EXHIBIT 13

To Our Stockholders:

1998 marked the beginning of the "Rebuilding and Turnaround" of the Daniel Green
Company.  I would like to break my remarks  into two key areas.  First,  I would
like to  specifically  address  the  operating  results  for 1998  and  where we
currently  are as a  company.  Secondly,  I would  like to  share  with  you the
rebuilding and turnaround process that we have begun to implement for the future
of a strong and successful Daniel Green Company.

Current Position and Results

In 1998, sales declined 26% to $14.6 million. A significant part of the decrease
is the result of lower  shipments of footwear to a couple of key customers  that
market  consigned,  low  margin  items  with  rather  high  levels  of  returned
merchandise.  Decisions  were  made  to  eliminate  this  type  of  unprofitable
business.  

Selling and administrative  expenses increased approximately $1.9 million or 45%
during the year.  This  increase  reflects  donations of  defective/discontinued
merchandise  amounting  to $640,000  and  investments  of $410,000 to update the
Company image and establish a new corporate  identity.  Other  significant items
contributing  to the increase  included  $480,000 for a cost reduction  services
consultant and $337,000 of 401(k)  contributions.  Also included in expenses are
severance payments supporting the reorganization.

The  divestiture  of  manufacturing  operations  commenced  during 1998,  as the
Company ceased operations in two separate facilities. In addition,  $212,000 was
expensed  in  1998  for  obsolete  computer  software.  Total  related  expenses
represented charges of $938,000 in 1998.

Inventories were evaluated, defective,  discontinued, and old age inventories of
raw and  finished  goods were  marked  down,  and a charge of $2.7  million  was
realized during the year.  Inventory levels decreased $3.0 million in 1998. This
was due,  in part,  to the shut down of  production  during  the year.  

Our cash management efforts were aggressively intensified during the year. Total
debt was paid down  significantly  during the year. Total debt at the end of the
year was  approximately  $2.5  million,  compared to $4.1  million at the end of
1997, for an overall decrease of 39%.

All in all,  1998 was the  beginning of a major clean up of our Company from top
to bottom in order to position ourselves for profitable future growth.

Rebuilding for the Future

People
To begin  with,  key  personnel  changes  were made at all levels of the Company
during 1998. I believe the single most  important  ingredient for the success of
turning  around a  business  such as ours will be our  ability  to  attract  and
recruit those  qualified  individuals  who will become key  contributors  on our
team. A new Senior Management team was established  during the year and is ready
to begin the process of rebuilding the Daniel Green Company to its once dominant
position within the marketplace.

Strategic Direction
The first  matter of business  was to  establish  what the  Company's  strategic
profile  would be in the future.  As a result of hours of  formalized  strategic
meetings,  and soul searching,  our team developed the strategic profile for the
Company.
     o    Our Business Concept: Daniel Green's strategy is to market and develop
          slipper-designed  footwear.  We  will  strive  to  offer  value-added,
          distinctive  products  that are tailored to the needs of the end users
          of high  potential and growing mid to top tier  channels  where we can
          leverage our slipper technologies. 
      
     o    Driving Force: "Product Concept" (Shift away from Manufacturing)

     o    Areas of Excellence:  Product Development,  Marketing  Awareness,  and
          Sales Relationship Building
<PAGE>
Design/Development
We established a new design and development team in 1998. In past years,  Daniel
Green has carried over up to 90% of prior year product vs. the industry  average
of 30%. This  reinforces  the  importance of constantly  filling the new product
pipeline with  footwear  that will incite fresh  interest and strong demand each
and every selling season.  Steps were taken during the year to focus all Company
efforts on Slipper  Designed  Footwear to build a  defensible  market  position.
These early  investments  in product  design  should  become more evident in the
financial statements starting in the second half of 1999.

Marketing
Our next Company priority was a substantial shift in marketing  strategy.  While
retaining the positive  associations inherent in our fine brand name, we set out
to completely  update our overall image. We have  repositioned the brand for the
21st century.  We reached out to consumers,  launching a full  e-commerce  site:
www.DanielGreenCo.com.  On this site,  visitors  can check out our  products  by
selling  season and either order  on-line or locate the nearest  retail  outlets
stocking  their favorite  styles.  All data from our on-line site is warehoused,
which will allow us to gain new  marketing  insights  into our end user customer
base.

Sales
In order to rebuild  and grow our  business  for the  long-term,  several  sales
management  appointments were announced in late 1998. These appointments  ensure
our ability to focus our  Company  efforts and  resources  into key  channels of
distribution.  In addition to  restructuring  our sales force, we established an
aggressive  commission system to energize sales activities.  I am confident that
our revamped  sales team will perform very well for the Daniel Green  Company in
the years ahead.

Operations
Key personnel have been brought in for a transitional  task force that will move
the company from a manufacturing  based operation to a fully sourced  operation.
These  individuals  bring  with them a wealth of  experience  and  expertise  in
turnaround situations such as ours.

The Road Ahead
Our long-term  turnaround  plan is essentially  divided into three phases,  each
lasting  about 12 months.  The first  phase  occurred  this year by getting  our
organizational  and operational issues in place. The second phase focuses on the
full transformation of becoming a completely sourced organization competitive in
the  world  marketplace  vs. a  domestic  manufacturer.  The  final  phase  will
represent a full return to profitability  when we began to deliver quality goods
and services  that are  recognized as a value in the  marketplace.  We have made
significant progress in design, marketing,  sales, and balance sheet management,
and have a good running start at improving operations for the future.

Finally,  I would like to thank all the dedicated  employees at Daniel Green for
assisting with the numerous changes we made in 1998 as we started the turnaround
process.

Sincerely,



Greg Alan Tunney
President & Chief Operating Officer

                                       2
<PAGE>
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

Sales
Net sales  declined 26% in 1998, to $14.6  million,  from $19.7 million in 1997.
Compared to 1996, net sales for 1998 are down by 37%. A significant part of this
decrease is the result of lower  shipments  of  footwear to two major  customers
that  market  consigned,  low margin  items with  rather high levels of returned
merchandise.  Ten major customers  represented 45% of the Company's  business in
1998. These same customers represented 40% of sales in 1997 and 39% in 1996.

From a sales mix standpoint, slippers represented 66% of our sales, while casual
and private label footwear accounted for 23% and 11%,  respectively,  during the
year. In 1997,  55% of our sales were  slippers,  29% casual  footwear,  and 16%
private label. The sales content in 1996 was 59% slippers,  26% casual footwear,
and 15% private label.

Sourced  footwear  continues  to influence  our sales  numbers.  In 1998,  these
products accounted for approximately  $4.1 million or 28% of sales,  compared to
$4.1  million  or  20.8%  in  1997.  In  1996,  these  products   accounted  for
approximately $1.4 million or 6.1% of sales.

Expenses
Cost of goods sold, as a percentage of net sales,  was 83% in 1998,  compared to
75% in 1997 and 80% in 1996.  Cost of goods sold  reflects  the direct  costs of
footwear sold,  manufacturing  variances  from  pre-determined  cost  standards,
adjustments  to the  value of  inventory  on hand  and the  amount  of  material
purchased and labor spent to make the Company's  products.  In 1998, the Company
produced  35% fewer  shoes,  approximately  326,000  pairs  less than last year.
Driven by lower production volumes,  purchases of raw material were down by 55%,
and production  labor decreased by 46%, while  manufacturing  overhead  expenses
were 9% lower than last year. A lower sales volume and  associated  direct costs
of labor,  material and overhead also  contributed to a lower cost of goods sold
aggregate dollar amount in 1998.

The gross  profit  margin for 1998 was 17%,  compared  to 25% in 1997 and 20% in
1996.  The $2.5 million gross profit decline in 1998 from 1997 was primarily due
to the $1.3  million  lower  gross  profit  related to the lower  sales  volume,
reserving  an  incremental   $.9  million  for  slow   moving/obsolete/defective
inventory,  and writing-off  $357,000 of raw material inventory  associated with
discontinuing the production of certain styles of footwear.

Selling,  general and administrative  expenses for 1998 increased  approximately
$1.9 million or 45% to  approximately  $6.1  million,  from  approximately  $4.2
million in 1997. Compared to 1996, selling,  general and administrative expenses
are approximately $1.6 million higher.  This increase in 1998 reflects donations
of  defective/discontinued  merchandise  amounting to  $640,000.  This served to
eliminate  dated  inventory  without  having it deep  discounted  in the  United
States.  Investments  amounting  to  $410,000  to update the  Company  image and
establish a new corporate identity with a new logo,  updated packaging,  artwork
for a new display booth, a full e-commerce site, enhanced advertising and public
relations,  and senior level visits to foreign suppliers also contributed to the
increase over 1997. Other  significant  items  contributing to the increase over
1997 include: $480,000 paid to a cost reduction services consultant, $337,000 of
401(k)  contribution  expenses  related to 1998,  and payments of  approximately
$102,000 to the former President and Chief Operating Officer. To a large extent,
the benefits  associated with the  aforementioned  investments  will be incurred
starting in 1999. 

Several notable items that increased  administrative  expenses in 1997 over 1996
include:  Company  contributions to the new 401(k) plan,  computer  training and
network services,  and outside professional fees. In the second quarter of 1997,
the Company began to reorganize its field sales force.  This action  resulted in
the  separation of five  salespeople  and charges of  approximately  $198,000 in
1997.  Likewise,   in  1996,  the  Company  identified  and  reported  items  of
approximately $497,000 that were nonrecurring in nature.

During 1997,  the Company  terminated  its defined  benefit  pension plan.  This
transaction resulted in a 1997 gain totaling  approximately  $380,000,  and this
amount is reflected as other income in the 1997 statement of  operations.  Prior
to  termination,  the Company  recorded  income from this plan of  approximately
$204,000 in 1997,  which did not recur in 1998.

The Company  contributed  cash to the new 401(k) plan in 1997.  These funds were
used to  purchase  186,437  shares  of  common  stock in the  Company,  totaling
$894,896,  or $4.80 per  share.  The $4.80  share  value was  established  by an
independent  stock  valuation  consultant  retained  by the  Company.  The stock
purchased by the 401(k) plan was allocated to participating  employees beginning
in the 1998 plan year and will  continue  over the next two years.  Compensation
expense will be  recognized  as the shares are  allocated  to the  participants,
which is  expected to occur over a three year  period  which began in 1998.  The
amount  allocated to  participants  during the year ended  December 31, 1998 was
$337,000 (69,993 shares).

                                       3
<PAGE>
Current  levels of production  have fallen below  available  capacity.  Prior to
1998,  the  Company   rationalized  its  manufacturing   operations  and  ceased
production in two separate  facilities.  A third facility will cease  production
and be vacated by June 30,  1999.  Accordingly,  the  Company has  recognized  a
$572,000 expense for impaired assets and a $153,000  liability  related to lease
commitments for equipment used in these  facilities that expire at various dates
subsequent  to June 30,  1999.  Imports  are  handled  in a  separate  facility.
Additionally,  the Company  recognized a $212,000 expense for impaired  computer
information   system  assets  resulting  from  the  decision  to  replace  major
components of the current  computer  information  system by the end of the third
quarter 1999 with the intent to comply with year 2000 requirements.

Operating (Loss) Income
Operating  (loss) income  changed  significantly  in 1998,  compared to 1997 and
1996, and is directly  related to the items discussed  above.

Interest  Expense
Interest expense is down by approximately $248,000 in 1998 and is 46% lower than
in 1997 and 64% than in 1996. This decrease is due to lower borrowing levels and
lower financing  rates. On April 14, 1997, the Company entered into a new credit
arrangement with Key Bank National Association,  which provides the Company with
a three-year  credit facility bearing  interest at LIBOR plus 2.25%.

Income Tax Provision 
The Company's income tax benefit was approximately  $1.1 million in 1998, from a
tax  provision  of  approximately   $225,000  in  1997  and  a  tax  benefit  of
approximately  $417,000  in 1996.  The  increase  in  taxes in 1997  principally
relates to the reportable gain after terminating the defined pension plan and in
part from the income realized from operations. 

The effective tax rate was 24% in 1998. In 1997,  the effective tax rate was 49%
versus a tax  benefit  rate in 1996 (due to the loss that year) of 38%.  The low
tax rate in 1998 reflects a valuation allowance,  and the high tax rate for 1997
reflects  the  tax  accounting  for  permanent  book  to  tax   differences  and
adjustments to deferred taxes. Deferred income taxes reflect the net tax effects
of temporary  differences between the carrying amount of assets and liabilities,
for financial reporting purposes, and the amounts used for income tax purposes.

At December  31,  1998,  the Company has  approximately  $700,000 of federal net
operating loss carryforwards which expire in 2018. The Company has an AMT credit
carryforward of approximately  $49,000, which will never expire. The Company has
approximately $2.4 million of net operating loss carryforwards available for New
York State tax purposes,  which begin to expire in 2011. Due to the  uncertainty
of the realization of certain tax  carryforwards,  the Company has established a
valuation  allowance  against  these  carryforward  benefits  in the  amount  of
$500,000.

In computing the tax provision for 1997, the Company applied and used all of its
federal net operating loss carryforwards.  At the end of 1997, the Company still
had approximately  $454,000 left in net operating loss  carryforwards that could
be  used  for  New  York  State  tax  reporting  purposes.   From  a  historical
perspective,  a limited  amount of the  Company's  sales are in New York  State,
thereby impacting the utilization of New York State loss carryforwards.

Net (Loss) Earnings 
The net loss for  1998 was  approximately  $3.7  million,  or $2.39  per  share,
compared with last year's  performance  of after-tax  earnings of  approximately
$235,000,  or $.16  per  share.  The  Company  had a net  loss of  approximately
$690,000, or $.54 per share, in 1996.

Financial Condition
Once  again in 1998  (as in 1997  and  1996),  total  debt has been  drastically
reduced.  Total debt consists of notes  payable,  the line of credit and capital
lease  obligations.  At December 31,  1998,  total debt was  approximately  $2.5
million,  compared with  approximately $4.1 million at December 31, 1997, for an
overall  decrease of 39%. At December 31,  1996,  the  Company's  total debt was
approximately  $6.9 million.  The 1998 total debt was reduced by cash  generated
from operating activities,  and by regular repayments of the debt. Total debt in
1997 was reduced by the proceeds from terminating the Company's  defined benefit
plan, by cash generated from operating activities,  and by regular repayments of
the debt.  

Inventory  levels decreased $3.0 million from 1997 to 1998 and, in comparison to
1996,  are   approximately   $2.4  million  lower.   Finished  goods   decreased
significantly   in  1998  to   approximately   $4.4  million,   as  compared  to
approximately   $6.2  million  in  1997.  In  1998,   raw  materials   decreased
approximately  $945,000 to  $996,000.  Work-in-process  for 1998 also  decreased
significantly  from  approximately  $374,000 to $83,000.  In 1996,  the finished
goods inventory amounted to approximately $5.1 million or approximately $700,000
higher than in 1998.  The number of days of 

                                       4
<PAGE>
inventory  declined  from 208 days at December  31, 1997 to 162 days at December
31, 1998,  due, in part,  to the increase in the  inventory  reserves and a shut
down of  production  that  occurred  during  the  year.  There  were 165 days of
inventory at December 31, 1996. Accounts  receivable  decreased by approximately
$1.5 million or 27% from 1997 and decreased 36% or $2.4 million in comparison to
1996.  Accounts  receivable days decreased from 105 days at December 31, 1997 to
104 days at December 31,  1998.  There were 103 days of accounts  receivable  at
December 31, 1996.

During 1998, the Company generated  approximately $1.1 million in cash flow from
operating activities. In 1997 and 1996, the Company generated approximately $3.0
million. The principal components of cash flow from operations were decreases in
accounts  receivable and  inventory,  increases in accounts  payable,  partially
offset by the net loss, income taxes  receivable,  accrued  liabilities,  income
taxes payable, and deferred tax  asset/liability.  Working capital at the end of
1998 was approximately $6.8 million,  which was approximately $4.6 million lower
than at the end of 1997. In 1997,  this working  capital  number was impacted by
the cash amount of $894,896,  related to the sale of Company stock to the 401(k)
plan.  Subsequently,  in 1998,  the  cash  was  applied  against  the  Company's
revolving  line of credit  with Key Bank  National  Association.  The  Company's
current  ratio,  the  relationship  of current  assets to  current  liabilities,
decreased  to 2.93:1  at the end of 1998,  from  3.83:1 at the end of 1997,  and
increased from 2.34:1 at the end of 1996.

Capital expenditures in 1998 totaled approximately $341,000 and were principally
used for the purchase of a new show booth, a new CAD system,  and other computer
systems  and  software.  In 1997,  capital  expenditures  totaled  approximately
$254,000 and were  principally used for the purchase of new computer systems and
software,  and repairs made to the Company's buildings.  Capital expenditures in
1996 totaled  approximately  $201,000 and were  utilized  primarily for computer
systems and software, furniture and fixtures, and lasts for new footwear styles.

The Company's revolving and term loan credit agreements contain covenants which,
among  other  things,  require  the  Company  to  maintain  a certain  number of
financial ratios. As of December 31, 1998, the Company was in violation of three
bank  covenants  related  to  the  maintenance  of an  established  debt-service
coverage ratio, a minimum tangible net worth level and a minimum working capital
level.  The Company has not obtained  waivers  from the bank on these  financial
covenants  which  resulted  in  classifying  all the  related  debt as a current
liability  at December  31,  1998.  In 1999,  the Company is exposed to a higher
interest rate with financial penalty at least until the Company obtains waivers,
cures the violations, or establishes new financing.

Except for the historical information contained herein, the matters discussed in
this annual  report are  forward  looking  statements  which  involve  risks and
uncertainties,  including but not limited to economic, competitive, governmental
and technological factors affecting the Company's operations, markets, products,
services and prices,  and other factors  discussed in the Company's filings with
the Securities and Exchange Commission.

Year 2000
The Company currently uses software and related computerized information systems
that will be affected by the date change in the year 2000. The Company  believes
it does not have any significant non-information technology systems that will be
affected by the change in the year 2000.  Based on its  assessment,  the Company
has  determined  that it will replace or upgrade major  portions of its computer
hardware  and  software  so that its  computer  systems  will  properly  use and
recognize dates beyond December 31, 1999.  Based on information  compiled by the
Company,  the Company  believes that the costs of addressing the year 2000 issue
will be between  $850,000  and $1.0  million.  The  Company is in the process of
establishing  long-term financing for these costs. Other factors that may affect
the  Company's  costs in  addressing  the year 2000 issue  include,  but are not
limited to, the  availability  and cost of personnel  trained in this area,  the
ability  to  locate  and  correct  all  relevant  computer  codes,  and  similar
uncertainties. The Company expects to complete all year 2000 programming changes
prior to the fourth  quarter  of 1999.  The  estimated  costs of, and time frame
related to, this project are based on estimates of the Company's management, and
there can be no assurance that actual costs will not differ  materially from the
current expectations.  In addition,  the Company's ability to interface with its
customers,  particularly  with respect to EDI  programs,  may be impacted by the
failure of its customers to make the appropriate  upgrades or  modifications  to
their programs to address the year 2000 issue. The Company relies on third-party
suppliers  for  products and  services.  If these  suppliers  do not  adequately
address  the  impact of the year 2000 on their own  systems  and  products  in a
timely manner,  it may be necessary for the Company to secure alternate  vendors
to supply these required  products and services.  The Company  believes that its
most  significant  risk  regarding  the year 2000  issue is that its  customers,
suppliers or service  providers may not be year 2000 compliant.  Currently,  the
Company  does  not  have a  contingency  plan in place  to  address  this  risk.
Nevertheless, the Company does not expect that the costs of addressing potential
problems  relating to the year 2000 issue will have a material adverse impact on
the Company's financial position,  results of operations or cash flows in future
periods.  While the Company plans to devote the  necessary  resources to resolve
all significant year 2000 issues in a timely manner, which includes developing a
contingency  plan by the end of the second  quarter of 1999, if such  processing
issues are not  resolved  in a timely  manner,  the year 2000 issue could have a
material impact on the operations and financial condition of the Company.

                                       5
<PAGE>
<TABLE>
<CAPTION>
Statements of Operations
Years ended December 31,                              1998              1997           1996
<S>                                              <C>             <C>             <C>

Net sales                                         $ 14,610,867    $ 19,663,142    $ 23,060,724
----------------------------------------------------------------------------------------------
Operating expenses:
Cost of goods sold                                  12,172,075      14,679,388      18,404,790
Selling and administrative expenses                  6,043,475       4,165,379       4,445,901
Other expense (income)                                 937,830        (181,732)        497,230
----------------------------------------------------------------------------------------------
Total operating expenses                            19,153,380      18,663,035      23,347,921
----------------------------------------------------------------------------------------------
Operating (loss) income                             (4,542,513)      1,000,107        (287,197)
Interest expense                                       291,544         539,486         820,090
----------------------------------------------------------------------------------------------
(Loss) earnings before income taxes                 (4,834,057)        460,621      (1,107,287)
Income tax (benefit) provision                      (1,141,368)        225,287        (417,102)
----------------------------------------------------------------------------------------------
Net (loss) earnings                               $ (3,692,689)   $    235,334    $   (690,185)
==============================================================================================
Net (loss) earnings per common share:
Basic                                             $      (2.39)   $        .16    $       (.54)
==============================================================================================
Diluted                                           $      (2.39)   $        .16    $       (.54)
==============================================================================================

See notes to financial statements.
</TABLE>

<TABLE>
<CAPTION>
Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
 

                                             Common Stock       Additional                    Treasury Stock
                                        ---------------------    Paid-In      Retained     --------------------
                                        Shares         Amount    Capital      Earnings      Shares       Amount            Total
                                        -------------------------------------------------------------------------------------------
<S>                                    <C>         <C>          <C>       <C>           <C>           <C>             <C>
Balance, January 1, 1996                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
Issuance of common stock                  186,437      466,093    428,803         --           --             --            894,896
Purchase of shares for Company
sponsored defined
contribution plan                            --           --         --           --       (186,437)      (894,896)        (894,896)
Net earnings, 1997                           --           --         --        235,334         --             --            235,334
                                        -------------------------------------------------------------------------------------------
Balance, December 31, 1997              1,698,329    4,245,823    741,303    7,208,878     (186,437)      (894,896)      11,301,108
Purchase of treasury stock                   --           --         --           --         (7,165)       (34,392)         (34,392)
Allocation of shares in Company
sponsored definedcontribution plan           --           --         --           --         69,993        336,965          336,965
Net loss, 1998                               --           --         --     (3,692,689)        --             --         (3,692,689)
                                        -------------------------------------------------------------------------------------------
Balance, December 31, 1998              1,698,329   $4,245,823   $741,303  $ 3,516,189     (123,609)   $  (592,323)    $  7,910,992
                                        ===========================================================================================

See notes to financial statements.
</TABLE>

                                       6
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
As of December 31,                                                     1998                    1997
-------------------------------------------------------------------------------------------------------
<S>                                                              <C>                      <C>
Assets
Current assets:
   Cash                                                           $      7,300             $    901,875  
   Accounts receivable (less allowances of $250,000a                                       
     in 1998 and $231,000 in 1997)                                   4,205,979                5,721,431
   Inventories, net                                                  5,480,899                8,469,375
   Deferred income tax asset                                           164,124                  287,306
   Other current assets                                                 50,275                   65,656
   Income taxes receivable                                             387,142                     --
-------------------------------------------------------------------------------------------------------
Total current assets                                                10,295,719               15,445,643
Property - net                                                         907,067                1,707,647
Other assets:                                                                              
   Other assets                                                         69,399                  114,687
   Deferred income tax asset                                           267,905                     --
-------------------------------------------------------------------------------------------------------
Total other assets                                                     337,304                  114,687
-------------------------------------------------------------------------------------------------------
Total assets                                                      $ 11,540,090             $ 17,267,977
=======================================================================================================
                                                                                           
Liabilities and stockholders' equity                                                       
Current liabilities:                                                                       
   Note payable - line of credit                                  $  1,144,092             $  2,219,802
   Accounts payable                                                    833,177                  303,492
   Accrued salaries and commissions                                     21,242                  240,065
   Accrued expenses                                                    301,802                  283,261
   Notes payable - current                                           1,212,424                  562,030
   Income tax payable                                                     --                    421,389
-------------------------------------------------------------------------------------------------------
Total current liabilities                                            3,512,737                4,030,039
Notes payable - noncurrent                                             116,361                1,325,104
Deferred income tax liability - noncurrent                                --                    611,726
-------------------------------------------------------------------------------------------------------
Total liabilities                                                    3,629,098                5,966,869
Stockholders' equity:                                                                      
   Common stock - $2.50 par value: authorized 4,000,000 shares;                            
   1998: 1,698,329 shares issued, 1,574,720 shares outstanding;                            
   1997: 1,698,329 shares issued, 1,511,892 shares outstanding       4,245,823                4,245,823
   Additional paid-in-capital                                          741,303                  741,303
   Retained earnings                                                 3,516,189                7,208,878
-------------------------------------------------------------------------------------------------------
                                                                     8,503,315               12,196,004
Less:  Treasury stock at cost, 123,609 shares in 1998                                      
   and 186,437 in 1997                                                (592,323)                (894,896) 
-------------------------------------------------------------------------------------------------------
Total stockholders' equity                                           7,910,992               11,301,108
-------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                        $ 11,540,090             $ 17,267,977
=======================================================================================================
                                                                                  
See notes to financial statements.
</TABLE>

                                       7
<PAGE>
Statements of Cash Flow
<TABLE>
<CAPTION>
Years ended December 31,                                                  1998           1997           1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>            <C>
Cash flows from operating activities:
  Net (loss) earnings                                                $(3,692,689)   $   235,334    $  (690,185)
  Adjustments to reconcile net (loss) earnings to net
    cash provided by operating activities:
    Depreciation and amortization                                        355,016        344,345        398,653
    Net pension credit                                                      --         (204,496)       (94,132)
    Loss on impairment of assets                                         784,581           --             --
    (Gain) loss on sale of property and equipment                        (11,515)        (2,950)        89,819
    Contribution to defined contribution plan                               --         (894,896)          --
    Allocation of shares in defined contribution plan                    336,965           --             --
Changes in assets and liabilities:
(Increase) decrease in:
    Accounts receivable                                                1,515,452        860,650        628,346
    Inventories                                                        2,988,476        (15,672)     2,446,540
    Other current assets                                                  15,381          3,823         80,106
    Income taxes receivable                                             (387,142)       157,704        301,183
    Other noncurrent assets                                               45,288            276          4,948
    Prepaid pension expense                                                 --        2,579,865           --
Increase (decrease) in:
    Accounts payable                                                     529,685       (176,638)       168,148
    Accrued salaries and commissions                                    (218,823)        30,638         (2,381)
    Accrued expenses                                                      18,541       (143,771)       (38,762)
    Income taxes payable                                                (421,389)       421,389           --
    Deferred tax asset/liability                                        (756,449)      (196,489)      (268,465)
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                              1,101,378      2,999,112      3,023,818
==============================================================================================================
Cash flows from investing activities:
    Purchases of property and equipment                                 (341,191)      (254,077)      (201,355)
    Proceeds from disposal of property and equipment                      13,689          3,350         15,500
--------------------------------------------------------------------------------------------------------------
Net cash used by investing activities                                   (327,502)      (250,727)      (185,855)
==============================================================================================================
Cash flows from financing activities:
    Net payments on line of credit                                    (1,075,710)    (2,318,054)    (3,763,874)
    Issuance of common stock                                                --          894,896      1,500,000
    Purchase of treasury stock                                           (34,392)          --             --
    Proceeds from notes payable                                             --          200,000           --
    Repayments of notes payable                                         (558,349)      (613,085)      (586,087)
    Principal payments under capital lease obligation                       --          (23,480)        (4,551)
--------------------------------------------------------------------------------------------------------------
Net cash used by financing activities                                 (1,668,451)    (1,859,723)    (2,854,512)
==============================================================================================================
Net (decrease) increase in cash                                         (894,575)       888,662        (16,549)
Cash, beginning of year                                                  901,875         13,213         29,762
--------------------------------------------------------------------------------------------------------------
Cash, end of year                                                    $     7,300    $   901,875    $    13,213
==============================================================================================================
Supplemental cash flow information: Cash paid during the year for:
    Interest                                                         $   369,214    $   502,354    $   847,649
--------------------------------------------------------------------------------------------------------------
    Income taxes                                                     $   436,628    $     2,153    $      --
==============================================================================================================

See notes to financial statements.
</TABLE>
                                       8
<PAGE>
Notes to Financial Statements Years ended December 31, 1998, 1997 and 1996

1. Description Of Business And Summary Of Significant Accounting Policies
Description of Business - The Company is engaged in the manufacture,  import 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 estimated  useful lives under the  straight-line
method.  The Company  regularly  assesses  its fixed assets for  indications  of
impairment. (See Note 8.)

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 in the
year the credits are earned.

Concentration of Credit Risk - Financial  instruments  that potentially  subject
the Company to credit  risk  consist of accounts  receivable.  Companies  in the
retail  industry  comprise  a  significant  portion of the  accounts  receivable
balance;  collateral is not required. The risk associated with the concentration
is limited due to the large number of retailers and their geographic dispersion.

Earnings Per Share - The  calculations for both basic and diluted EPS were based
on (loss) earnings  available to common  stockholders of $(3,692,689),  $235,334
and  $(690,185) and a weighted  average  number of common shares  outstanding of
1,547,608,  1,511,892  and  1,280,978  for  December  31,  1998,  1997 and 1996,
respectively.  Options to purchase  shares of common stock were  outstanding but
were not included in the  computation of diluted  earnings per share because the
options'  exercise  prices were  greater  than the average  market  price of the
common shares.

New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial  Accounting Standards (SFAS) No. 130,
Reporting  Comprehensive Income, which became effective for the Company in 1998.
SFAS No. 130 establishes standards for reporting and disclosure of comprehensive
income and its components in financial statement format.  Compre-hensive  income
is defined as the change in equity of a business enterprise during a period from
transactions and other events and  circumstances  from nonowner  sources.  Items
considered  comprehensive income include foreign currency items, minimum pension
liability  adjustments and unrealized gains and losses on certain investments in
debt and equity  securities.  The Company  has no  components  of  comprehensive
income other than net income.

In June 1997,  the FASB issued SFAS No. 131,  Disclosures  About  Segments of an
Enterprise and Related Information,  which is effective for the Company in 1998.
The Statement  requires  enterprises to report certain financial  information on
operating  segments,  products  and  services,  geographic  areas in which  they
operate  and  their  major  customers  that  would  be  determined  based on the
Company's internal reporting. The Company operates in only one business segment.
In addition,  the Company's  internal  reporting does not make it practicable to
provide  information  on net sales earned from  different  styles of footwear or
from different geographic  locations.  Long-lived assets are entirely located in
the United States.  There is no single  customer that accounts for 10 percent or
more of the Company's net sales.

In  June  1998,  the  FASB  issued  SFAS  No.  133,  Accounting  for  Derivative
Instruments and Hedging Activities,  which establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other  contracts,  and for hedging  activities.  It requires that an
entity  recognize  all  derivatives  as  either  assets  or  liabilities  in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of derivatives  depends on the intended
use of the  derivatives.  SFAS No. 133 is effective  for the Company in the year
2000.  Currently,  since  the  Company  does  not  use  derivative  instruments,
management  has  determined  that  this  Statement  will  have no  effect on its
financial statements.

Reclassifications  - The value of  unallocated  shares in the Company  sponsored
defined  contribution  plan totaling $894,896 as of December 31, 1997, which was
previously  included in  long-term  assets,  has been  classified  as a separate
component within stockholders' equity. (See Note 4.)
<PAGE>
2. Inventories
Inventories, net of reserves, as of December 31 consisted of the following:

                                              1997              1998
-----------------------------------------------------------------------
Finished goods                            $4,402,186         $6,153,858
Work-in-process                               82,795            374,484
Raw materials                                995,918          1,941,033
-----------------------------------------------------------------------
Total                                     $5,480,899         $8,469,375
=======================================================================

3. Property
Property as of December 31 consisted of the following:
                                               1998              1997

Land                                      $   18,655         $   18,655
Buildings and water plant                  2,541,849          3,356,209
Machinery and equipment                       38,594          3,964,228
Computers                                    378,776            632,324
Vehicles                                      74,011            107,070
Furniture and fixtures                     1,035,361            861,577
-----------------------------------------------------------------------
                                           4,087,246          8,940,063
Less accumulated depreciation              3,180,179          7,232,416
-----------------------------------------------------------------------
Property - net                            $  907,067         $1,707,647
=======================================================================
During 1998, the Company recorded an asset impairment.  (See Note 8.)

4. Benefit Plans
Defined Contribution Plan
During 1997,  following the termination of its defined benefit plan, the Company
established a defined  contribution  401(k)  savings plan ("the Plan")  covering
substantially  all employees of the Company.  In 1997,  the Company  contributed
cash  of  $894,896  to  the  Plan  which  was  recorded  as a  long-term  asset.
Subsequently,  in  December  1997,  the  Plan  acquired  186,437  shares  of the
Company's  common  stock at a price per  share of  $4.80,  which was based on an
independent  appraisal.  There were no allocated shares as of December 31, 1997.
The unallocated  shares in the Plan have been reclassified from long-term assets
and are now recorded as treasury  stock in  stockholders'  equity.  Compensation
expense will be  recognized  as the shares are  allocated  to the  participants,
which is  expected to occur over a three year  period  which began in 1998.  The
amount  allocated to  participants  during the year ended  December 31, 1998 was
$336,965 (69,993 shares).  In addition,  the Company's matching  contribution to
the Plan totaled $74,178 and $75,811 in 1998 and 1997, respectively.

Defined Benefit Pension Plan
During  1997,  the  Company   terminated  its  defined   benefit  pension  plan.
Immediately prior to the termination,  the projected benefit obligation and plan
assets totaled  $7,937,856  and  $11,517,441,  respectively.  On the date of the
termination,  the Company received cash totaling $3,579,585,  which exceeded the
carrying value of the prepaid pension expense of $2,579,865, resulting in a gain
of  $999,720.  This gain was reduced by certain  administrative  expenses and an
excise tax totaling  $619,489,  which resulted in a net gain on this transaction
totaling $380,231. This amount is included in other (income) expense in the 1997
statement of operations.  (See Note 8.) 

The Company's  defined benefit pension plan covered all regular  employees,  and
benefits  were  earned  based on  years of  service  and the  employee's  annual
compensation  over the entire service time. It had been the Company's  policy to
fund the maximum amount which could be deducted for federal income tax purposes.
For 1997  and  1996,  no  contribution  was  required  due to the  full  funding
limitation of the Internal Revenue Code.

The net pension credit for 1997 and 1996 included the following components:

                                            1997                  1996

Service cost                           $   187,277           $   285,204  
Interest cost                              573,952               570,251
Actual return on plan assets              (835,865)           (1,003,253)
Net amortization and deferral             (129,860)               53,666
------------------------------------------------------------------------
Net pension credit                     $  (204,496)          $   (94,132)
========================================================================

5. Income Taxes
The provision (benefit) for income taxes consists of:

                                    1998           1997           1998
Current:
   Federal                     $  (387,142)   $   415,574    $  (156,500)
   State                             2,223          6,202          3,112
------------------------------------------------------------------------
                                  (384,919)       421,776       (153,388
------------------------------------------------------------------------
Deferred:                      
   Federal                      (1,095,235)      (247,762)      (211,581)
   State                          (161,214)        51,273        (52,133)
   Valuation allowance             500,000           --             --
------------------------------------------------------------------------    
                                  (756,449)      (196,489)      (263,714)
------------------------------------------------------------------------
Total                          $(1,141,368)   $   225,287    $  (417,102)
========================================================================
<PAGE>
Notes to Financial Statements continued
    
The  difference  between tax computed at the statutory  U.S.  federal income tax
rate and the Company's effective tax rate is as follows:

                                    1998             1997          1996     
Provisions (benefit) at
   statutory rate               $(1,643,580)   $   156,600   $  (376,500)
State and other taxes,
   net of federal tax benefit         1,467          2,400       (29,700)
Reduction of NYS NOL
   carryforward                        --           13,200          --
Deferred tax rate rollout
   adjustment                          --           32,800          --
Valuation allowance                 500,000           --            --
Other                                   745         20,287       (10,902)
------------------------------------------------------------------------
Provision (benefit)
   for income taxes             $(1,141,368)   $   225,287   $  (417,102)
========================================================================

At December  31,  1998,  the Company has  approximately  $700,000 of federal net
operating loss carryforwards which expire in 2018. The Company has an AMT credit
carryforward of $49,074,  which will never expire. The Company has approximately
$2,438,800 of net operating loss carryforwards  available for New York State tax
purposes,  which  begin  to  expire  in  2011.  Due  to the  uncertainty  of the
realization  of  certain  tax  carryforwards,  the  Company  has  established  a
valuation  allowance  against  these  carryforward  benefits  in the  amount  of
$500,000.  Components  of the  Company's  deferred tax asset and liability as of
December 31, 1998 and 1997 are as follows:
                                                            1998
                                                ----------------------------
                                                 Current          Noncurrent
Assets
Non-deductible bad debt reserves                 $  68,250        $    --
Uniform capitalization of inventory                 75,577             --
Non-deductible sales allowances                     29,250             --
Non-deductible inventory reserves                  210,802             --
Net operating loss carryforward                       --            344,460
Fixed assets                                          --            355,142
AMT carryforward                                      --             49,074
Charitable contribution                               --            261,986
Liabilities
Prepaid pension expense                               --           (217,593)
Depreciation                                          --           (244,919)
Valuation allowance                               (219,755)        (280,245)
---------------------------------------------------------------------------
Deferred tax asset                               $ 164,124        $ 267,905
===========================================================================

                                                            1997
                                                ----------------------------
                                                  Current        Noncurrent
Assets
Non-deductible bad debt reserves                 $  60,785        $    --
Uniform capitalization of inventory                104,660             --
Non-deductible sales allowances                     29,250             --
Non-deductible inventory reserves                   72,341             --
State net operating loss carryforward               20,270             --
Liabilities
Prepaid pension expense                               --           (349,010)
Depreciation                                          --           (262,716)
---------------------------------------------------------------------------
Deferred tax asset (liability)                   $ 287,306        $(611,726)
===========================================================================

6.       Notes Payable
The Company has a debt agreement for a revolving line of credit ("revolver") and
a mortgage/term  loan. Under the terms of the agreement,  the borrowing base for
the revolver is based on certain balances of accounts  receivable and inventory,
as defined in the  agreement.  The maximum  credit  amount under the revolver is
$8,000,000,  the  interest  rate is LIBOR plus 2.25% and the  revolver is due to
expire on April 30,  2000.  The  revolver  is  secured by  accounts  receivable,
inventory,  equipment  and is due to cash.  The  mortgage/term  loan is  payable
through April 2001 and is secured by the Company's manufacturing facilities. The
balance  owed under the  Company's  revolving  line of credit as of December 31,
1998 and 1997 totalled $1,144,092 and $2,219,802,  respectively.  Long-term debt
as of December 31 consisted of the following:

                                                    1998               1997

Note payable to bank in monthly
         principal installments of $41,905
         through April 2001; interest is
         due monthly at LIBOR plus 2.25%.      $  1,173,335         $1,676,192
Other notes payable in monthly
         principal installments of
         $967-$1,887 through September
         2003 plus interest at 4-6%.                155,450            210,942
                                                  1,328,785          1,887,134
------------------------------------------------------------------------------
Less: Current portion                             1,212,424            562,030 
------------------------------------------------------------------------------
Noncurrent portion                             $    116,361         $1,325,104
==============================================================================
<PAGE>
The aggregate principal payments of notes payable are as follows:
1999                                                 $1,212,424
2000                                                     36,910
2001                                                     38,628
2002                                                     27,051
2003                                                     13,772
---------------------------------------------------------------
Total                                                $1,328,785
===============================================================

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

The line of credit  and the notes  payable  to bank  contain  certain  financial
covenants relative to working capital,  current ratio, tangible net worth, total
debt to tangible net worth, and debt service coverage. In addition,  the payment
or declaration  of dividends and  distributions  is prohibited  unless a written
consent from the lender is received.  The Company was not in compliance with the
covenants  related to  tangible  net worth,  working  capital  and debt  service
coverage as of December 31, 1998. The Company has not obtained a waiver from the
lender and, accordingly, has reclassified $670,475 of notes payable to bank from
a long-term liability to a current liability as of December 31, 1998.

7.       Stockholders' Equity
Stock Option Plan - The Company has reserved  100,000 shares of its common stock
for issuance under its Stock  Incentive  Plan. 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's  stock,  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, 1998, 1997, and 1996 is as follows:

                                1998              1997              1996
Options outstanding,
   beginning of year           22,000            22,500            17,500  
Options granted                75,000             2,000            10,000
Options cancelled             (10,000)           (2,500)           (5,000)
-------------------------------------------------------------------------
Options outstanding,                                             
   end of year                 87,000            22,000            22,500
=========================================================================
Options exercisable,                                             
   end of year                 12,000            14,500            12,500
=========================================================================
                                                          
The  outstanding  options have an exercise price ranging from $3.88 to $5.88 per
share and expire at various dates from February 1999 through October 2008.

The  Company  also  granted  25,000  stock  options in 1997,  separate  from the
Company's Stock Incentive Plan, to a majority stockholder. These options are all
outstanding and exercisable at December 31, 1998.

As permitted  by SFAS No. 123,  Accounting  for  Stock-Based  Compensation,  the
Company has elected to continue to follow  Accounting  Principles  Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations in
accounting  for  employee  stock-based   compensation.   Pro  forma  information
regarding  net income  (loss) and related per share  amounts as required by SFAS
No. 123 are as follows:

                                    1998             1997          1996
Net (loss) earnings:
  As reported                 $  (3,692,689)   $   235,334   $  (690,185)
  Pro forma                      (3,806,387)       233,147      (699,317)
Basic earnings per share:
   As reported                $       (2.39)   $       .16   $      (.54)
   Pro forma                  $       (2.46)   $       .15   $      (.55)
Diluted earnings per share:                                  
  As reported                 $       (2.39)   $       .16   $      (.54)
  Pro forma                   $       (2.46)   $       .15   $      (.55)
                                                          
The weighted  average fair value of the options  granted  during 1998,  1997 and
1996  is  estimated  as  $1.52,   $1.09  and  $.91,   respectively,   using  the
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions:
                               1998               1997               1996
Expected life              6.5 years           10 years          6.25 years
Volatility                    33.18%             34.77%              38.23%
Risk-free interest rate        6.15%              6.12%               6.35%
Dividend yield                    0%                 0%                  0%

8.       Other (Income) Expense
In the first quarter of 1998,  the Company  hired a new  President,  who,  among
other things,  began to assemble a  substantially  new  management  team for the
Company.  In the  fourth  quarter of 1998,  the  Company's  Board of  Directors,
President and the new management  team completed and began to implement a formal
restructuring  plan. Based on the restructuring plan, the Company will cease its
manufacturing operations completely by June 30, 1999. As a result, the Company's
primary  business  activity will be to outsource  entirely the production of its
footwear and to  distribute  the footwear to its  customers  under the Company's
label and certain private labels. 

Prior to December  31,  1998,  the Company  ceased  production  in two  separate
facilities and substantially  vacated these two facilities.  A third facility is
expected to cease production and be vacated by June 30, 1999.  Accordingly,  the
Company has recognized an expense for impaired assets and a liability related to
lease  commitments for equipment used in these facilities that expire at various
dates subsequent to June 30, 1999.
<PAGE>
In the fourth quarter of 1998, the Company determined that certain software that
it currently  uses will not be year 2000  compliant and that it will be disposed
of by the end of the third quarter of 1999. Accordingly,  the Company determined
that an impairment loss was required for the software totaling $212,229 based on
management's  estimate  of the fair  value of the  software.

A summary of these expenses is as follows:

Two vacated facilities held for disposal at 
December 31, 1998:
   Fair value (carrying amount)                           $       --
   Net book value                                           (214,803)
--------------------------------------------------------------------
Asset impairment                                            (214,803)
--------------------------------------------------------------------
Facility and related equipment to be held                 
and used until June 30, 1999:                             
   Fair value (carrying amount)                                   --
   Net book value of equipment                              (236,503)
   Net book value of facility                               (121,046)
--------------------------------------------------------------------
Asset impairment                                            (357,549)
--------------------------------------------------------------------
Liability for equipment lease commitments which           
expire at various dates subsequent to June 30, 1999         (153,249)
Impairment of computer software                             (212,229) 
--------------------------------------------------------------------
Total other expense                                       $ (937,830)
====================================================================

The two impaired  facilities  held for disposal are greater than fifty years old
and have been used  exclusively  for  footwear  production  by the  Company.  In
addition, these facilities are located in a depressed,  rural region of New York
State, where the economy has been contracting in recent years. The prospect of a
business  expanding or  relocating  to this region,  given the current  economic
climate, is remote.  These factors,  among others, were considered by management
in estimating the fair values of these two facilities.

The Company determined that an impairment loss was required for the facility and
related equipment to be held and used until June 30, 1999, because the estimated
future cash flows expected to result from the use of the applicable  assets were
less than the carrying  amount of those  assets.  The fair value of these assets
was determined based on the same factors  considered by management in developing
the fair value of the two  facilities  held for  disposal,  as  described in the
preceding paragraph.

Other income in 1997 consisted of the following: 
Gain on termination of pension plan (see Note 4)       $ 380,231  
Separation expense                                      (198,499) 
----------------------------------------------------------------
Total other income                                     $ 181,732 
================================================================

During 1997, the Company  separated five  salespeople as a result of changes the
Company made in its sales  department and related  compensation  structure.  The
separation expense related to these individuals totaled $198,499.

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).

9. Commitments
The Company leases machinery and equipment under  noncancelable lease agreements
which are  classified  as operating  leases for  financial  reporting  purposes.
Rental expense was $121,819 in 1998,  $115,641 in 1997 and $296,399 in 1996. The
leases  expire at various  dates  through  2002 and  provide  for the  following
minimum  rentals:  

                   1999                      $  85,000 
                   2000                         72,000  
                   2001                         27,000 
                   2002                         12,000 
                   Total                     $ 196,000  
      
Purchase  Commitments  - The  Company has  agreements  with  certain  vendors to
purchase  minimum  quantities  of raw  materials.  At December 31,  1998,  these
commitments totaled approximately $345,000.
<PAGE>
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,  1998  and  1997,  and  the  related   statements  of  operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1998. 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 a reasonable 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, 1998
and 1997,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1998 in conformity  with generally
accepted accounting principles.

Deloitte & Touche LLP
Rochester, New York
January 29, 1999

Selected Financial Data
<TABLE>
<CAPTION>
                                                1998           1997            1996            1995            1994
----------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>            <C>             <C>             <C>         
Net sales                                  $ 14,610,867    $ 19,663,142   $ 23,060,724    $ 23,560,772    $ 23,214,609
Income (loss) from continuing operations     (3,692,689)        235,334       (690,185)       (853,761)        635,328
EPS (loss) from continuing operations             (2.39)            .16           (.54)           (.82)            .61
Total assets                                 11,540,090      17,267,977     19,564,827      23,571,961      22,205,778
Long-term debt                                  116,361       1,325,104      1,708,240       2,306,093       2,894,413
</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.

Based on records maintained by the Transfer Agent, Boston Equiserve,  there were
536 registered  shareholders as of the February 12, 1999 record date.  Copies of
the  Company's  Annual  Report on Form  10-KSB  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.