PENOBSCOT SHOE COMPANY 1996 ANNUAL REPORT
                             14
<PAGE>
DIRECTORS

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

JAMES L. MOODY, JR.           FRANCIS J. GUTHRIE
Chairman of the Board         Executive Vice President
Hannaford Bros. Co.           Marketing and Sales
(Retail and wholesale         Fortis Benefits Insurance Company 
distribution of groceries)    

JOHN I. RIDDLE                PAUL HANSEN
Retail Real Estate and        President and
Shopping Center Developer     Chief Executive Officer

OFFICERS

PAUL HANSEN                   WILHELM PFANDER
President and                 Vice President-Manufacturing
Chief Executive Officer

DAVID L. KEANE                JOHN R. FRENCH
Treasurer and                 Vice President 
Vice President                Management Information Systems
Finance and Administration

WILLIAM HOSKINS               GERALD E. RUDMAN
Vice President-Sales          Corporate Clerk

                           15
<PAGE>

                              January 31, 1997


TO OUR SHAREHOLDERS...

Net sales for the fiscal year ended November 29, 1996, were $15,429,000, up 22%
from $12,681,000 last year. Net income for fiscal 1996 was $857,000, or $.59
per share, compared to $438,000, or $.30 per share, in fiscal 1995.

For the fourth quarter of fiscal 1996, net sales were $4,315,000, up 33% from
$3,234,000 a year ago. Net income for the current quarter was $406,000, or
$.29 per share, up from net income of $318,000, or $.21 per share in the
same quarter last year.

TROTTERS sales growth in 1996 was the result of several factors.  Improved
product sell through, as indicated by a 26% increase in our in-stock
business, sales programs and expanded penetration into key retail segments
all contributed to this success.

Future growth will be dependent on further expansion of TROTTERS distribution
in the highly competitive women's footwear  market and the strength of the
retail footwear environment.


Sincerely,



Irving Kagan                  Paul Hansen
Chairman of the Board         President and Chief Executive Officer

                           16
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME

For the Years Ended November 29, 1996,
November 24, 1995 and November 25, 1994
(In thousands, except for share data)

                                          1996            1995           1994
<S>                                     <C>            <C>           <C>
Net Sales                                $   15,429     $   12,681     $  14,506

Costs and operating expenses (Notes 1 and 3)
     Cost of sales                           10,291          8,218         9,536
     Selling and administrative expenses      4,234          4,140         4,094
              
                                             14,525         12,358        13,630
     Operating income                           904            323           876
Other income (expense), net (Note 7)            539            412          (44)
     Income before taxes on income            1,443            735         832
Taxes on income (Notes 1 and 8)                 586            297           322

     Net income                          $      857     $      438     $     510
Per common share:
     Net income (Note 1)                 $      .59     $      .30     $     .34
     Dividends declared                  $      .20     $      .20     $     .20

Weighted average share outstanding       1,458,568      1,482,117      1,480,548
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF SHAREHOLDERS' EQUITY

For the Years Ended November 29, 1996,
November 24, 1995 and November 25, 1994 
(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 26, 1993  1,533,042  $ 1,533       $ 1,109        $ 7,332         -          57,125     $  310
Net income for the year             -        -             -            510         -               -          -
Sale of treasury stock              -        -             -            (20)        -          (6,200)       (40)
Less dividends on common 
  stock ($.20 per share)            -        -             -           (296)        -               -          -
Balance, November 25, 1994  1,533,042    1,533         1,109          7,526         -          50,925        270
Net income for year                 -        -             -            438         -               -          -
Marketable Sec (note 1 )            -        -             -              -       356               -          -
Less dividends on common
  stock ($.20 per share)            -        -             -           (297)        -               -          -
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          -        -             -            (20)        -          86,952        467
Marketable Sec (note 1 )            -        -             -              -        (1)              -          -
Less dividends on common
  stock ($.20 per share)            -        -             -           (290)        -               -          -
Balance, November 29, 1996  1,533,042  $ 1,533       $ 1,109        $ 8,234       355          137,877    $  737

       See accompanying notes to financial statements
                   PENOBSCOT SHOE COMPANY
</TABLE>
                             17
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS

November 29, 1996 and November 24, 1995
(In thousands)

ASSETS                                               1996     1995
<S>                                                <C>      <C>
   CURRENT ASSETS:
      Cash and cash equivalents (Note 1)               548   1,301
      Marketable securities (Notes 1 and 2)          3,299   3,271
      Receivables (Note 8):
          Trade, less allowances of $470 and $468    3,292   3,460
          Refundable income taxes                        -       -
          Other                                         27      32
      Inventories (Notes 1 and 3)                    4,036   3,054
      Prepaid expenses and other (Notes 4 and 8)       433     341

          TOTAL CURRENT ASSETS                      11,635  11,459

   PROPERTY AND EQUIPMENT (Note 1):
      Land                                              66      66
      Land improvements                                  4       4
      Buildings and improvements                     1,417   1,413
      Machinery and equipment                          298   1,546
                                 
                                                     1,785   3,029
      Less accumulated depreciation and amortization 1,584   2,660
          NET PROPERTY ANDEQUIPMENT                    201     369

   TOTAL ASSETS                                    $11,836 $11,828

LIABILITIES AND SHAREHOLDERS' EQUITY
   CURRENT LIABILITIES:
      Accounts payable                             $   502 $   791
      Accruals (Notes 1 and 6)
          Salaries, wages and commissions              159      44
          Retirement plan                              183     189
          Income taxes                                 188     105
          Other                                        141      84
      Dividends payable                                 70      74
          TOTAL CURRENT LIABILITIES                  1,243   1,287

   DEFERRED INCOME TAXES (Notes 1 and 8)                99     146

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

   SHAREHOLDERS' EQUITY (Note 9):
      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                              8,234   7,667

                                                    10,876  10,309
      Unrealized gain on marketable securities 
          (Note 1)                                     355     356
      Less treasury stock, at cost,       
	     137,877 and 50,925 shares   		     	             737     270
          TOTAL SHAREHOLDERS' EQUITY                10,494  10,395

   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY      $11,836 $11,828

See accompanying notes to financial statements 
PENOBSCOT SHOE COMPANY
</TABLE>
                             18
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS

For the Years Ended November 29, 1996,
November 24, 1995 and November 25, 1994
(In thousands)

                                                     1996     1995      1994
<S>                                                  <C>      <C>       <C>
Cash flows from operating activities: 
  Net income                                          $ 857    $ 438     $ 510
  Adjustments to reconcile net income to net cash
       provided (used) by operating activities:
          Depreciation and amortization                  87      128       133
          Provision for losses on accounts receivable   132       67        44
          Gain on sale of marketable securities        (226)    (178)      (65)
          (Gain) loss on sale property and equipment     20        -                     (2)
          Deferred income taxes                         (48)     (11)       67
          Changes in operating assets and liabilities:
               Receivables                               41      183       227
               Inventories                             (982)    (585)     (260)
               Prepaid expenses and other               (90)     (65)      (70)
               Accounts payable                        (289)     261      (303) 
               Accruals                                 249       29      (208)
               Dividends payable                         (4)       -         -

                  Total adjustments                  (1,110)    (171)     (437)

       Net cash provided (used) by operating activities(253)     267        73

Cash flows from investing activities:
   Proceeds from sale of marketable securities        1,554      949     1,143
   Purchase of marketable securities                 (1,358)    (890)   (1,124)
   Proceeds from sale of property and equipment          81        -         2
   Purchase of property and equipment                   (20)     (36)      (24)
       Net cash provided (used) by investing activities 257       23        (3)

Cash flows from financing activities:
   Dividends paid                                      (290)    (297)     (296)
   Purchase (sale) of treasury stock                   (467)       -        20

       Net cash (used) by investing activities         (757)    (297)     (276)

       Net increase (decrease) in cash and cash 
           equivalents                                 (753)      (7)     (206)
Cash and cash equivalents at beginning of year        1,301    1,308     1,514

Cash and cash equivalents at end of year               $548   $1,301    $1,308

</TABLE>
Supplemental Disclosure of Cash Flow Information
Payments for income taxes amounted to $553,000, $284,000 and $465,000 in
1996, 1995 and 1994, respectively.  Cash paid for interest expense in 1996 and
1994 was $3,000.  Unrealized gains on marketable securities were $594,000 and
$596,000 in 1996 and 1995, respectively.

       See accompanying notes to financial statements
                   PENOBSCOT SHOE COMPANY
                   
                            19
<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,
sport and leisure footwear, including fashion boots and sandals, for the
retail market throughout North America.

Fiscal Year:

The Company's fiscal year ends on the last Friday in November.  Fiscal 1996
included 53 weeks while the years 1995 and 1994 each included 52 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:

Effective November 26, 1994, 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").  Previously, the Company accounted for these
investments at the lower of aggregate cost or market.  Upon the adoption of
SFAS No. 115, the Company recorded an unrealized gain of $133,604, net of
tax, as a separate component of stockholders' equity. During fiscal 1995 the
unrealized gain increased by $222,755, and during 1996 the gain decreased by
$1,517 to a year end balance of $354,842, net of tax.  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 29, 1996.

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 and accounts payable, approximate their
carrying value.  At November 29, 1996 and November 24, 1995, the Company's
trade recievables 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:

Net income per share amounts are based on the weighted average number of
common shares outstanding.

Cash Equivalents:

The Company considers all highly liquid instruments with a maturity 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.

Effect of Accounting Pronouncement Not Adopted:

The effect of adopting Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," has not been estimated.  The
Company is required to adopt the disclosure requirements of FAS No. 123
during the year ended November 28, 1997.

(2) Marketable Securities

At November 29, 1996 and November 24, 1995, marketable securities consist of
the following (in thousands):
          			          Fair Market Value	            Cost    
   	                     1996	     1995        1996        1995

Preferred and	
   common stock	      $ 1,406	   $ 1,018     $   917     $   638
U.S. Government and 
   U.S. Government 
   agency obligations	  1,524      1,889       1,428       1,694
Mutual funds	   	          73	        53          62          47
Corporate bonds	 	        296	       311         298         295

Total	                $ 3,299    $ 3,271     $ 2,705     $ 2,674



Gross unrealized gains and losses at November 29, 1996, were $597,000 and
$3,000, respectively. Gross unrealized gains and losses at November 24, 1995,
were $597,000 and $1,000, respectively.

The contractual maturity of debt securities are summarized as follows at
November 29, 1996:
                                   Cost  Fair Market
                                            Value
Within 1 year                  $     99  $    102
After 1 year through 5 years        613       622
After 5 years through 10 years      618       638
After 10 years                      396       458

Total debt securities          $  1,726  $  1,820

(3) Inventories

Inventories are summarized as follows (in thousands):

                             1996      1995
FIFO Cost:
   Finished shoes          $ 4,358  $  3,355
   Shoes in process              -        22
   Raw materials                20       232
                     
                             4,378     3,609
Excess of FIFO cost over
   LIFO inventory value       (342)     (555)
     
                         $   4,036 $   3,054
      
                      20
<PAGE>
The Company uses the LIFO method because it more realistically reflects
operating results by charging current costs against current revenues.
Certain 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 $342,000 and $555,000 at
November 29, 1996 and November 24, 1995, respectively.  Reported net income
would have been lower by approximately $127,000 ($.09 per share), $84,000
($.06 per share) and $125,000 ($.08 per share) in 1996, 1995 and 1994,
respectively.

During 1996, 1995 and 1994, 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 $205,000
($.14 per share), $182,000 ($.12 per share) and $82,000 ($.06 per share) in
1996, 1995 and 1994, respectively.

(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 29, 1996
and November 24, 1995 (in thousands):

Actuarial present value of                       1996        1995
   benefit obligation:
<S>                                            <C>          <C>
Accumulated benefit obligation,
   including vested benefits of
    $2,778 and $2,742                           $ (3,205)    $ (2,824)

Projected benefit obligation                    $ (3,319)    $ (3,017)
Unrecognized net gain from
   past experience difference from
   that assumed                                   (1,351)      (1,184)
Plan assets at fair market value                   5,085        4,604
Prior service cost not yet recognized
     in net periodic pension cost                      9           10                           )
Unrecognized transition assets being
     amortized over 15 years                        (198)        (231)

Prepaid pension cost                            $    226     $    182
</TABLE>
<TABLE>
<CAPTION>
Net periodic pension expense (credit) in 1996, 1995 and 1994 included the
following (in thousands):

                          1996       1995       1994
<S>                     <C>         <C>         <C>
Service cost            $   43      $  33       $   37
Interest cost              239        218          216
Return on plan assets     (294)      (278)        (297)
Net amortization
   and deferral            (32)       (35)         (30)
Net periodic pension
   expense (credit)     $  (44)     $ (62)      $  (74)
</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 29, 1996, the Company had a line of credit of $3,750,000 for
letters of credit and short-term borrowings.  Borrowings under this
arrangement are unsecured and bear interest at the bank's "base rate."
There were no short-term borrowings during fiscal 1995. During fiscal 1996
and 1994, the maximum amount of short-term borrowings under these
arrangements was $315,000 and $400,000 respectively, with an interest rate
paid of 8.25% and 7.75%.  At November 29, 1996, commitments against letters
of credit were approximately $987,000.

(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 $183,000 in 1996 and $189,000 in 1995 are reflected
in the accompanying financial statements as accrued retirement plan. Retirement
payments under this program amounted to $20,000 in both 1996 and 1995.


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
$357,000 in the event of officers' deaths while employed.

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 (Expense), Net
<TABLE>
<CAPTION>
Other income (expense), net, consists of the following (in thousands):

                     1995    1995    1994
<S>                  <C>     <C>     <C>
Interest income      $  200  $  218  $  173
Dividend income          23      25      25
Gain on sale
   of securities        226     178      65
Interest expense         (3)      -      (3)
Litigation settlement   100       -    (300)
Other, net               (7)     (9)     (4)

                     $  539  $  412  $  (44)
</TABLE>

                            21
<PAGE>

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

1995:
     Federal            $   296     $    (8)     $  288
     State                   12          (3)          9
                     
                            308         (11)        297

1994:
     Federal            $   204     $    51      $  255
     State                   51          16          67 

                        $   255     $    67      $  322

</TABLE>
Deferred tax assets (liabilities) are comprised of the following
(in thousands)

                                   1996      1995
Deferred tax asset: 
Accounts receivable reserves       $ 189     $ 188
Inventory valuation                   33        31
Deferral related to 
   marketable securities            (239)     (240)
Basis difference of accrued
   liabilities                       132       134
            
                                   $ 115     $ 113

Deferred tax liability:
Depreciation                        ( 99)     (146)


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

                     1995    1995    1994
<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     5.5     5.1 

Dividends
  received  
  deduction            (.4)    (.8)    (.7) 
                 
Other - net             .9     1.7      .3
Effective tax rate    40.6%   40.4%   38.7%

</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.  Stock option activity is
shown below.
<TABLE>
<CAPTION>
                               1995    1995    1994   
<S>                            <C>     <C>     <C>
Outstanding at
    beginning of year          29,800  29,800  31,000
Granted (price of $5.00
    per share)                      -       -   5,000
Exercised (price of
    $3.125 per share)               -       -  (6,200)
Outstanding at end of
    year (prices range
    from $3.125 to $5.00 
    per share)                 29,800  29,800  29,800

Available for grant
    at end of year             33,000  33,000  33,000
</TABLE>
<TABLE>
<CAPTION>
(10)  Summarized Quarterly Results of Operations 
      (unaudited)
         
                      (In thousands except
                          per share data)
 
                    1996     1995
<S>                 <C>      <C>
First quarter
    Revenue         $4,225   $3,120
    Gross profit     1,385    1,054
    Net income         224       14
    Net income     
      per common share .15      .01

Second quarter
    Revenue          $3,024  $2,455
    Gross profit        951     827
    Net income (loss)    31     (27)
    Net income (loss)
      per common share  .02    (.02)
    
Third quarter
    Revenue          $3,865   $3,872
    Gross profit      1,168    1,285
    Net income          196      133
    Net income  
      per common share  .13      .09

Fourth quarter
    Revenue          $4,315   $3,234
    Gross profit      1,635    1,297
    Net income          406      318
    Net income
      per common share  .29      .21
        
</TABLE>

                             22
<PAGE>


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 29, 1996 and November 24, 1995, and the related statements
of  income, shareholders' equity, and cash flows for each of the three years
in the period ended November 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide 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 29, 1996 and November 24, 1995, and the results of its operations 
and its cash flows for each of the three years in the period ended November 
29, 1996, in conformity with generally accepted accounting principles.

	As discussed in Note 1 to the financial statements, the Company changed its 
method of accounting for investments in debt and equity securities in fiscal 
1995.

Boston, Massachusetts
January 10, 1997



BDO Seidman, LLP

<TABLE>
<CAPTION>

                  SELECTED FINANCIAL DATA
                             
         (In thousands, except per share amounts)
                             
                               1996        1995         1994        1993        1992
<S>                           <C>          <C>          <C>         <C>         <C>
Selected Financial Data
  Net Sales                    $  15,429    $  12,681  $  14,506     $  14,861   $14,170
  Income  Before Taxes         $   1,443    $     735  $     832     $   1,087   $  1,341
  Net Income                   $     857    $     438  $     510     $     663   $  879
  Net Income  per Share        $     .59    $     .30  $     .34     $     .45   $  .60
  Cash Dividends Declared per
     Common Share              $     .20    $     .20  $     .20     $     .20   $   .20

At year-end:
  Total Assets                 $  11,836    $  11,828  $  11,026     $  11,290   $ 10,388
  Working Capital              $  10,392    $  10,172  $   9,568     $   9,212   $ 8,832
  Shareholders' Equity         $  10,494    $  10,395  $   9,898     $   9,664   $ 9,278
  Book Value per Common Share 
     Outstanding at Year End   $    7.52    $    7.01  $    6.68     $    6.55   $  6.31

</TABLE>
                             23
<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 $220,000 during
1996, compared to an increase of $604,000 and $356,000 in 1995 and 1994, 
respectively.  Working capital at the end of 1996 was $10,392,000, compared
to $10,172,000 at the end of 1995 and $9,568,000 at the end of 1994.  The
current ratio for each of the last three years was 8.1 to 1, 8.9 to 1 and 
10.6 to 1, respectively.

The Statement of Cash Flows for the year ended November 29, 1996, shows a 
decrease in cash and cash equivalents of $753,000. The Company's operations
used $253,000 during 1996, primarily due to increased inventory.  The 
payment of the Company's quarterly dividend amounted to $290,000 during
1996.  During 1996, the Company used $467,000 to purchase treasury stock.

During 1996, the total value of the Company's inventory which included both
domestically assembled and imported footwear increased by $982,000.  In 
1995, the inventory had increased by $585,000 from 1994.  The increase in 
inventory in fiscal 1996 was due to larger purchases of imported footwear 
in advance of 1997 shipment. In both 1996 and 1995, the portion of inventory
comprised of domestically assembled footwear decreased, reducing the amount
of inventory carried at prior years' LIFO values.  As a result, in each of 
the last two years cost of sales was charged for goods carried at prior 
years' LIFO values which were significantly less than the cost of current 
purchases.  The effect of these LIFO liquidations was to increase earnings
by $205,000, or $.14 per share, and $182,000, or $.12 per share, in 1996 
and 1995, respectively.

The increase in marketable securities was primarily due to the adoption of
Statement of Accounting Standards No. 115 "Accounting for Certain 
Investments in Debt and Equity Securities" on November 26, 1994. As a result
of the adoption of this accounting standard, marketable securities includes
$594,000  of unrealized gain and a deferred tax liability of $239,000 is 
recorded on the balance sheet as an offset to prepaid expenses and other. 
The increases in accruals and prepaid expenses, and the decrease in 
accounts receivable and accounts payable were a result of timing.

Management believes that Penobscot Shoe Company remains financially well 
structured to consider a variety of financing options should the need arise 
and will make choices depending 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 $3,750,000 with a major bank available at the bank's base rate
should the need arise. The Company had no material commitments for capital
expenditures as of November 29, 1996.

Results of Operations:

Net sales for 1996 increased 22% from the preceding year which had decreased
by 13% from 1994.  Total pairs of footwear shipped increased by approximately
15% from 1995, and the average selling price per pair increased by
approximately 6%.  Most of the increase in the average selling price per pair
was a result of the product mix rather than price increases.

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 67% of net sales in 1996 and 65% in 1995 and 66% in 1994.
The gross profit percentage was 33%, 35% and 34% in 1996, 1995 and 1994
respectively.  Costs related to the closure of the Company's domestic
assembly factory in 1996 reduced  margins by approximately 1%.  The closing
of the factory in Old Town, Maine, was in response to a decline in the
portion of the product line which had been assembled at that facility.  The
resulting inefficiencies reached a point at which it was no longer economically
viable to operate the factory.

Selling and administrative costs increased by approximately $94,000, or 2%,
from 1995.  In 1995, these expenses had increased by approximately 1% from 
1994. The increase in the current year was mainly due to costs variable on 
sales.

In the fiscal year 1996, other income amounted to $539,000, pre-tax, 
including $226,000 in gains from the sales of securities and interest income 
of $200,000. Also in 1996, other income was increased by a gain of $100,000 
related to the settlement of litigation.  In 1995 gains from the sales of 
securities amounted to $178,000, pre-tax, and interest income amounted to 
$218,000.  

During fiscal 1996, the Company's effective income tax rate was 41%.  During 
1995 the rate was 40% and 1994 the effective rate was 39%.  In all three 
years the effective income tax rate consisted of State and Federal income taxes.

TROTTERS sales growth in 1996 was the result of several factors.  Improved 
product sell through, as indicated by a 26% increase in our in-stock 
business, sales programs and expanded penetration into key retail segments 
all contributed to this success.

Future growth will be dependent on further expansion of TROTTERS distribution 
in the highly competitive women's footwear market and the strength of the 
retail footwear environment.



                              24
<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 Chemical Mellon Shareholder Services, 111 Founders Plaza,
E. Hartford, CT 06108.  As of November 29, 1996, there were 239 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>
1996
   High             4 7/8    6 1/4    5 7/8    6 3/8
   Low              4 1/4    4 7/8    4 3/4    5 3/8
   Dividends        $.05     $.05     $.05     $.05

1995
   High             4 7/8    5        4 3/4    4 3/4
   Low              4        4 3/8    4 3/8    4 3/16
   Dividends        $.05     $.05     $.05     $.05

</TABLE>

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

TROTTERS
                              25
<PAGE>