<PAGE>
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549
                               -----------------

                                   FORM 10-K
(Mark One)
[X]  Annual Report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934
     For the fiscal year ended October 31, 1998
                                       or
[ ]  Transition Report Pursuant to Section 13 or 15(d) of the
     Securities Exchange Act of 1934
     For the transition period from _____________ to ______________ 

                         Commission File Number 0-24026

                           MAXWELL SHOE COMPANY INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                           04-2599205
(State or other jurisdiction of                              (IRS Employer
 incorporation or organization)                          Identification Number)

      101 Sprague Street
         P.O. Box 37
    Readville (Boston), MA                                        02137
(Address of principal executive offices)                        (Zip code)

                                (617) 364-5090
              (Registrant's telephone number, including area code)
 
          Securities Registered Pursuant to Section 12(b) of the Act:
                                                          Name of Each Exchange
     Title of Each Class:                                  on Which Registered:
     --------------------                                 ---------------------
           None                                                    None

          Securities Registered Pursuant to Section 12(g) of the Act:
                             Class A Common Stock,
                            par value $.01 per share
                                (Title of class)

          Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes [X]  No [ ]

          Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

          The aggregate market value of the Class A Common Stock of the
registrant held by non-affiliates of the registrant on January 21, 1999 based on
the closing price of the Class A Common Stock on the NASDAQ National Market
System on such date was $101,702,582.

          The number of shares of the registrant's Class A Common Stock 
outstanding at January 21, 1999 was 8,795,899 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the proxy statement for the registrant's 1999 Annual
Stockholders Meeting are incorporated by reference into Part III herein.

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<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
                      INDEX TO ANNUAL REPORT ON FORM 10-K

                   For The Fiscal Year Ended October 31, 1998


Caption                                                                 Page
                                                                        ----

PART I
------ 
 
Item 1.     Business..................................................    3
Item 2.     Properties................................................   16
Item 3.     Legal Proceedings.........................................   16
Item 4.     Submission of Matters to a Vote of Security Holders.......   16
 
PART II
------- 
Item 5.     Market for Registrant's Common Equity and Related 
            Stockholder Matters.......................................   17
Item 6.     Selected Financial Data...................................   18
Item 7.     Management's Discussion and Analysis of Financial 
            Condition and Results of Operations.......................   19
Item 8.     Consolidated Financial Statements and Supplementary Data..   22
Item 9.     Changes in and Disagreements with Accountants on 
            Accounting and Financial Disclosure.......................   39
 
PART III
-------- 
Item 10.    Directors and Executive Officers of the Registrant........   39
Item 11.    Executive Compensation....................................   39
Item 12.    Security Ownership of Certain Beneficial Owners 
            and Management............................................   39
Item 13.    Certain Relationships and Related Transactions............   39
 
PART IV
------- 
Item 14.    Exhibits, Financial Statement Schedules, and Reports
            on Form 8-K...............................................   40
 

                                       2
<PAGE>
 
                                     PART I
                                     ------
                                        
                                        
Item I.  Business

General

      All references herein to the "Company" mean Maxwell Shoe Company Inc., a
Delaware corporation, and its predecessors and its consolidated subsidiaries,
unless the context otherwise requires.  The Company's fiscal year ends on
October 31; all references herein to a fiscal year mean the twelve-month period
ended on the October 31 of the particular year.

      The Company designs, develops and markets casual and dress footwear for
women and children under multiple brand names, each of which is targeted to a
distinct segment of the footwear market. The Company offers casual and dress
footwear for women in the moderately priced market segment under the Mootsies
Tootsies brand name, in the upper moderately priced market segment under the Sam
& Libby brand name and in the better market segment under the Jones New York and
Jones New York Sport brand names. The Company also sells moderately priced and
upper moderately priced children's footwear under both the Mootsies Tootsies and
Sam & Libby brand names.  The Company designs and develops private label
footwear for selected retailers under the retailers' own brand names. The
Company has licensed the J.G. Hook tradename to source and develop private label
products for retailers who require brand identification. The Company has
licensed the Dockers/(R)/ Khakis brand name to increase its brand offerings in
the upper moderate and better industry segment.  In addition, the Company sells
footwear closeouts that it has purchased at discounts from other manufacturers.

      Since 1987, when the Company first focused on its branded footwear
strategy, the Company has increased net sales every year and consistently
maintained profitability.  In fiscal 1998, the Company's net sales and net
income increased 23.6% and 46.9%, respectively, as compared to fiscal 1997. The
Company's financial success has been largely a result of its ability to design,
develop and market footwear with contemporary styles at affordable prices.
Retail prices for the Company's footwear generally range from $20 to $70 for the
Mootsies Tootsies and Sam & Libby brand offerings and from $40 to $90 for the
Jones New York Sport and Jones New York product lines. Substantially all of the
Company's products are manufactured overseas by independent factories selected
by the Company and its overseas agents. The Company sells its footwear primarily
to department stores and specialty stores in the United States as well as
through national catalog retailers and cable television consumer shopping
channels.

      The Company's strategy is to leverage its existing competitive strengths,
including but not limited to its strong manufacturing relationships and focused
brand management and to increase profitably its share of the women's and
children's footwear markets by further strengthening its existing footwear
brands and its private label business and expanding its brand portfolio through
a combination of acquisition, licensing and development of additional brands in
the future.

      Through advertising, promotion and packaging, the Company has built
consumer and retail recognition for the Mootsies Tootsies and Mootsies Kids
brand names, and management believes that Mootsies Tootsies is currently one of
the largest selling brands in the moderately priced segment of the women's
casual and dress footwear industry. In 1994 and 1995, the Company expanded its
branded product portfolio through the introduction of the Jones New York and
Jones New York Sport footwear brands. Both product lines allow the Company to
capitalize on the strong brand name recognition and reputation for style,
quality and value enjoyed by Jones New York in the better segments of the
women's apparel industry. The Company continued its brand expansion through the
acquisition of the Sam & Libby worldwide trademarks and tradenames in 1996.  The
Company has re-positioned the Sam & Libby brand from its prior focus on the
junior women's market segment to the late 20's, career-oriented women market
segment, and management believes that sales under the Sam & Libby lines should
increase significantly in the future upon completion of this brand re-
positioning and the introduction of additional products under such brand name.
The Company believes that there is a growing demand among retailers for footwear
to market on a first cost basis with brand names.  The Company licensed the J.G.
Hook name in 1997 to sell as a first cost product for retailers who require
brand identification.  In late 1998, the Company licensed the Dockers/(R)/
Khakis footwear brand name for women, in order to increase its brand offerings
in the upper moderate and better industry segments.

                                       3
<PAGE>
 
      The Company competes primarily in the women's casual and dress footwear
market, which emphasizes contemporary fashion, quality and value. The Company
believes that there has been a shift in the "moderate" segment of the women's
casual and dress footwear market toward value priced footwear. The Company has
positioned its Mootsies Tootsies line to take advantage of this shift by
offering value priced footwear that reflects current fashion trends. The Sam &
Libby brand is directed to appeal to the fashion forward customers in the upper
moderate price range that has been less affected by this shift.  The Company
plans for Dockers/(R)/ Khakis footwear for women to compete in the upper
moderate and better industry segments.  The initial shipments for Dockers/(R)/
Khakis footwear for women are planned for the fall 1999 retail-selling season.
The Company believes that the better segment of this market has not been as
affected by this shift due to a continuing interest in higher quality and brand
name products, such as the Company's Jones New York and Jones New York Sport
brands.

      The Company, originally a closeout footwear business founded in 1949, was
incorporated as Maxwell Shoe Company Inc. in Massachusetts in 1976.  During the
late 1980s, the Company shifted its focus to designing, developing and marketing
full lines of branded women's footwear.  In order to implement this new
strategy, the Company hired experienced senior management to strengthen its
organizational infrastructure, developed cost-efficient product sourcing,
implemented an advertising program and improved internal systems.  In March
1994, Maxwell Shoe Company Inc. became a Delaware incorporated company.

Business Strategy

      The Company's strategy is to leverage its existing competitive strengths
to increase profitably, its share of the women's and children's footwear markets
by further developing its existing footwear brands and its private label
business and expanding its brand portfolio through a combination of acquisition,
licensing and development of additional brands in the future.

     Competitive Strengths.  The Company has developed certain core operating
     ---------------------                                                   
strengths which have been significant sources of growth to date and which
management believes will help the Company achieve further growth in the future.
Such operating strengths include:

   .   Portfolio of Established Brands.  Through advertising and promotion, the
       Company has built consumer and retail recognition for its Mootsies
       Tootsies and Mootsies Kids brand names and has established Mootsies
       Tootsies as one of the largest selling brands in the moderately priced
       segment of the women's casual and dress footwear industry.  The Company
       continued its brand expansion through the acquisition of the Sam & Libby
       worldwide trademarks and tradenames in 1996.  The Company offers its
       Jones New York and Jones New York Sport footwear lines with the intention
       of capitalizing on the strong brand name recognition and reputation for
       style, quality and value enjoyed by the Jones New York and Jones New York
       Sport in the better segments of the women's apparel industry.  The
       Company licensed the Dockers/(R)/ Khakis footwear for women brand in
       order to increase its brand offering in the upper moderate and better
       industry segments.  The Company has also licensed the J. G. Hook name to
       sell as a first cost product for retailers who require brand
       identification.  The Company continues to seek licensing or acquisition
       opportunities in order to expand its current portfolio of brands.

   .   Strong Manufacturing Relationships.  The Company believes that one of the
       contributing elements of its growth has been its strong relationships
       with overseas buying agents and manufacturers capable of meeting the
       Company's requirements for quality and price in a timely fashion.  The
       Company's increased use of China-based manufacturing facilities has
       resulted in lower manufacturing costs while continuing to meet the
       Company's high quality standards.  Universal Max Trading, the Company's
       principal buying agent in The Peoples Republic of China ("China"), has
       agreed to exclusively source and monitor product manufacturing for the
       Company in China. Universal Max Trading has a dedicated manufacturing
       facility and a recently opened tanning facility in China which

                                       4
<PAGE>
 
       will further improve the Company's product development and sourcing
       capabilities.  The Company continues to seek to develop other exclusive
       relationships with buying agents whose access to numerous manufacturing
       facilities will enable the Company to maximize its sourcing flexibility.

   .   Emphasis on High Volume Moderate Through Better Segments of the Footwear
       Market. The Company believes that its strategy of focusing on the high
       volume moderate through better segments of the women's and children's
       footwear markets and of providing value-priced products reduces the risks
       associated with changing fashion trends.  The Company also attempts to
       reduce the risks of changing fashion trends and product acceptance
       through market research and development and testing of a broad range of
       styles prior to placing orders with its manufacturers.  The Company
       believes that this approach mitigates the risks of carrying obsolete
       inventory and poor retail sell-through.

   .   Comprehensive Customer Relationships.  The Company supports its customers
       by maintaining an in-stock inventory position for selected styles in
       order to minimize the time necessary to fill customers' orders. In
       addition, the Company provides its customers with electronic data
       interchange (EDI) capability (see "--Distribution"), co-op advertising,
       point of sale displays and assistance in evaluating which products are
       likely to appeal to their retail customers.  Management believes that the
       Company has earned a strong reputation among its customers by
       consistently providing quality products at attractive prices.  In return,
       the Company's customers provide certain information to the Company on
       current retail selling trends which helps the Company identify and
       interpret fashion trends.

     Growth Strategy. By leveraging the above competitive strengths, the Company
     ---------------                                                            
has pursued and will continue to pursue growth through various initiatives,
including, but not limited to, the following:

   .   Growing the Company's Existing Brands. Management seeks to increase sales
       of the Company's products under each of the Company's existing brands by:
       (i) offering a broader assortment of products and styles under such brand
       names, (ii) further penetrating the Company's existing retail channels
       through increased display area and additional stores, (iii) developing
       new retail channel relationships appropriate to the Company's product
       offerings and (iv) increasing the use of advertising to strengthen brand
       awareness among retailers and consumers.

   .   Increasing the Company's Private Label Business. The Company entered the
       private label footwear market in order to leverage its offshore
       manufacturing experience and existing infrastructure by providing
       selected retailers with private label products for sale under their own
       house brands. This business enables the Company to sell products to new
       customers as well as strengthening the Company's relationship with
       certain of its existing customers. The Company believes that there is a
       growing demand among retailers for footwear to market under their own
       brand names, and the Company has licensed the J. G. Hook name to sell as
       a first cost product for retailers who require brand identification.

   .   Adding Brands to the Company's Portfolio.  Management believes that the
       footwear industry segments in which the Company operates remain highly
       fragmented, although consolidation has been accelerating recently as
       fewer companies control more brands and retailers generally purchase
       footwear merchandise from a reduced number of manufacturers. The Company
       intends to continue capitalizing on this ongoing consolidation by
       expanding its existing brand portfolio which will appeal to different
       market segments of the footwear industry. Management believes that
       creating, acquiring or licensing additional brands will enable the
       Company to increase its sales by satisfying the needs of a broader range
       of customers. The Company intends to sell these new brands through the
       Company's existing customers as well as new customers which the Company
       seeks to develop. The acquisition of the Sam & Libby brand and the
       licensing of the Jones New York and Dockers/(R)/ Khakis brands represent
       the Company's most recent efforts to expand into new market segments. The
       Company intends to continue to explore entering other market segments
       through acquisition or licensing of additional brands. The Company
       believes that it is well positioned to continue pursuing this strategy
       due to its relatively strong and unencumbered balance sheet.

                                       5
<PAGE>
 
Product Lines

     The Company's products consist of eight lines of brand name footwear as
well as private label footwear for selected retailers for sale under their own
house brands. Each of the branded product lines is targeted to appeal to a
different market segment of the footwear industry. The characteristics of the
product lines sold by the Company are summarized in the following table:

<TABLE>
<CAPTION>
                                                                                   General Retail
                                                                                    Price Range
                                                                                  ----------------
                                               Style         Industry Segment      Shoes    Boots
                                            ------------    -------------------   -------  -------
<S>                                        <C>             <C>                    <C>      <C>
Mootsies Tootsies........................   Contemporary         Moderate         $25-$40  $35-$55
Mootsies Kids............................   Contemporary         Moderate         $20-$25  $30-$40
Sam & Libby and Just Libby...............     Updated         Upper Moderate      $35-$50  $45-$70
Sam & Libby Kids.........................     Updated         Upper Moderate      $25-$45  $35-$55
Dockers/(R)/ Khaki.......................      Casual      Upper Moderate-Better  $40-$65     -
Jones New York...........................   Contemporary          Better          $65-$90     -
Jones New York Sport.....................  Classic Casual         Better          $40-$75  $60-$85
J.G. Hook Private Label..................       All           Budget-Moderate     $12-$20  $25-$30
</TABLE>


  Mootsies Tootsies

     The Mootsies Tootsies brand line provides consumers with a wide selection
of footwear with contemporary styles and quality at affordable prices primarily
targeted at women ages 18 to 34. The line includes approximately 30 new styles
each spring and fall season, as well as a number of core styles that are updated
periodically based on fashion trends. The line principally consists of casual
shoes, dress shoes, boots and sandals. Styles are available in a wide variety of
colors and materials, including leather, sueded leather and fabric. All footwear
in the line is designed to have soft construction for comfort.


  Mootsies Kids

     The Mootsies Kids brand line is targeted at girls in the misses market
(ages 8 to 12) who desire contemporary footwear. The line consists of
approximately 20 new styles each spring and fall that, in many cases, represent
a miniature version of the Mootsies Tootsies line. The children's line is
focused on casual shoes, party shoes, boots and sandals.


  Sam & Libby and Just Libby

     The Sam & Libby line is updated casual and dress footwear targeted at
female fashion customers, ages 21 to 35, and contains approximately 30 styles
per season, consisting of casual shoes, dress shoes, boots and sandals. The
acquisition of the Sam & Libby brand with its trademarks registered in over 20
countries will bolster the Company's efforts to develop and grow
internationally, although the Company's expansion to overseas markets will be a
long-term effort. A wholly owned subsidiary of the Company has granted to SLJ
Retail LLC ("SLJ Retail") a license to sell Sam & Libby and Just Libby women's
footwear products. See "--License Agreements--SLJ Retail."

                                       6
<PAGE>
 
  Sam & Libby Kids

     The Sam & Libby Kids line is geared toward girls ages 8 to 14 and is
targeted towards the updated and more fashion-conscious girl. The line will have
approximately 20 styles each season often similar to the Sam & Libby women's
styles. The children's line is focused on dress shoes, casual shoes, casual
athletic shoes, boots and sandals.


  Dockers/(R)/ Khaki

     The Dockers/(R)/ Khakis footwear for women line targets women between the
ages of 25-34 and has been designed to provide women with a new choice in
stylish, comfortable casual footwear.  The footwear line will compliment the
Dockers/(R)/ Khakis for women apparel products and are specifically designed to
be worn with Khakis, complimenting a wide variety of versatile looks.


  Jones New York

     The Jones New York footwear line focuses on contemporary, quality footwear
targeted at career oriented women 30 years and older. The line capitalizes on
the name recognition and reputation enjoyed by the Jones New York apparel line
produced by the Company's licensor and is designed to complement Jones New York
apparel. The Company's Jones New York footwear line consists of approximately 25
styles per season with all leather uppers and soles.


  Jones New York Sport

     The Jones New York Sport line appeals to the Jones New York casual
sportswear customer by providing leisure footwear to career oriented women. The
line contains approximately 20 styles per season.  The Company has granted a
sub-license to SLJ Retail to use the Jones New York trademark in connection with
certain activities, including retail sale of women's footwear merchandise
bearing such trademark. See "--License Agreements--SLJ Retail."


  J. G. Hook and Private Label Products

     In response to the growing demand among retailers for footwear to market
under their own brand names, the Company designs and sources private label
women's and children's footwear for selected retailers. The Company's private
label business has minimal overhead and capital requirements primarily because
the Company utilizes its existing branded product styles (thereby incurring no
additional product development costs) and because the Company does not incur any
costs related to purchasing, importing, shipping or warehousing of inventory,
all of which costs are borne by the retailer. The Company has licensed the J. G.
Hook name to sell as a first cost product for retailers who require brand
identification.

     The following table sets forth the percentage of the Company's sales
generated by each of its major product categories for the periods indicated:


<TABLE>
<CAPTION>
                                                                   Year Ended October 31
                                                            -----------------------------------
       Category                                                1996         1997         1998
       --------                                             ----------   ----------   ---------
      <S>                                                   <C>          <C>          <C>
       Women's...........................................      85.4%        84.9%        86.5%
       Children's........................................      14.2         14.8         13.3
       Other.............................................       0.4          0.3          0.2
                                                              -----        -----        -----
       Total.............................................     100.0%       100.0%       100.0%
                                                              =====        =====        =====
</TABLE>

                                       7
<PAGE>
 
Closeout Business

     The Company sells certain product styles that it purchases at volume
discounts from other footwear manufacturers. These products, which are typically
either slow moving or factory seconds, are sold to discount retailers. At times,
the Company holds closeout products in inventory until the next fashion season.


Retail Joint Venture

     In April 1997, the Company completed a transaction to operate approximately
130 retail Sam & Libby and Jones New York women's footwear stores through SLJ
Retail.  The Company and the Butler Group LLC, a wholly-owned subsidiary of
General Electric Capital Corporation, owned initially 49% and 51% of SLJ Retail,
respectively.  A subsidiary of the Company has been designated as the manager of
SLJ Retail.  The Company accounts for its ownership under the equity method of
accounting since it owns less than 50% of the equity of SLJ Retail.  The Company
also holds an option through February 1, 2000 to purchase additional equity in
the joint venture to increase its equity ownership by approximately 5%.  Under
certain circumstances, the Company may be obligated to acquire the ownership
interest of the Butler Group at a value based upon the operating results of SLJ
Retail.

     On June 24, 1998 the Company and Butler Group LLC entered into a new
financing agreement where Butler could contribute up to $6 million in additional
capital, at its election.  The Butler Group's equity interest in SLJ Retail
could increase up to 72% of SLJ Retail's equity depending on the amount of
additional capital.  As of January 7, 1999 Butler contributed $4 million of
additional capital under the agreement and increased its equity in SLJ Retail to
65%.  Also, under the agreement, the Company agreed to defer certain management
fees and Butler agreed to defer certain fees and interest due it.

     Under the Services Agreement with SLJ Retail, which, effective January 19,
1999, was terminated by the Company, Mr. James Tinagero, the Executive Vice
President of the Company was required to devote at least 25% of his time to SLJ
Retail's business. Under the Option Agreement among the Company, SLJ Retail and
Butler, Butler has certain rights to require the Company to purchase all or a
portion of its interest in SLJ Retail for cash or Common Stock of the Company.
There is no assurance that any exercise by Butler of its rights under such
Option Agreement would not have a material adverse effect on the Company's
financial condition and results of operations. On January 19, 1999, the Company
resigned as Manager of SLJ Retail and terminated the Services Agreement.

     SLJ Retail is in the process of reducing its store base of Sam & Libby and
Jones New York stores from 99 to 53 retail locations. SLJ Retail expects to
complete the related store closings by March 1, 1999. Because SLJ Retail is an
unconsolidated affiliate of the Company, the store reduction actions will have
no impact on the Company's financial results.

     On December 16, 1998, SLJ Retail entered into a forbearance extension 
agreement with its banks which lapses on April 30, 1999. The lenders have 
terminated their commitments to make additional loans and issued letters of 
credit; but they agreed not to accelerate the loans before April 30, 1999, 
subject to certain conditions. There is no assurance that the forbearance 
extension agreement will be extended beyond April 30, 1999, and if it is not 
extended, the lenders can exercise any appropriate remedy at that time. SLJ 
Retail does not currently have a bank facility to issue, extend, renew letters 
of credit or borrow additional funds.

     Butler has extended financial support to SLJ Retail in the form of
providing loan guarantees, opening letters of credit for purchases of spring
1999 goods and contributed additional equity capital.  There is no assurance
that Butler will continue to provide financial support for the SLJ Retail
business.

     Cash flow from operations of SLJ Retail is currently insufficient to fund
the SLJ Retail business on an ongoing basis. Unless and until a successful
turnaround of the SLJ Retail business can be executed, SLJ Retail business will
require additional cash to fund working capital requirements. The Company has no
requirement to provide for such working capital. No assurances can be given that
any such turnaround can be executed.

                                       8
<PAGE>
 
Design and Product Development

     The Company seeks to identify fashion trends and to translate such trends
into contemporary footwear that appeal to its target market segments'
requirements for style, quality, fit and price. Management believes that its
philosophy of marketing contemporary styles to a broad audience rather than
"fashion forward" styles reduces the risks associated with changing fashion
trends.

     Each branded product line has its own design team, including design staff,
sales staff and a brand manager in an effort to design footwear that appeals to
the characteristics of that line's market segment. The designers research and
confirm market trends by: (i) traveling extensively to fashion markets in the
United States and Europe, (ii) attending trade shows, (iii) subscribing to
fashion and color information services and (iv) commissioning market studies. In
addition, product development efforts benefit from interaction with retailers,
who provide information on current retail selling trends, and the Company's
buying agents, who provide information on industry trends. The designers for the
Jones New York and Jones New York Sport lines also meet regularly with the Jones
New York apparel group to exchange product and fashion concepts.  See "--License
Agreements  Jones New York."  Each line initially consists of between 100 and
200 prototypes each season from which the design team selects the styles that it
believes will satisfy the target market segment's requirements for style,
quality, fit and price. Each line is further refined following presentations at
industry shows.


Marketing and Customer Support

     Each branded product line has its own sales organization, including a
divisional executive who oversees all aspects of selling the line and works with
a network of independent sales representatives located throughout the United
States. Certain of the independent sales representatives sell only the Company's
brands, and the rest of the independent sales representatives sell brands that
do not compete directly with the Company's brands. The Company develops spring
and fall product lines for each of its brands. Each line is first introduced at
industry trade shows prior to on-site sales visits by the independent sales
representatives and the Company's divisional head responsible for the line. In
addition, the Company maintains showrooms in New York and Boston where buyers
view products and place orders. While the Company's products are distributed
primarily in the United States, the Company also sells to independent wholesale
distributors in Canada.

     In fiscal 1998, the Company sold products to approximately 1,500 accounts
with over 7,000 retail locations. The Mootsies Tootsies retailers, which market
moderately priced apparel merchandise, include the Federated Department Stores,
Kohl's and Belks. The Jones New York and Jones New York Sport footwear lines are
distributed to those retailers who typically market merchandise at higher retail
price points, including Macy's, May Co., Dayton Hudson and Bloomingdale's. The
Sam & Libby footwear lines are distributed to retailers such as Federated, May
Co., Bon Ton and Nordstrom. The retail industry has periodically experienced
consolidation, and any future consolidation may result in loss of customers of
the Company and lower profit margins on the Company's footwear.  The Company
also markets its branded products through national catalog retailers such as
Spiegel, Nordstrom and Chadwicks of Boston and through home shopping clubs such
as QVC and Home Shopping Network.

     The Company's largest customer, The TJX Companies, Inc. ("TJX"), the
successor entity from the combination of Marshall's and T. J. Maxx, accounted
for 19% and 18% of the Company's net sales in fiscal 1997 and fiscal 1998,
respectively, including revenues from closeouts.  The Company's top three
customers accounted for 32% and 31% of net sales for fiscal 1997 and fiscal
1998, respectively.  While the Company seeks to build long-term customer
relationships, revenues from any particular customer can fluctuate from period
to period due to such customer's purchasing patterns.  In addition, the Company
believes that although purchasing decisions have generally been made
independently by each department store customer, there is a trend among
department store customers toward more centralized purchasing decisions.  The
retail industry has also periodically

                                       9
<PAGE>
 
experienced consolidation, and any future consolidation may result in loss of
customers of the Company and lower profit margins on the Company's footwear. In
the future, the Company's wholesale customers may consolidate, undergo
restructuring or reorganizations, or realign their affiliations, any of which
could decrease the number of stores that carry the Company's products or
increase the ownership concentration within the retail industry. Any termination
or significant disruption of the Company's relationships with one or more of the
Company's major customers could have a material adverse effect on the Company's
financial condition or results of operations. See Note 1 of "Notes to
Consolidated Financial Statements."

     The Company believes that its reputation for quality products and
relationships with retailers will also be useful during the introduction of new
brands that it may develop or acquire to fill other niches in the women's
footwear market.

     The Company supports its customers through a variety of programs, including
its in-stock inventory position for selected styles, the availability of EDI,
co-op advertising and point of sale displays. In addition, the Company assists
its customers in evaluating which products are more likely to appeal to their
retail customers. Customers may return defective products in quantities of more
than six pairs for full credit. Customer allowances are based on the Company's
ability to meet the particular customer's objectives and specifications.


Advertising and Promotion

     The Company works closely with its retailers in promoting its brands
through its own and cooperative national consumer print advertising, in-store
merchandising, point of sale promotions, in-store events, distinctive packaging
and active solicitation of fashion editorial space. The Company increased its
advertising and promotional expenditures during fiscal 1998 in order to maximize
the growth potential of its Sam & Libby lines.  In fiscal 1999, the Company
plans to continue to increase Sam & Libby advertising expenditures, as well as
participate in the Jones Apparel national ad campaign.  The Company intends to
launch an initial advertising campaign for Dockers/(R)/ Khakis footwear for
women in fiscal 1999.

     Print advertisements for Mootsies Tootsies are designed to build brand
awareness, rather than market a particular footwear product, by linking the
brand to a consumer's lifestyle. The advertisements run in fashion/lifestyle
publications like Glamour and Cosmopolitan as well as in general interest
publications like People. Utilizing the print media, the Company seeks to reach
a large percentage of its target audience, women ages 18 to 34, with a number of
advertisements each selling season. The Company's print advertising campaign for
its Jones New York and Jones New York Sport footwear is intended to build rapid
consumer awareness and acceptance of the footwear by taking advantage of the
recognition of the Jones New York apparel name. In addition, the Company has
gained additional media attention through fashion editorial publications.

     Print advertisements for Sam & Libby are designed to build brand awareness
by creating a lifestyle viewpoint that appeals to the modern consumer. The
advertisements will appear in fashion publications such as Vogue, Glamour and
Cosmopolitan.

     The Company also participates with its retail customers in cooperative
advertising programs intended to take the brand awareness created by the
national print advertising and channel it to local retailers where consumers can
buy the Company's brands. This includes local advertising on radio, television,
and newspaper as well as Company participation in major catalogs for retailers
such as Spiegel. The Company's co-op efforts are intended to maximize
advertising resources by having its retailers share in the cost of promoting the
Company's brands. Also the Company believes that co-op advertising encourages
the retailer to merchandise the brands properly and sell them aggressively on
the sales floor.

     The Company uses point-of-sale advertising to further promote its products
in the store. Point-of-sale techniques used by the Company includes packaging,
point-of-sale displays, counter cards, banners and other visual merchandising
displays. These materials mirror the look and feel of the national print
advertising in order to reinforce brand image at the point-of-sale. Management
believes these efforts stimulate impulse sales and repeat purchases.

                                       10
<PAGE>
 
Manufacturing

     Mootsies Tootsies, Mootsies Kids, Sam & Libby and Jones New York footwear
are manufactured primarily in China and Brazil because of the ability of the
suppliers in these countries to manufacture quality products at affordable
prices. The Jones New York footwear brand is also manufactured in Spain and
Italy because Spanish and Italian suppliers can meet the Company's quality
requirements for this product line and the Spanish and Italian reputation for
quality footwear is consistent with the Jones New York image. Dockers/(R)/
Khakis footwear for women will be primarily manufactured in China.

     The Company does not have contracts with any of the factories that produce
its footwear. The Company relies on its relationships with buying agents who are
responsible for securing raw materials, selecting manufacturers, monitoring the
manufacturing process, inspecting finished goods and coordinating shipments to
the Company. These agents work regularly with numerous factories with the
capacity to meet the Company's product specifications for quality, fit, volume
and price. By using buying agents rather than manufacturing products itself, the
Company is able to maximize production flexibility while avoiding significant
capital expenditures, work-in-process inventory and costs of managing a
production work force. To date, the Company has not encountered significant
delivery or quality problems. The Company works with buying agents with access
to numerous manufacturing facilities in order to maximize the Company's sourcing
flexibility. The Company believes it has built strong relationships with its
agents and manufacturing facilities over time and through volume of business.
Management believes that its buying agents do not represent other direct
competitor branded footwear lines, and Universal Max Trading, the Company's
principal buying agent in China, has agreed to act exclusively for the Company
in China. The Company pays its buying agents a percentage of the order price of
products shipped to the Company. The Company manufactures none of its products
and does not own any manufacturing facilities or equipment.

     Prior to the start of production, the Company submits specifications for
products to the buying agent, who then provides a confirmation sample of each
style for inspection by the Company. During production, the Company makes
periodic reviews of products at the factory in addition to inspections conducted
by the buying agent. The Company also inspects products upon receipt at its
warehouse.

     The Company maintains an in-stock position for selected styles of its
footwear in order to minimize purchasing costs and the time necessary to fill
customer orders. In order to maintain an in-stock position, the Company places
orders for selected footwear with its manufacturers prior to the time the
Company has received customers' orders for such footwear. In order to reduce the
risk of overstocking, the Company seeks to assess demand for its products by
soliciting input from its customers and monitoring retail sell-through
throughout the selling season.

     The Company believes that its ability to satisfy customer order demands is
enhanced by designing its products to use common elements in raw materials,
lasts and dyes. Whenever possible, the Company seeks to use factories that have
previously produced the Company's footwear because the Company believes that
this enhances continuity and quality while holding down production costs.

     The Company protects itself against currency fluctuations by purchasing
products in U.S. dollars from China and Brazil. In order to minimize volatility
in the price of products from Spain, the Company buys forward exchange contracts
for Spanish pesetas in connection with the placement of orders for products.


Distribution

     Following manufacture, the Company's products are packaged in retail boxes
bearing bar codes and shipped to the Company's warehouse facilities in Boston,
Westwood and Brockton, Massachusetts. When an order is received, it is filled in
the warehouse and shipped to the customer by whatever means the customer
requests, which is usually by common carrier.

                                       11
<PAGE>
 
     In fiscal 1998, the Company invested more than $3 million in a new
warehouse management and conveyor system.  This system will allow the Company to
increase its shipping efficiency and consolidate its warehouse space
requirements by closing the Westwood facility in the second fiscal quarter of
1999.

     The Company has an electronic data interchange system to which some of the
Company's larger customers are linked. This system allows these customers to
automatically place orders with the Company, thereby eliminating the time
involved in transmitting and inputting orders. The Company is working to add
more of its customers to the system and to expand system capability to include
direct billing, payment and shipping information.


Restrictions on Imports

     The Company's operations are subject to compliance with relevant laws and
regulations enforced by the United States Customs Service and to the customary
risks of doing business abroad, including fluctuation in the value of
currencies, increases in customs duties and related fees resulting from position
changes by the United States Customs Service, import controls and trade barriers
(including the unilateral imposition of import quotas), restrictions on the
transfer of funds, work stoppages and, in certain parts of the world, political
instability causing disruption of trade. These factors have not had a material
adverse impact upon the Company's operations to date. Imports into the United
States are also affected by the cost of transportation, the imposition of import
duties and increased competition from greater production demands abroad. The
United States or the countries in which the Company's products are manufactured
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duty or tariff levels,
which could affect the Company's operations and its ability to import products
at current or increased levels. The Company cannot predict the likelihood or
frequency of any such events occurring.

     The Company's use of common elements in raw materials, lasts and dyes give
the Company the flexibility to duplicate sourcing in various countries in order
to reduce the risk that the Company may not be able to obtain products from a
particular country.

     The Company's imported products are subject to United States customs duties
and, in the ordinary course of its business, the Company may, from time to time,
be subject to claims for duties and other charges. United States customs duties
currently range from 10% to 37.5% on the principal products currently imported
by the Company. Because the Company has had no disputes with the United States
Customs Service in the past, the Company is allowed to and does submit its
footwear products to United States customs officials for pre-classification and
customs duties rates determination prior to importation of such footwear
products from abroad.

     For fiscal 1998, approximately 94% of the Company's footwear was imported
from China. After a serious dispute with the United States Trade Representative
("USTR") over the protection of intellectual property rights in China,
including the threat by USTR to impose trade sanctions, the Chinese government
agreed to meet its enforcement obligations. That agreement is now being
monitored by USTR and the failure of China to comply with its obligations could
result in trade sanctions in the future, including the imposition of retaliatory
tariffs that might affect the Company's imports of footwear from China. From
time to time there have been other trade disputes with China, involving such
things as market access, textile quotes, automotive industry policies and
agricultural products. These and other such matters could also present problems
in the future that might lead to trade sanctions affecting the Company's imports
of footwear.

     Imports from China continue to enter the United States on a conditional
normal-trade-relations ("NTR") basis. Pursuant to NTR status, products imported
by the Company from China currently receive the lower tariff rates made
available to most of the United States' major trading partners. In the case of
China, however, this NTR treatment is made possible under the Trade Act of 1974
by virtue of certain Presidential findings that waive restrictions that would
otherwise render China ineligible for NTR treatment. The President has waived
these restrictions each year since 1979. There can be no assurance that China
will continue to enjoy NTR status in the future. If goods manufactured in China
enter the United States without the benefit of NTR treatment, such goods will be
subject to significantly higher duty rates, ranging between 20% and 66% of
customs value. Any such increased duties or tariffs could significantly increase
the cost or reduce the supply of goods from China.

                                       12
<PAGE>
 
Backlog

     At October 31, 1996, 1997, and 1998, the Company had unfilled customer
orders of $50.0 million, $61.6 million and $68.0 million respectively.  This is
an increase of 10.4% for fiscal year end 1998 over fiscal year end 1997. The
backlog at a particular time is affected by a number of factors, including
seasonality and the scheduling of manufacturing and shipment of products. Orders
generally may be canceled by customers without financial penalty. Accordingly, a
comparison of backlog from period to period is not necessarily meaningful and
may not be indicative of eventual actual shipments to customers. To date, the
Company has not experienced material returns of its products or material
cancellations of orders.  The Company expects that substantially all of its
backlog as of October 31, 1998 will be filled during the first six months of
fiscal 1999.


License Agreements

  Jones New York

     In July 1993, the Company entered into a license agreement (the "Jones
License Agreement") with Jones Investment Co., Inc. ("Jones") under which the
Company has the exclusive right to use the Jones New York and Jones New York
Sport names in connection with the development, manufacturing and marketing of
women's footwear (other than performance athletic shoes and bedroom slippers).
The Jones License Agreement covers the United States (including its territories)
and Canada and expires in December 2002.  In April 1997, the Company and Jones
amended the Jones License Agreement to, among other things:  (i) grant the
Company three, five-year options to extend the Jones License Agreement through
December 2017, subject to the Company meeting certain minimum net sales amounts,
(ii) extend the Jones License Agreement to cover the retail sale of Jones New
York women's footwear by SLJ Retail, (iii) require the Company and SLJ Retail to
pay certain royalties to Jones, and (iv) permit Jones to terminate the Jones
License Agreement with respect to the retail sale of Jones New York women's
footwear by SLJ Retail only if the Company is no longer the managing member of
SLJ Retail or if SLJ Retail defaults on any of its royalty payments. The Jones
License Agreement also requires the Company to spend a specified minimum amount
each year on advertising the Jones New York and Jones New York Sport footwear
lines, which obligation may be satisfied through cooperative advertising. The
Jones License Agreement prohibits the Company from manufacturing, selling,
distributing or promoting any merchandise which would compete as to style; price
or quality with the Jones New York and Jones New York Sport footwear lines.
Hence, the Company is restricted from expanding its brand portfolio and
acquiring new product lines, which would compete both as to style and price with
the Jones New York and Jones New York Sport women's footwear while this license
is in effect.  A breach by the Company of its obligations under the Jones
License Agreement would permit Jones to terminate such license agreement. The
Jones License Agreement could also be terminated by the licensor for certain
other reasons, including any occurrence of an event where the beneficial
ownership of the Company changes in a manner so as to change the actual control
of the Company.

                                       13
<PAGE>
 
  Dockers/(R)/ Khakis

     On November 13, 1998, the Company entered into a license agreement (the
"Dockers/(R)/ Khakis Agreement") with Levi Strauss Co. under which the Company
has the exclusive right to use the Dockers/(R)/ Khakis name in connection the
development, manufacturing and marketing of footwear for women.  The
Dockers/(R)/ Khakis License Agreement covers the United States (including its
territories and possessions) and expires on December 31, 2001.  The Company may
renew the license for one (1) additional four (4) year term ending December 31,
2005, upon meeting certain terms and conditions.  The Company will pay Levi
Strauss Co. a royalty on all net sales and is responsible for a guaranteed
minimum royalty payment during each year of the agreement.  The licensor can
terminate the agreement for a variety of reasons, including but not limited to
default in performing any of the terms of the agreement and bankruptcy of the
licensee.


  J.G. Hook

     In April 1997, the Company entered into a license agreement (the "J.G.
Hook License Agreement") with J.G. Hook, Inc. pursuant to which the Company
received the right to design, develop and market women's and children's shoes
under the J.G. Hook and Hook Sport brand names in exchange for payment of
royalties based on net sales of products marketed under such brand names. The
J.G. Hook License Agreement was for an initial 18-month period ending September
30, 1998, with two one-year extension options.  In September 1998, the Company
exercised its first one-year option and renewed the agreement through September
1999.  The J.G. Hook License Agreement is subject to early termination for
various specified reasons, including any failure by the Company to meet its
royalty obligations thereunder. The Company plans to use the J.G. Hook label to
sell footwear on a first cost basis.


  SLJ Retail

     In April 1997, the Company entered into a sub-license agreement (the "SLJ
Retail Sub-License Agreement") with SLJ Retail pursuant to which the Company
granted to SLJ Retail a sub-license throughout the United States to use the
Jones New York and Jones New York Sport trademarks in connection with the
manufacturing, promotion and retail sale of women's footwear merchandise bearing
such trademarks. The initial term of the SLJ Retail Sub-License Agreement
expires in December 2002 but is extended automatically for the same period of
time as any extension by the Company of the Jones License Agreement.  The SLJ
Retail Sub-License Agreement is subject to early termination for various
reasons, including any termination of the Jones New York License Agreement or if
the Company or its subsidiaries is not a managing member of SLJ Retail.

     In April 1997, the Company entered into a retail license agreement (the
"SLJ Retail Sam & Libby License Agreement") with SLJ Retail pursuant to which
the Company granted to SLJ Retail a license, throughout the United States and
such other locations outside the United States in which the Company or its
affiliates may from time to time sell Sam & Libby and Just Libby women's
footwear products, to use the Sam & Libby and Just Libby trademarks in
connection with the manufacturing, advertising, merchandising, promotion and
retail sale of women's footwear merchandise bearing such trademarks; provided
however, that such license does not extend to products to which Inter-Pacific
Corporation ("IPC") has the exclusive rights.  Under the SLJ Retail Sam &
Libby License Agreement, SLJ Retail does not have to pay any royalty to the
Company in consideration of the license granted and the services to be performed
by the Company under such agreement. The initial term of the SLJ Retail Sam &
Libby License Agreement expires on January 31, 2047, subject to earlier
termination upon the occurrence of certain specified events.


  Inter-Pacific Corporation

     In January 1997, the Company entered into a license agreement with IPC.
IPC is a 40 year old California-based seller and distributor of men's, women's
and children's footwear.  IPC has the exclusive rights to design, manufacture
and distribute Sam & Libby beachwear type footwear (E.V.A. sandals, jellies,
aqua socks and

                                       14
<PAGE>
 
injected molded slides) for men, women and children for an initial period from
January 1997 to May 2000. IPC may also design and manufacture women's slippers
bearing the Sam & Libby trademark. For the use of the Sam & Libby tradename, IPC
will pay the Company royalties at a rate based on sales volume, subject to
payment of minimum royalties of $396,000 over the initial term of the agreement.
Upon satisfaction of certain conditions, IPC may exercise its option to extend
the license agreement until May 2003.


Trademarks

     Mootsies Tootsies and Mootsies Kids are registered trademarks of the
Company in the United States. In addition, these trademarks have been registered
in Canada, Japan and Taiwan and trademark registration applications are pending
in several other countries. The Company's United States trademark registration
for Mootsies Tootsies expires in 2000 and the registration for Mootsies Kids
expires in 2003, although both are renewable.

     Sam & Libby, Just Libby, New Nineties and Jeff & Kristi are registered
trademarks of Sprague Company, a 100% owned subsidiary of the Company.  These
trademarks were acquired by the Company in August 1996 from Sam & Libby, Inc.
and are registered trademarks in the United States (see Note 1 of "Notes to
Consolidated Financial Statements"). In addition, the Sam & Libby and Just
Libby trademarks are registered in over 20 countries worldwide. Sprague's United
States trademark registration of Sam & Libby expires in 2001 and the
registration of Just Libby expires in 2005, although both are renewable. In
January 1997, the Company entered into a license agreement with IPC, a 40 year
old California-based seller and distributor of men's, women's and children's
footwear to license the Sam & Libby trademarks for slippers and E.V.A. sandals,
pursuant to which the Company will receive certain royalties and other revenues.

     Jones New York and Jones New York Sport are registered trademarks of Jones
in the United States. Under the Jones License Agreement, Jones has the sole
right to defend against any infringement of these trademarks.


     Dockers/(R)/ Khakis is a registered trademark of the Levi Strauss Co. in
the United States.  Under the Dockers/(R)/ Khakis Agreement, Levi Strauss Co.
has the sole right to defend against any infringement of this trademark.


Competition

     The women's and kids' fashion footwear markets are highly competitive. The
Company's products compete against other branded footwear and, in the case of
Mootsies Tootsies, against private label footwear sold by many large retailers,
including some of the Company's customers. Many of the Company's competitors
have substantially greater financial, distribution and marketing resources, as
well as greater brand awareness than the Company. In addition, the general
availability of offshore manufacturing capacity allows easy access by new market
entrants. The Company believes its ability to compete successfully is based on
its ability to design, develop and market value priced footwear that reflects
current fashion trends.


Employees

     At October 31, 1998, the Company employed 149 people, including officers,
administrative, selling and warehouse personnel. None of the Company's employees
are represented by a union. The Company considers its relationship with its
employees to be good.

                                       15
<PAGE>
 
Item 2.  Properties

     The Company's headquarters, which includes approximately 10,000 square feet
of office space and 130,000 square feet of warehouse space, is located in
Boston, Massachusetts, approximately 49,000 square feet of which is leased to an
unaffiliated third party. This facility is leased by the Company under a lease
that expires in 2001. The Company also leases a 64,000 square foot warehouse
located near its headquarters in Westwood, Massachusetts. This lease expired in
December 1998. The Company is currently a tenant at will, with plans to vacate
this facility in the second fiscal quarter of 1999.  The Company also leases a
215,000 square feet warehouse in Brockton, Massachusetts. This lease expires in
2007, subject to two five-year options. The Company also holds an option
exercisable in the year 2001 to lease for six years, with two additional five-
year options, an additional 240,000 square feet of space in the same warehouse
facility. The Company also leases a 4,000 square feet showroom in New York City
under a lease that expires in 2001. The Company believes that these facilities
are adequate for its current needs and that it will be able to obtain additional
space at a reasonable cost if required in the future.


Item 3.  Legal Proceedings

     The Company is, from time to time, a party to litigation that arises in the
normal course of its business operations. The Company does not believe it is
presently a party to litigation that will have a material adverse effect on its
business operations.


Item 4.  Submission of Matters to a Vote of Security Holders

         None.

                                       16
<PAGE>
 
                                    PART II
                                    -------
                                        

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

  The Class A Common Stock is traded on the NASDAQ National Market System under
the symbol MAXS. The following table sets forth for the fiscal periods indicated
the range of high and low sale prices of the Class A Common Stock as reported by
NASDAQ:


<TABLE>
<CAPTION>
                    1997              January 31,     April 30,     July 31,    October 31,
                    ----              -----------   ------------  ------------  ------------
       <S>                            <C>           <C>           <C>           <C>
        Low.........................     6 1/2         7 1/8          7 1/2        10 3/4
        High........................     8 3/8         8 3/4         13            15

<C> 
                    1998              January 31,    April 30,      July 31,    October 31,
                    ----              ------------  ------------  ------------  ------------
        Low.........................    10 1/2        13 7/8         17 1/2         9 13/16
        High........................    14 5/8        19 1/2         23 3/8        20 1/2
</TABLE>


  The Class A Common Stock is listed on the automatic quotation system of the
National Association of Securities Dealers under the symbol MAXS.

  The number of stockholders of record of the Class A Common Stock on October
31, 1998 was 33.  However, based on available information, the Company believes
that the total number of Class A Common stockholders, including beneficial
stockholders, is approximately 1600.



Dividend Policy

  The Company has not paid cash dividends on the Common Stock to date since the
payment of certain distributions in connection with the termination of the S
Corporation status of the Company prior to the consummation of the Company's
initial public offering. In addition, because the Company currently intends to
retain any earnings for development of its business, the Company does not intend
to pay cash dividends on its Common Stock in the foreseeable future. Any
determination to pay cash dividends on the Common Stock in the future will be at
the sole discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements, the
general financial condition of the Company and general business conditions.

                                       17
<PAGE>
 
Item 6.  Selected Financial Data

  The following selected financial data are derived from audited financial
statements of the Company. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."


<TABLE>
<CAPTION>
                                                                               Year Ended October 31,
                                                       ------------------------------------------------------------------
                                                           1994          1995         1996          1997         1998
                                                       ------------  -----------  ------------  -----------  ------------
<S>                                                    <C>           <C>          <C>           <C>          <C>
                                                                     (In thousands, except per share data)
Statement of Income Data:
Net sales............................................     $100,931      $101,870     $104,337      $134,211     $165,921
Cost of sales........................................       72,117        77,912       79,915        98,230      121,032
                                                          --------      --------     --------      --------     --------
Gross profit.........................................       28,814        23,958       24,422        35,981       44,889
Selling, general and administrative
  expenses(1)(2)....................................        23,695        13,581       15,413        20,982       25,122
                                                          --------      --------     --------      --------     --------
Operating income.....................................        5,119        10,377        9,009        14,999       19,767
Interest expense.....................................          662           255           38           110           34
Other expense (income), net..........................         (101)          399         (579)          325         (156)
                                                          --------      --------     --------      --------     --------
Income before income taxes...........................        4,558         9,723        9,550        14,564       19,889
Income taxes.........................................        1,709         3,889        3,629         5,534        6,624
                                                          --------      --------     --------      --------     --------
Net income...........................................     $  2,849      $  5,834     $  5,921      $  9,030     $ 13,265
                                                          ========      ========     ========      ========     ========
Earnings per share(3)
 Basic...............................................                      $0.77        $0.78         $1.19        $1.61
                                                                        ========     ========      ========     ========
 Diluted.............................................                      $0.70        $0.72         $1.06        $1.44
                                                                        ========     ========      ========     --------
 
Shares used to compute earnings per share(3)
 Basic...............................................                      7,588        7,588         7,588        8,222
                                                                        ========     ========      ========     ========
 
 Diluted.............................................                      8,311        8,261         8,537        9,226
                                                                        ========     ========      ========     ========
<CAPTION>
                                                                                 October 31,
                                                       ---------------------------------------------------------------
                                                           1994         1995        1996          1997         1998
                                                       -----------  -----------  -----------  -----------  -----------
<S>                                                    <C>          <C>          <C>          <C>          <C>
Balance Sheet Data:
Working capital......................................      $28,770      $35,097      $35,523      $44,441      $69,802
Total assets.........................................       36,621       39,979       46,920       60,179       91,005
Total debt (including current maturities)............          123          787          611          469        1,628
Total stockholders' equity...........................      $29,850      $35,684      $41,605      $50,635      $79,309
</TABLE>

(1)  Operating results for fiscal 1994 were significantly affected by officers'
     compensation expense, which totaled $12,381. Operating income before
     officers' compensation for fiscal 1994 was $17,500.

(2)  Includes a $7,000 one-time compensation expense incurred in the first
     quarter of fiscal 1994 in connection with the grant of an option to the
     Company's President to purchase 888,412 shares of Class A Common Stock,
     which option was granted in exchange for the termination of a pre-existing
     deferred compensation arrangement.

(3)  Earnings per share have not been presented for fiscal year 1994 since such
     amounts are not deemed meaningful due to the significant changes in the
     Company's income tax status and compensation arrangements subsequent to the
     initial public offering in April 1994.  Prior to the initial public
     offering, as a Subchapter S corporation the Company was not required to
     provide for federal income taxes and incurred significantly greater
     officers' compensation expense.

                                       18
<PAGE>
 
Item 7.  Management's Discussion and Analysis of Financial Condition 
         and Results of Operations

     Certain statements contained in this Form 10-K regard matters that are not
historical facts and are forward looking statements (as such term is defined in
the rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")).  Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed in or
implied by such forward-looking statements.  Factors that could cause actual
results to differ materially include, but are not limited to:  changing consumer
preferences, competition from other footwear manufacturers, loss of key
employees, general economic conditions and adverse factors impacting the retail
footwear industry, and the inability by the Company to source its products due
to political or economic factors or the imposition of trade or duty
restrictions.  The Company undertakes no obligation to release publicly the
results of any revisions to these forward looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.


Results of Operations

     The following table sets forth net sales by product line or category of
business:

<TABLE>
<CAPTION>
                                                                         Year Ended October 31,
                                             --------------------------------------------------------------------------------     
                                                       1996                         1997                        1998
                                             -------------------------      ---------------------      ----------------------
<S>                                          <C>          <C>              <C>          <C>            <C>          <C>
                                                                      (In millions--except percentages)
Mootsies Tootsies..........................    $ 60.8        58.3%           $ 71.0        52.9%         $ 79.7        48.0%
Jones New York Footwear....................      24.0         23.0             32.2         24.0          42.2         25.5
Sam & Libby................................      --           --               14.6         10.9          17.2         10.3
Private Label Footwear.....................      14.5         13.9             13.6         10.1          22.2         13.4
Closeout...................................       5.0          4.8              2.8          2.1           4.6          2.8
                                               ------        -----           ------        -----        ------        -----
                                               $104.3        100.0%          $134.2        100.0%       $165.9        100.0%
                                               ======        =====           ======        =====        ======        =====
</TABLE>


  Fiscal 1998 Compared to Fiscal 1997

     Net sales were $165.9 million in fiscal 1998 compared to $134.2 million in
fiscal 1997, an increase of 23.6%. This increase was due to a 31.1%, 12.3% and
17.8% rise in net sales of Jones New York, Mootsies Tootsies, and Sam & Libby
footwear, respectively, over the prior year.  Private label unit sales increased
63.1% over the prior fiscal year.

     Gross profit was $44.9 million in fiscal 1998 compared to $36.0 million in
fiscal 1997, an increase of 24.8%. Gross margins were substantially unchanged in
fiscal 1998 as compared to fiscal 1997.  Selling, general and administrative
expenses increased $4.1 million during fiscal 1998 from fiscal 1997 due to an
increase in administrative charges relating to increased net sales.

     Other income was $122,000 for fiscal 1998 compared to other expenses of
$435,000 for fiscal 1997. In fiscal 1998, management fees from the SLJ Retail
LLC joint venture ($500,000), interest income from cash equivalents ($447,000),
and royalty income ($176,000) were offset by expenses related to a public stock
offering ($503,000), and amortization of expenses relating to the acquisition of
the Sam & Libby trademark ($367,000).  During fiscal 1997, amortization expense
relating to the acquisition of the Sam & Libby trademark was $367,000 and losses
of $76,000 were realized from foreign exchange contracts, offset by $132,000 in
interest income from cash equivalents.  Interest expense in fiscal 1998 was
incurred for capital leases and short term borrowings. The Company had no short
term borrowings in fiscal 1998.

                                       19
<PAGE>
 
  Fiscal 1997 Compared to Fiscal 1996

     Net sales were $134.2 million in fiscal 1997 compared to $104.3 million in
fiscal 1996, an increase of 28.7%. This increase was due to a 34.2% and 16.8%
rise in net sales of Jones New York and Mootsies Tootsies footwear,
respectively, over the prior year, and the additional $14.6 million in net sales
generated by the Sam & Libby division, offset by a decrease of  6.2% in net
sales generated by private label footwear.

     Gross profit was $36.0 million in fiscal 1997 compared to $24.4 million in
fiscal 1996, an increase of 47.5%. Gross margins also increased in fiscal 1997
from fiscal 1996 due to improved gross margins in the branded lines of footwear
and a decrease in the proportion of net sales derived from lower margin private
label sales.    Selling, general and administrative expenses increased $5.6
million during fiscal 1997 from fiscal 1996 due to an increase in aggregate
compensation and corresponding fringe benefits expenses resulting from the
addition of new personnel required for the launching of the Company's Sam &
Libby division and administrative charges relating to increased net sales and
improved profitability.

     Other expenses were $325,000 for fiscal 1997 compared to other income of
$579,000 for fiscal 1996. During fiscal 1997, amortization expense relating to
the acquisition of the Sam & Libby trademark was $367,000 and losses of $76,000
were realized from foreign exchange contracts, offset by $132,000 in interest
income from cash equivalents. During fiscal 1996, the account was comprised
principally of net gains from forward exchange contracts entered into in
anticipation of future purchase of inventory denominated in foreign currencies
and interest income from the investment of cash equivalents.  In fiscal 1997,
other expenses included interest expense of $110,000 compared to $38,000 for
fiscal 1996. Interest expense in fiscal 1997 was incurred for capital leases and
short term borrowings. The Company had no short term borrowings in fiscal 1996.


Liquidity and Capital Resources

  The Company has relied primarily upon internally generated cash flows from
operations, borrowings under its credit facility, and borrowings from
stockholders (when the Company was privately held) to finance its operations and
expansion. Cash provided (used) by operating activities totaled approximately
$9.5 million in fiscal 1996, ($6.5) million in fiscal 1997 and $5.7 million in
fiscal 1998. At October 31, 1998, working capital was $69.8 million as compared
to $44.4 million at October 31, 1997.  Working capital may vary from time to
time as a result of seasonal requirements, the timing of early factory shipments
and the Company's in-stock position, which requires increased inventories, and
the timing of accounts receivable collections.  Capital expenditures were $5.7
million for the year ended October 31, 1998.

     In fiscal 1998, cash provided by operations was $5.7 million as compared to
cash used by operations in fiscal 1997 of $6.5 million. The increase in cash
provided in fiscal 1998 was due to increased net income and lower increase of
accounts receivable and inventory balances as compared to fiscal 1997.

     On April 27, 1998, the Company completed a public stock offering of an
aggregate of 6,145,792 shares of Class A Common Stock at $17.50 per share.  Of
the shares sold, 5,044,167 Class A shares were sold by members of the founder's
family and a trust for their benefit upon conversion of a like number of Class B
shares and exercise of stock options, and 300,000 Class A shares were sold by
the Company Chairman and CEO pursuant to the exercise of stock options.  The
Company did not receive any proceeds from the sale of shares by the selling
stockholders.  In addition, the Company sold 801,625 shares of Class A Common
Stock pursuant to the full exercise of an over-allotment option granted by the
Company to the underwriters.  The Company received $13.2 million from the
exercise of the over-allotment option and $1.3 million from the exercise of
stock options.  The Company no longer has any Class B shares outstanding.  The
Company expensed $.5 million of costs related to the sale of shares by the
selling stockholders pursuant to prior contractual obligations of the Company.

  The exercise of the CEO's options resulted in a tax benefit of $.9 million for
1998.  The benefit results from the realization of a portion of a deferred tax
asset previously recorded and fully reserved in connection with the granting of
the options in 1994.  The Company's effective tax rate for 1998 is 33%.  If the
Company's fiscal 1998 diluted earnings per share was calculated on the same
basis as fiscal 1997, (i.e. no $.5 million cost related to the public stock
offering and an effective tax rate of 38%) the adjusted diluted earnings per
share for fiscal 1998 would have been $1.37 per share, as compared to the actual
reported $1.44 diluted earnings per share.

                                       20
<PAGE>
 
  The Company currently has a $35.0 million discretionary demand credit facility
bearing interest at either the Bank of Boston's base rate or Adjusted Eurodollar
Rate plus one percent (1.0%), renewable annually under certain conditions.  This
demand line of credit will cover the aggregate amount of demand loans
outstanding plus the letter of credit exposure amount.  As of October 31, 1998,
there were no outstanding borrowings, $17.4 million was outstanding under
letters of credit and $17.6 million was available for future borrowings.

Year 2000 Readiness

     The Company is in the process of installing a computerized warehouse
inventory management system in its Brockton, Massachusetts facility, as well as
new hardware and software for the Company's computer needs.  The Company is
dependent upon complex computer systems for certain phases of its operations,
including sales, distribution and delivery.  Since many of the Company's older
computer software programs recognize only the last two digits of the year in any
date (e.g., "97" for "1997"), some software may fail to operate properly in 1999
or 2000 if the software is not reprogrammed or replaced (the "Year 2000
Problem").  This could result in system failures or miscalculations leading to
disruptions in the Company's operations, including, among other things, a
temporary inability to process transactions, receive inventory from suppliers,
ship inventory to customers, or engage in similar business activities.  The
Company believes that many of its customers also have Year 2000 Problems which
could adversely affect the Company.  One area in which customers' Year 2000
Problems could adversely impact the Company and its operations relates to
electronically received orders for the Company's products through Electronic
Data Interchange (EDI).  Significant customers have been identified and the
Company has opened communication with them in regards to the Year 2000 Problem.
Correspondence has been sent to all significant customers and the Company has
been told by a large majority that they expect to be Year 2000 compliant prior
to the creation of material Year 2000 Problems.  The Company plans to perform
follow-up inquiries with these significant customers.  In the event some
customers are not Year 2000 compliant, the Company's contingency plan includes
utilization of existing manual order receiving capabilities.  The Company
currently receives approximately 15-20% of orders for its products in this
manner.  The Company intends to spend up to $1.0 million in fiscal 1999 to
upgrade its computer systems and address the Year 2000 Problem and currently
expects its computer systems to be substantially Year 2000 compliant by June
1999.  The Company plans to fund this expenditure with current cash resources or
equipment financing arrangements.  It is not possible at present to quantify the
financial effect of the Year 2000 Problem if it is not timely resolved.
However, the Company presently believes that the cost of fixing the Year 2000
Problem will not have a material effect on the Company's financial condition or
results of operations.

  Although the Company anticipates no material business disruption will occur as
a result of the Year 2000 issue, the Year 2000 issue is unique and the failure
to correct a material Year 2000 issue could result in an interruption, or a
failure of, certain normal business activities or operations, such as loss of
communications with store locations, inability to process transactions,
inability for malls to operate, and the disruption of the supply of product and
distribution channel.  Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition.  Due to
general uncertainty inherent in the Year 2000 Problem, resulting from the
uncertainty of the Year 2000 readiness of third parties, the Company is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on the Company's results of operations, liquidity or
financial condition.  The Company's Year 2000 Plan is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 issue and the
readiness of its material third parties.  The Company believes that with the
completion of the Plan as scheduled, the possibility of significant
interruptions of normal operations should be reduced.

  The Company anticipates that it will be able to satisfy its cash requirements
for fiscal 1999 including its expected growth, primarily with cash flow from
operations, supplemented by borrowings under its demand credit facility.

                                       21
<PAGE>
 
Effects Of Inflation

  The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on the Company's revenues or
profitability.


Item 8.  Consolidated Financial Statements and Supplementary Data

  The Consolidated Financial Statements required in response to this section are
submitted as part of Item 14(a) of this Report.

                                       22
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS

                                        



The Board of Directors and Stockholders
Maxwell Shoe Company Inc.


We have audited the accompanying consolidated balance sheets of Maxwell Shoe
Company Inc. as of October 31, 1997 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended October 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Maxwell
Shoe Company Inc. at October 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended October 31, 1998 in conformity with generally accepted accounting
principles.


                                  ERNST & YOUNG LLP



Boston, Massachusetts
December 16, 1998

                                       23
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

                          CONSOLIDATED BALANCE SHEETS
                   (In Thousands -- except per share amounts)


                                        
<TABLE>
<CAPTION>
                                                                                              October 31,
                                                                              ----------------------------------------
                                    ASSETS                                         1997                      1998
                                                                              ---------------          ---------------
<S>                                                                          <C>                      <C> 
Current assets:
   Cash and cash equivalents..............................................    $         3,129          $       18,731
   Accounts receivable, trade (net of allowance for doubtful accounts and
     discounts of $739 in 1997, $581 in 1998).............................             28,594                  35,655
   Inventory, net.........................................................             20,141                  22,928
   Prepaid expenses.......................................................                251                     430
   Prepaid income taxes...................................................                 --                   1,177
   Deferred income taxes..................................................              1,526                   1,074
                                                                              ---------------          --------------
Total current assets......................................................             53,641                  79,995
Property and equipment, net...............................................              1,393                   6,231
Trademarks, net...........................................................              5,133                   4,767
Other assets..............................................................                 12                      12
                                                                              ---------------          --------------
                                                                              $        60,179          $       91,005
                                                                              ===============          ===============
 
                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable.......................................................    $         2,197          $         3,824
   Accrued expenses.......................................................              6,767                    5,938
   Deferred income taxes..................................................                111                      306
   Current portion of capital lease obligation............................                125                      125
                                                                              ---------------          --------------- 
Total current liabilities.................................................              9,200                   10,193
Long-term deferred income taxes...........................................                 --                    1,283
Capital lease obligation..................................................                344                      220
Stockholders' equity:
   Preferred stock, par value $.01, 1,000 shares
       authorized, none outstanding.......................................     
   Class A common stock, par value $.01, 20,000 shares authorized,
       2,525 shares outstanding in 1997, 8,794 shares outstanding in 1998..                25                       88
   Class B common stock, par value $.01, 10,000 shares authorized,
       5,063 shares outstanding in 1997.....................................               51                       --
   Additional paid-in capital...............................................           27,312                   43,015
   Deferred compensation....................................................                                      (306)
   Retained earnings........................................................           23,247                   36,512
                                                                              ---------------          ---------------
Total stockholders' equity..................................................           50,635                   79,309
                                                                              ---------------          ---------------
                                                                              $        60,179          $        91,005
                                                                              ===============          ===============
</TABLE>

                            See accompanying notes.

                                       24
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

                       CONSOLIDATED STATEMENTS OF INCOME
                   (In Thousands -- except per share amounts)
                                        


<TABLE>
<CAPTION>
                                                                                           October 31,
                                                                --------------------------------------------------------------
                                                                      1996                    1997                   1998
                                                                ---------------         ---------------        ---------------
<S>                                                             <C>                    <C>                     <C> 
Net sales..................................................     $       104,337         $       134,211        $       165,921
Cost of sales..............................................              79,915                  98,230                121,032
                                                                ---------------         ---------------        ---------------
Gross profit...............................................              24,422                  35,981                 44,889
Operating expenses:
  Selling..................................................               5,589                   7,903                 10,241
  General and administrative...............................               9,824                  13,079                 14,881
                                                                ---------------         ---------------        ---------------
                                                                         15,413                  20,982                 25,122
                                                                ---------------         ---------------        ---------------
Operating income...........................................               9,009                  14,999                 19,767
Other expenses (income)
  Interest.................................................                  38                     110                     34
  Other, net...............................................                (579)                    325                   (156)
                                                                ---------------         ---------------        ---------------
                                                                           (541)                    435                   (122)
                                                                ---------------         ---------------        ---------------
Income before income taxes.................................               9,550                  14,564                 19,889
Income taxes...............................................               3,629                   5,534                  6,624
                                                                ---------------         ---------------        ---------------
Net income.................................................     $         5,921         $         9,030        $        13,265
                                                                ===============         ===============        ===============
Earnings per share
  Basic....................................................                $.78                   $1.19                  $1.61
  Diluted..................................................                $.72                   $1.06                  $1.44
Shares used to compute earnings per share:
  Basic....................................................               7,588                   7,588                  8,222
  Diluted..................................................               8,261                   8,537                  9,226
</TABLE>


                            See accompanying notes.

                                       25
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)


                                        
<TABLE>
<CAPTION>
                                                                                           October 31,
                                                                --------------------------------------------------------------
                                                                      1996                    1997                   1998
                                                                ---------------         ---------------        ---------------
<S>                                                             <C>                    <C>                     <C> 
Operating activities:
Net income.................................................     $         5,921         $         9,030        $        13,265
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
  Depreciation and amortization............................                 242                     672                  1,214
  Deferred income taxes....................................                 240                    (685)                 1,930
  Doubtful accounts provision..............................                  50                     125                    125
  Changes in operating assets and liabilities:
     Accounts receivable...................................                 931                 (11,866)                (7,186)
     Inventory.............................................                 219                  (7,966)                (2,787)
     Prepaid expenses......................................                 706                    (124)                  (487)
     Accounts payable......................................                 (48)                  1,317                  1,627
     Income taxes payable..................................                 433                    (433)                    --
     Accrued expenses......................................                 791                   3,467                   (829)
                                                                ---------------         ---------------        ---------------
Net cash provided (used) by operating activities...........               9,485                  (6,463)                 6,872
 
Investing activities:
Purchase of trademark......................................              (5,500)                     --                     -- 
Purchases of property and equipment........................                (101)                   (659)                (5,686)
                                                                ---------------         ---------------        ---------------
Net cash used by investing activities......................              (5,601)                   (659)                (5,686)
 
Financing activities:
Proceeds from sale of common stock.........................                  --                      --                 13,246
Proceeds from exercise of stock option.....................                  --                      --                  1,294
Payments on capital lease obligation.......................                (176)                   (142)                  (124)
                                                                ---------------         ---------------        ---------------
Net cash (used) provided by financing activities...........                (176)                   (142)                14,416
                                                                ---------------         ---------------        ---------------
Net increase (decrease) in cash and cash equivalents.......               3,708                  (7,264)                15,602
Cash and cash equivalents at beginning of year.............               6,685                  10,393                  3,129
                                                                ---------------         ---------------        ---------------
Cash and cash equivalents at end of year...................     $        10,393         $         3,129        $        18,731
                                                                ===============         ===============        ===============
Interest paid..............................................     $            38         $           110        $            34
                                                                ===============         ===============        ===============
Income taxes paid..........................................     $         2,380         $         6,807        $         4,847
                                                                ===============         ===============        ===============
</TABLE>


                            See accompanying notes.

                                       26
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (In Thousands)
                                        


<TABLE>
<CAPTION>
                                      Class A          Class B
                                    Common Stock     Common Stock
                                   -------------   ---------------
                                   Number          Number            Additional  Deferred
                                     of              of               Paid-In     Compen-   Retained
                                   Shares  Amount  Shares   Amount    Capital     sation    Earnings   Total
                                   ------  ------  ------   ------   ---------   --------   --------   -------
<S>                                <C>     <C>     <C>      <C>      <C>         <C>        <C>       <C>
Balance at October 31, 1995......   2,525  $   25   5,063   $   51    $ 27,312              $  8,296  $ 35,684
 Net income for 1996.............                                                              5,921     5,921
                                   ------  ------  ------   ------   ---------   --------   --------   -------
Balance at October 31, 1996......   2,525      25   5,063       51       27,312               14,217    41,605
 Net income for 1997.............                                                              9,030     9,030
                                   ------  ------  ------   ------   ---------   --------   --------   -------
Balance at October 31, 1997......   2,525      25   5,063       51       27,312               23,247    50,635
 Net income for 1998.............                                                             13,265    13,265
 Shares converted................   5,063      51  (5,063)     (51)                                         --
 Sale of common stock............     802       8                        13,238                         13,246
 Options exercised...............     404       4                         1,290                          1,294
 Tax benefit from options
   exercised.....................                                           869                            869
 Options granted.................                                           306  $   (306)                  --  
                                   ------  ------  ------   ------   ---------   --------   --------   -------
Balance at October 31, 1998......   8,794  $   88       0   $    0   $  43,015   $   (306)  $ 36,512   $79,309
                                    =====  ======  ======   ======   ==========  ========    =======   =======
</TABLE>


                            See accompanying notes.

                                       27
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (Dollars in Thousands -- except per share amounts)

                                        
                                October 31, 1998

1.   Summary of Significant Accounting Policies

  Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation.


  Concentration of Credit Risk

     The Company sells footwear for women and children to retailers located
throughout the United States, Canada and Japan. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. Credit losses have been within or below management's
expectations. In fiscal 1996, 1997 and 1998 one customer accounted for
approximately 15%, 19% and 18% respectively, of net sales. During 1996, this one
customer was acquired by another customer of the Company. Had these two
customers been treated as one account for fiscal year 1996, they would have
accounted for approximately 22% of net sales.


  Use of Estimates

     The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.


  Recognition of Revenue

     Sales are recognized upon shipment of products.


  Cash and Cash Equivalents

     Cash, checking accounts and all highly-liquid debt instruments with
original maturities three months or less are deemed to be cash and cash
equivalents.


  Inventory

     Inventory is valued at the lower of cost or market, using the first-in,
first-out method.

                                       28
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)


  Long Term Assets

     Property and equipment are stated at cost. Depreciation is provided using
both straight line and accelerated methods over the estimated useful lives of
these assets or the lease term, if shorter. The estimated useful lives of these
assets are as follows:


      Asset                                            Useful Life
      -----                                            -----------
      Furniture and fixtures........................     5 Years
      Warehouse equipment...........................     7 Years
      Leasehold improvements........................     7 Years
      Computer equipment............................     5 Years

  In August 1996, the Company acquired the rights to the Sam & Libby and certain
related trademarks and tradenames for $5.5 million cash. The trademarks and
tradenames are being amortized on a straight line basis over 15 years, their
estimated useful lives. Amortization began in 1997 when sale of product with the
trademark names commenced. Accumulated amortization at October 31, 1997 and 1998
was $367 and $733, respectively.


 Operating Expenses

  General and administrative expenses include the cost of warehousing and
shipping operations.


 Advertising Expenses

  Advertising costs are expensed as incurred. Advertising expense (including
cooperative advertising with retailers) amounted to $1,546, $2,502 and $3,852
for the years ended October 31, 1996, 1997 and 1998, respectively.


 Income Taxes

  The Company utilizes the liability method for accounting for income taxes.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and law that will be in effect when the
differences reverse. Deferred tax assets may be reduced by a valuation allowance
to reflect the uncertainty associated with their ultimate realization.


  Earnings Per Common Share

     In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share.  Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share.  Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities.  Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share.  The Company adopted
Statement 128 in fiscal 1998 and, accordingly, all earnings per share amounts
for all periods have been presented, and where necessary, restated to conform to
the Statement 128 requirements.

                                       29
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)


     Basic income per share is computed based on the weighted average number of
common shares outstanding during the period. Diluted income per share is
computed based on basic shares outstanding increased by incremental shares
assumed issued for dilutive common stock equivalents in the form of stock
options.


 Forward Exchange Contracts

  The Company uses forward exchange contracts to manage its foreign currency
exposure. Realized and unrealized gains and losses on contracts that hedge
anticipated cash flows are determined by comparison of contract values to
current market values upon execution of a contract (realized) and at each
balance sheet date for open contracts (unrealized). Resulting gains and losses
are recognized in other income and expense ($275 gain in 1996, $76 loss in 1997
and $13 gain in 1998).


  Stock Based Compensation

     The Company grants stock options for a fixed number of shares to employees,
generally with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and, accordingly, recognizes no compensation expense for
the stock option grants when the exercise price equals the fair value of the
shares at the date of grant.

  The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." These provisions require the Company to disclose pro forma net
income and earnings per share amounts as if compensation related to grants of
stock options were recognized based on the fair value of such options (see 
Note 5).


  Accounting Pronouncements

     In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income" (FAS 130) and Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
(FAS 131). FAS 130 establishes standards for reporting and displaying
comprehensive income and its components. FAS 131 establishes standards for
public companies to report information about operating segments in financial
statements, and supersedes FAS 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirements to report information about
major customers. FAS 130 and FAS 131 are effective for the Company in fiscal
1999. The Company does not believe the adoption of these Statements will have a
material effect on the Company's financial statements.

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
provides for the recognition and measurement of derivatives and hedging
activities.  The Statement is effective for years beginning after June 15, 1999,
however companies may early adopt as of the beginning of any fiscal quarter.
Management of the Company does not expect the adoption of this Statement to have
a material impact on the Company's financial statements.

                                       30
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)



2.    Property and Equipment

  Property and equipment consists of the following:
<TABLE>
<CAPTION>
                                                                               1997        1998
                                                                            ---------   ---------
      <S>                                                                  <C>          <C>
       Warehouse equipment................................................  $   1,278   $   4,298
       Furniture and fixtures.............................................        641         756
       Leasehold improvements.............................................        635         863
       Computer equipment.................................................        485       2,807
       Other..............................................................          4           4
                                                                            ---------   ---------
                                                                                3,043       8,728
       Less accumulated depreciation......................................      1,650       2,497
                                                                            ---------   ---------
       Property and equipment, net........................................  $   1,393   $   6,231
                                                                            =========   =========
</TABLE>
                                                                                
  At October 31, 1997 and 1998, property and equipment included assets recorded
under capital leases of $1,047. Accumulated depreciation of such assets was $637
and $765 at October 31, 1997 and 1998, respectively. Depreciation expense,
including amortization of assets recorded under capital leases, for the years
ended October 31, 1996, 1997 and 1998 amounted to $242, $305 and $847,
respectively.


3.  Bank Borrowings

  The Company currently has a $35.0 million discretionary demand credit facility
bearing interest at either the Bank of Boston's base rate or Adjusted Eurodollar
Rate plus one percent (1.0%), renewable annually under certain conditions.  The
credit agreement provides that the bank will both advance funds directly to the
Company and issue letters of credit on behalf of the Company.  As of October 31,
1998, there were no outstanding borrowings, $17.4 million was outstanding under
letters of credit and $17.6 million was available for future borrowings.


4.    Accrued Expenses

     Accrued expenses consist of the following at October 31:

<TABLE>
<CAPTION>
                                                                               1997        1998
                                                                            ---------   ---------
      <S>                                                                  <C>          <C>
       Inventory purchases................................................  $   3,394   $   3,076
       Compensation.......................................................      2,653       1,687
       Employee benefit plan contribution.................................        248         283
       Other..............................................................        472         892
                                                                            ---------   ---------
                                                                            $   6,767   $   5,938
                                                                            =========   =========
</TABLE>
                                                                                

5.  Stockholders' Equity

     Preferred Stock

     The Company's Charter authorizes the issuance of 1,000,000 shares of
preferred stock. The Company's Charter provides that the Board of Directors of
the Company may authorize the issuance of one or more series of 

                                       31
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)


preferred stock having such rights, including voting, conversion and redemption
rights, and such preferences, including dividend and liquidation preferences, as
the Board may determine without any further action by the stockholders of the
Company. There are no shares of preferred stock currently outstanding.

     Common Stock

     Each share of Class B Common Stock is freely convertible into one share of
Class A Common Stock at the option of the Class B stockholders. Holders of Class
A Common Stock are entitled to one vote for each share held of record, and
holders of Class B Common Stock are entitled to ten votes for each share held of
record. The Class A Common Stock and the Class B Common Stock vote together as a
single class on all matters submitted to a vote of stockholders (including the
election of directors), except that, in the case of a proposed amendment to the
Company's Certificate of Incorporation that would alter the powers, preferences
Maxwell Shoe Company, Inc., or special rights of either the Class A Common Stock
or the Class B Common Stock, the class of Common Stock to be altered shall vote
on the amendment as a separate class. Shares of Common Stock do not have
cumulative voting rights with respect to the election of directors.

     On April 27, 1998, the Company completed a public stock offering of an
aggregate of 6,145,792 shares of Class A Common Stock at $17.50 per share.  Of
the shares sold, 5,044,167 Class A shares were sold by members of the founder's
family and a trust for their benefit upon conversion of a like number of Class B
shares and exercise of stock options, and 300,000 Class A shares were sold by
the Company Chairman and CEO pursuant to the exercise of stock options.  The
Company did not receive any proceeds from the sale of shares by the selling
stockholders.  In addition, the Company sold 801,625 shares of Class A Common
Stock pursuant to the full exercise of an over-allotment option granted by the
Company to the underwriters.  The Company received $13.2 million from the
exercise of the over-allotment option and $1.3 million from the exercise of
stock options.  The Company no longer has any Class B shares outstanding.  The
Company expensed $.5 million of costs related to the sale of shares by the
selling stockholders pursuant to prior contractual obligations of the Company.


     Stock Options

     Under the 1994 Stock Incentive Plan (the Plan), the Board of Directors has
reserved 750,000 shares of Class A Common Stock for issuance upon exercise of
options or grants of other awards under the Plan. On June 1, 1998, the Plan was
amended to increase the number of shares by 300,000 of Class A Common Stock for
issuance upon exercise of options or grants of other awards under the Plan.
Except for options granted to non-employee directors, which vest immediately,
options generally vest annually over a four-year period.

     In September 1998, the Company granted 30,000 options to certain employees
to purchase stock at $1.00 per share.  Based on the market price of the
Company's stock on the date of grant, the Company recorded deferred compensation
expense of $306, which will be recognized ratably over the vesting period of
five years.

                                       32
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)


     Presented below is a summary of the status of the stock option plan and
related transactions:

<TABLE>
<CAPTION>
                                                                   Year ended October 31,
                                                 -----------------------------------------------------------
                                                        1996                1997                1998
                                                 -------------------  ------------------  ------------------
                                                           Weighted            Weighted             Weighted
                                                           Average             Average              Average
                                                  Shares    Price     Shares    Price     Shares     Price
                                                 -------   --------  -------   -------    -------   --------
<S>                                              <C>       <C>       <C>       <C>       <C>        <C>
Options outstanding at beginning of year.......  294,250   $   9.47  670,850   $  7.46    735,850   $   7.15
Granted........................................  382,500   $   5.96  129,500   $  6.45    145,000   $  14.03
Exercised......................................        0   $   0.00        0   $  0.00   (104,257)  $   8.17
Canceled.......................................   (5,900)  $  10.38  (64,500)  $  9.00    (94,293)  $   7.13
                                                 -------             -------             --------
Options outstanding at end of year.............  670,850   $   7.46  735,850   $  7.15    682,300   $   8.46
                                                 =======             =======             ========
Options exercisable at end of year.............  102,324             214,405              437,696
                                                 =======             =======             ========
</TABLE>
                                                                                
     The following table summarizes information about stock options outstanding
under the stock option plan at October 31, 1998:


<TABLE>
<CAPTION>
                                                            Options Outstanding                Options Exercisable
                                                    -------------------------------------   --------------------------
                                                                 Weighted-
                                                                  Average      Weighted-                   Weighted-
                                                                 Remaining      Average                     Average
                                                                Contractual     Exercise                   Exercise
Range of Exercise Price                             Shares     Life (Years)      Price        Shares         Price
-----------------------                            ----------  ------------    ---------     ----------    ----------
<S>                                               <C>          <C>            <C>           <C>          <C>
       $1.00....................................       30,000       10.0       $    1.00              0            --
       $5.00 - $  7.75..........................      408,900        8.6       $    6.06        280,830    $     6.07
       $9.00 - $10.38...........................      128,400        6.1       $    9.79        115,200    $     9.88
       $17.00 - $17.50..........................      115,000        9.5       $   17.43         41,666    $    17.32
                                                   ----------                                ---------- 
                                                      682,300        8.1       $    8.46        437,696    $     8.15
                                                   ==========                                ==========
</TABLE>



     At October 31, 1997 and 1998, there were 14,150 shares and 263,443 shares
available, respectively, for future grants under stock option plans.

     In 1994, in consideration for the termination of a deferred compensation
agreement, the Board of Directors approved a non-transferable stock option grant
to the CEO for the purchase of 888,412 shares of Class A Common Stock at an
exercise price of $1.50 per share. The grant was outside of the Company's stock
option plan, and the stock options were immediately exercisable.  In connection
with the public stock offering, the CEO exercised a portion of these options to
purchase 300,000 shares of common stock.  At October 31, 1998, 588,412 shares
remained outstanding.

     Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123) utilizes the fair value method of
accounting for employee stock options. Under this method, compensation expense
for stock-based compensation plans is measured at the grant date based on the
fair value of the award and is recognized over the service period.  In
accordance with FAS 123, the Company has elected to continue to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25) and related interpretations in accounting for its employee
stock options. Under APB 25, no compensation expense is recognized as long as
the exercise price equals the market price of the underlying stock on the date
of grant.

                                       33
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)


     Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options and other stock-
based compensation granted subsequent to October 31, 1995 under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates ranging from 5.26% to
6.89%; dividend yield of 0%; volatility factor of the expected market price of
the Company's common stock of 63.4% for 1996 and 1997 and 61.2% for 1998; and a
weighted average expected life of 5.1 years for options granted in 1996 and 1997
and 5.0 years for options granted in 1998. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.

<TABLE>
<CAPTION>
                                                                                      Year ended
                                                                                      October 31,
                                                                        ----------------------------------------
                                                                            1996          1997           1998
                                                                        -----------   ----------     ----------- 
<S>                                                                    <C>           <C>          <C>
     Pro forma:
       Net income....................................................   $     5,758   $    8,731     $    12,662
       Earnings per share:
        Basic........................................................   $      0.76   $     1.15     $      1.54
        Diluted......................................................   $      0.70   $     1.02     $      1.37
 
     Options granted whose exercise price equals
       market price on grant date
        Weighted average fair value of options granted...............    $     3.53   $     4.07     $      9.99
        Weighted average exercise price..............................    $     5.96   $     6.74     $     17.44
 
     Options granted whose exercise price is less than
       market price on grant date
        Weighted average fair value of options granted...............            --    $    4.74     $     10.52
        Weighted average exercise price..............................            --    $    6.00     $      1.00
</TABLE>

     During the initial phase-in period, the effects of applying FAS 123 for
recognizing compensation expense may not be representative of the effects on
reported net income or loss for future years because the options granted by the
Company vest over several years and additional awards may be made in future
years.

  Stockholder Rights Plan

  The Company adopted a Stockholder Rights Plan, under which each outstanding
share of the Company's Class A common stock carries one Common Stock Purchase
Right.  The rights may only become exercisable under certain circumstances
involving acquisition of the Company's common stock by a person or group of
persons without the prior written consent of the Company's board.  Depending on
the circumstances, if the rights become exercisable, the holder of rights may be
entitled to purchase shares of the Company's Class A common stock or shares of
common stock of the acquiring person at discounted prices.  The rights will
expire on November 2, 2008 unless they are earlier exercised, redeemed or
exchanged.

                                       34
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)



6.   Income Taxes

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of October 31 were as
follows:

<TABLE>
<CAPTION>
                                                                               1997          1998
                                                                            ----------    ----------
       <S>                                                                 <C>          <C>
       Deferred tax assets
           Stock option compensation......................................  $    2,800    $    1,854
           Inventory reserve..............................................         571           482
           Allowance for doubtful accounts................................         295           232
           Accrued compensation...........................................         386             0
           Inventory capitalization.......................................         274           360
                                                                            ----------     ---------
                                                                                 4,326         2,928
       Valuation allowances for deferred tax assets.......................      (2,800)       (1,854)
                                                                            ----------     ---------
       Total deferred tax assets..........................................       1,526         1,074
       Deferred tax liabilities:
           Trademark......................................................           0         1,283
           Property and equipment.........................................         111           306
                                                                            ----------     ---------
       Total deferred tax liabilities.....................................         111         1,589
                                                                            ----------     ---------
       Net deferred tax assets (liabilities)..............................  $    1,415     $    (515)
                                                                            ==========     =========
</TABLE>
                                                                                

     FAS 109 requires a Company to recognize a valuation allowance if it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.  In connection with the stock option compensation discussed in Note 5,
the Company recorded a valuation allowance in 1994 for the related deferred tax
asset.  The stock option compensation is deductible for tax purposes upon
exercise of the option.  During 1998, a portion of the options were exercised
and a proportionate share of the valuation allowance was reduced resulting in a
tax benefit of $946, which is included in the income tax provision.
Furthermore, for tax purposes, the Company recognized additional compensation
expense for the difference between the market price at the date of grant and the
market price at the date of exercise.  This additional tax benefit of $869 has
been recorded as a reduction of current taxes payable and an increase in
additional paid-in-capital.

  Significant components of the provision for income taxes are as follows:


<TABLE>
<CAPTION>
                                                             1996              1997             1998
                                                         -----------      -----------       -----------
         Current:
        <S>                                              <C>             <C>               <C> 
             Federal.................................    $     3,011     $      5,023       $     3,844
             State...................................            378            1,196               850
                                                         -----------      -----------       -----------
         Total current...............................          3,389            6,219             4,694
         Deferred:
             Federal.................................            204             (582)            1,559
             State...................................             36             (103)              371
                                                         -----------      -----------       -----------
         Total deferred..............................            240             (685)            1,930
                                                         -----------      -----------       -----------
                                                         $     3,629      $     5,534       $     6,624
                                                         ===========      ===========       ===========
</TABLE>

                                       35
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)

                                                                                

     The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the effective income tax rate is as follows:

<TABLE>
<CAPTION>
                                                                    1996       1997       1998
                                                                  --------   --------   --------
      <S>                                                         <C>        <C>        <C>
       U.S. statutory rate......................................     34%        34%        35%
           State income taxes, net of federal tax benefit.......      5          5          5
           Stock option compensation............................      0          0         (5)
           Other................................................     (1)        (1)        (2)
                                                                  --------   --------   --------
       Effective tax rate.......................................     38%        38%        33%
                                                                  ========   ========   ========
</TABLE>
                                                                                

7.  Profit-Sharing Plan

     The Company has a contributory 401(k) profit-sharing plan covering
substantially all employees.  Employees may contribute up to 15% of their pre-
tax salary subject to statutory limitations.  The plan requires the Company to
match 100% of employee contributions up to 2% of total employee compensation.
The plan also allows for additional discretionary Company contributions. Total
plan expense amounted to $200, $300 and $350 for fiscal years 1996, 1997 and
1998, respectively.


8.  Commitments

     The Company leases equipment and office and warehouse space under long-term
non-cancelable operating leases which expire at various dates through January
31, 2007. These leases require the Company to pay the real estate taxes on the
real property. The Company also leases equipment under capital leases.

     At October 31, 1998, future minimum payments under such leases were as
follows:

<TABLE>
<CAPTION>
                                                                              Capital          Operating
                                                                              -------          --------- 
<S>                                                                          <C>               <C>
     1999..................................................................   $   151          $   1,221
     2000..................................................................       142              1,184
     2001..................................................................       123              1,199
     2002..................................................................         0                672
     Later years...........................................................         0              2,550
                                                                              -------          --------- 
     Total minimum lease payments..........................................       416          $   6,826
                                                                                               =========
     Amounts representing interest.........................................       (71)
                                                                              -------
     Capital lease obligation (including current portion)..................   $   345
                                                                              =======
</TABLE>
                                        
     Rent expense for the years ended October 31, 1996, 1997 and 1998 was $639,
$831 and $981, respectively.

     The Company is a licensee under three agreements which allow for the
manufacture and sale of various items of footwear. The agreements require the
payment of royalties on qualified product sales and generally guarantee minimum
royalty payments regardless of sales volume. In April 1997, the Company
exercised its option to renew the license agreement with Jones Investment Co.,
Inc. (the Jones Agreement) through December 31, 2002 which requires a minimum
royalty payments ranging from $800 to $1,250 per annum during the period ending
December 31, 2002.  The April 1997 amendment also granted the Company three
five-year option periods to renew through December 2017, subject to satisfying
certain conditions. The three option periods require 

                                       36
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)



minimum royalty payments of $1,250 per annum. In April 1997, the Company entered
into a license agreement with J. G. Hook, Inc. (the Hook agreement) for an
initial 18 month period ending September 30, 1998, with two one-year option
periods. In September 1998, the Company exercised its first one year option and
renewed the agreement through September 1999. On November 13, 1998, the Company
entered into a license agreement with Levi Strauss Co. which allows for the
manufacture and sale of a full range of women's casual footwear under the
Dockers(R) brand name. The agreement requires the payment of royalties on
qualified sales and guarantees minimum royalty payments. The minimum royalty
ranges from $144 to $864 through the initial term ending December 31, 2001.
There is one four-year option to renew through December 31, 2005, subject to
satisfying certain conditions.

     In January 1997, the Company entered into a license agreement with Inter-
Pacific Corporation (IPC), which provides IPC with the exclusive rights to
design, manufacture and distribute Sam & Libby beachwear type footwear for an
initial term of January 1997 to May 2000. For the use of the Sam & Libby
tradename, IPC will pay the Company royalties based on qualified product sales
subject to payment of minimum royalties of $396 over the initial term of the
agreement. Upon satisfaction of certain conditions, IPC may exercise its option
to extend the license agreement until May 2003.

     On April 14, 1997 the Company completed a transaction to own and operate
retail women's footwear stores through a joint venture, SLJ Retail LLC (SLJ),
which  sells a complete selection of women's footwear under the Sam & Libby and
Jones New York brand names. Initially, the joint venture was  49% owned by the
Company, which will account for its ownership under the equity method, and 51%
owned by the Butler Group, Inc., a wholly owned subsidiary of General Electric
Capital Corporation. The Company also holds an option through February 1, 2000
to purchase additional equity in the joint venture to increase its equity
ownership by approximately 5%. Under certain circumstances, the Company may be
obligated to acquire the ownership interest of the Butler Group at a value based
upon the operating results of SLJ Retail. The Company also entered into an
agreement to provide management services to SLJ Retail.

     Summarized financial information of SLJ Retail as of October 31, 1998 and
for the year then ended is as follows:  current assets - $12,286, non-current
assets - $5,836, current liabilities - $8,866, non-current liabilities -
$32,958, net sales - $41,405, gross profit - $19,270 and net operating loss -
($22,756).  The Company has not recognized any portion of SLJ Retail's net
operating losses through October 31, 1998 because, under the equity method of
accounting, the Company does not recognize any losses beyond the carrying value
of its investment in SLJ Retail, which is zero.

     Simultaneously with the formation of SLJ Retail, the Company entered into a
sub-license agreement with SLJ Retail pursuant to which the Company granted to
SLJ Retail a sub-license of its rights under the Jones Agreement noted above.
The initial term of this sub-license agreement expires in December 2002, but is
extended automatically for the same period of time as any extension by the
Company of the Jones Agreement. The sub-license agreement is subject to early
termination for various reasons, including any termination of the Jones
Agreement. In addition, the Company entered into a retail license agreement (the
"Retail License Agreement") with SLJ Retail pursuant to which the Company
granted to SLJ Retail a license, throughout the United States and such other
locations outside the United States, in which SLJ Retail may manufacture and
sell Sam & Libby women's footwear products, provided however, that such license
does not extend to products to which IPC has the exclusive rights. Under the
Retail License Agreement, SLJ Retail does not have to pay any royalty to the
Company in consideration of the license granted. The initial term of the Retail
License Agreement expires on January 31, 2047, subject to earlier termination
upon the occurrence of certain specified events.

                                       37
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              (Dollars in Thousands -- except per share amounts)



9.  Earnings Per Share

     The following table sets forth the computation of basic and diluted
earnings per share:


<TABLE>
<CAPTION>
                                                                    1996        1997        1998
                                                                   ------      ------      ------
<S>                                                            <C>         <C>         <C>
       Numerator:
           Net income........................................      $5,921      $9,030      $13,265
                                                                   ======      ======      =======
       Denominator:
           Denominator for basic earnings per share
               Weighted average shares.......................       7,588       7,588        8,222
           Denominator for diluted earnings per share
               Dilutive stock options........................         673         949        1,004
                                                                   ------      ------      -------
           Adjusted weighted average shares and assumed
               conversions...................................       8,261       8,537        9,226
                                                                   ======      ======      =======
 
       Earnings per share
           Basic.............................................      $  .78      $ 1.19      $  1.61
                                                                   ======      ======      =======
           Diluted...........................................      $  .72      $ 1.06      $  1.44
                                                                   ======      ======      =======
</TABLE>
                                                                                
10.  Supplementary Quarterly Financial Data (Unaudited)

     The following is a summary of unaudited quarterly results for the fiscal
years ended October 31, 1997 and October 31, 1998.

<TABLE>
<CAPTION>
                                                                             Quarter Ended
                                                     --------------------------------------------------------------
                                                     January 31,       April 30,        July 31,        October 31,
                                                     -----------       ---------        --------        -----------
<S>                                                  <C>               <C>              <C>             <C>
     Fiscal 1997
        Net sales................................       $28,764         $31,073          $36,833          $37,541
        Gross profit.............................         7,261           9,161           10,173            9,386
        Net income...............................         1,662           2,190            2,965            2,213
        Earnings per share
          Basic..................................       $   .22         $   .29          $   .39          $   .29
                                                        =======         =======          =======          =======
          Diluted................................       $   .20         $   .26          $   .35          $   .25
                                                        =======         =======          =======          =======
 
     Fiscal 1998
        Net sales................................       $36,328         $39,786          $47,386          $42,421
        Gross profit.............................         9,837          10,924           13,056           11,072
        Net income...............................         2,230           3,145            4,468            3,422
        Earnings per share
          Basic..................................       $   .29         $   .41          $   .51          $   .40
                                                        =======         =======          =======          =======
          Diluted................................       $   .26         $   .35          $   .46          $   .36
                                                        =======         =======          =======          =======
</TABLE>

                                       38
<PAGE>
 
Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure.

  None.



                                    PART III
                                        

Item 10.  Directors and Executive Officers of the Registrant

  The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 8, 1999 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1998 and is incorporated herein by reference.


Item 11.  Executive Compensation

  The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 8, 1999 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1998 and is incorporated herein by reference.


Item 12.  Security Ownership of Certain Beneficial Owners and Management

  The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 8, 1999 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1998 and is incorporated herein by reference.


Item 13.  Certain Relationships and Related Transactions

  The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 8, 1999 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1998 and is incorporated herein by reference.

                                       39
<PAGE>
 
                                    PART IV
                                    -------
                                        
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

  (a)(1)  Financial Statements:

  The following financial statements of the Company are included in response to
Item 8 of this report.
<TABLE>
<CAPTION>
                                                                                  Page Reference
                                                                                     Form 10K
                                                                                  --------------
<S>                                                                               <C>
 
     Report of Independent Auditors.............................................            23
     Balance Sheets as of October 31, 1997 and 1998.............................            24
     Statements of Income for each of the three years in the period ended
       October 31, 1998.........................................................            25
     Statements of Cash Flows for each of the three years in the period ended
       October 31, 1998.........................................................            26
     Statements of Changes in Stockholders' Equity for each of the three years
       in the period ended October 31, 1998.....................................            27
     Notes to Financial Statements..............................................            28
 
   (a) (2)  Financial Statements:
 
     Schedule II -- Valuation and qualifying accounts for the years
       ended October 31, 1996, 1997 and 1998....................................            45
</TABLE>

     Schedules other than those listed above have been omitted since they are
either not
       required, not applicable, or the information is otherwise included.

  (b)  Reports on Form 8-K

       There were no reports on Form 8-K filed during the fourth quarter of
fiscal 1998.

  (c)  Exhibits

       3.1     Certificate of Incorporation of Maxwell Shoe Company Inc.
               (incorporated by reference to exhibit 3.1 to the registrant's
               Form S-1 Registration Statement No. 33-74768)

       3.2     Bylaws of Maxwell Shoe Company Inc., as amended (incorporated by
               reference to exhibit 3.2 to the registrant's Form S-1
               Registration Statement No.33-74768) 

       4.1     Specimen Maxwell Shoe Company Inc. Class A Common Stock 
               Certificate (incorporated by reference to exhibit 4.1 to the
               registrant's Form 10-K for the fiscal year ended October 31,
               1994)

       4.2     Specimen Maxwell Shoe Company Inc. Class B Common Stock 
               Certificate (incorporated by reference to exhibit 4.2 to the
               registrant's Form 10-K for the fiscal year ended October 31,
               1994)

       4.3     Rights Agreement dated as of November 2, 1998 between Maxwell 
               Shoe Company Inc. and BankBoston, N.A., as Rights Agent
               (incorporated by reference to Exhibit 99.1 to the registrant's
               Form 8-K filed on November 12, 1998)

       10.1    Amended 1994 Stock Incentive Plan (incorporated by reference to
               exhibit 4.1 to the registrant's Form S-8 Registration Statement
               No. 333-55723)

                                       40
<PAGE>
 
       10.2.1  Form of Employee Nonqualified Stock Option Agreement pursuant to
               1994 Stock Incentive Plan (incorporated by reference to exhibit
               10.2.1 to the registrant's Form S-1 Registration Statement No.
               33-74768)

       10.2.2  Form of Employee Incentive Stock Option Agreement pursuant to 
               1994 Stock Incentive Plan (incorporated by reference to exhibit
               10.2.2 to the registrant's Form S-1 Registration Statement No 33-
               74768)

       10.2.3  Form of Nonemployee Director Stock Option Agreement pursuant to
               1994 Stock Incentive Plan (incorporated by reference to exhibit
               10.2.3 to the registrant's Form S-1 Registration Statement No.
               33-74768)

       10.3    Form of Restricted Stock Agreement pursuant to 1994 Stock 
               Incentive Plan (incorporated by reference to exhibit 10.3 to the
               registrant's Form S-1 Registration Statement No. 33-74768)

       10.4    Form of Indemnity Agreement between Maxwell Shoe Company Inc. and
               each of its directors and executive officers (incorporated by
               reference to exhibit 10.4 to the registrant's Form S-1
               Registration Statement No. 33-74768)

       10.5    Form of Tax Indemnification Agreement between Maxwell Shoe
               Company Inc. and each of Maxwell V. Blum, Eleanor S. Blum, Betty
               Ann Blum and Marjorie Blum (incorporated by reference to exhibit
               10.5 to the registrant's Form S-1 Registration Statement No.
               33-74768)

       10.6    Lease dated as of May 15, 1991 by and between George Shapiro,
               Arthur S. Goldberg and Sidney Shapiro, Trustees of the Shapiro
               Properties Realty Trust, as lessor, and Maxwell Shoe Company
               Inc., as lessee (incorporated by reference to exhibit 10.7 to the
               registrant's Form S-1 Registration Statement No. 33-74768)

       10.7    Lease dated as of November 17, 1993 by and between Trustees of 
               Bradshaw Westwood Trust, as landlord, and Maxwell Shoe Company
               Inc., as tenant (incorporated by reference to exhibit 10.8 to the
               registrant's Form S-1 Registration Statement No.33-74768)

       10.8    Agreement of Lease between Anon Realty Associates, L.P., as 
               successor lessor to 1414 Americas Company and Maxwell Shoe
               Company Inc., as lessee (incorporated by reference to exhibit
               10.9 to the registrant's Form S-1 Registration Statement No. 
               33-74768)

       10.9    Demand Credit Facility Agreement dated September 2, 1998 
               between Maxwell Shoe Company Inc. and BankBoston, N.A.

       10.10   Form of Registration Rights Agreement between Maxwell Shoe 
               Company Inc. on the one hand and Maxwell V. Blum, Betty A. Blum,
               Marjorie Blum, Mark J. Cocozza, and Joseph Aborn, as trustee of
               the Eleanor S. Blum Trust (incorporated by reference to exhibit
               10.13 to the registrant's Form S-1 Registration Statement No. 
               33-74768)

       10.11   License Agreement dated July 1, 1993 between Jones Investment
               Co., Inc. and Maxwell Shoe Company Inc. (incorporated by
               reference to exhibit 10.12 to the registrant's Form S-1
               Registration Statement No. 33-74768)

       10.12   Employment Agreement dated as of April 27, 1998 between Maxwell
               Shoe Company Inc. and Mark J. Cocozza

       10.13   Employee Agreement dated as of April 27, 1998 between Maxwell 
               Shoe Company Inc. and James J. Tinagero.

       10.14   Stock Option and Registration Rights Agreement dated as of 
               January 26, 1994 between Maxwell Shoe Company Inc. and 
               Mark J. Cocozza (incorporated by reference to exhibit 10.15 to
               the registrant's Form S-1 Registration Statement No. 33-74768)

                                       41
<PAGE>
 
       10.15   Master Lease Agreement dated as of July 18, 1994 between Maxwell
               Shoe Company Inc. and BancBoston Leasing Inc. (incorporated by
               reference to exhibit 10.23 to the registrant's Form 10-K for the
               fiscal year ended October 31, 1994)

       10.16   Assumption Agreement dated July 7, 1995 between BancBoston 
               Leasing Inc. and Maxwell Shoe Company Inc. (incorporated by
               reference to exhibit 10.24 to the registrant's Form 10-K for the
               fiscal year ended October 31, 1995)

       10.17   Letter Agreement dated January 25, 1995 between Legas Realty 
               Corp., as successor lessor to S.L. Green Properties Inc., as
               successor to Anon Realty Associates, L.P., and Maxwell Shoe
               Company Inc. (incorporated by reference to exhibit 10.25 to the
               registrant's Form 10-K for the fiscal year ended October 31,
               1995)

       10.18   First Amendment to License Agreement dated October 2, 1995
               between Jones Investment Co., Inc., and Maxwell Shoe Company Inc.
               (incorporated by reference to exhibit 10.26 to the registrant's
               Form 10-K for the fiscal year ended October 31, 1995)

       10.19   Sublease Agreement dated June 16, 1997 between Macy's East, 
               Inc. and Maxwell Shoe Company Inc. (incorporated by reference to
               exhibit 10.32 to the registrant's Form 10-K for the fiscal year
               ended October 31, 1997)

       10.20   Lease Agreement dated June 16, 1997 between John H. Finley, III
               as trustee of Brockton Oak Real Estate Trust and Maxwell Shoe
               Company Inc. (incorporated by reference to exhibit 10.33 to the
               registrant's Form 10-K for the fiscal year ended October 31,
               1997.

       10.21   Contribution Agreement dated as of April 14, 1997, by and among
               The Butler Group Inc., Maxwell Shoe Company Inc., and Maxwell
               Retail Inc. (incorporated by reference to exhibit 10.1 to the
               registrant's Form 8-K filed on May 5, 1997)

       10.22   Operating Agreement of SLJ Retail LLC dated as of April 14, 1997
               by and between the Butler Group, Inc. and Maxwell Retail Inc.
               (incorporated by reference to exhibit 10.2 to the registrant's
               Form 8-K filed on May 5, 1997)

       10.23   First Amendment to Operating Agreement dated as of June 24, 1998
               by and among Butler Group LLC. and Maxwell Retail Inc.

       10.24   Option Agreement dated as of April 14, 1997 by and among The 
               Butler Group Inc., Maxwell Shoe Company Inc., Maxwell Retail Inc.
               and SLJ Retail LLC (incorporated by reference to exhibit 10.3 to
               the registrant's Form 8-K filed on May 5, 1997)

       10.25   First Amendment to Option Agreement dated as of June 24, 1998 by
               and among Maxwell Shoe Company Inc., Maxwell Retail Inc. and SLJ
               Retail LLC.

       10.26   Services Agreement dates as of April 14, 1997 by and between 
               Maxwell Shoe Company Inc. and SLJ Retail LLC (incorporated by
               reference to exhibit 10.4 to the registrant's Form 8-K filed on
               May 5, 1997)

       10.27   First Amendment to Services Agreement dated as of June 24, 1998
               by and among Maxwell Shoe Company Inc. and SLJ Retail LLC.

       10.28   Non-Compete Agreement dated as of April 14, 1997 by and among 
               SLJ Retail LLC, Maxwell Shoe Company Inc. Maxwell V. Blum, Betty
               Ann Blum, Marjorie W. Blum, Mark J. Cocozza, David Andelman, as
               trustee of the Eleanor S. Blum Trust, Maxwell Retail Inc. and
               Sprague Company (incorporated by reference to exhibit 10.5 to the
               registrant's Form 8-K filed on May 5, 1997)

       10.29   Retail Opportunity Agreement dates as of April 14, 1997 by and
               among SLJ Retail LLC, Maxwell Shoe Company Inc., Maxwell V. Blum,
               Betty Ann Blum, Marjorie W. Blum, David Andelman, as trustee of
               the Eleanor S. Blum Trust, Maxwell Retail Inc. and Sprague
               Company (incorporated by reference to exhibit 10.6 to the
               registrant's Form 8-K filed on May 5, 1997)

                                       42
<PAGE>
 
       10.30   Registration Rights Amendment dates as of April 14, 1997 by and
               among Maxwell Shoe Company Inc., The Butler Group Inc., Maxwell
               V. Blum, Betty Ann Blum, Marjorie W. Blum, Mark J. Cocozza and
               David Andelman, as trustee of the Eleanor S. Blum Trust
               (incorporated by reference to exhibit 10.7 to the registrant's
               Form 8-K filed on May 5, 1997)

       10.31   Second Amendment to License Agreement dated as of April 14, 1997
               by and between Maxwell Shoe Company Inc. and Jones Investment
               Co., Inc. (incorporated by reference to exhibit 10.8 to the
               registrant's Form 8-K filed on May 5, 1997)
               
       10.32   Trademark Sublicense Agreement dated as of April 14, 1997 by and
               between Maxwell Shoe Company Inc. and SLJ Retail LLC
               (incorporated by reference toexhibit 10.9 to the registrant's
               Form 8-K filed on May 5, 1997)
 
       10.33   Sublease Agreement dated June 16, 1997 between Macy's East Inc.
               and Maxwell Shoe Company Inc.

       10.34   Contribution Agreement dated as of June 24, 1998 by and among
               The Butler Group LLC, Maxwell Shoe Company Inc, and Maxwell
               Retail Inc.

       21      Subsidiaries of Maxwell Shoe Company, Inc.

       23      Consent of Independent Auditors

       27      Financial Data Schedule
 

                                       43
<PAGE>
 
                                   SIGNATURES
                                        
  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                                 MAXWELL SHOE COMPANY, INC.

                                                    /s/ Mark J. Cocozza
                                        By  ------------------------------------
                                                        Mark J. Cocozza,
                                            Chairman and Chief Executive Officer
                                                        January 21, 1999

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
               Signature                                 Title                          Date
               ---------                                 -----                          ----       
<S>                                     <C>                                      <C> 
          /s/ MARK J. COCOZZA                  Chairman of the Board and          January 21, 1999
  ------------------------------------          Chief Executive Officer
            Mark J. Cocozza                  (Principal Executive Officer)
 
         /s/ JAMES J. TINAGERO           Executive Vice President and Director    January 21, 1999
  ------------------------------------       (Principal Financial Officer)
           James J. Tinagero 
 
          /s/ RICHARD J. BAKOS                Vice President Finance and          January 21, 1999
  ------------------------------------          Chief Financial Officer
            Richard J. Bakos                (Principal Accounting Officer)
 
        /s/ STEVEN C. GOLDSTEIN                       Controller                  January 21, 1999
  ------------------------------------
          Steven C. Goldstein
 
           /s/MAXWELL V. BLUM                          Director                   January 21, 1999
  ------------------------------------
            Maxwell V. Blum
 
          /s/ STEPHEN A. FINE                          Director                   January 21, 1999
  ------------------------------------
            Stephen A. Fine
 
         /s/ JONATHAN K. LAYNE                         Director                   January 21, 1999
  ------------------------------------
           Jonathan K. Layne
 
         /s/ MALCOLM L. SHERMAN                        Director                   January 21, 1999
  ------------------------------------
           Malcolm L. Sherman

</TABLE>

                                       44
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.

                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                (In Thousands)

<TABLE>
<CAPTION>
                                                  Balance at     Charged to                   Balance at
                                                 Beginning of    Costs and                      End of
                 Description                        Period        Expenses     Deductions1      Period
-------------------------------------------      ------------    ----------    -----------    ----------
<S>                                              <C>             <C>           <C>            <C>
Year ended October 31, 1996
   Allowance for doubtful accounts.........         $853           $ 50           $173           $730
Year ended October 31, 1997
   Allowance for doubtful account..........         $730           $125           $116           $739
Year ended October 31, 1998
   Allowance for doubtful account..........         $739           $125           $283           $581
</TABLE>

--------------
/1/Uncollectible accounts written off, net of recoveries.
<PAGE>
 
                                   Schedule A
                                   ----------
                                        
                                  DEFINITIONS
                                  -----------
                                        

     Accountants:  Ernst & Young LLP, Arthur Andersen & Co., LLP or other
     -----------                                                         
independent certified public accountants of nationally-recognized standing.

     Adjusted Eurodollar Rate:  As applied to any Interest Period, the rate per
     ------------------------                                                  
annum determined pursuant to the following formula:

     AER = [     IOR    ]*
           -------------- 
            [1.00 - RP]

     AER = Adjusted Eurodollar Rate
     IOR = Interbank Offered Rate
     RP = Reserve Percentage

     *The amount in brackets shall be rounded upwards, if necessary, to the next
     higher 1/100th of 1%.

     Where:

          The "Interbank Offered Rates" applicable to any Eurodollar Loan for
               -----------------------                                       
     any Interest Period means the rate of interest (rounded upward, if
     necessary, to the nearest 1/16th of 1%) determined by the Bank to be the
     prevailing rate per annum at which deposits in U.S. dollars are offered to
     the Bank by first-class banks in the interbank eurodollar market where the
     eurodollar and foreign currency and exchange operations in respect of its
     Eurodollar Loans are then being conducted on or about 10:00 a.m. (Boston
     time) two (2) Business Days before the first day of such Interest Period in
     an amount approximately equal to the principal amount of the Eurodollar
     Loan to which such Interest Period is to apply for a period of time
     approximately equal to such Interest Period; and

          The "Reserve Percentage" applicable to any Interest Period means the
               ------------------                                             
     aggregate of the rates (expressed as a decimal) applicable to the Bank
     during such Interest Period under regulations issued from time to time by
     the Board of Governors of the Federal Reserve System (or other governmental
     authority having jurisdiction with respect thereto) for determining the
     maximum reserve requirement (including, without limitation, any basic,
     supplemental, emergency or marginal reserve requirement) of the Bank with
     respect to "Eurocurrency liabilities" as that term is defined under such
     regulations.

     The Adjusted Eurodollar Rate shall be adjusted automatically as of the
effective date of any change in the Reserve Percentage.
<PAGE>
 
     Base Rate:  The higher of (i) the annual rate of interest announced from
     ---------                                                               
time to time by the Bank at its head office as its Base Rate, and (ii) the
Federal Funds Effective Rate plus 1/2 of 1% per annum.  The Base Rate is not
necessarily intended to be the lowest rate of interest determined by the Bank in
connection with extensions of credit.

     Base Rate Loan:  Any Demand Loan bearing interest calculated by reference
     --------------                                                           
to the Base Rate.

     Borrower:  See the Preamble.
     --------                    

     Business Day:  (i) For all purposes other than as covered by clause (ii)
     ------------                                                            
below, any day, other than a Saturday, Sunday or legal holiday, on which banks
in Boston, Massachusetts are open for the transaction of a substantial part of
their commercial banking business; and (ii) with respect to all notices and
determinations in connection with, and payments of principal and interest on,
Eurodollar Loans, any day that is a Business Day described in clause (i) and
that is also a day for trading by and between banks in U.S. Dollar deposits in
the relevant interbank eurodollar market.

     Cash Management Agreement:  Any Cash Management Master Agreement entered
     -------------------------                                               
into between the Bank and the Borrower from time to time, as from time to time
in effect, including all schedules and addenda attached thereto, relating to
cash management, sweep account or similar services provided by the Bank to the
Borrower allowing for daily advances and repayments in connection with the
Borrower's daily operations and working capital requirements.

     Code:  The Internal Revenue Code of 1986 and the rules and regulations
     ----                                                                  
promulgated thereunder, collectively, as the same may from time to time be
supplemented or amended and remain in effect.

     Demand Loan:  See Section 1.1
     -----------                  

     Demand Loan Account:  See Section 1.2
     -------------------                  

     Demand Note:  See Section 1.1
     -----------                  

     Encumbrances:  See Section 11.2.
     ------------                    

     Environmental Laws:  Any and all applicable federal, state and local
     ------------------                                                  
environmental, health or safety statutes, laws, regulations, rules, ordinances,
policies and rules or common law (whether now existing or hereafter enacted or
promulgated), of all governmental agencies, bureaus or departments which may now
or hereafter have jurisdiction over the Borrower or any of its Subsidiaries and
all applicable judicial and administrative and regulatory decrees, judgments and
orders, including common law rulings and determinations, relating to the effect
of the environment on human health and safety or injury to, or the protection
of, the environment, including, without limitation, all requirements pertaining
to reporting, licensing, 

                                      -2-
<PAGE>
 
permitting, investigation, remediation and removal of emissions, discharges,
releases or threatened releases of Hazardous Materials, pollutants or
contaminants whether solid, liquid or gaseous in nature, into the environment or
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of such Hazardous Materials, pollutants or
contaminant. Without limiting the generality of the foregoing, the term shall
encompass each of the following statutes and regulations promulgated thereunder,
and amendments and successors to such statutes and regulations, as enacted and
promulgated from time to time: (a) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, (42 U.S.C. (S)(S)9601 et seq.); (b) the
                                                              ------
Resource Conservation and Recovery Act of 1976 (42 U.S.C. (S)(S)6901 et seq. );
                                                                     ------
(c) the Hazardous Materials Transportation Act (49 U.S.C. (S)(S)1801 et seq.);
                                                                     ------
(d) the Toxic Substances Control Act (15 U.S.C. (S)(S)2601 et seq.); (e) the
                                                           ------
Clean Water Act (33 U.S.C. (S)(S)1251 et seq.); (f) the Clean Air Act (42 U.S.C.
                                      ------
(S)(S)7401 et seq.); (g) the Safe Drinking Water Act (42 U.S.C. (S)300 et seq.);
                                                                       ------
(h) the National Environmental Policy Act of 1969 (42 U.S.C. (S)(S)4321); 
(i) the Superfund Amendment and Reauthorization Act of 1986 (codified in 42
U.S.C.); and (j) Title III of the Superfund Amendment and Reauthorization Act
(42 U.S.C. (S)(S)11001 et seq.) and any state or local laws of similar substance
                       ------
and effect.

     ERISA:  The Employee Retirement Income Security Act of 1974 and the rules
     -----                                                                    
and regulations thereunder, collectively, as the same may from time to time be
supplemented or amended and remain in effect.

     Eurodollar Loan:  Any Demand Loan bearing interest at a rate calculated by
     ---------------                                                           
reference to the Adjusted Eurodollar Rate.

     Expiration Date:  April 30, 1999, subject to renewal for one or more
     ---------------                                                     
additional one-year periods at the Bank's sole discretion, unless sooner
terminated by demand by the Bank in the Bank's sole discretion.

     Federal Funds Effective Rate:  For any day, a fluctuating interest rate per
     ----------------------------                                               
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day that is a Business Day, the
average of the quotations for such day on such transactions received by the Bank
from three Federal funds brokers of recognized standing selected by the Bank.

     GAAP:  For all purposes of this agreement, GAAP shall mean the generally
     ----                                                                    
accepted accounting principles in effect from time to time, applied on a
consistent basis with past financial statements (except for changes with which
the Accountants concur).

     Guaranty or Guarantees:  All guarantee(s), endorsement(s) (other than
     ----------------------                                               
endorsements of instruments for collection in the ordinary course of business)
or other contingent or surety obligation(s) of the Borrower with respect to
obligations of others, whether or not reflected on the Borrower's balance sheet,
including any obligation to furnish funds, directly or indirectly (whether by
virtue of partnership arrangements, by agreement to keep-well or otherwise),

                                      -3-
<PAGE>
 
through the purchase of goods, supplies or services, or by way of stock
purchase, capital contribution, advance or loan, or to enter into a contract for
any of the foregoing, for the purpose of payment of obligations of any other
person or entity.

     Hazardous Material:  Any substance (a) the presence of which requires or
     ------------------                                                      
may hereafter require notification, investigation or remediation under any
Environmental Law; (b) which is or becomes defined as a "hazardous waste",
"hazardous material", "hazardous material or oil" or "hazardous substance" or
"controlled industrial waste" or "pollutant" or "contaminant" or "chemical
substance or mixture" under any present or future Environmental Law or
amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. (S)(S)9601 et
                                                                             --
seq.) and any applicable local statutes and the regulations promulgated
---                                                                    
thereunder; (c) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department, commission, board,
agency or instrumentality of the United States, any state of the United States,
or any political subdivision thereof to the extent any of the foregoing has or
had jurisdiction over the Borrower; or (d) without limitation, which contains
gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated
biphenyls.

     Interest Period:  With respect to each Eurodollar Loan, the period
     ---------------                                                   
commencing on the date of the making or continuation of or conversion to such
Eurodollar Loan and ending one, two, three or six months thereafter, as the
Borrower may elect in request made pursuant to Section 3(a) or (b); provided
that:

     (i)   any Interest Period (other than an Interest Period determined
           pursuant to clause (iv) below) that would otherwise end on a day that
           is not a Business Day shall be extended to the next succeeding
           Business Day unless, in the case of Eurodollar Loans, such Business
           Day falls in the next calendar month, in which case such Interest
           Period shall end on the immediately preceding Business Day;

     (ii)  if the Borrower shall fail to give notice as provided in Section
           3(b), the Borrower shall be deemed to have requested a conversion of
           the affected Eurodollar Loan to a Base Rate Loan on the last day of
           the then current Interest Period with respect thereto;

     (iii) any Interest Period relating to a Eurodollar Loan that begins on the
           last Business Day of a calendar month (or on a day for which there is
           not numerically corresponding day in the calendar month at the end of
           such Interest Period) shall, subject to clause (iv) below, end on the
           last Business Day of a calendar month;

     (iv)  any Interest Period related to a Eurodollar Loan that would otherwise
           end after the Expiration Date shall end on the Expiration Date; and

     (v)   notwithstanding clause (iv) above, no Interest Period relating to a
           Eurodollar Loan shall have a duration of less than one month.

                                      -4-
<PAGE>
 
     LC Draw Obligation:  The Borrower's obligation to reimburse the Bank on
     ------------------                                                     
account of any drawing under any Letter of Credit as provided in Section 5.3.

     LC Exposure Amount:  At any time, the sum of (i) the aggregate undrawn face
     ------------------                                                         
amount of all Letters of Credit outstanding at such time, and (ii) the aggregate
amount of all drawings under Letters of Credit for which the Bank shall not have
been reimbursed by the Borrower as provided in Section 5.3.

     Bank:  See the Preamble.
     ----                    

     Letter of Credit:  See Section 5.1.
     ----------------                   

     Letter of Credit Documents:  See Section 5.7.
     --------------------------                   

     Line of Credit:  See Section 1.1.
     --------------                   

     Letter of Credit Fee:  See Section 2.8(i).
     --------------------                      

     Letter of Credit Fee Schedule:  A schedule attached hereto, as the same may
     -----------------------------                                              
be amended, modified or supplemented from time to time by the Bank and the
Borrower.

     Loan Documents:  Collectively, this Agreement, the Note, the Letters of
     --------------                                                         
Credit, and any and all other agreements, instruments, certificates or reports
executed by the Borrower in connection with this Agreement, as amended from time
to time.

     Loans:  Collectively, the Demand Loans.
     -----                                  

     Margin Stock:  See Section 10.8.
     ------------                    

     Obligations:  Any and all obligations of the Borrower or any of its
     -----------                                                        
Subsidiaries to the Bank or any Bank of every kind and description, direct or
indirect, absolute or contingent, primary or secondary, due or to become due,
now existing or hereafter arising, arising under this Agreement, the Demand
Note, the Letters of Credit, or any of the other Loan Documents.

     PBGC:  The Pension Benefit Guaranty Corporation or any entity succeeding to
     ----                                                                       
any or all of its functions under ERISA

     Periodic Reports:  All regular and periodic reports filed or required to be
     ----------------                                                           
filed by the Borrower within the S.E.C. or any securities exchange, including,
without limitation, reports on Form 10K, Form 10Q or Form 8K).

     Person:  Any individual, corporation, limited liability company,
     ------                                                          
partnership, joint venture, trust or unincorporated organization or any
government or any agency or political subdivision thereof.

                                      -5-
<PAGE>
 
     Plan:  At any time, an employee pension or other benefit plan that is
     ----                                                                 
subject to Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (a) maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group or (b) if such Plan is established or maintained pursuant
to a collective bargaining agreement or any other arrangement under which more
than one employer makes contributions and to which the Borrower or any member of
the Controlled Group is then making or accruing an obligation to make
contributions or has within the preceding five Plan years made contributions.

     S.E.C.:  The U.S. Securities and Exchange Commission.
     ------                                               

     Subsidiary:  (a) Any corporation, association, joint stock company,
     ----------                                                         
business trust or other similar organization of which 50% or more of the
ordinary voting power for the election of a majority of the members of the board
of directors or other governing body of such entity is held or controlled by the
Borrower or a Subsidiary of the Borrower; or (b) any other such organization the
management of which is directly or indirectly controlled by the Borrower or a
Subsidiary of the Borrower through the exercise of voting power or otherwise.

                                      -6-
<PAGE>
 
                         LETTER OF CREDIT FEE SCHEDULE
                         -----------------------------
                                        

     The following prices will be charged to the Borrower for all letters of
credit issued by the Bank for beneficiaries in India, Italy, Panama and United
States.  These letters of credit will continued to be advised and negotiated by
an overseas bank as designated by the beneficiary.

                    Issuance                          Waived
                   Amendments                         Waived
                   Negotiation                        1/10% (min. $40.00)
                   Telex Advice                       $15.00
                   Cancellation/Unitilized            $50.00
 
                   Discrepancy processing             $60.00 per drawing
                   Funds Transfer                     $25.00 per transfer
<PAGE>
 
                                   EXHIBIT A
                                   ---------
                                        

                             DEMAND PROMISSORY NOTE
                             ----------------------
                                        


$35,000,000                                   Boston, Massachusetts
                                              September ____, 1998


          FOR VALUE RECEIVED, MAXWELL SHOE COMPANY INC., a Delaware corporation
(the "Borrower"), hereby promises to pay to BANKBOSTON, N.A. (the "Bank"), or
      --------                                                     ----      
order, ON DEMAND or, if no demand is made, on the Expiration Date (as defined in
the Demand Loan Agreement referred below), the principal amount of $35,000,000
or, if less, the aggregate unpaid principal amount of advances made by the Bank
to the Borrower pursuant to the letter agreement dated as of the date hereof by
and between the Borrower and the Bank (as amended or extended from time to time,
the "Demand Loan Agreement"), together with interest thereon at the rate or
     ---------------------                                                 
rates provided in the Demand Loan Agreement, payable in arrears, without set-
off, deduction or counterclaim, ON DEMAND or, if no demand is made, on the dates
specified in the Demand Loan Agreement, and at the maturity of this Note,
whether by payment or prepayment, demand or otherwise.

          Overdue principal (whether at maturity, by reason of acceleration or
otherwise) and, to the extent permitted by applicable law, overdue interest and
fees or any other amounts payable under the Demand Loan Agreement due to the
Borrower's failure to pay the same in full shall bear interest from and
including the due date thereof until paid, at a rate per annum equal to 2% above
the rate of interest otherwise applicable thereto, which interest shall be
compounded daily and payable on demand.  The foregoing shall in no way affect
the Bank's right to exercise any of its rights or remedies, including those
provided in the Demand Loan Agreement arising upon such failure to pay or
otherwise.

          All payments under this Note shall be made at the head office of the
Bank at 100 Federal Street, Boston, Massachusetts 02110 (or at such other place
as the Bank may designate from time to time in writing) in lawful money of the
United States of America in federal or other immediately available funds.

          The Borrower may prepay this Note in whole or in part at any time upon
the terms provided in the Demand Loan Agreement.  Amounts so paid and other
amounts may be borrowed and reborrowed by the Borrowers hereunder from time to
time as provided in the Demand Loan Agreement.

          This Note is the "Demand Note" referred to in, and is entitled to the
benefits of, the Demand Loan Agreement and other agreements and instruments
evidencing and/or securing the indebtedness hereunder (the "Demand Loan
                                                            -----------
Documents"), which Demand Loan Documents are 
---------                                                                 
<PAGE>
 
hereby incorporated herein by reference; but neither this reference to the
Demand Loan Documents nor any provision thereof shall affect or impair the
absolute and unconditional obligation of the Borrower to pay the principal of
and interest on this Note as herein provided.

          The Borrower hereby waives presentment, demand, notice of dishonor,
protest and all other demands and notices in connection with the delivery,
acceptance, performance and enforcement of this Note.

          All agreements between the Borrower and the Bank are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness or otherwise, shall the amount paid
or agreed to be paid for the use or forbearance of the indebtedness evidenced
hereby exceed the maximum amount which the Bank is permitted to receive under
applicable law. If, from any circumstances whatsoever, fulfillment of any
provision hereof or of the Demand Loan Agreement, at the time performance of
such provision shall be due, shall involve exceeding such amount, then the
obligation to be fulfilled shall automatically be reduced to the limit of such
validity and if, from any circumstances the Bank should ever receive as interest
an amount which would exceed such maximum amount, such amount which would be
excessive interest shall be applied to the reduction of the principal balance
evidenced hereby and not to the payment of interest. As used herein, the term
"applicable law" shall mean the law in effect as of the date hereof, provided,
                                                                     -------- 
however, that in the event there is a change in the law which results in a
-------                                                                   
higher permissible rate of interest, then this Note shall be governed by such
new law as of its effective date. This provision shall control every other
provision of all agreements between the Borrower and the Bank.

          If this Note shall not be paid when due and shall be placed by the
holder hereof in the hands of any attorney for collection, through legal
proceedings or otherwise, the Borrower will pay reasonable attorneys' fees to
the holder hereof (including without limitation any allocation costs of the
Bank's in-house counsel) together with reasonable costs and expenses of
collection, including, without limitation, any such attorneys' fees, costs and
expenses relating to any proceedings with respect to the bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or liquidation of
the Borrower or any party to any instrument or agreement securing this Note, all
is provided in the Demand Loan Agreement.
<PAGE>
 
          This instrument shall have the effect of an instrument executed under
seal and shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).

WITNESS:                                      MAXWELL SHOE COMPANY INC.


                                              By:
----------------------------------                ------------------------------
<PAGE>
 
                            DEMAND PROMISSORY NOTE
                            ----------------------
                                        


$35,000,000                                   Boston, Massachusetts
                                              September 2, 1998


          FOR VALUE RECEIVED, MAXWELL SHOE COMPANY INC., a Delaware corporation
(the "Borrower"), hereby promises to pay to BANKBOSTON, N.A. (the "Bank"), or
      --------                                                     ----      
order, ON DEMAND or, if no demand is made, on the Expiration Date (as defined in
the Demand Loan Agreement referred below), the principal amount of $35,000,000
or, if less, the aggregate unpaid principal amount of advances made by the Bank
to the Borrower pursuant to the letter agreement dated as of the date hereof by
and between the Borrower and the Bank (as amended or extended from time to time,
the "Demand Loan Agreement"), together with interest thereon at the rate or
     ---------------------                                                 
rates provided in the Demand Loan Agreement, payable in arrears, without set-
off, deduction or counterclaim, ON DEMAND or, if no demand is made, on the dates
specified in the Demand Loan Agreement, and at the maturity of this Note,
whether by payment or prepayment, demand or otherwise.

          Overdue principal (whether at maturity, by reason of acceleration or
otherwise) and, to the extent permitted by applicable law, overdue interest and
fees or any other amounts payable under the Demand Loan Agreement due to the
Borrower's failure to pay the same in full shall bear interest from and
including the due date thereof until paid, at a rate per annum equal to 2% above
the rate of interest otherwise applicable thereto, which interest shall be
compounded daily and payable on demand.  The foregoing shall in no way affect
the Bank's right to exercise any of its rights or remedies, including those
provided in the Demand Loan Agreement arising upon such failure to pay or
otherwise.

          All payments under this Note shall be made at the head office of the
Bank at 100 Federal Street, Boston, Massachusetts 02110 (or at such other place
as the Bank may designate from time to time in writing) in lawful money of the
United States of America in federal or other immediately available funds.

          The Borrower may prepay this Note in whole or in part at any time upon
the terms provided in the Demand Loan Agreement.  Amounts so paid and other
amounts may be borrowed and reborrowed by the Borrowers hereunder from time to
time as provided in the Demand Loan Agreement.

          This Note is the "Demand Note" referred to in, and is entitled to the
benefits of, the Demand Loan Agreement and other agreements and instruments
evidencing and/or securing the indebtedness hereunder (the "Demand Loan
                                                            -----------
Documents"), which Demand Loan Documents are hereby incorporated herein by
---------                                                                 
reference; but neither this reference to the Demand Loan Documents nor any
provision thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
herein provided.
<PAGE>
 
          The Borrower hereby waives presentment, demand, notice of dishonor,
protest and all other demands and notices in connection with the delivery,
acceptance, performance and enforcement of this Note.

          All agreements between the Borrower and the Bank are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness or otherwise, shall the amount paid
or agreed to be paid for the use or forbearance of the indebtedness evidenced
hereby exceed the maximum amount which the Bank is permitted to receive under
applicable law.  If, from any circumstances whatsoever, fulfillment of any
provision hereof or of the Demand Loan Agreement, at the time performance of
such provision shall be due, shall involve exceeding such amount, then the
obligation to be fulfilled shall automatically be reduced to the limit of such
validity and if, from any circumstances the Bank should ever receive as interest
an amount which would exceed such maximum amount, such amount which would be
excessive interest shall be applied to the reduction of the principal balance
evidenced hereby and not to the payment of interest.  As used herein, the term
"applicable law" shall mean the law in effect as of the date hereof, provided,
                                                                     -------- 
however, that in the event there is a change in the law which results in a
-------                                                                   
higher permissible rate of interest, then this Note shall be governed by such
new law as of its effective date.  This provision shall control every other
provision of all agreements between the Borrower and the Bank.

          If this Note shall not be paid when due and shall be placed by the
holder hereof in the hands of any attorney for collection, through legal
proceedings or otherwise, the Borrower will pay reasonable attorneys' fees to
the holder hereof (including without limitation any allocation costs of the
Bank's in-house counsel) together with reasonable costs and expenses of
collection, including, without limitation, any such attorneys' fees, costs and
expenses relating to any proceedings with respect to the bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or liquidation of
the Borrower or any party to any instrument or agreement securing this Note, all
is provided in the Demand Loan Agreement.

          This instrument shall have the effect of an instrument executed under
seal and shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).

WITNESS:                                      MAXWELL SHOE COMPANY INC.


                                              By: /s/ Mark Cocozza, President
----------------------------------                ---------------------------
                                                  Mark Cocozza, President