<PAGE>

                 PENOBSCOT SHOE COMPANY 1998 ANNUAL REPORT

<PAGE>

DIRECTORS


IRVING KAGAN                       	GERALD E. RUDMAN
Chairman of the Board and          	Retired Senior Partner,
Chief Executive Officer            	Rudman & Winchell (Law firm)

JAMES L. MOODY, JR.                	FRANCIS J. GUTHRIE
Retired Chairman of the Board       Executive Vice President
Hannaford Bros. Co.                	Marketing and Sales
                         	         	Fortis Benefits Insurance Company 

JOHN I. RIDDLE                	
Retail Real Estate and        	
Shopping Center Consultant    	


OFFICERS


WILHELM PFANDER				            WILLIAM HOSKINS
Vice President-Manufacturing	 	Vice President-Sales

DAVID L. KEANE                	GERALD E. RUDMAN
Treasurer and                 	Corporate Clerk
Vice President                
Finance and Administration

IRVING KAGAN
Chairman of the Board and
Chief Executive Officer


                                                  		February 1, 1999

TO OUR SHAREHOLDERS...

Net sales for the fiscal year ended November 27, 1998, were $19,607,000, up 32%
from $14,826,000 last year. Net income for fiscal 1998 was $1,486,000, or $1.08
per share, compared to $444,000, or $.32 per share, in fiscal 1997.

For the fourth quarter of fiscal 1998, net sales were $4,950,000, up 12% from
$4,421,000 a year ago. Net income for the current quarter was $499,000, or
$.36 per share, up from net income of $156,000, or $.11 per share in the
same quarter last year.

This year's increase in net sales and the resulting profits were primarily due
to the strong performance of Trotters at retail.  A combination of appealing
styles and improved distribution led to the growth.  The Company's focus in 1999
will be to continue its successful styling efforts while looking for 
opportunities to further grow the business.

The death in December 1998 of Paul Hansen, our CEO and President, has saddened
us all.  Paul first joined Penobscot in 1958 as a production employee.  His
dedication and hard work through the years contributed to both the success of 
the Company and to his reaching the position of CEO in 1994.  Having had the
pleasure of mentoring Paul during his career with Penobscot, I enjoyed working
with him for these many years, particularly since 1994 when he replaced me as
Chief Executive Officer.  I will miss him as I resume the role of Chief
Executive Officer on an interim basis.


Sincerely,


Irving Kagan, Chairman                  	
Chief Executive Officer		

<PAGE>
<TABLE>
<CAPTION>
                           STATEMENTS OF INCOME

                  For the Years Ended November 27, 1998,
                 November 28, 1997 and November 29, 1996
                   (In thousands, except for share data)
                                            1998            1997           1996
<S>                                     <C>            <C>           <C>
Net Sales (Note 11)                      $   19,607     $   14,826     $  15,429          
Costs and operating expenses (Notes 1,3 and 4)
     Cost of sales                           12,868         10,266        10,291         
     Selling and administrative expenses      4,664          4,181         4,234         
              
                                             17,532         14,447        14,525        
     Operating income                         2,075            379           904
     Other income (Note 7)                      483            372           539
     Income before taxes on income            2,558            751         1,443
     Taxes on income (Notes 1 and 8)          1,072            307           586

Net income                               $    1,486     $      444     $     857


Per common share (Note 10):
     Basic                               $     1.08     $      .32     $     .59 
     Diluted                             $     1.07     $      .32     $     .58 

     Dividends declared                  $      .20     $      .20     $     .20

      
</TABLE>
<TABLE>
<CAPTION>
                  STATEMENTS OF SHAREHOLDERS' EQUITY
                For the Years Ended November 27, 1998,
               November 28, 1997 and November 29, 1996 
                (In thousands, except for share data)

                                                     Additional
                              Common Stock            Paid-in       Retained     Unrealized      Treasury Stock
                           Shares      Amount         Capital       Earnings       Gains        Shares    Amount
<S>                         <C>        <C>            <C>           <C>          <C>           <C>        <C>
Balance, November 24, 1995  1,533,042    1,533         1,109          7,667         356         50,925        270
Net income for year                 -        -             -            857           -              -          -
Purchase of treasury stock          -        -             -              -           -         86,952        467
Marketable securities (Note 1 )     -        -             -              -          (1)             -          -
Dividends paid ($.20 per share)     -        -             -           (290)          -              -          -
Balance, November 29, 1996  1,533,042    1,533         1,109          8,234         355        137,877        737
Net income for the year             -        -             -            444           -              -          -
Purchase of treasury stock         	-        -             -              -           -         13,974         81
Exercise of stock options           -        -             -             (9)          -         (3,800)       (19)
Marketable securities (Note 1)     	-        -             -              -		        94              -          -
Dividends paid ($.20 per share)     -        -             -           (277)          -              -          -
Balance, November 28, 1997  1,533,042    1,533 	       1,109          8,392	        449	       148,051    	   799
Net income for the year             -        -             -          1,486           -              -          -
Purchase of treasury stock         	-        -             -              -           -         11,701         71
Sale of stock options               -        -             -              -		         -         (5,000)       (31)
Marketable securities (Note 1)     	-        -             -              -		         6		            -          -
Dividends paid ($.20 per share)     -        -             -           (276)          -              -          -
Balance, November 27, 1998  1,533,042   $1,533	       $1,109         $9,602	       $455	       154,752    	  $839

               See accompanying notes to financial statements
                          PENOBSCOT SHOE COMPANY
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                              BALANCE SHEETS
                 November 27, 1998 and November 28, 1997
                              (In thousands)

ASSETS                                               1998     1997
<S>                                                <C>      <C>
   CURRENT ASSETS:
      Cash and cash equivalents (Note 1)               454     403
      Marketable securities (Notes 1, 2 and 5)       3,757   3,457   
      Receivables (Notes 1 and 11):
          Trade, less allowances of $526 and $478    3,806   3,733   
          Other                                         19      20
      Inventories (Notes 1 and 3)                    6,568   4,283   
      Prepaid expenses and other (Notes 4 and 8)       575     382

          TOTAL CURRENT ASSETS                      15,179  12,278  

   PROPERTY AND EQUIPMENT (Note 1):
      Land                                              66      66
      Land improvements                                  5       5
      Buildings and improvements                     1,443   1,437
      Machinery and equipment                          425     403
                                 
                                                     1,939   1,911   
      Less accumulated depreciation and amortization 1,725   1,618   
          NET PROPERTY ANDEQUIPMENT                    214     293

   TOTAL ASSETS                                    $15,393 $12,571 

LIABILITIES AND SHAREHOLDERS' EQUITY
   CURRENT LIABILITIES:
      Accounts payable                             $ 1,088 $   597
     	Notes payable (Note 5)	                        1,475     750
      Accruals (Notes 1 and 6)
          Salaries, wages and commissions              313      43
          Retirement plan                              168     176
          Income taxes                                 129       7
          Other                                        123     136
      Dividends payable                                 69      69
          TOTAL CURRENT LIABILITIES                  3,365   1,778

   DEFERRED INCOME TAXES (Notes 1 and 8)               168     109

   COMMITMENTS AND CONTINGENCIES 
      (Notes 4, 5, 6 and 9)

   SHAREHOLDERS' EQUITY (Notes 1 and 10):
      Common stock, $1 par - shares
          authorized 2,000,000; issued 1,533,042     1,533   1,533
      Additional paid-in capital                     1,109   1,109
      Retained earnings                              9,602   8,392

                                                    12,244  11,034
      Unrealized gain on marketable securities 
          (Notes 1 and 2)                              455     449
      Less treasury stock, at cost,       
	     154,752 and 148,051 shares                       839     799
          TOTAL SHAREHOLDERS' EQUITY                11,860  10,684
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY      $15,393 $12,571


                See accompanying notes to financial statements 
                          PENOBSCOT SHOE COMPANY


</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                         STATEMENT OF CASH FLOWS

                 For the Years Ended November 27, 1998,
                November 28, 1997 and November 29, 1996
                             (In thousands)

                                                     1998     1997      1996
<S>                                                  <C>      <C>       <C>
Cash flows from operating activities: 
  Net income                                        $ 1,486    $ 444      857
  Adjustments to reconcile net income to net cash
       used by operating activities:
          Depreciation and amortization                 107      101       87
          Provision for losses on accounts receivable   243      171      132
          Gain on sale of marketable securities        (381)    (228)    (226)
          (Gain) loss on sale property and equipment      -       (7)      20
          Deferred income taxes                         (70)      54      (48)
          Changes in operating assets and liabilities:
               Receivables                             (315)    (605)      41
               Inventories                           (2,285)    (247)    (982)
               Prepaid expenses and other               (68)     (56)     (90)
               Accounts payable                         491       95     (289) 
               Accruals                                 371     (309)     249
               Dividends payable                          -       (1)      (4)
                  Total adjustments                  (1,907)  (1,033)  (1,110)
       Net cash used by operating activities           (421)    (589)    (253)

Cash flows from investing activities:
   Proceeds from sale of marketable securities        1,556    1,474     1,554
   Purchase of marketable securities                 (1,465)  (1,246)   (1,358)
   Proceeds from sale of property and equipment           -        7        81
   Purchase of property and equipment                  (28)     (192)      (20)
       Net cash provided by investing activities        63        43       257

Cash flows from financing activities:
   Notes payable	                               	       725	     750         -
   Dividends paid                                      (276)    (278)     (290)
   Purchase of treasury stock                        	  (71)     (83)     (467)
   Sale of treasury stock					                           31        -         -
   Exercise of stock options				                          -	      12         -
       Net cash provided(used) by investing activities  409      401      (757)

       Net (decrease) in cash and cash equivalents       51     (145)     (753)
Cash and cash equivalents at beginning of year          403      548     1,301

Cash and cash equivalents at end of year             $  454   $  403    $  548
</TABLE>

Supplemental Disclosure of Cash Flow Information
Payments for income taxes amounted to $1,019,000, $434,000 and $553,000 in
1998, 1997 and 1996, respectively.  Cash paid for interest expense in 1998,1997
and 1996 was $45,000, $35,000 and $3,000 respectively. Net unrealized gains on 
marketable securities were $762,000, $752,000 and $594,000 in 1998, 1997 and 
1996, respectively.

              See accompanying notes to financial statements
                        PENOBSCOT SHOE COMPANY                 

<PAGE>

NOTES TO FINANCIAL STATEMENTS

(1) Summary of Business Operations and Significant Accounting Policies
Business Operations:

The Company is engaged in the design, importing and sale of women's casual
and tailored footwear, including boots and sandals, for the retail market
throughout North America.

Fiscal Year:

The Company's fiscal year ends on the last Friday in November, which results
in a 52 or 53 week year. Fiscal years 1998 and 1997 included 52 weeks while
the year 1996 included 53 weeks.

Use of Estimates:

The preparation of financial statements in conformity with generally accepted
accounting principals 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.

Marketable Securities:

The Company accounts for investments in debt and equity securities under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities"  ("SFAS No. 115").  
The Company classifies the debt and equity securities as available-for-sale
securities, and therefore records them at fair market value.

The cost of securities sold is based on the first-in, first-out method in the
determination of realized gains and losses.  Unrealized gains and losses are
recorded as a separate component of stockholders' equity.  Realized gains and
losses are recognized in the results of operations.

Inventories:

Inventories are stated at cost, not in excess of market.  Cost is determined
on a last-in, first-out ("LIFO") basis.

Property, Equipment and Depreciation:

Property and equipment are stated at cost.  Depreciation is computed using
the straight line method over the following estimated useful lives: 
                           	Years	
Land improvements               10		
Buildings and improvements   10-33
Machinery and equipment      	3-10

Retirement Plan:

The Company has a defined benefit retirement plan covering substantially all
employees. The Company's policy is to fund retirement cost as accrued. Plan
assets consist principally of equity securities and corporate and US
Government obligations. The plan was fully funded at November 27, 1998.

Financial Instruments and Concentrations of Credit Risk:

The fair values of debt securities and equity investments are based
on quoted market prices at the reported date for those investments.  The
estimated fair value of the Company's other financial instruments, which 
include cash, trade receivables notes payable to bank and accounts payable,
approximate their carrying value.  At November 27, 1998 and November 28, 1997,
the Company's trade receivables were primarily due from the retail trade.  The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral.  Credit losses relating to
customers have consistently been within management's expectations.

Income Per Share:

Effective November 29, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128).  SFAS No. 128
requires the presentation of both basic and diluted earnings per share and
replaces previously required standards for computing and presenting earnings
per share.  Earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the new requirements of SFAS No. 128.
(See Note 10)
 
Cash Equivalents:

The Company considers all highly liquid instruments with a maturities of three
months or less when purchased to be cash equivalents.

Income Taxes:

Income taxes are based on income (loss) for financial reporting purposes and
reflect a current tax liability (asset) for the estimated taxes payable
(recoverable) in the current-year tax return and changes in deferred taxes.
Deferred tax liabilities or assets are recognized for the estimated tax
effects of temporary  differences between financial reporting and taxable
income (loss) and for tax credit and loss carryforwards based on enacted tax
laws and rates.

Stock Based Compensation:

Effective November 30, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-
Based Compensation."  The Company has elected to continue to account for stock
options at their intrinsic value with disclosure of the effects of fair value
accounting on net earnings (loss) and earnings (loss) per share on a pro forma
basis (See note 9).

New Accounting Pronouncements Not Adopted:

In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards.  Results of operations and financial position will be unaffected by
implementation of these new standards.

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," (SFAS No. 130) establishes standards for reporting and display of
comprehensive income, its components, and accumulated balances.  Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners.  Among other disclosures,
SFAS No. 130 requires that all items are required to be recognized under current
accounting standards as components of comprehensive income reported in a 
financial statement that is displayed with the same prominence as other
financial statements.

SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public.  It also
establishes standards for disclosures regarding products and services,
geographic areas, and major customers.  SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.

<PAGE>

SFAS No. 130 and SFAS No. 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated.  Due to recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.

In February 1998, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards No. 132 "Employers' Disclosure about Pensions 
and Other Postretirement Benefits" (SFAS No. 132), which revises employers' 
disclosures about pension and other postretirement benefit plans, but does not 
change the measurement or recognition of those plans.  SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits to 
the extent practicable, requires additional information on changes in the 
benefit obligations and fair values of plan assets that will facilitate 
financial analysis, and eliminate certain disclosures that are no longer 
considered useful.
 
SFAS 132 is effective for financial statements for periods beginning after 
December 15, 1997 and requires comparative information for earlier years to be 
restated.  Management does not expect implementation of this new standard to 
materially affect future financial state ment disclosures.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, 
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).  
SFAS No. 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value.  
If certain conditions are met, a derivative may be specifically designated as a 
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition or (i) the changes in the fair 
value of the hedged asset or liability or (ii) the earnings effect of the hedged
forecasted transition.  For a derivative not designated as a hedging instrument,
the gain or loss is recognized in income in the period of change.  SFAS No. 133 
is effective for all fiscal quarters of fiscal years beginning after June 15, 
1999.
 
Historically, the Company has not entered into derivative contracts either to 
hedge existing risks or for speculative purposes.  Accordingly, the Company 
does not expect adoption of the new standard on November 27, 1999 to affect its 
financial statements.

Advertising:

The Company expenses advertising costs as incurred.  Advertising expense was
approximately $553,000, $618,000 and $569,000 in 1998, 1997 and 1996
respectively.

(2) Marketable Securities

At November 27, 1998 and November 28, 1997, marketable securities consisted of
the following (in thousands):
                 		    Fair Market Value	            Cost    
   	                       1998	     1997        1998        1997

Preferred and	
   common stock	        $ 2,083	   $ 2,176     $ 1,466     $  1,519
U.S. Gov't. and 
   U.S. Gov't. 
   agency obligations	      908        795         830          746
Mutual funds	   	           376	       109         354           95
Corporate bonds	 	          390        377         345          345

Total	                  $ 3,757    $ 3,457     $ 2,995      $ 2,705

Gross unrealized gains and losses at November 27, 1998, were $801,000 and
$39,000, respectively. Gross unrealized gains and losses at November 28, 1997,
were $757,000 and $5,000, respectively.

The contractual maturity of debt securities are summarized as follows at
November 27, 1998:
                               Fair Market  
                                  Value      Cost
Within 1 year                  $     51   $     51
After 1 year through 5 years        371	       352
After 5 years through 10 years      581        536
After 10 years                      295        236

Total debt securities          $  1,298   $  1,175


(3) Inventories

Inventories are summarized as follows (in thousands):

                             1998      1997
FIFO Cost:
   Finished shoes          $ 6,618  $  4,318
   Raw materials                11        15
                     
                             6,629     4,333
Excess of FIFO cost over
   LIFO inventory value        (61)      (50)
     
                           $ 6,568  $  4,283 
     
The Company uses the LIFO method because it more realistically reflects
operating results by charging current costs against current revenues.
Some companies in the same industry use the first-in, first-out ("FIFO")
method. Had the Company's inventory been stated using the FIFO method, the
inventory would be greater by approximately $61,000 and $50,000 at
November 27, 1998 and November 28, 1997, respectively.  Reported net income
would have been higher by approximately $7,000 ($.01 per basic and diluted
common share), in 1998, and lower by approximately $172,000 ($.12 per basic 
and diluted common share) and $127,000 ($.09 per basic and diluted common 
share) in 1997 and 1996, respectively.

During 1997 and 1996, cost of sales included charges for goods carried
at prior years' LIFO values which were less than the cost of current
purchases. This result was to increase net income by approximately $201,000
($.14 per basic and diluted common share), $205,000 ($.14 per basic and diluted
common share) in 1997 and 1996, respectively.  No such charges were included in
cost of sales during 1998.

(4) Retirement Plan

The Company has a retirement plan covering substantially all of its employees.
<TABLE>
<CAPTION>
The following table sets forth the plan's funded status at November 27, 1998
and November 28, 1997 (in thousands):

Actuarial present value of                       1998       1997
   benefit obligation:
<S>                                            <C>          <C>
Accumulated benefit obligation,
   including vested benefits of
    $3,030 and $3,023                           $ (3,118)    $ (3,131)

Projected benefit obligation                    $ (3,335)    $ (3,341)
Unrecognized net gain from
   past experience difference from
   that assumed                                   (2,574)      (2,071)
Plan assets at fair market value                   6,443        5,856
Prior service cost not yet recognized
     in net periodic pension cost                      5            7                           
Unrecognized transition assets being
     amortized over 15 years                        (132)        (165)

Prepaid pension cost                            $    407     $    286
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Net periodic pension expense (credit) in 1998, 1997 and 1996 included the
following (in thousands):

                          1998       1997      1996
<S>                     <C>         <C>         <C>
Service cost            $   53      $  55      $   43
Interest cost              236        235         239
Return on plan assets     (343)      (309)       (294)
Net amortization
   and deferral            (67)       (41)        (32)
Net periodic pension
   expense (credit)     $ (121)     $ (60)     $  (44)
</TABLE>

The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
were 7.5% and 6%, respectively.  The expected long-range rate of return on
assets was 7.5%.

5) Short-term Borrowings

At November 27, 1998, the Company has a line of credit of $4,750,000 for
letters of credit and short-term borrowings.  Borrowings under this
arrangement are secured by the company's marketable securities portfolio 
and currently bear interest at the bank's prime rate minus 1.5%.During 
fiscal 1998, 1997 and 1996, the maximum amount of short-term borrowings 
under these arrangements was $1,475,000, $1,500,000 and $315,000 
respectively, with an interest rate paid of 6.25%, 7.25% and 8.25%.  
At November 27, 1998, commitments against letters of credit were 
approximately $204,000.

(6)  Commitments and Contingencies

Supplemental retirement benefit:

The Company provides retirement benefits to its former chief executive
officer in accordance with a supplemental retirement plan approved by the
Board of Directors.  The present value of the estimated future payments under
this benefit program of $168,000 in 1998 and $176,000 in 1997 is reflected
in the accompanying financial statements as accrued retirement plan. Retirement
payments under this program amounted to $20,000 in both 1998 and 1997.

Employment death benefit:

The Board of Directors has voted to make payments to spouses and minor
children of certain officers in the aggregate amount of approximately
$244,000 in the event of officers' deaths while employed.  In December 1998,
the Company incurred a death benefit liability in the amount of approximately
$165,000 due to the death of an officer subsequent to year end.

Litigation:

In September 1987, the Company and numerous other parties entered into two
Administrative Orders by Consent issued by the U.S. Environmental Protection
Agency and the Maine Department of Environmental Protection regarding the
removal of hazardous wastes from two locations in Maine. The Company
initially established a loss contingency of $75,000 to cover anticipated
liabilities in these two proceedings. Costs totaling $14,000 have been incurred
to date.

(7)  Other Income, Net
<TABLE>
<CAPTION>
Other income, net, consists of the following (in thousands):
                     1998    1997    1996
<S>                  <C>     <C>     <C>
Interest income      $  126  $  154  $  200
Dividend income          30      28      23
Gain on sale
   of securities        381     229     226
Interest expense        (45)    (35)     (3)
Litigation settlement     -       -     100
Other, net               (9)     (4)     (7)

                     $  483  $  372  $  539
</TABLE>
(8)  Taxes on Income (Credit)
<TABLE>
<CAPTION>
The provision (credit) for income taxes is comprised of 
the following (in thousands):

Fiscal Year              Current     Deferred     Total
<S>                     <C>         <C>          <C>
1998:
     Federal            $   880     $   (54)    $   826
     State                  262         (16)        246
                     
                        $ 1,142     $   (70)    $ 1,072

1997:
     Federal            $   194     $    41      $  235
     State                   59          13          72
                     
                        $   253     $    54      $  307

1996:
     Federal            $   472     $   (37)     $  435
     State                  162         (11)        151
                     
                        $   634     $   (48)     $  586

</TABLE>

Deferred tax assets (liabilities) are comprised of the following
(in thousands)

                                   1998      1997
Deferred tax asset: 
Accounts receivable reserves       $ 212     $ 193
Inventory valuation                  135        22
Deferral related to 
   marketable securities            (307)     (303)
Basis difference of accrued
   liabilities                        92        95
            
                                   $ 132     $   7
Deferred tax liability:
Depreciation                       $  (4)    $   6
Deferral related to prepaid
   pension costs		                 	(164)     (115)
					
			                         		     $(168)    $(109)

<PAGE>
<TABLE>
<CAPTION>
A reconciliation on income at the United States statutory rate to
the effective rate follows:

                     1998    1997    1996
<S>                  <C>     <C>     <C>
Taxes on income
  computed at the
  United States
  statutory rate      34.0%   34.0%   34.0%

State and local
  taxes, net of
  federal benefit      6.1     6.3     6.1 

Dividends received  
  deduction            (.3)    (.8)    (.4) 
                 
Other - net            2.1     1.4      .9
Effective tax rate    41.9%   40.9%   40.6%
</TABLE>

(9)  Stock Options Plan

The Company has a nonqualified stock option plan (the "Plan") designed to
reward key employees of the Company.  Options are available for the purchase
of shares of the Company's common stock at an exercise price as determined by
the Board of Directors, but at a price not less than the fair market value of
the common stock at the time the option in granted.  The Plan provides that 
options for the purchase of up to 75,000 shares of common stock may be granted,
of which 33,000 shares remained available at November 27, 1998.  Changes in the
outstanding options under the Plan are summarized as follows:

<TABLE>
<CAPTION>

                               1998    1997    1996   
<S>                            <C>     <C>     <C>
Outstanding at
    beginning of year          26,000  29,800  29,800
Exercised (price of
    $3.125 per share)               -  (3,800)      -
Outstanding at end of
    year (prices range
    from $3.125 to $5.00 
    per share)                 26,000  26,000  29,800
Weighted average exercise
    price			                   $3.486  $3.486  $3.439

Available for grant
    at end of year             33,000  33,000  33,000
</TABLE>

The weighted average remaining contractual life of the shares at November 27,
1998 is 3.1 years.  The Company accounts for its stock based compensation using
the intrinsic value method.  Accordingly, no compensation cost has been
recognized for its stock option plan.  Had compensation cost for the Company's
stock option plan been determined based on the fair value at grant dates for
awards under the plan consistent with the method of Statement of Financial
Accounting Standards No. 123, the Company's net income and earnings per share
for fiscal 1998, 1997 and 1996 would not have been affected, as options were
neither granted nor vested during these years.

(10) Net Income Per Share of Common Stock

The Company follows Statement of Financial Accounting Standards No. 128 
"Earnings Per Share" (SFAS No. 128) issued by the Financial Accounting 
Standards Board.  Under SFAS No. 128, the basic and diluted net earnings 
per share of common stock for the years ended November 27, 1998, 
November 28, 1997 and November 29, 1996 are computed by dividing net income 
by the weighted average number of common shares outstanding during the 
period.   The weighted average number of shares outstanding is summarized 
as follows:

<TABLE>
<CAPTION>
                         					    1998           1997         1996
<S>    			                  	 <C>            <C>            <C>					    
Denominator for basic
 income per share:
     Weighted average common
     shares outstanding	       1,376,643      1,391,000      1,458,568
Potential dilutive
common shares:
     Stock options                12,574         12,924         10,569
Denominator for diluted
income per share               1,389,217      1,403,924      1,469,137
</TABLE>

The above calculations include all securities outstanding at November 27,
1998, November 28, 1997 and November 29, 1996, as no securities are 
considered to be antidilutive.

(11) Significant Sales and Concentration of Credit Risk

In 1998, 1997 and 1996, the Company derived revenues from a single customer
totaling $2,691,000, $1,909,000 and $2,134,000, respectively.  Included
in accounts receivable are amounts due from this customer of approximately
$532,000 and $608,000 at November 27, 1998 and November 28, 1997, respectively.

<PAGE>
<TABLE>
<CAPTION>

(12)  Summarized Quarterly Results of Operations 
      (unaudited)
         
                      (In thousands except per share data)
 
                   		  		1998     1997
<S>                		 		<C>      <C>
First quarter
    Revenue         		 	      	$4,784   $4,103
    Gross profit     	  	  	  	 1,612    1,330
    Net income         		    		   348      149
    Net income per common share:     
      Basic			  	    		           .25      .11
     	Diluted			             		   .25      .11

Second quarter
    Revenue               		 		$4,236   $2,439
    Gross profit        	    		 1,303      845
    Net income (loss)   	    		   133      (54)
    Net income (loss)per common share:
      Basic				   		              .10     (.04)
     	Diluted		             			   .10     (.04)
    
Third quarter
    Revenue                				$5,637   $3,864
    Gross profit           				 1,855    1,230
    Net income          	    		   506      193
    Net income per common share: 
      Basic			  		                .37      .14
     	Diluted		             			   .36      .14

Fourth quarter
    Revenue         				       $4,950   $4,420
    Gross profit      			       1,969    1,155
    Net income          			       499      157
    Net income per common share
      Basic		 				                .36      .11
     	Diluted		            			    .36      .11         
</TABLE>


            REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                
                        Penobscot Shoe Company
                           Old Town, Maine

We have audited the accompanying balance sheets of Penobscot Shoe Company 
as of November 27, 1998 and November 28, 1997, and the related statements
of  income, shareholders' equity, and cash flows for each of the three years
in the period ended November 27, 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Penobscot Shoe Company at 
November 27, 1998 and November 28, 1997, and the results of its operations 
and its cash flows for each of the three years in the period ended November 
27, 1998, in conformity with generally accepted accounting principles.

Boston, Massachusetts
January 12, 1999

BDO Seidman, LLP

            
<PAGE>        
<TABLE>
<CAPTION>
                        SELECTED FINANCIAL DATA                           
               (In thousands, except per share amounts)
                             
                                  1998        1997        1996         1995       1994        
<S>                           <C>        <C>          <C>          <C>         <C>         
Selected Financial Data 
  Net Sales                   $  19,607    $  14,826    $  15,429   $  12,681    $  14,506   
  Income  Before Taxes        $   2,558    $     751    $   1,443   $     735    $     832   
  Net Income                  $   1,486    $     444    $     857   $     438    $     510   
  Net Income per Common Share                    
     	Basic			               	$    1.08    $     .32    $     .59   $     .30    $     .34
     	Diluted			              $    1.07  	 $     .32    $     .58   $     .30    $     .34			

  Cash Dividends Declared per
     Common Share             $     .20    $     .20    $     .20   $     .20    $     .20   

At year-end:
  Total Assets                $  15,393    $  12,571    $  11,836   $  11,828    $  11,026   
  Working Capital             $  11,814    $  10,500    $  10,392   $  10,172    $   9,568   
  Shareholders' Equity        $  11,860    $  10,684    $  10,494   $  10,395    $   9,898   
  Book Value per Common Share 
     Outstanding at Year End  $    8.60    $    7.71    $    7.52   $    7.01    $    6.68   
</TABLE>

<PAGE>
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources:

Penobscot Shoe Company's net working capital increased by $1,314,000 during 
1998, compared to an increase of $108,000 and $220,000 in 1997 and 1996, 
respectively. Working capital at the end of 1998 was $11,814,000, compared to 
$10,500,000 at the end of 1997 and $10,392,000 at the end of 1996.  The current 
ratio for each of the last three years was 4.5 to 1, 6.9 to 1 and 9.4 to 1, 
respectively.

The Statement of Cash Flows for the year ended November 27, 1998, shows an 
increase in cash and cash equivalents of  $51,000. The Company's operations 
used $421,000 during 1998, primarily due to increased inventory purchases.  The 
payment of the Company's quarterly dividend amounted to $276,000 during 1998.  
During 1998, the Company used $28,000 for capital purchases, mainly new and 
upgraded data processing equipment, and used $40,000 for net treasury stock 
purchases. Borrowings under the terms of the Company's existing credit line were
used to fund short-term cash needs in the second half of fiscal 1998. These 
borrowings totaled $1,475,000 at November 27, 1998.

During 1998, the total value of the Company's inventory increased by $2,285,000.
In 1997, the inventory had increased by $247,000 from 1996. Much of this 
increase in inventory was a result of a buildup of key styles in response to the
rapid growth in sales volume that was experienced in the second half of fiscal 
1998.  The styles that comprise the bulk of the inventory remain very strong.  
The inventory increase in 1997 was a result of reduction in the LIFO reserve.

The increase in marketable securities was consistent with the trend toward 
higher market values in the debt and equity markets in 1998.

Management believes that Penobscot Shoe Company remains financially well 
structured to consider a variety of financing options should the need arise 
and will make decisions based on economic conditions at the time.  Options 
available include conversion of marketable securities held by the Company into 
cash and cash equivalents.  The Company also has an established line of credit 
of $4,750,000 with a major bank available at the bank's prime rate minus 1.5%.
The Company had no material commitments for capital expenditures as of 
November 27, 1998.


Results of Operations:

Net sales for 1998 increased 32% from the preceding year which had decreased by
4% from 1996.  The increase in net sales and the resulting profits were 
primarily due to the strong performance of Trotters at retail.  A combination of
appealing styles and improved distribution led to the growth.  Most of the 
increase was a result of increased volume.  The average price increased 
approximately 4% from last year.

The Company's business is characterized by two major selling seasons, one for
the Fall retail season and the other for the Spring retail season. Sales for the
Fall season generally account for slightly more than half of a year's sales, 
while the Spring sales account for the balance.

Cost of sales was 66% of net sales in 1998, 69% in 1997 and 67% in 1996.  The 
gross profit percentage was 34% , 31% and 33% in  1998, 1997 and 1996 
respectively. The margin in 1997 was lower due to a higher percentage of surplus
product sold during that year.  The current year benefited from cost
efficiencies realized as a result of the higher volume of pairs produced.

Selling and administrative costs increased by approximately $483,000, or 12%, 
from 1997.  In 1997, these expenses had decreased by approximately 1% from 1996.
The increase in the current year was due to higher sales and marketing 
expenditures and higher compensation costs.

In 1998, other income totaled $483,000, pre-tax. Gains from the sales of 
securities amounted to $381,000, and interest income amounted to $126,000. 
In the fiscal year 1997, other income amounted to $372,000, pre-tax, 
including $228,000 in gains from the sales of securities and interest income 
of $154,000. 

The Company is required to adopt the financial reporting disclosure requirements
of  SFAS No. 130, SFAS No. 131 and SFAS No. 132 during the year ended 
November 26, 1999.  Additionally, the Company is required to adopt the 
provisions of SFAS No. 133 for fiscal 2000.  Management does not expect the 
implementation of these new standards to materially affect future financial 
statements and disclosures.

The Company's focus in 1999 will be to continue its successful styling efforts 
while looking for opportunities to further grow the business.

The Company is continuing its assessment of Year 2000 exposure as it pertains 
to management and operational information systems, key outside vendor and key 
customer Year 2000 compliance programs. The assessment of all in-house data 
processing systems is being supervised and conducted by the Company's in-house 
information technology staff.  Based on the Company's assessment to date, the 
Company presently believes that with minor modifications to existing software, 
the Year 2000 issue will not pose significant operational problems for its 
computer systems.  Plans to address areas of particular concern are expected 
to be finalized by February 28, 1999.  At this time, the Company is unable to 
determine the actual cost of correcting any deficiencies found during the 
assessment, however, based on the fact that no significant unanticipated 
remedial costs have been identified to date, the Company does not anticipate 
that the ultimate costs of any required remediation will be significant. 

The Company's ongoing assessment of Year 2000 risks relating to non-information
technology components such as internal telecommunications, heating and 
ventilation equipment has not revealed any problem.

The Company is in the process of communication with its significant suppliers, 
shippers, telecommunications companies and customers to determine the extent 
to which the Company may be vulnerable to a failure by any of these third 
parties to remediate their own Year 2000 issues.  The Company is in the 
process of identifying contingency arrangements to minimize the adverse 
impact of third party Year 2000 problems that could interfere with the 
Company's operations.


<PAGE>
               MARKET FOR THE COMPANY'S COMMON STOCK AND
                   RELATED SECURITY HOLDER MATTERS

Principal Market, Transfer Agent and Registrar

The principal market on which the Company's Common Stock is traded is the
American Stock Exchange.  The Transfer Agent and Registrar for the Company's
Common Stock is Chase Mellon Shareholder Services, 111 Founders Plaza,
E. Hartford, CT 06108.  As of November 27, 1998, there were 208 holders of
record of the Company's Common Stock.
   
Stock Price and Dividend Information
<TABLE>
The table presents the high and low sales prices as reported by the American
Stock Exchange, and dividend information for the Company's Common Stock
for each quarterly period during the past two years.

                    First   Second   Third    Fourth
                    Quarter Quarter  Quarter  Quarter
<S>                <C>      <C>      <C>      <C>
1998
   High             5 7/8    6 3/4    8 3/8    8 3/8
   Low              5 1/8    5 3/8    6 1/4    6 1/16
   Dividends        $.05     $.05     $.05     $.05

1997
   High             7 1/8    6 3/4    6 11/16  6 3/8
   Low              5 3/8    5 1/4    5 1/2    5 3/4
   Dividends        $.05     $.05     $.05     $.05

</TABLE>

PENOBSCOT SHOE COMPANY
PO BOX 545, OLD TOWN, MAINE 04468

TROTTERS