of which the Managers have voting and dispositive power over the shares of the Company’s common stock owned by B Investment Co.

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THE PROPOSED AMENDMENTS

     The following is a description of the material terms and effects of the transaction. Copies of the proposed certificates of amendment to our Certificate of Incorporation, effecting the reverse stock split and the forward stock split following immediately thereafter, are attached as Appendix A to this proxy statement and are referred to herein as the “proposed amendments.” This discussion does not include all of the information that may be important to you. You should read the proposed certificates of amendment and this proxy statement and related appendices before deciding how to vote at the Special Meeting.

The Structure of the Transaction

     The transaction includes both a reverse stock split and a forward stock split of the common stock. If the transaction is approved by stockholders and implemented by the board of directors, the transaction is expected to occur as soon as practicable after the Special Meeting.

     Upon consummation of the reverse split, each registered stockholder at the effective time would receive 1 share of common stock for each 200 shares of common stock held by such stockholder at that time. If a registered stockholder holds 200 or more shares of a particular class of common stock, such stockholder’s fractional share interests would not be cashed out after the reverse stock split. Any registered stockholder who holds fewer than 200 shares of a particular class of common stock at the effective time would receive a cash payment of $14.25 for each share of such class owned immediately before the effective time.

     Immediately following the reverse split, all stockholders who are not cashed out would receive 200 shares of common stock for every 1 share of common stock they held following the reverse split and of the same class they held before the reverse split. Consequently, such stockholders would be restored to their share holdings immediately prior to the transaction, and the number of shares held by them would not be affected by the transaction.

     Under Delaware law the proposed charter amendments would operate only at the record holder level, as a result of which beneficial holders who hold less than 200 shares of a particular class of common stock in “street name” immediately before the reverse stock split would not have such shares cashed out in the transaction. However, we plan to work with brokers and nominees to offer to treat stockholders holding shares in street name in substantially the same manner as stockholders whose shares are registered in their names. To determine the transaction’s effect on any shares you hold in street name, you should contact your broker, bank or other nominee. Please see the following sections herein for further discussion on the treatment of shares held in street name: “Summary Term Sheet,” “Questions and Answers,” “The Special Meeting – Who Can Vote at the Special Meeting,” and “The Proposed Amendments — Exchange of Certificates; Payment of Cash Consideration.”

Conversion of Shares in the Transaction

     At the effective time of the transaction:

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     We (along with any other person or entity to which we may delegate or assign any responsibility or task with respect thereto) shall have full discretion and exclusive authority (subject to its right and power to so delegate or assign such authority) to:

     For purposes of effecting the transaction, we may, in our sole discretion, but without any obligation to do so:

     Rule 12g5-1 under the Exchange Act provides that, for the purpose of determining whether an issuer is subject to the registration provisions of the Exchange Act, securities shall be deemed to be “held of record” by each person who is identified as the owner of such securities on the records of security holders maintained by or on behalf of the issuer, subject to the following:

Exchange of Certificates; Payment of Cash Consideration

     Promptly after the transaction, we will mail to each holder who appears to have owned of record fewer than 200 shares of a particular class of common stock immediately before the effective time of the transaction a letter

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of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the certificates shall pass, only upon delivery of the certificates to us) and instructions to effect the surrender of the certificates in exchange for the cash payment payable with respect to such certificates. Upon surrender of a certificate for cancellation to us, together with such letter of transmittal, duly completed and executed and containing the certification that the holder of the certificate holds fewer than 200 shares of a particular class, and such other customary documents as may be required pursuant to such instructions, the holder of such certificate will receive a cash payment payable with respect to the shares formerly represented by such certificate and the certificate so surrendered shall be cancelled.

     After the reverse stock split and pending surrender for cancellation, all certificates representing shares of common stock that, under the terms of the transaction, would be cashed out and not be subject to the forward stock split would represent only the right to receive cash consideration after the transaction of $14.25 for each of such shares cashed out by the transaction, payable upon surrender of such certificates to us.

     If your shares are held in street name, under Delaware law the proposed charter amendments would not impact your shares. However, we plan to work with brokers and nominees to offer to treat stockholders holding shares in street name in substantially the same manner as stockholders whose shares are registered in their names. To determine the transaction’s effect on any shares you hold in street name, you should contact your broker, bank or other nominee.

YOU SHOULD NOT SEND YOUR STOCK CERTIFICATES NOW. YOU SHOULD SEND THEM ONLY AFTER YOU RECEIVE A LETTER OF TRANSMITTAL FROM THE COMPANY. IF THE TRANSACTION IS APPROVED AT THE SPECIAL MEETING, LETTERS OF TRANSMITTAL WILL BE MAILED SOON AFTER THE TRANSACTION IS COMPLETED.

Effective Time of Transaction

     If the transaction is approved by our stockholders and implemented by the board of directors (refer to sections above entitled “Special Factors — Conditions to the Completion of the Transaction” and “Special Factors — Reservation of Rights”), it is anticipated that the transaction will occur as soon as practicable after the Special Meeting. However, the board of directors has reserved the right to defer the transaction until as late as December 31, 2005, or to abandon (and not implement) the transaction. See “Special Factors – Reservation of Rights” above.

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SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS

     The following table sets forth the common stock beneficially owned by the only beneficial owners, known to us as of July 11, 2005, of more than five percent of our Class A and Class B shares, and by the directors and executive officers as a group. Beneficial ownership of common stock by individual directors and the executive officers is disclosed in the section immediately following.

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SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

     The following table sets forth the name of each of our directors, his principal occupation (including our executive officers), and the common stock beneficially owned by him as of July 11, 2005, of our Class A and Class B shares.