TO OUR STOCKHOLDERS

Every statement tells a story. Some are just more obvious than others.

We want to take the next few pages to detail  for you what our story was in 1996
and what our financial  statements  have to tell.  This was clearly a transition
year for our Company,  so, while reading annual statements may be a terribly dry
sport to some, your attention will be rewarded by a much better understanding of
our future prospects.

Let's start with the balance sheet.  On page 8, you'll see  comparative  balance
sheets  for 1996 and 1995.  Before we review the  ending  numbers,  let's take a
moment  to  review  how we got  there.  We  started  1996,  on the  heels of the
Company's first year with an operating loss,  $1,388,987 pre-tax.  Combined with
an  already  leveraged  balance  sheet,  our bank debt stood at a new record for
January,  topping $11.2 million.  While we moved quickly to address our problems
(the first step being a  significant  reduction in our  workforce),  the efforts
were not  enough to prevent  our  lender  from  constructively  terminating  our
relationship.  Without a competitive  banking  relationship,  our prospects were
limited.

Those prospects began to change,  however, when the Company received an infusion
of capital from  Riedman  Corporation  of  $1,500,000  in June.  As part of that
transaction, Daniel Green issued 475,000 new shares of common stock. Ultimately,
in conjunction,  Warren Reardon purchased 31,645 of these shares,  making a very
important statement about his commitment and belief in the Company's future.

Under Warren's leadership,  the employees of Daniel Green then set out to tackle
our balance sheet  problems.  The result of their  efforts?  Turn to page 9, the
Statements of Cash Flows. A very important  sub-total is listed halfway down the
page, "Net cash provided by operating activities." It was a positive $3,023,818.
Two numbers in particular jump off the schedule,  accounts receivable ($628,346)
and  inventories  ($2,446,540).  The  inventory  is  detailed  in  note  #2  and
represents the result of some very aggressive inventory  management.  Ed Vedder,
Larry  Sargeant and Gary  Miller,  in  particular,  deserve a large share of the
credit.  Ultimately,  if we can  operate and build the  business  with less hard
assets, we can significantly increase the value of our operations.

The second initiative was to work as quickly as possible to replace our existing
lender. We recently signed a letter of commitment with Key Bank to do just that.
In 1996,  we paid  Fleet  Bank an  average  interest  rate of 9.54% and the rate
currently stands at 10.25%, or Prime Plus 2%. Our new relationship with Key is a
floating  interest rate. As we write to you in late  February,  this new rate of
7.75%  stands in sharp  contrast  to our old rate of  10.25%.  Even at our lower
level of debt, this new rate will result in a substantial annual savings.

The third  initiative  to  strengthen  our balance  sheet  focused on our "Other
Assets." If you turn to page 11, note #5,  while  arcane,  explains  the current
status of our  employees'  retirement  plan. As you can see, the Company has set
aside  considerably  more  assets  ($11,123,411)  than  the  liabilities  it has
incurred (actuarial present value of accumulated obligation - $7,338,486).  This
excess  represents  assets  which can be more  effectively  used to shore up the
financial footings of Daniel Green.

<PAGE>


At Daniel  Green,  we remain  strongly  commited to our  tradition  of providing
retirement  benefits  to our  employees.  On January  31st of 1997,  a series of
employee  meetings  were  held  announcing  steps we will be  taking in the near
future to change the nature of those benefits.  First, we will be implementing a
401(k) savings plan. Secondly, in the process of "reverting" the pension plan, a
significant  amount of  capital  will be freed up and flow back to the  Company.
These funds will remain in the Company and be used primarily to reduce our debt.
Lastly, as part of this transaction, we will be making a one time grant of stock
to  current  employees,  making  them  partners  and  vested  co-workers  in our
financial well being. I should note, for those readers who are already retirees,
you will see no change to your existing benefits.

As we go through the year, we will  continue to provide more details  concerning
these changes,  but rest assured,  in addition to those of our  employees,  your
interests as shareholders will be well represented in the process.

These  steps,  the June  infusion of  capital,  inventory  and cash  management,
renegotiating our debt and restructuring our retirement benefits,  all add up to
a very solid performance on the balance sheet front.

Turning to our Profit and Loss statement,  page 7, the first encouraging item is
our sales of $23,060,724.  We were able to maintain a sales level  comparable to
last year, while selling considerably fewer patterns.

We wrote to you in last year's Annual Statement about the culling of our product
line.  While it caused us to  realize a charge to write  down our  inventory  in
1995,  it clearly  positioned us to improve our margins and manage our inventory
level. This focused approach, of course, means you better have some styles which
will sell. Jane Bynon, new to the Company in 1996,  deserves a lot of credit for
changing our focus to also include world sourcing.

Our  1997  line  features  some  new and  innovative  products  which  show  the
considerable  influence  of  imports.  The chart on page 5 shows  the  impact of
non-domestic footwear in our line. This trend is likely to continue.

On the distribution side, we've also strengthened our position.  The role of the
traditional  independent  shoe store has  diminished  over the  years.  As these
outlets have lost their market  share,  we have been  successful  in forging new
relationships.  An expanding presence in May Co., J.C. Penney and even Cabella's
catalog,  combined with some of our old stalwarts such as Arizona Mail Order and
Nordstrom's, helped replace the loss of old outlets.

The cost of goods sold,  rose as a percentage of net sales to 79.8%.  This is up
from 79.6% in 1995 and 76.3% in 1994, a rise  seemingly at odds with our earlier
comments.  Much of the rise, however, is a result of a conscious decision on our
part.

As we  finished  1996,  management  took a  close  look at our  inventory,  both
finished and raw material. What we developed as a result of that exercise was an
aggressive  and honest  assessment of the real value of our factory  damaged and
discontinued or close-out styles.  Those two categories totaled 134,000 pairs of
shoes.  We've done three very important things.

                                       2
<PAGE>


First,  we've  recognized the decreased  value of this inventory by two separate
charges to our  financial  statements.  These charges  totaled  $479,000 and are
included as part of our Cost of Goods Sold. Excluding this charge, our margin in
1996 would have been 77.7%, a much more favorable comparison to 1995.

Secondly,  we have moved  quickly to realize what value we can from these shoes.
Since the first of the year,  we have  completed  several  sales  totaling  over
50,000 pairs. Encouragingly, these sales were at an average price which modestly
exceeded the value to which they had been written  down. We are well underway to
dealing  with this  inventory  and do not expect it to have any future  material
impact.

Lastly,  and most importantly,  we are aggressively  managing our production and
styles to mitigate these types of problems in the future.

Our selling and administrative  expenses,  while down from 1995, were also at an
unacceptably high level,  19.3% of sales. We believe that the 1994 SG&A level is
an  achievable  benchmark,  and  we've  already  taken  steps to move us in that
direction.  In the fall of last year,  the  decision  was made to close our Lake
George and Finger  Lakes  stores and our New York City sales  office.  Net costs
associated with operating these locations  totaled $281,516 in 1996. In 1997, we
will  incur no  costs  associated  with  these  operations,  and in light of the
write-down of close-outs and damaged inventory  discussed  earlier,  the lack of
these  stores will have no material  negative  impact on our Cost of Goods Sold.
Our  Dolgeville  store remains open and continues to be an important part of our
operations.

We've also attacked other costs within the business and have already  achieved a
significant savings in the cost of our health insurance and audit fees.

We have  detailed  a separate  line item on the  financial  statement  this year
entitled  "Other  Expenses."  If you turn to note #9 on page 13, you'll see what
makes up this $497,230.  The total is important because these are expenses which
truly are  non-recurring  and are  unrelated  to the ongoing  nature of our core
business.

Finally,  I'd like you to turn to note #6, page 11.  You'll see that the company
has $767,400 and $1,234,400 of loss carryforwards  available for Federal and New
York State tax purposes  respectively.  These are two important  assets which we
are going to convert to cash the old fashioned way..soon!

Before  leaving,  one last note. Stan Kabot joined our team earlier this year as
our new  Chief  Financial  Officer.  Stan  brings  with him a  strong  financial
background,  having worked both in public accounting  (Price  Waterhouse) and in
private industry (Schlegel Corp. and Indium Corp). As we move forward, Stan will
be a valuable resource for our Company.

Best wishes to you in 1997.  Buy more slippers!



James R. Riedman                           Warren J. Reardon III
Chairman & Chief Executive Officer         President & Chief Operating Officer

                                       3
<PAGE>

Sales

Total net sales for 1996,  were down by  $500,048,  a decrease  of 2.1% and were
relatively flat in comparison to 1995.

Total pairs  shipped in 1996  dropped 5.6% to  1,513,803  in  comparison  to the
1,603,842  pairs  shipped  in 1995.  Total  pairs  shipped in 1994  amounted  to
1,583,675.  The  average  selling  price  per pair  was  $15.23  in 1996,  which
represents an increase of 3.7% over 1995's average selling price of $14.69. This
increase is related to the pricing program implemented by the Company throughout
the year.

The sales mix between 1996 and last year has remained stable with no significant
changes within each product group. In 1996,  slippers  represented  68.7% of our
total shipments as compared with 69.2% in 1995. In 1994,  slippers accounted for
59.5% of our shipments.  "Outdorable" sales were 29.6% of our shipments in 1996,
while in 1995 they were 27.4%. In 1994, 32% of pairs sold were in the Outdorable
product line.

The Company  anticipates a small increase in the number of slippers and shoes it
will sell in 1997. Initial reaction to new styles has been very positive.

Expenses

There was a slight  increase in cost of goods sold in 1996.  As a percentage  of
net sales,  it increased to 79.8% from 79.6% in 1995. In 1994,  this  percentage
was 76.3%.

Direct material  purchases  decreased in 1996 by 15.6% over 1995.  While overall
direct  labor  costs went down by 20.1%,  the labor cost per pair  increased  to
$2.67 in 1996  versus  $2.35 in 1995.  In 1994,  labor  cost per pair was $2.55.
Other manufacturing  expenses declined by approximately  $412,000 as compared to
1995. Due to a reduction in our work force, we experienced a 17.4% decrease from
1995 in our payroll taxes and groupinsurance  program.  Our spending levels went
down from last year which resulted in sales/use taxes being reduced by 28.8%. In
addition,  fewer  maintenance  and repair projects in 1996, as compared to 1995,
resulted in a cost reduction of 37.9%.

Selling,  general and administrative expenses went down by $257,578 or 5.5% from
last year. The majority of savings were realized through a reduction in spending
in the following areas:  advertising,  publicity and travel.  Additional savings
were the result of cost-containment efforts made by the Company in 1996 and also
a reduction in our bad debt expense by 46% from 1995.

In the fourth  quarter of fiscal 1996,  the Company made a decision to close its
retail outlets located in the Finger Lakes and Lake George  shopping  complexes.
The decision was made based on poor  performance and lower than expected returns
on the investment required to operate the retail store outlets. In addition, the
Company  also  closed  its New York sales  office due to limited  use. A pre-tax
charge of approximately $191,000 was recorded for the exit costs associated with
these closings. The Company will continue to operate its factory outlet store in
Dolgeville.

                                       4
<PAGE>


The  $152,370  decrease in interest  expense  from 1995 to 1996 was due to lower
borrowings,  even though the Company was  experiencing  higher average  interest
charges. The average interest rate in 1996 was 9.54%.

Earnings were  substantially  impacted by a number of  non-recurring  items that
were incurred  during the year.  As a result,  the Company  recorded  additional
expenses  of $497,000  in 1996.  Based on the  settlement  of these  items,  the
Company does not expect to incur similar expenses in the foreseeable future. The
expenses consisted of:

-    $53,000  in  legal  fees  and  settlement   charges  related  to  a  patent
     infringement lawsuit;
-    $191,000 associated with closing a sales office and two outlet stores;
-    $118,000 incurred to eliminate  non-traditional footwear from the Company's
     product line;
-    $114,000  in  professional  fees  for  financial  and  investment   banking
     services; and
-    $21,000 in severance payments for terminated employees.

Accounts Receivable

At December 31,  accounts  receivable  were  historically  at their lowest level
since 1994.  Accounts  receivable  decreased by $628,346 or 8.7% from last year.
The Company's seven largest  customers  accounted for  approximately  50% of net
sales  for  1996.  At  December  31,  1996,   these   customers   accounted  for
approximately  60%  of net  accounts  receivable.  An  aggressive  approach  was
implemented in 1996 to ensure that  collections were made on a timely basis, and
the Company plans are to continue this practice into 1997.

Inventories

Total  inventories  decreased  significantly  from last year,  by  $2,446,540 or
22.4%.  Major  reductions  took place in raw materials and finished  goods while
work-in-process  increased  by $569,654.  The  reduction  in raw  materials  was
related to lower purchasing levels required to support manufacturing activities.
In addition, the Company had a write-down of approximately $280,000 for obsolete
and excess raw  material.  The  increase  in  work-in-process  was the result of
increased production activity during December in Dolgeville and in the Dominican
Republic.  Finished  goods went down by  $2,402,333  or 32.1% for the year.  Our
finished goods  inventory of various slipper and shoe styles amounted to 460,892
pairs in stock,  compared  to 612,041  pairs at  year-end  1995.  As in previous
years,  the  Company  thoroughly  evaluated  its product  lines in December  and
determined  which styles to discontinue and effectively  increased the number of
discontinued  styles.  The review  resulted in the  write-down of finished goods
inventory by $361,619 in 1996, compared to $173,692 in 1995.

Debt

Total debt consists of notes payable,  the line of credit, and the capital lease
obligation.  At the end of 1996,  total debt was  $6,861,555  as  compared  with
$11,216,067  in 1995 for an  overall  decrease  of  $4,354,512  or  38.8%.  This
significant  change  reverses the trend of increasing debt loads that took place
in the prior three years  (1993-  1995).  Total debt was reduced by the proceeds
from issuing common stock in 1996, by making regular repayments of the debt, and
by improved cash management techniques.

                                       5
<PAGE>


The Company has a commitment  from a new lender and will be refinancing its line
of credit and  certain  long-term  notes  payable.  Our new lender has agreed to
provide the Company with the following:

-    a $8,000,000 revolving line of credit;
-    a $1,000,000 equipment line of credit; and
-    a $2,300,000 mortgage/term loan.

The credit  facility is for a three year period and will bear  interest at LIBOR
plus 2.25%.

Cash Flow

As noted in the  Statements  of Cash Flows,  net cash flow provided by operating
activities  was  $3,023,818 in 1996,  in comparison to a negative  $2,135,287 in
1995. The net cash flows from operating  activities in 1996 were generated by an
increase in accounts payable and decreases in accounts receivable and inventory.
Cash flows used in investing activities declined  significantly during the year,
particularly  when compared to the level of capital  spending in 1995. Cash flow
from financing  activities were  considerably less in 1996 than 1995 because the
Company made  significant  repayments  against its line of credit with the bank,
offset  by  $1,500,000  for the  issuance  of  common  stock.  Net  cash on hand
decreased  by $16,549 in 1996.  Net cash on hand at  year-end  was  $13,213,  as
compared with $29,762 in 1995.

Financial Analysis

An analysis of the Company's  financial position shows the effects of the year's
activity. Debt ratios (debt/equity,  liabilities/equity,  and total assets/total
liabilities)   and  liquidity   ratios  (current  and  quick  ratios)   improved
significantly in 1996 due to lower debt levels. Profitability ratios reflect the
net loss for the year, but are considerably less

Disclosure Statement

Management  is not aware of any other  known  demands,  commitments,  or events,
other than those  discussed  above which would  materially  affect the company's
liquidity.  There are not material  capital  expenditures  or commitments  which
would affect capital resources.


                                       6
<PAGE>

<TABLE>
<CAPTION>

STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994


                                                            Note         1996           1995            1994
<S>                                                          <C>   <C>             <C>            <C>

Net Sales                                                           $ 23,060,724    $ 23,560,772    $ 23,214,609 
                                                                   
Cost of goods sold                                                    18,404,790      18,762,134      17,707,454
Selling and administrative expenses                                    4,445,901       4,703,479       3,693,204
Earnings before other expenses and income taxes                          210,033          95,159       1,813,951
   Other expenses:                                                 
   Interest expense                                                      820,090         972,460         721,478
                                                                   
   Other expenses                                              9         497,230         511,686           --
                                                                   
Total other expenses                                                   1,317,320       1,484,146         721,478
(Loss) earnings before income taxes                                   (1,107,287)     (1,388,987)      1,092,473
Income tax benefit (provision)                                 6         417,102         535,226       (457,145)
                                                                   
Net (loss) earnings                                                 $   (690,185)   $   (853,761)   $    635,328
                                                                   
Net (loss) earnings per common share                                $       (.54)   $       (.82)   $        .61
                                                        
See notes to financial statements.
</TABLE>


<TABLE>
<CAPTION>

STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994


     Common Stock
                                    Shares          Amount    Additional Paid-in    Retained        Total
                                                                  Capital           Earnings
<S>                               <C>         <C>             <C>               <C>            <C>

Balance, January 1, 1994           1,036,892   $  2,592,230           --         $  7,882,162    $ 10,474,392 
     Net earnings, 1994                 --             --             --              635,328         635,328
Balance, December 31, 1994         1,036,892      2,592,230           --            8,517,490      11,109,720
     Net loss, 1995                     --             --             --             (853,761)       (853,761)
Balance, December 31, 1995         1,036,892      2,592,230           --            7,663,729      10,255,959
     Issuance of common stock        475,000      1,187,500        312,500               --         1,500,000
     Net loss, 1996                     --             --             --             (690,185)       (690,185)
Balance, December 31, 1996         1,511,892   $  3,779,730   $    312,500       $  6,973,544    $ 11,065,774
                                                                            

See notes to financial statements.

</TABLE>

                                       7
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31, 1996 and 1995


Assets                                                                             Notes          1996                 1995
<S>                                                                                <C>      <C>                 <C>

Current Assets:
     Cash                                                                                    $      13,213       $     29,762
     Accounts receivable (less allowances of $200,000 in 1996 and $275,000 in 1995)   7          6,582,081          7,210,427 
     Inventories                                                                     2,7         8,453,703         10,900,243
     Deferred tax asset                                                               6                  -            320,977
     Income taxes receivable                                                                       157,704            458,887
     Other current assets                                                                           69,479            149,585
Total current assets                                                                            15,276,180         19,069,881
Property - Net                                                                        3,7        1,798,315          2,076,396
Other Assets:                                                                            
     Prepaid pension expense                                                           5         2,375,369          2,281,237
     Other assets                                                                                  114,963            144,447
Total other assets                                                                               2,490,332          2,425,684
                                                                                         
Total assets                                                                                   $19,564,827        $23,571,961
                                                                                         
Liabilities                                                                              
Current Liabilities:                                                                     
     Note payable - line of credit                                                      7   $    4,537,856      $   8,301,730
     Accounts payable                                                                              480,130            311,982
     Accrued salaries and commissions                                                              209,427            211,808
     Accrued cooperative advertising                                                               307,909            300,000
     Other accrued liabilities                                                                     119,123            165,794
     Notes payable - current                                                            7          591,979            591,129
     Capital lease obligation - current                                                             23,480             17,115
     Deferred income tax liability - current                                            6          258,193                  -
Total current liabilities                                                                        6,528,097          9,899,558
                                                                                         
Capital Lease Obligation - noncurrent                                                                    -             10,916
Notes Payable - noncurrent                                                              7        1,708,240          2,295,177
Deferred Income Tax Liability  - noncurrent                                             6          262,716          1,110,351
Total liabilities                                                                                8,499,053         13,316,002
                                                                                         
Stockholders' Equity:                                                                   8 
Common stock - $2.50 par value; authorized 4,000,000 shares;                             
     issued and outstanding in 1996 and 1995: 1,511,892shares                            
   and 1,036,892 shares, respectively                                                            3,779,730          2,592,230 
Additional paid-in-capital                                                                         312,500                  -
Retained earnings                                                                                6,973,544          7,663,729 
     Total stockholders' equity                                                                 11,065,774         10,255,959
                                                                                         
Total liabilities and stockholders' equity                                                    $ 19,564,827       $ 23,571,961
                                                                              


See notes to financial statements.

</TABLE>

                                       8
<PAGE>
<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994


                                                                1996           1995         1994
<S>                                                      <C>            <C>            <C>

Operating Activities:
     Net (loss) earnings                                  $  (690,185)   $  (853,761)   $   635,328
     Adjustments to reconcile net(loss) earnings to net
     cash provided (used) by operating activities:
         Depreciation and amortization                        398,653        356,345        361,391
         Net pension credit                                   (94,132)      (101,340)       (64,862)
         Loss (gain) on sale of property and equipment         89,819           --          (15,933)
     Changes in assets andliabilities:
                (Increase) decrease in:
                Accounts receivable                           628,346       (577,370)      (423,733)
                Inventories                                 2,446,540         70,437     (1,434,960)
                Other current assets                          381,289       (519,272)        (4,851)
                Other noncurrent assets                         4,948        (53,459)       (72,194)
     Increase (decrease) in:
                Accounts payable                              168,148       (120,904)       (49,980)
                Accrued salaries and commissions               (2,381)        25,199         17,368
                Accrued cooperative advertising                 7,909        120,000           --
                Income taxes payable                             --         (402,947)       242,414
                Other accrued liabilities                     (46,671)        18,154         14,801
                Deferred tax liability                       (268,465)       (96,369)        44,503
Net cash provided (used) by operating activities            3,023,818     (2,135,287)      (750,708)

Investing Activities:
     Purchases of property and equipment                     (201,355)      (459,406)      (300,001)
     Proceeds from disposal of property and equipment          15,500           --           17,510
Net cash used by investing activities                        (185,855)      (459,406)      (282,491)

Financing Activities:
     Net borrowings (payments) from line of credit         (3,763,874)     3,194,468       (767,515)
     Issuance of common stock                               1,500,000           --             --
     Repayments of notes payable                             (586,087)      (590,078)      (537,902)
     Principal payments under capital lease obligation         (4,551)        (3,486)       (60,111)
     Proceeds from issuance of notes payable                     --             --        2,300,000
Net cash (used) provided by financing activities           (2,854,512)     2,600,904        934,472

Net (decrease) increase in cash                               (16,549)         6,211        (98,727)
Cash, beginning of year                                        29,762         23,551        122,278
Cash, end of year                                         $    13,213    $    29,762    $    23,551

Supplemental cash flow information:
Cash paid during the year for interest                    $   847,649    $   954,646    $   698,291
Cash paid during the year for income taxes                $      --      $    40,993    $   170,229


See notes to financial statements.
</TABLE>

                                       9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - The Company is engaged  exclusively in the manufacture
and sale of leisure  footwear.  Sales are made  principally  to retailers in the
United States.

Estimates - The preparation of financial statements in conformity with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Inventories  -  Inventories  are stated at the lower of cost or market.  Cost is
determined on a first-in, first-out basis.

Property  and  Accumulated  Depreciation  -  Property  is stated  at cost,  less
accumulated  depreciation.  Expenditures  for  maintenance,  repairs,  and minor
renewals and  betterments  are charged to earnings as incurred.  Replacements of
significant items and major renewals and betterments are capitalized.

Depreciation  is computed  using the  straight-line  method with useful lives as
follows:  Buildings and water plant - 10-67 years; machinery and equipment -5-15
years.

Income  Taxes - Income  taxes  are  provided  on the  earnings  (losses)  in the
financial  statements.  Deferred income taxes are provided to reflect the impact
of "temporary  differences"  between the amounts of assets and  liabilities  for
financial  reporting  purposes  and such  amounts  as  measured  by tax laws and
regulations.  Tax credits are  recognized  as a reduction  to income taxes inthe
year the credits are earned.

Net Earnings  (Loss) Per Common Share - Net earnings (loss) per common share are
based on the weighted  average  number of common shares  outstanding  during the
year and  totalled  1,280,978  shares in 1996 and  1,036,892  shares in 1995 and
1994.

Concentration of Credit Risk - Financial  instruments  that potentially  subject
the Company to credit  risk  consist of accounts  receivable.  Companies  in the
retail  industry  comprise  asignificant  portion  of  the  accounts  receivable
balance; collateral is not required.

2. INVENTORIES
Inventories as of December 31 consisted of the following:
                                1996               1995
Finished goods           $   5,075,618      $    7,477,851
Work-in-process              1,351,945             782,291
Raw material                 2,026,140           2,640,101
Total                    $   8,453,703       $  10,900,243

3. PROPERTY
Property as of December 31 consisted of the following:
                               1996                 1995
Land                   $        19,055      $       19,555
Buildings and water plant    3,251,913           3,251,913
Machinery and equipment      5,427,711           5,415,774
                             8,698,679               8,687,242
Less accumulated
   depreciation              6,900,364           6,610,846
Property - net           $   1,798,315        $  2,076,396

4. LEASES
The Company leases  machinery,  equipment,  office space and retail outlet space
generally under  cancellable  lease agreements which are classified as operating
leases for financial  reporting  purposes.  Rental expense was $296,399 in 1996,
$219,950 in 1995,  and  $162,374  in 1994.  The leases  expire at various  dates
through 2000 and provide for the following minimum rentals:

1997                                             $ 107,000
1998                                                95,000
1999                                                70,000
2000                                                59,000
2001                                                14,000
Total                                           $  345,000

                                       10
<PAGE>
5.  PENSION PLAN
The Company has a defined benefit  pension plan covering all regular  employees.
Benefits  earned  are  based on  years  of  service  and the  employee's  annual
compensation  over the entire service time. It has been the Company's  policy to
fund the maximum  amount which can be deducted for federal  income tax purposes.
For 1996,  1995, and 1994, no  contribution  was allowed due to the full funding
limitation of the Internal Revenue Code.

The net pension credits included the followingcomponents:

                              1996               1995               1994

Service cost             $   285,204        $   201,635       $    233,264 
Interest cost                570,251            560,720            572,966
Actual return on                                             
   plan assets            (1,003,253)        (1,271,440)          (234,081)
Net amortization                                             
   and deferral               53,666            407,745           (637,041)
                                                             
Net pension credit       $   (94,132)       $  (101,340)       $   (64,892)
                                                         
A  reconciliation  of the pension  plan's  funded  status,  determined as of the
plan's year end,  September  30, 1996 and 1995,  with amounts  recognized in the
Company's balance sheets follows:

                                                  1996               1995
Actuarial present value of
   accumulated benefit
   obligation (including
   vested benefits of 1996,
   $7,232,953; 1995, $7,250,866)             $  7,338,486        $  7,348,094
Plan assets at fair value, primarily
   listed stocks and bonds, and
   guaranteed investment contract             $11,123,411        $ 10,662,651
Actuarial present value of projected
   benefit obligation                          (8,595,110)         (8,779,025)
Plan assets in excess of projected
   benefit obligation                           2,528,301           1,883,626
Unrecognized net loss (gain) from
   past experience different from
   that assumed                                  (173,434)            232,219
Prior service cost not yet recognized
   in net periodic pension cost                   650,715             921,647
Unrecognized net asset as of
   Oct. 1, 1985 being recognized
   over 16 years                                 (630,213)           (756,255)
Prepaid pension expense                      $  2,375,369        $  2,281,237

The following  assumptions were used in determining the actuarial  present value
of the projected benefit obligation for all three years:

                                  1996        1995       1994

Discount rate                      7.0%       7.0%       8.5%
Rate of increase in future
   compensation levels             3.5%       3.5%       3.5%
The expected long-term
   rate of return on plan assets   8.5%       8.5%       8.5%

Subsequent to December 31, 1996,  the Company  elected to terminate the Plan and
is implementing a defined  contribution  plan. The Company has not completed its
analyses of the financial  statement  effect of terminating  the plan,  however,
upon  completion,  it is  expected  to have a positive  effect on the  Company's
financial position and results of operations.

6. INCOME TAXES
The provision (benefit) for income taxes consists of:

                      1996              1995            1994

Current:
   Federal        $(156,500)        $(421,335)        $ 357,176 
   State              3,112           (17,522)           55,152
                   (153,388)         (438,857)          412,328
                                                    
Deferred:                                           
   Federal         (211,581)          (34,603)           (2,324)
   State            (52,133)          (61,766)           47,141
                   (263,714)          (96,369)           44,817
                                                    
Total             $(417,102)        $(535,226)        $ 457,145
                                                    
                                               
The  difference  between tax computed at the statutory  U.S.  federal income tax
rate and the Company's effective tax rate is as follows:

                                   1996         1995         1994
(Benefit) provision
   at statutory rate            $(376,500)   $(472,300)   $ 371,500
State and other taxes,
   net of federal tax benefit     (29,700)     (71,600)      87,840
Other                             (10,902)       8,674       (2,195)

(Benefit) provision for
   income taxes                 $(417,102)   $(535,226)   $ 457,145


                                       11
<PAGE>

At December 31, 1996, the Company has  approximately  $767,400 and $1,234,400 of
net operating  loss  carryforwards  available for Federal and New York State tax
purposes,  respectively,  which expire in 2011. For federal purposes, the entire
net operating loss generated in 1995 was utilized to generate a refund of income
taxes previously paid.

Components of the Company's  deferred tax asset and liability as of December 31,
1996 and 1995 are as follows:
                                                   1996
                                            Current    Noncurrent
Assets
Contributions carryover                   $  18,256         --
Non-deductible bad debt reserves             48,750         --
Uniform capitalization of inventory         159,352         --
Non-deductible sales allowances              29,250         --
Non-deductible inventory reserves              --           --
State net operating loss carryforward       110,173         --
Federal net operating loss carryforward     260,916         --
Federal credit carryforwards                 13,100         --

Liabilities
Prepaid pension expense                    (897,990)        --
Depreciation                                   --       (262,716)
Deferred tax liability                    $(258,193)   $(262,716)


                                                      1995
                                              Current      Noncurrent
Assets
Contributions carryover                   $     8,055          --
Non-deductible bad debt reserves               78,000          --
Uniform capitalization of inventory           122,283          --
Non-deductible sales allowances                29,250          --
Non-deductible inventory reserves              83,389          --
State net operating loss carryforward            --          56,677
Federal net operating loss carryforward          --            --
Federal credit carryforwards                     --            --

Liabilities
Prepaid pension expense                          --        (889,682)
Depreciation                                     --        (277,346)
Deferred tax asset (liability)            $   320,977   $(1,110,351)

A valuation  allowance has not been provided against the Company's  deferred tax
assets as of December 31, 1996 and 1995,  since the Company  believes it is more
likely than not that the deferred tax assets will be realized in future years.

7.   NOTES PAYABLE
Subsequent to December 31, 1996,  the Company  received a commitment  from a new
lender for a revolving line of credit ("revolver"),  an equipment line of credit
and a  mortgage/term  loan.  The  Company  expects to execute and  finalize  the
lending agreement in the first quarter of1997.

Under the terms of the  commitment,  the borrowing base for the revolver will be
based on certain  balances of accounts  receivable and inventory,  as defined in
the agreement.  The maximum credit amount under the revolver will be $8,000,000,
the interest rate will be LIBOR plus 2.25% and the revolver will expire on April
30,  2000.  The  revolver  will be secured by  accounts  receivable,  inventory,
equipment and cash.

The equipment line of credit will be for a maximum of  $1,000,000,  the interest
rate will be LIBOR plus 2.25%,  the  expiration  date will be on April 30, 2000,
and it will be secured by new equipment purchased thereunder.

The  minimum  amount  that  will  be  available  under  the  mortgage/term  loan
approximates  $2,300,000  which  represents the total amount owed by the Company
under two notes  payable to its existing  lender as of December  31,  1996.  The
Company  has  the  ability  to  borrow  an  additional   $1,900,000   under  the
mortgage/term loan, which results in a total mortgage/term loan of$4,200,000, if
the Farmers' Home Administration  issues 80% guaranty on the total mortgage/term
loan.  The  mortgage/term  loan will be secured by the  Company's  manufacturing
facilities.

The balance owed under a line of credit to the Company's  existing  lender as of
December 31, 1996 and 1995 totalled $4,537,856 and $8,301,730, respectively.

                                       12
<PAGE>

The Company has the following long-term notes payable as of December 31:

Note 1 - Note payable to bank in monthly principal installments through December
1997 of $35,714 plus interest at the prime rate plus one percent.

Note 2 - Note  payable  to bank in  monthly  principal  installments  of $11,904
through December 1997 and $41,905 from January 1998 through April 2001; interest
is due monthly at the prime rate plus one percent.

                            1996           1995
Note 1 payable to bank   $  428,559   $  857,142
Note 2 payable to bank    1,819,058    1,961,906
Other notes payable          52,602       67,258
                         $2,300,219   $2,886,306
Less: Current portion       591,979      591,129
Noncurrent portion       $1,708,240   $2,295,177

The aggregate principal payments of notes payable are as follows:
1997                                             $ 591,979
1998                                               524,572
1999                                               513,173
2000                                               502,857
2001                                               167,638
Total                                          $ 2,300,219

The carrying  value of the  long-term  notes payable to bank  approximates  fair
value.

The existing  line of credit and the notes  payable  contain  certain  financial
covenants  relative  to  working  capital,  tangible  net  worth,  total debt to
tangible  net worth and  capital  expenditures.  In  addition,  the  payment  or
declaration  of  dividends  and  distributions  is  prohibited  unless a written
consent from the lender is received.  The Company was in  compliance  with these
financial  covenants as of December 31, 1996.  The Company was not in compliance
with certain of these  financial  covenants as of December 31, 1995. On March 5,
1996, the Company obtained waivers from the lender up to and including  December
31, 1995.

8.   STOCK OPTION PLAN
The Company has reserved  100,000  shares of its common stock for issuance under
the Company's Stock Incentive Plan which was adopted in 1995. The price at which
options can be exercised  shall be at least $1 more than 100% of the fair market
value of the  Company's  stock on the date of grant;  for an optionee who at the
time of grant  owns  more  than 10% of the  Company'sstock,  the  price at which
options can be exercised  shall be at least $1 more than 110% of the fair market
value of the Company's stock on the date of grant.

The stock option  activity for the years ended  December 31, 1996 and 1995 is as
follows:
                                          1996            1995
Options outstanding,
  beginning of theyear                   17,500            --   
Options granted                          10,000          17,500
Options cancelled                        (5,000)           --
Options outstanding, end of year         22,500          17,500
Options exercisable, end of year         22,500          17,500
                                                     
9.   OTHER EXPENSES                             
During 1996, the Company  recorded other expenses of  approximately  $497,000 in
the  statement of  operations  for items  considered  by  management  to be of a
nonrecurring  nature.  These expenses  included legal fees and a settlement cost
relative to a patent infringement  lawsuit ($53,000),  costs associated with the
closing of a sales office and two outlet stores  ($191,000),  costs  incurred to
eliminate  nontraditional  footwear  styles  from  the  Company's  product  line
($118,000),  professional fees associated with financial advisory and investment
banking services ($114,000) and various other costs ($21,000).

In the fourth quarter of 1995, the Company recorded an expense of $511,686 for a
write-off  of certain  raw  materials  inventory  associated  with a decision to
discontinue the production of certain styles of footwear.

                                       13

<PAGE>

<TABLE>
<CAPTION>
QUARTERLY FINANCIAL AND MARKET DATA
Summarized quarterly financial data for 1996 and 1995 (Unaudited)


1996                                     March 31      June 30     September 30   December 31
<S>                                 <C>            <C>            <C>           <C>
Net sales                            $ 3,763,545    $ 4,020,072    $ 7,341,607   $ 7,935,500
Gross profit on sales                    898,738        968,951      1,974,810       813,435
Net income (loss)                       (399,075)      (315,066)       196,508      (172,552)
Net income (loss) per common share          (.38)          (.30)           .13          (.11)

NASDAQ high bid                            4 1/8          3 1/2          3 3/4         3 3/4
NASDAQ low bid                             3 5/8          2 1/2          3 1/8         2 7/8

                                                                                        1995

Net sales                            $ 4,015,406    $ 4,610,074    $ 6,612,108   $ 8,323,184
Gross profit on sales                  1,146,554      1,198,206      1,984,921       468,957
Net income (loss)                       (207,010)      (212,753)       138,679      (572,677)
Net income (loss) per common share          (.20)          (.20)           .13          (.55)

NASDAQ high bid                            5 5/8          4 3/4          4 7/8         5 1/2
NASDAQ low bid                             3 1/4          3 5/8          3 5/8         4 1/2

Based on records  maintained by the Transfer Agent,  Bank of Boston  Shareholder
Services, the number of shareholders of record was 632 at year end.
</TABLE>


INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of
Daniel Green Company
Dolgeville, New York

We have audited the  accompanying  balance  sheets of Daniel Green Company as of
December  31,  1996  and  1995,  and  the  related   statements  of  operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1996. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects, the financial position of Daniel Green Company as of December 31, 1996
and 1995,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1996 in conformity  with generally
accepted accounting principles.



/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
January 24, 1997

                                       14

<PAGE>
<TABLE>
<CAPTION>

SELECTED FINANCIAL DATA



                                                1996           1995            1994           1993           1992

<S>                                       <C>             <C>             <C>            <C>           <C>

Net sales                                  $ 23,060,724    $ 23,560,772    $ 23,214,609   $ 24,125,228   $ 20,493,288
Income (loss) from continuing operations       (690,185)       (853,761)        635,328        293,423        438,718
Total assets                                 19,564,827      23,571,961      22,205,778     20,414,652     17,884,840
Long-term debt                                1,708,240       2,306,093       2,894,413      1,317,232      1,805,914

Income (loss) from continuing operations
per common share                                   (.54)           (.82)            .61            .28            .42

</TABLE>



Daniel Green Company's common stock is traded in the over-the-counter market and
is listed on the National  Association of Security Dealers  Automated  Quotation
system (NASDAQ) under the ticker symbol DAGR.

Copies of the Company's Annual Report on Form 10-K filed with the Securities and
Exchange  Commission  are available and will be furnished  upon written  request
directed to the Company's main office, Dolgeville, New York 13329.

                                       15
<PAGE>
Officers                                 Directors                             
                                                                               
                                         Edward Bloomberg                      
                                            Independent Investment Advisor     
James R. Riedman                                                               
   Chairman & Chief Executive Officer    Steven DePerrior                      
                                            Principal                          
Warren J. Reardon III                       William M. Mercer,Inc.             
   President & Chief Operating Officer                                         
                                         William L. Fay                        
W. Lee Bynon                                President                          
   Vice President of Sales                  Faytex Corp.                       
                                                                               
Stanley W. Kabot                         John B. French, Esq.                  
   Treasurer & Chief Financial Officer      Partner                            
                                            Sullivan & Worcester               
John B. French, Esq.                                                           
   Clerk                                 David T. Griffith                     
                                            President                          
                                            M. Griffith, Inc.                  
                                                                               
                                         Gregory Harden                        
                                            President                          
                                            Harden Furniture                   
                                                                               
                                         Gary E. Pflugfelder                   
                                            Sales Consultant                   
                                                                               
                                         Warren J. Reardon III                 
                                            President & Chief Operating Officer
                                                                               
                                         James R. Riedman                      
                                            President                          
                                         Riedman Corporation                   
                                                                               
                                          
                                          
                                       16