<PAGE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 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, 1996
 
                                      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
                                             (I.R.S. EMPLOYER IDENTIFICATION
   (STATE OR OTHER JURISDICTION OF                       NUMBER)
   INCORPORATION OR ORGANIZATION)
 
 
 
101 SPRAGUE STREET, P.O. BOX 37 HYDE
                PARK
 
                                                          02137
            (BOSTON), MA
                                                       (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE
              OFFICES)
 
                                (617) 364-5090
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                         NAME OF EACH EXCHANGE
      TITLE OF EACH CLASS:                               ON WHICH REGISTERED:
      --------------------                               ---------------------
      <S>                                                <C>
              NONE                                               NONE
</TABLE>
 
          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 15, 1997 based on the
closing price of the Class A Common Stock on the NASDAQ National Market System
on such date was $21,146,875.
 
  The number of shares of the registrant's Class A Common Stock outstanding at
January 15, 1997 was 2,525,000 shares. The number of shares of the
registrant's Class B Common Stock outstanding at January 15, 1997 was
5,063,317 shares.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the proxy statement for the registrant's 1997 Annual
Stockholders Meeting are incorporated by reference into Part III herein.
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
                      INDEX TO ANNUAL REPORT ON FORM 10-K
 
                   FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
 
<TABLE>
<CAPTION>
          CAPTION                                                                                 PAGE
          -------                                                                                 ----
<S>       <C>                                                                                     <C>
PART I
Item 1.   Business...............................................................................   3
Item 2.   Properties.............................................................................  11
Item 3.   Legal Proceedings......................................................................  11
Item 4.   Submission of Matters to a Vote of Security Holders....................................  12
PART II
Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters..................  12
Item 6.   Selected Financial Data................................................................  12
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations..  14
Item 8.   Consolidated Financial Statements and Supplementary Data...............................  16
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...  30
PART III
Item 10.  Directors and Executive Officers of the Registrant.....................................  30
Item 11.  Executive Compensation.................................................................  30
Item 12.  Security Ownership of Certain Beneficial Owners and Management.........................  30
Item 13.  Certain Relationships and Related Transactions.........................................  30
PART IV
Item 14.  Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K..........  31
</TABLE>
 
                                       2
<PAGE>
 
                                    PART I
 
ITEM I. BUSINESS
 
GENERAL
 
  Maxwell Shoe Company designs, develops and markets moderately priced casual
and dress footwear for women under the Mootsies Tootsies brand name as well as
for children under the Mootsies Kids brand name. The Company entered the
"better" women's footwear market segments through an exclusive license
agreement to design, develop and market casual and dress footwear under the
Jones New York and Jones New York Sport brand names. On August 20, 1996 the
Company purchased the worldwide trademarks and tradenames from Sam & Libby,
Inc. for the following brand names: Sam & Libby, Just Libby, Jeff & Kristi,
New Nineties. The Company intends to ship Sam & Libby and Just Libby women's
and Sam & Libby children's product starting in the first quarter of fiscal
1997. In addition, the Company designs and develops private label footwear for
selected retailers under the retailers' own brand names. The Company also
sells footwear close-outs that it purchases at volume discounts from other
manufacturers.
 
  The Company differentiates itself from its competitors through its ability
to design, develop and market value priced footwear that reflects current
fashion trends. Retail prices for Mootsies Tootsies generally range from $25
to $40 and Mootsies Kids retail prices generally range from $20 to $40. Jones
New York Sport footwear generally retails from $45 to $75, while Jones New
York footwear generally retails between $65 and $80. Retail prices for Sam &
Libby and Just Libby women's footwear are expected to range from $35 to $70
and Sam & Libby kids retail prices will range from $25 to $50. Substantially
all of the Company's products are manufactured overseas by independent
factories. 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 net sales increased from $101.9 million in fiscal 1995 to
$104.3 million in fiscal 1996. The Company's success is largely a result of
its ability to design, develop and market footwear with contemporary styles at
affordable prices. Through advertising, promotion and packaging, the Company
has built consumer and retail recognition for the Mootsies Tootsies brand
name. Based on its knowledge of the industry, 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.
The Company entered a new market segment by leveraging its existing resources
and the brand recognition for Mootsies Tootsies to introduce its Mootsies Kids
line in 1991. The Company expanded the branded product offering through the
introduction of the Jones New York (in 1994) and Jones New York Sport (in
1995) footwear brands. Both are intended to capitalize on the strong brand
name recognition and reputation for quality and style enjoyed by Jones New
York in the better segments of the women's apparel industry. The Company has
continued its brand expansion through the acquisition of the Sam & Libby
worldwide trademarks and tradenames in 1996.
 
  The Company competes primarily in the women's casual and dress footwear
market. Both the "moderate" segment of this market, in which the Company's
Mootsies Tootsies line competes, and the "better" segment of this market, in
which the Company's Jones New York footwear line competes, are characterized
by an emphasis on contemporary fashion and style. The Company believes that
there has been a shift in the "moderate" segment of 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 designing,
developing and marketing value priced footwear that reflects current fashion
trends. The Company believes that the "better" segment of this market has been
affected to a lesser extent by this shift, as these consumers have remained
interested in higher quality and brand name products. The Company seeks to
appeal to these consumers with its Jones New York footwear line by
capitalizing on the strong brand name recognition and reputation for quality
and style enjoyed by Jones New York in the "better" segments of the women's
apparel industry. Jones New York Sport, which includes styles for weekend and
casual wear, competes in the better segment. The Company believes the Sam &
Libby line of upper moderate footwear will be price positioned between the
Mootsies Tootsies and Jones New York Sport lines.
 
                                       3
<PAGE>
 
BUSINESS STRATEGY
 
  The Company's strategy is to increase its share of the casual and dress
footwear market by expanding penetration in the segments for its established
brands and by developing new products targeted at other segments of the
market. In addition, the Company will continue to exploit growth through
acquisition or licensing of incremental brands. The Company seeks to provide
quality products with the best value in each market segment in which the
Company competes. Key elements in the Company's strategy are the following:
 
  . Capitalize on Consolidating Footwear Industry. The Company intends to
    capitalize on the recent consolidation in the footwear industry where
    more brands are being controlled by fewer companies and where retailers
    are generally purchasing footwear merchandise from a reduced number of
    manufacturers. The Company will execute this strategy by maintaining a
    portfolio of brands which appeal to different market segments of the
    footwear industry.
 
  . New Brands. The Company intends to continue to develop new brands that
    target segments of the women's and children's footwear market that the
    Company does not currently serve. Management believes that new brands
    will enable the Company to increase its sales by satisfying the needs of
    a broader range of consumers. The Company will seek to sell these new
    brands through the Company's existing customers as well as develop new
    customers for these brands. The acquisition of the Sam & Libby brand
    represents the Company's most recent effort to expand into new market
    segments. The Company intends to pursue entering other segments of the
    market through acquisition and the development or licensing of new
    brands. The Company believes it is well positioned to pursue and
    consummate this strategy due to its relatively strong and unencumbered
    balance sheet.
 
  . Management Structure. The Company has restructured to strengthen its
    management to run efficiently as a multibranded footwear company. Each
    brand is managed by a divisional executive who is responsible for the
    sales, product development, merchandising, marketing and advertising of
    their respective brand. This divisional structure and focus, which
    provides the Company with what it believes to be a competitive advantage,
    enables the Company to execute its merchandising strategy in a timely and
    cost effective manner.
 
  . Broaden Acceptance of Existing Brands/Increase Brand Awareness. The
    Company seeks to increase sales of the Mootsies Tootsies brand by
    expanding the appeal of the brand to a broader group of retail consumers
    interested in quality footwear at affordable prices. The Company's
    efforts in this direction include the development of a broader range of
    styles and the use of innovative packaging and advertising. Management
    believes that the value priced segment of the footwear industry served by
    the Mootsies Tootsies brand presents continued growth opportunities. The
    Company seeks to increase sales of the Mootsies Kids brand by leveraging
    off of the brand recognition of Mootsies Tootsies, as well as by
    developing more styles and working to expand the customer base for this
    brand of footwear. The Company seeks to increase sales of its Jones New
    York and Jones New York Sport footwear capitalizing on the strong brand
    recognition and reputation for quality and style enjoyed by Jones New
    York women's apparel. The Company believes each of its brands has
    potential to further increase its market share in their existing
    category.
 
  . Expand Private Label Business. The Company entered the private label
    footwear market in order to leverage its competitive strengths and
    existing infrastructure by providing selected retailers with private
    label products for sale under their own house brands. This enables the
    Company to sell products to new customers as well as strengthens the
    Company's relationship with certain of its existing customers.
 
  . Provide Customer Support. 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 and point of sale
    displays and assists them in evaluating which products are likely to
    appeal to their retail customers.
 
  . Maintain Manufacturing Relationships. The Company believes that one of
    the elements of its success is its strong relationships with buying
    agents and overseas manufacturers capable of meeting the
 
                                       4
<PAGE>
 
   Company's requirements for quality and price on a timely basis. The
   Company has developed an exclusive relationship with a buying agent
   (Universal Max Trading) to source and oversee manufacturing in the Orient.
   Universal Max Trading has recently opened a manufacturing facility which
   will improve the Company's product development capabilities. The Company
   will seek to develop similar exclusive relationships in other areas of the
   world, each capable of manufacturing quality products. The Company
   continues to work with buying agents with access to numerous manufacturing
   facilities in order to maximize the Company's sourcing flexibility.
 
PRODUCT LINES
 
  The Company's products consist of six 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>
                           MOOTSIES     MOOTSIES               SAM & LIBBY  JONES NEW     JONES NEW    PRIVATE
                           TOOTSIES       KIDS     SAM & LIBBY    KIDS         YORK       YORK SPORT    LABEL
                         ------------ ------------ ----------- ----------- ------------ -------------- --------
<S>                      <C>          <C>          <C>         <C>         <C>          <C>            <C>
Style................... Contemporary Contemporary   Updated     Updated   Contemporary Classic Casual   All
Industry Segment........   Moderate     Moderate      Upper       Upper       Better        Better     Budget-
                                                    Moderate    Moderate                               Moderate
General Retail Price
 Range:
 Shoes..................   $25-$40      $20-$35      $35-$50     $25-$45     $65-$80       $45-$75     $12-$20
 Boots..................   $35-$65      $30-$40      $45-$70     $35-$55                   $60-$85     $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, suede leather and fabric.
All footwear in the line is designed to have soft construction for comfort.
Mootsies Tootsies accounted for a majority of the Company's total sales during
fiscal 1996.
 
 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
 
  The Sam & Libby line is updated casual and dress footwear targeted for female
fashion customers, ages 18-45. The lines will contain approximately 30 styles
per season, consisting of casual shoes, dress shoes, boots and sandals. The
introduction of the Sam & Libby brand with its trademarks registered in over 20
countries will allow the Company to begin international development and growth.
The Company's expansion to overseas markets will be a long term effort. The Sam
& Libby kids line is geared toward girls ages 8 to 14 and it is targeted
towards the updated 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, boots and sandals.
 
 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
 
                                       5
<PAGE>
 
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 the career oriented
women. The line contains approximately 20 styles per season.
 
 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 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 END OCTOBER 31,
                                                         ----------------------
     CATEGORY                                             1994    1995    1996
     --------                                            ------  ------  ------
     <S>                                                 <C>     <C>     <C>
     Women's............................................   83.8%   83.0%   85.4%
     Children's.........................................   15.1    16.3    14.2
     Other..............................................    1.1      .7      .4
                                                         ------  ------  ------
     Total..............................................  100.0%  100.0%  100.0%
                                                         ======  ======  ======
</TABLE>
 
CLOSE-OUT 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 close-out products in inventory until
the next fashion season.
 
DESIGN AND PRODUCT DEVELOPMENT
 
  The Company seeks to identify fashion trends and to translate such trends
into contemporary footwear appealing to its target market segments'
requirements for style, quality, fit and price. The Company believes that its
philosophy of marketing contemporary styles that appeal to a broad audience
rather than "fashion forward" styles reduces the risks associated with
changing fashion trends.
 
  Each of the Company's product lines is built separately using a team concept
that includes design staff, sales staff and management 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 and (iii)
subscribing to fashion and color information services. 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 with the Jones New York apparel
group to exchange product and fashion concepts. 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.
 
 
                                       6
<PAGE>
 
  The Company conducts market research through discussions with retailers and
the Company's independent sales representatives, analysis of competitors'
products and commissioned market studies.
 
MARKETING AND CUSTOMER SUPPORT
 
  Each branded product line has its own organization that includes 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. 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. The Company's
products are distributed primarily in the United States. The Company also
sells to independent wholesale distributors in Canada and Japan.
 
  In fiscal 1996, the Company sold products to approximately 1,200 accounts
with over 3,000 retail locations. The Mootsies Tootsies retailers, which
market moderately priced apparel merchandise, include the Federated Department
Stores (Stern's and Rich's), the Mercantile Stores (McAlpin's, Joslin's and
Gayfer'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. These include Macy's, May Co. (Lord & Taylor),
Burdines, Dayton Hudson, and Bloomingdale's. The Company also markets its
branded products through national catalog retailers such as Spiegel and
Chadwicks of Boston and through home shopping clubs such as QVC and HSN.
 
  The Company believes that the reputation and relationships it has
established among retailers for its existing products will also be useful in
the future to distribute 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
electronic data interchange (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.
 
  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 ads run in fashion/lifestyle publications
such as Glamour, Seventeen, 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.
 
  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 (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
 
                                       7
<PAGE>
 
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 brand properly and sell
it aggressively on the sales floor.
 
  The Company uses point-of-sale advertising to further promote its products
in the store. Point-of-sale used by the Company includes packaging, point-of-
sale displays, counter cards, banners, and other visual merchandising
techniques. 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.
 
MANUFACTURING
 
  Mootsies Tootsies, Mootsies Kids, Sam & Libby and Jones New York Sport
footwear are manufactured primarily in the People's Republic of 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 manufactured in Spain because Spanish suppliers can meet the
Company's quality requirements and the Spanish reputation for quality footwear
is consistent with the Jones New York image.
 
  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 the 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. 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 dies. 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 the People's Republic of China and Brazil. In
order to assure the price of products from Spain, the Company buys
 
                                       8
<PAGE>
 
forward exchange contracts for Spanish pesetas in connection with the
placement of orders for products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital
Resources."
 
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,
Massachusetts. When an order is received, it is filled in the warehouse and
shipped to the customer by whatever means the customer requests, usually by
common carrier.
 
  The Company has an electronic data interchange (EDI) 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 imputing 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 are between 8.5% and 10.0% of the customs value of footwear
made principally of leather and between 6.0% and 48.0% of the customs value on
synthetic textile footwear, as classified pursuant to the Harmonized Tariff
Schedule of the United States.
 
  For the fiscal year ended October 31, 1996, approximately 65% of the
Company's footwear was imported from the People's Republic of China ("China").
As discussed below, continued importation of these products could be affected
by trade issues that presently impact U.S.-China relations.
 
  In 1995, following negotiations with the United States Trade Representative
("USTR"), the Chinese government agreed to take specific enforcement measures
against the piracy of computer software and compact discs and to make other
long standing changes to ensure the effective protection of intellectual
property rights pursuant to a previous memorandum of understanding executed
with the U.S. government. Subsequently, in early 1996, USTR threatened trade
sanctions against China for its alleged failure to live up to its enforcement
commitments. This trade dispute was resolved in June 1996 when USTR announced
that, based on the enforcement measures the Chinese government had taken and
would take in the future, it was satisfied that China was complying with its
obligations and the threat of trade sanctions was withdrawn. USTR continues to
monitor
 
                                       9
<PAGE>
 
the Chinese government's implementation of its intellectual property
enforcement obligations, however, and the failure to meet those obligations in
the future could result in trade sanctions, including 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
most-favored nation ("MFN") basis. Pursuant to MFN, 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 MFN 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 MFN treatment. The President has waived
these restrictions each year since 1979. There can be no assurance that China
will continue to enjoy MFN status in the future. If goods manufactured in
China enter the United States without the benefit of MFN 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.
 
BACKLOG
 
  At October 31, 1994, 1995, and 1996, the Company had unfilled customer
orders of $40.1 million, $38.1 million and $50.0 million, respectively. 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, 1996 will be filled during
fiscal 1997.
 
JONES NEW YORK LICENSE AGREEMENT
 
  In July 1993, the Company entered into a License Agreement with Jones
Investment Co., Inc. 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 License Agreement covers
the United States (including its territories) and Canada. While the original
License Agreement expired in December 1996, the Company, on April 23, 1996
exercised an option to renew the Agreement for an additional four years
through December 2000. On October 2, 1995, a first amendment to the License
Agreement was signed, which provides the Company a second renewal option for
the five year period January 2001 to December 2005. The Company's second
renewal option is subject to certain conditions including, among others, the
condition that at the time of renewal net sales of Jones New York footwear
during 2000 appear likely to equal or exceed a specified amount. The License
Agreement requires the Company to pay an annual royalty equal to the greater
of (i) 5% of net sales of Jones New York and Jones New York Sport footwear or
(ii) a specified amount that escalates over the term of the License Agreement.
During the first renewal term (1997-2000) and the second renewal term (2001-
2005) of the License Agreement, the aggregate minimum royalty payments will be
approximately $3.4 million and $6.3 million, respectively. The 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
License Agreement prohibits the Company from manufacturing, selling,
distributing or promoting any merchandise that would compete both as to style
and price with the Jones New York and Jones New York Sport footwear lines. A
breach by the Company of its obligations under the License Agreement would
permit the licensor to terminate the License Agreement. The License Agreement
could also be terminated by the licensor if there is a change in control of
the Company.
 
 
                                      10
<PAGE>
 
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 and both are renewable.
 
  Jones New York and Jones New York Sport are registered trademarks of Jones
Investment Co., Inc. in the United States. Under the License Agreement, Jones
Investment Co., Inc. has the sole right to defend against any infringement of
these trademarks.
 
  Sam & Libby, Just Libby, New Nineties and Jeff & Kristi are registered
trademarks of Sprague Company, a wholly-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 and both are renewable. In January
1997, the Company entered into a license agreement with Inter-Pacific
Corporation, 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
royalty and other revenues. The agreement requires the licensee to pay the
Company certain annual minimum payments and is subject to renewal options
through the year 2003.
 
COMPETITION
 
  The women's fashion footwear market is 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, 1996, the Company employed 90 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.
 
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. 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 expires
in 1998, subject to a three-year renewal option. The Company also leases a
4,000 square foot 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 it is 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 or operations.
 
 
                                      11
<PAGE>
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Company's Class A Common Stock began trading May 12, 1994 on the
National Market System maintained by the National Association of Securities
Dealers upon completion of the Company's initial public offering. Per share
stock prices (in dollars) for the quarterly periods during 1995 and 1996 as
reported by NASDAQ were as follows:
 
<TABLE>
<CAPTION>
                   1995               JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
                   ----               ----------- --------- -------- -----------
     <S>                              <C>         <C>       <C>      <C>
     Low.............................    7          8 1/2    5          3 3/4
     High............................   11         11 1/2    9 1/2      7 1/2
<CAPTION>
                   1996               JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
                   ----               ----------- --------- -------- -----------
     <S>                              <C>         <C>       <C>      <C>
     Low.............................    4 3/4      4 1/2    5          6 1/8
     High............................    7          6        7 3/8      6 3/4
</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, 1996 was 30. However, based on available information, the Company believes
that the total number of Class A Common stockholders, including beneficial
stockholders, is approximately 1,350.
 
  There is currently no established public trading market for the Company's
Class B Common Stock. The number of stockholders of record of the Class B
Common Stock on October 31, 1996 was 4.
 
DIVIDEND POLICY
 
  The Company does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. The payment of any future dividends will be at the
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.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following selected financial data with respect to the Company's
statements of income for the years ended October 31, 1994, 1995 and 1996 and
with respect to the Company's balance sheets as of October 31, 1995 and 1996
are derived from the Company's consolidated financial statements, which appear
elsewhere in this report and which have been audited by Ernst & Young LLP,
independent auditors. The following selected financial data with respect to
the Company's statements of income for the years ended October 31, 1992 and
1993 and with respect to the Company's balance sheets as of October 31, 1992,
1993 and 1994 are derived from the Company's consolidated financial
statements, which have been audited by Ernst & Young LLP, independent
auditors, and which are not included herein. The data should be read in
conjunction with the consolidated financial statements, related notes and
other financial information included herein.
 
                                      12
<PAGE>
 
<TABLE>
<CAPTION>
                                           YEARS ENDED OCTOBER 31,
                                  -------------------------------------------
                                   1992    1993     1994      1995     1996
                                  ------- ------- --------  -------- --------
                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                               <C>     <C>     <C>       <C>      <C>
STATEMENT OF INCOME DATA:
Net sales........................ $50,345 $79,049 $100,931  $101,870 $104,337
Cost of sales....................  36,789  56,297   72,117    77,912   79,915
                                  ------- ------- --------  -------- --------
Gross profit.....................  13,556  22,752   28,814    23,958   24,422
Selling expenses.................   3,164   5,258    5,518     4,777    5,314
General and administrative ex-
 penses..........................   4,015   4,062    5,796     6,954    7,986
Officers' compensation(1)(2).....   4,505   8,370   12,381     1,850    2,113
                                  ------- ------- --------  -------- --------
Operating income.................   1,872   5,062    5,119    10,377    9,009
Interest expense.................     542     609      662       255       38
Other expenses (income), net.....      25      62     (101)      399     (579)
                                  ------- ------- --------  -------- --------
Income before income taxes.......   1,305   4,391    4,558     9,723    9,550
Income taxes.....................     116     400    1,709     3,889    3,629
                                  ------- ------- --------  -------- --------
Net income....................... $ 1,189 $ 3,991 $  2,849  $  5,834 $  5,921
                                  ======= ======= ========  ======== ========
Net income per share
 (Supplemental pro forma in
 1994)(3)........................                 $   1.10  $    .70 $    .72
                                                  ========  ======== ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                     OCTOBER 31,
                                       ---------------------------------------
                                        1992    1993    1994    1995    1996
                                       ------- ------- ------- ------- -------
<S>                                    <C>     <C>     <C>     <C>     <C>
BALANCE SHEET DATA:
Working capital....................... $11,100 $15,967 $28,770 $35,097 $35,523
Total assets..........................  21,383  27,926  36,621  39,979  46,920
Total debt (including current
 maturities)..........................   6,725   8,279     123     787     610
Total stockholders' equity............ $10,632 $14,623 $29,850 $35,684 $41,605
</TABLE>
 
(1) Operating results for fiscal 1992, 1993, and 1994 were significantly
    affected by officers' compensation expense, which totaled $4,505, $8,370
    and $12,381, respectively. Operating income before officers' compensation
    for fiscal 1992, 1993 and 1994 was $6,377, $13,432 and $17,500,
    respectively.
(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. See "Management's Discussion and
    Analysis of Financial Condition and Results of Operations."
(3) Supplemental pro forma net income per share for fiscal 1994 is based upon
    5,213,317 shares of Class B Common Stock outstanding during the year
    increased by (i) the assumed issuance of 765,644 shares, using the
    treasury stock method and the average stock price during the period, upon
    the exercise of an option granted to the Company's President to purchase
    888,412 shares of Class A Common Stock, (ii) 1,187,500 shares, the
    weighted average Class A shares issued and outstanding during the year,
    (iii) 938,173 shares, the assumed weighted average Class A shares required
    to repay the $20,227 of S Corporation Dividend, and (iv) 249,444 shares,
    weighted average number of Class A shares (an assumed price, net of
    offering expenses, of $10.78 per share), that would be necessary to repay
    indebtedness to certain officers as if the initial public offering had
    occurred at the beginning of the fiscal 1994. The total number of shares
    used for the supplemental pro forma net income per share calculation is
    8,354,078 for fiscal 1994. In computing the supplemental pro forma net
    income per share, the historical income statement data for fiscal 1994 is
    revised to assume that the Company had (i) paid annual officers'
    compensation aggregation $1,800 (the compensation that was paid between
    the completion of the Company's initial public offering and the end of
    Fiscal 1994 on an annualized basis), (ii) been treated as a C Corporation
    rather than an S Corporation for income tax purposes, with an assumed
    effective income tax rate of 40%, and (iii) net income was increased by
    $132, to reflect the net reduction of interest expense after giving effect
    to the assumed repayment of certain debt outstanding during the fiscal
    year and after related tax effect.
 
                                      13
<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,
                                       ----------------------------------------
                                           1994          1995          1996
                                       ------------  ------------  ------------
<S>                                    <C>    <C>    <C>    <C>    <C>    <C>
Mootsies Tootsies..................... $ 75.5  74.8% $ 65.6  64.4% $ 60.8  58.3%
Jones New York Footwear...............    7.4   7.4    17.2  16.9    24.0  23.0
Private Label Footwear................   11.0  10.9    12.9  12.7    14.5  13.9
Closeout..............................    7.0   6.9     6.2   6.0     5.0   4.8
                                       ------ -----  ------ -----  ------ -----
                                       $100.9 100.0% $101.9 100.0% $104.3 100.0%
                                       ====== =====  ====== =====  ====== =====
</TABLE>
 
 Fiscal 1996 Compared to 1995
 
  Net sales were $104.3 million in fiscal 1996 compared to $101.9 million in
fiscal 1995, an increase of 2.4%. Net sales for the Jones New York footwear
lines of business in fiscal 1996 increased 139.1% over fiscal 1995 net sales.
Private label net sales in fiscal 1996 increased 13.5% over fiscal 1995 net
sales. These net sales increases were offset by a 7.4% decrease in Mootsies
Tootsies net sales for fiscal 1996 from fiscal 1995. The average selling price
per pair of shoes sold increased 2.3% in fiscal 1996 over the fiscal 1995
average selling price per pair.
 
  Gross profit was $24.4 million in fiscal 1996 compared to $24.0 million in
fiscal 1995. Gross margin was substantially unchanged from fiscal 1995 to
1996.
 
  Selling expenses were $5.3 million in fiscal 1996 compared to $4.8 million
in fiscal 1995. As a percentage of net sales, selling expenses increased to
5.1% in fiscal 1996 from 4.7% in fiscal 1995 due to expenses associated with
launching the Company's Sam & Libby brand and increased advertising expense.
General and administrative expenses were $8.0 million in fiscal 1996 compared
to $7.0 million in fiscal 1995, an increase of 14.8%. As a percentage of
sales, general and administrative expenses increased to 7.7% in fiscal 1996
from 6.8% in fiscal 1995. The increase in expense was due to the higher
salaries and corresponding fringe benefit increase added as a result of new
personnel associated with launching the Company's Sam & Libby brand and
administrative charges which are volume related.
 
  Interest expense was less than $0.1 million in fiscal 1996 compared to $0.3
million in fiscal 1995. This decrease was due to the Company being able to
rely on cash provided by operating activities to fund its working capital
requirements throughout the year.
 
  Other income was $0.6 million for the fiscal year ended October 31, 1996
compared to other expense of $0.4 million for the same period in the prior
year. In 1996 this income was comprised principally of gains and
 
                                      14
<PAGE>
 
losses from forward exchange contracts entered into in anticipation of future
purchases of inventory denominated in foreign currencies and interest income.
During fiscal year 1995 expenses of approximately $0.3 million were recognized
as non recurring costs arising from terminated discussions relating to the
possible sale of the Company.
 
 Fiscal 1995 Compared to 1994
 
  Net sales were $101.9 million in fiscal 1995 compared to $100.9 million in
fiscal 1994. Net sales for the Jones New York footwear lines of business in
fiscal 1995 increased 132.1% over fiscal 1994 net sales. Private label net
sales in fiscal 1995 increased 16.9% over fiscal 1994 net sales. These net
sales increases were offset by a 13.1% decrease in Mootsies Tootsies net sales
for fiscal 1995 from fiscal 1994. The average selling price per pair of shoes
sold increased 4.8% in fiscal 1995 over the fiscal 1994 average selling price
per pair. This was the result of higher average priced per pair Jones New York
footwear gaining a larger part of the Company's overall mix of sales.
 
  Gross profit was $24.0 million in fiscal 1995 compared to $28.8 million in
fiscal 1994. The decrease in gross margin was due to the soft retail
environment. As a percentage of net sales the gross margins of all lines of
business were lower in fiscal 1995 as compared to fiscal 1994. The Company
pursued an aggressive inventory reduction program in the fourth fiscal quarter
of 1995 which also had an adverse effect on gross margins.
 
  Selling expenses were $4.8 million in fiscal 1995 compared to $5.5 million
in fiscal 1994. As a percentage of sales, selling expenses decreased to 4.7%
in fiscal 1995 from 5.5% in fiscal 1994 due to reduced advertising expense and
a decrease in the share of net sales through commission sales representatives.
General and administrative expenses were $7.0 million in fiscal 1995 compared
to $5.8 million in fiscal 1994, an increase of 20.0%. As a percentage of
sales, general and administrative expenses increased to 6.8% in fiscal 1995
from 5.7% in fiscal 1994. The increase in expense was due to the higher
salaries and corresponding fringe benefit increase added as a result of new
personnel relating to the Jones New York footwear line, additional expenses
incurred as a public company and administrative charges which are volume
related.
 
  As a result of the above, operating income before officers' compensation was
$12.2 million or 12.0% of sales in fiscal 1995 compared to $17.5 million or
17.3% of sales in fiscal 1994. Officers' compensation was $1.9 million in
fiscal 1995 compared to $12.4 million in fiscal 1994. The decrease was due
primarily to a $7.0 million one-time compensation expense incurred in the
first quarter of fiscal 1994 relating to the grant of a stock option to the
Company's President, which option was granted in exchange for the termination
of a pre-existing deferred compensation arrangement, and reduced officers'
compensation.
 
  Interest expense was $0.3 million in fiscal 1995 compared to $0.7 million in
fiscal 1994. The decrease was due to the Company's ability to pay down all of
its debt at the end of fiscal 1995, as well as lower levels of debt throughout
fiscal 1995.
 
  Other expenses (income) were $0.4 million for the fiscal year ended October
31, 1995 compared to ($0.1 million) for the same period in the prior year. In
1994 this expense was comprised principally of gains and losses from forward
exchange contracts entered into in anticipation of future purchases of
inventory denominated in foreign currencies. During fiscal year 1995 expenses
of approximately $0.3 million were recognized as non recurring costs arising
from terminated discussions relating to the possible sale of the Company.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company has relied primarily upon internally generated cash flows from
operations, borrowings under its revolving credit facility, and borrowings
from stockholders (when the Company was privately held) to finance its
operations and expansion. Cash provided by operating activities totaled
approximately $4.3 million in fiscal 1994, $5.7 million in fiscal 1995 and
$9.5 million in fiscal 1996. Prior to the Company's May 1994 initial public
offering, the Company, as an S Corporation, paid a higher level of
compensation to its executive officers than the Company has after the
offering. At October 31, 1996, working capital was $35.5 million as compared
to
 
                                      15
<PAGE>
 
$35.1 million at October 31, 1995. 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.
 
  In fiscal year 1996, cash provided by operations was $9.5 million as
compared to cash provided by operations in fiscal 1995 of $5.7 million. The
increase of cash provided was due to reductions in accounts receivable and
prepaid expense balances and increases in accrued expenses. Other than the
acquisition of the rights to the Sam & Libby and certain related trademarks
and tradenames in fiscal 1996, investing activities over the same period have
been limited to modest capital expenditures. Financing activities for fiscal
years 1994 and 1995 consisted principally of short term bank borrowings to
finance build-up of inventory, lease financing for certain equipment, and
loans from officers for general working capital purposes. Although the Company
has available greater maximum borrowing levels under its bank credit line each
year since 1993 due to growth in inventory, average annual borrowings declined
in 1996 from 1995.
 
  The Company currently has a $25.0 million revolving credit facility,
renewable under certain conditions annually, which is secured by substantially
all of the assets of the Company. A portion of the revolving credit facility
can be utilized to issue letters of credit to guarantee payment of the
Company's purchases of footwear manufactured overseas. Amounts available under
the revolving credit facility are based on eligible accounts receivable,
inventory, and a portion of the open letters of credit. As of October 31,
1996, there were no outstanding borrowings and outstanding letters of credit
were $9.6 million and $13.7 million was available for future borrowings.
 
  Capital expenditures, which have been for equipment and leasehold
improvements, were minimal in fiscal 1996. The Company utilizes operating
leases for substantially all of its management information systems and related
equipment.
 
  The Company regularly enters into forward exchange contracts in anticipation
of future purchases of inventory denominated in foreign currency, principally
the Spanish peseta. At October 31, 1996, forward exchange contracts totaling
$0.5 million were outstanding with settlement dates ranging from November 4,
1996 through December 31, 1996. As of the date of this Form 10-K Annual
Report, future inventory purchases required sufficient foreign currency to
meet these commitments.
 
  The Company anticipates that it will be able to satisfy its cash
requirements for fiscal 1997 including its expected growth, primarily with
cash flow from operations, supplemented by borrowings under its revolving
credit facility.
 
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.
 
                                      16
<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, 1995 and 1996, 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, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance 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, 1995 and 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended October 31, 1996 in conformity with generally
accepted accounting principles.
 
                                          Ernst & Young LLP
 
Boston, Massachusetts
December 17, 1996
 
                                      17
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                  OCTOBER 31,
                                                                ---------------
                                                                 1995    1996
                                                                ------- -------
                                     ASSETS
<S>                                                             <C>     <C>
Current assets:
  Cash and cash equivalents.................................... $ 6,685 $10,393
  Accounts receivable, trade (net of allowance for doubtful
   accounts and discounts of $853 in 1995, $730 in 1996).......  17,834  16,853
  Inventory, net...............................................  12,394  12,175
  Prepaid expenses.............................................     833     127
  Deferred taxes...............................................   1,041     821
                                                                ------- -------
Total current assets...........................................  38,787  40,369
Property and equipment, net....................................   1,180   1,039
Trademarks.....................................................     --    5,500
Other assets...................................................      12      12
                                                                ------- -------
                                                                $39,979 $46,920
                                                                ======= =======
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable............................................. $   928 $   880
  Accrued expenses.............................................   2,509   3,300
  Income taxes payable.........................................     --      433
  Deferred taxes...............................................      71      91
  Current portion of capital lease obligation..................     182     142
                                                                ------- -------
Total current liabilities......................................   3,690   4,846
Capital lease obligation.......................................     605     469
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 outstanding...............................      25      25
  Class B common stock, par value $.01,10,000 shares
   authorized, 5,063 shares outstanding........................      51      51
  Additional paid-in capital...................................  27,312  27,312
  Retained earnings............................................   8,296  14,217
                                                                ------- -------
Total stockholders' equity.....................................  35,684  41,605
                                                                ------- -------
                                                                $39,979 $46,920
                                                                ======= =======
</TABLE>
 
                            See accompanying notes.
 
                                       18
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                         OCTOBER 31,
                                                  ---------------------------
                                                    1994      1995     1996
                                                  --------  -------- --------
<S>                                               <C>       <C>      <C>
Net sales........................................ $100,931  $101,870 $104,337
Cost of sales....................................   72,117    77,912   79,915
                                                  --------  -------- --------
Gross profit.....................................   28,814    23,958   24,422
Operating expenses:
  Selling........................................    5,518     4,777    5,314
  General and administrative.....................    5,796     6,954    7,986
  Officers compensation..........................   12,381     1,850    2,113
                                                  --------  -------- --------
                                                    23,695    13,581   15,413
                                                  --------  -------- --------
Operating income.................................    5,119    10,377    9,009
Other expenses (income):
  Interest--bank borrowings......................      421       255       38
  Interest--officers notes.......................      241       --       --
  Other, net.....................................     (101)      399     (579)
                                                  --------  -------- --------
                                                       561       654     (541)
                                                  --------  -------- --------
Income before income taxes.......................    4,558     9,723    9,550
Income taxes.....................................    1,709     3,889    3,629
                                                  --------  -------- --------
Net income....................................... $  2,849  $  5,834 $  5,921
                                                  ========  ======== ========
Net income per share (supplemental pro forma in
 1994)........................................... $   1.10  $    .70 $    .72
                                                  ========  ======== ========
Shares used to compute net income per share
 (supplemental pro forma in 1994)................    8,354     8,311    8,261
                                                  ========  ======== ========
</TABLE>
 
 
                             See accompanying notes
 
                                       19
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                          OCTOBER 31,
                                                    --------------------------
                                                      1994     1995     1996
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Operating activities
Net income........................................  $  2,849  $ 5,834  $ 5,921
Adjustments to reconcile net income to net cash
 provided (used) by operating activities:
  Depreciation and amortization...................       138      213      242
  Compensation expense related to stock option
   grant..........................................     7,000      --       --
  Deferred income taxes...........................      (817)    (153)     240
  Deferred compensation, net of payments..........    (1,691)     --       --
  Doubtful accounts provision.....................       --       150       50
  Changes in operating assets and liabilities:
    Accounts receivable...........................    (3,775)  (1,571)     931
    Inventory.....................................    (1,936)   4,157      219
    Prepaid expenses..............................      (674)      (2)     706
    Other assets..................................        84      --       --
    Accounts payable..............................       641   (1,768)     (48)
    Income taxes payable..........................       272     (306)     433
    Accrued expenses..............................     2,161     (897)     791
                                                    --------  -------  -------
Net cash provided by operating activities.........     4,252    5,657    9,485
Investing activities
Purchase of trademark.............................       --       --    (5,500)
Purchases of property and equipment...............      (885)    (144)    (101)
                                                    --------  -------  -------
Net cash used by investing activities.............      (885)    (144)  (5,601)
Financing activities
Proceeds of notes payable to officers.............     1,585      --       --
Repayments of notes payable to officers...........    (5,003)     --       --
Net proceeds (repayments) on bank borrowings......    (4,771)     --       --
Distributions to stockholders.....................   (20,227)     --       --
Payments on capital lease obligation..............       (44)    (163)    (176)
Proceeds from lease financing.....................       --       717      --
Net proceeds of stock offering....................    25,605      --       --
                                                    --------  -------  -------
Net cash provided (used) by financing activities..    (2,855)     554     (176)
                                                    --------  -------  -------
Net increase in cash and cash equivalents.........       512    6,067    3,708
Cash and cash equivalents at beginning of year....       106      618    6,685
                                                    --------  -------  -------
Cash and cash equivalents at end of year..........  $    618  $ 6,685  $10,393
                                                    ========  =======  =======
Interest paid.....................................  $    662  $   255  $    38
                                                    ========  =======  =======
Income taxes paid.................................  $  2,363  $ 4,975  $ 2,380
                                                    ========  =======  =======
</TABLE>
 
                            See accompanying notes.
 
                                       20
<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
                           OF            OF            PAID-IN   RETAINED
                         SHARES AMOUNT SHARES  AMOUNT  CAPITAL   EARNINGS   TOTAL
                         ------ ------ ------  ------ ---------- --------  --------
<S>                      <C>    <C>    <C>     <C>    <C>        <C>       <C>
Balance at October 31,
 1993...................   --     --   5,213    $52    $    458  $ 14,113  $ 14,623
  Net income for 1994...                                            2,849     2,849
  Dividends paid........                                 (5,727)  (14,500)  (20,227)
  Compensation expense
   related to stock
   option grant.........                                  7,000               7,000
  Net proceeds of common
   stock offering....... 2,375   $ 24                    25,581              25,605
                         -----   ----  -----    ---    --------  --------  --------
Balance at October 31,
 1994................... 2,375     24  5,213     52      27,312     2,462    29,850
  Net income for 1995...                                            5,834     5,834
  Shares converted......   150      1   (150)    (1)                            --
                         -----   ----  -----    ---    --------  --------  --------
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
                         =====   ====  =====    ===    ========  ========  ========
</TABLE>
 
 
                            See accompanying notes.
 
                                       21
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (DOLLARS IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
 
                               OCTOBER 31, 1996
 
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 1994, 1995 and 1996 one customer accounted for
approximately 10%, 14%, and 15% 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 years 1994, 1995 and 1996,
they would have accounted for approximately 14%, 18%, and 22% respectively, 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. Market is determined by net realizable value.
 
 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:
 
<TABLE>
<CAPTION>
       ASSET                                                        USEFUL LIFE
       -----                                                        -----------
       <S>                                                          <C>
       Furniture and fixtures......................................   5 Years
       Warehouse equipment.........................................   7 Years
       Leasehold improvements......................................   7 Years
       Computer equipment..........................................   5 Years
</TABLE>
 
 
                                      22
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
               (DOLLARS IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
 
  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 will be amortized on a straight line basis over 15
years, their estimated useful lives. Amortization will begin in 1997 when sale
of product with the trademark names will commence.
 
 Operating Expenses
 
  General and administrative expenses include the cost of warehousing and
shipping operations.
 
 Income Taxes
 
  Prior to May 15, 1994, the stockholders of the Company had elected
Subchapter S Corporation status under the Internal Revenue Code. As a result,
the Company's taxable income was reported on the tax returns of the Company's
stockholders. Consequently, no federal income tax was provided for in the
accompanying consolidated financial statements prior to May 15, 1994. A
provision for state income taxes was recorded to reflect corporate level
income taxes imposed on the Company by certain states.
 
  In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 109 ("FAS 109"), "Accounting for Income
Taxes." The Company adopted the provisions of the new standard in its
consolidated financial statements effective May 15, 1994. Prior year
consolidated financial statements were not restated (see Note 9).
 
  Under FAS 109, the liability method is used in 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.
 
 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 ($120 gain in 1994, $41 loss in
1995, $275 gain in 1996).
 
 Stock Based Compensation
 
  The Company grants stock options for a fixed number of shares to employees
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.
 
 Accounting Pronouncements
 
  In March 1995 Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" (FAS 121) was issued. Given the nature and amount of long-
lived assets included in the balance sheet, the Company does not expect that
FAS 121 will have any significant impact on the consolidated financial
statements when required to be adopted in fiscal 1997.
 
 
                                      23
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
               (DOLLARS IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
 
  In October 1995, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 "Accounting for Stock-Based Compensation" (FAS 123). The
Company will adopt FAS 123 in fiscal 1997, however, it will continue to follow
APB 25 and related Interpretations in accounting for its employee stock
options. Therefore, adoption of FAS 123 will not have an impact on the
consolidated financial statements upon adoption.
 
2. UNAUDITED 1994 SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
 
  In computing the supplemental pro forma net income per share, the historical
income statement data for fiscal 1994 is revised to assume that the Company
had (i) paid annual officers' compensation aggregation $1,800 (the
compensation that was paid between the completion of the Company's initial
public offering and the end of Fiscal 1994 on an annualized basis), (ii) been
treated as a C Corporation rather than an S Corporation for income tax
purposes, with an assumed effective income tax rate of 40%, and (iii) net
income was increased by $132, to reflect the net reduction of interest expense
after giving effect to the assumed repayment of certain debt outstanding
during the fiscal year and after related tax effect.
 
  Supplemental pro forma net income per share for fiscal 1994 is based upon
5,213,317 shares of Class B Common Stock outstanding during the year increased
by (i) the assumed issuance of 765,644 shares, using the treasury stock method
and the average stock price during the period, upon the exercise of an option
granted to the Company's President to purchase 888,412 shares of Class A
Common Stock, (ii) 1,187,500 shares, the weighted average Class A shares
issued and outstanding during the year, (iii) 938,173 shares, the assumed
weighted average Class A shares required to repay the $20,227 of S Corporation
Dividend and (iv) 249,444 shares, weighted average number of Class A Shares
(an assumed price, net of offering expenses, of $10.78 per share), that would
be necessary to repay indebtedness to certain officers as if the initial
public offering had occurred at the beginning of the fiscal 1994. The total
numbers of shares used for the supplemental pro forma net income per share
calculation is 8,354,078 for fiscal 1994.
 
3. RELATED PARTY TRANSACTIONS
 
  One of the principal stockholders and another officer of the Company had
owned a chain of six retail stores that purchase footwear from the Company.
Their ownership position in these stores was sold during fiscal 1996. Total
sales (and cost of sales) to these stores in fiscal 1994 and 1995, and while
they had an ownership position in 1996 were $368 ($256), $365 ($229), and $237
($173) respectively. Trade receivables owed by these stores at October 31,
1994, and 1995 were $110, and $162 respectively. In addition, the Company has
provided administrative services to these stores. Fees for such services, as
negotiated between the parties, totaled $11, $25, and $19 in fiscal 1994,
1995, and 1996 respectively.
 
4. PROPERTY AND EQUIPMENT
 
  Property and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                                   1995   1996
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Furniture and fixtures........................................ $  515 $  523
   Warehouse equipment...........................................  1,275  1,275
   Leasehold improvements........................................    378    398
   Computer equipment............................................    212    285
   Other.........................................................      4      4
                                                                  ------ ------
                                                                   2,384  2,485
   Less accumulated depreciation.................................  1,204  1,446
                                                                  ------ ------
   Property and equipment, net................................... $1,180 $1,039
                                                                  ====== ======
</TABLE>
 
 
                                      24
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
               (DOLLARS IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
 
  At October 31, 1995 and 1996, property and equipment included assets
recorded under capital leases of $1,047. Accumulated depreciation of such
assets was $305 and $468 at October 31, 1995, and 1996 respectively.
Depreciation expense, including amortization of assets recorded under capital
leases, for the years ended October 31, 1994, 1995 and 1996 amounted to $138,
$213 and $242 respectively.
 
5. BANK BORROWINGS
 
  The Company has a revolving line of credit pursuant to a loan agreement with
Bank of Boston. The loan agreement provides that the bank will both advance
funds directly to the Company and issue letters of credit on behalf of the
Company. The total credit line available shall not exceed an amount which is
the lesser of (i) an amount determined under a formula based upon qualified
accounts receivable and inventory balances, or (ii) $25,000.
 
  Direct borrowings bear interest at the bank's base rate. At October 31,
1996, the Company had outstanding letters of credit totaling $9.6 million for
the purchase of inventory and approximately $13.7 million available under the
line of credit. The line of credit is secured by substantially all of the
Company's assets.
 
6. ACCRUED EXPENSES
 
  Accrued expenses consist of the following at October 31:
 
<TABLE>
<CAPTION>
                                                                   1995   1996
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Inventory purchases........................................... $1,474 $1,149
   Compensation..................................................    474  1,455
   Employee benefit plan contribution............................    128    142
   Other.........................................................    433    554
                                                                  ------ ------
                                                                  $2,509 $3,300
                                                                  ====== ======
</TABLE>
 
7. DEFERRED COMPENSATION
 
  The Company had a deferred compensation agreement with a key employee which
was terminated effective May 18, 1994 (see Note 8). As of November 1, 1991,
the agreement provided that the Company accrue 13% of "adjusted income," as
defined. The agreement also provided for payment of such deferred compensation
at the discretion of the Board of Directors. Deferred compensation expense
included in the accompanying statement of income for fiscal year 1994 was
$780.
 
8. 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 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
 
                                      25
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
               (DOLLARS IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
 
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 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 January 25, 1994 the Company declared a $14,500 dividend payable to the
holders of Class B Common Stock. Prior to the completion of the initial public
offering of the Company's Class A Common Stock, the Company declared an
additional dividend to the Class B common stockholders in an aggregate amount
of $5,727. The Company paid the first dividend by borrowing $14,500 under a
proposed short-term bank facility, which was then funded with a portion of the
net proceeds from the Company's initial public offering. The second dividend
of $5,727 was also funded with a portion of the net proceeds from the initial
public offering.
 
  On January 26, 1994, in consideration for the termination of a deferred
compensation agreement, the Board of Directors approved a non-transferable
stock option grant to the President for the purchase of 888,412 shares of
Class A Common Stock at an exercise price of $1.50 per share. As a result, in
1994 the Company recognized $7,000 of compensation expense representing the
excess of the deemed value for accounting purposes of the stock option over
the aggregate exercise price of such option.
 
  On January 30, 1994, the Board of Directors adopted and approved the 1994
Stock Incentive Plan (the Plan) which allows the grants of incentive stock
options and other awards. 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.
 
  The following table reflects all option activity under the Plan from
inception to October 31, 1996:
 
<TABLE>
<CAPTION>
                                                     OUTSTANDING PRICE PER SHARE
                                                     ----------- ---------------
   <S>                                               <C>         <C>
   Granted..........................................   104,700   $10.38
                                                       -------
   Balance, October 31, 1994........................   104,700   $10.38
   Granted..........................................   198,000   $ 9.00
   Canceled.........................................    (8,450)  $ 9.00 - $10.38
                                                       -------
   Balance, October 31, 1995........................   294,250   $ 9.00 - $10.38
   Granted..........................................   382,500   $ 5.00 - $ 6.25
   Canceled.........................................    (5,900)  $ 9.00 - $10.38
                                                       -------
   Balance, October 31, 1996........................   670,850   $ 5.00 - $10.38
                                                       =======
</TABLE>
 
  Except for options granted to non-employee directors which vest immediately,
options generally vest annually over a four year period. At October 31, 1996,
117,839 options were exercisable under the Plan.
 
  In addition, in December 1996, 64,500 options which were granted to certain
employees in December 1994, at a per share exercise price of $9.00, were
canceled, and 64,500 new options were granted to the same employees at a per
share exercise price of $6.50 (the closing price per share of the Company's
Class A Common Stock on the date of grant).
 
 
                                      26
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
               (DOLLARS IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
 
9. INCOME TAXES
 
  Since 1986, the Company had been an S Corporation for federal and certain
state income tax purposes. As an S Corporation, the Company generally was not
responsible for the payment of income taxes. Instead, the stockholders were
taxed on the Company's taxable income at the stockholders' individual federal
and state income tax rates. In May, 1994, the Company terminated its status as
an S Corporation and, accordingly, the Company is subject to federal and state
income taxes.
 
  In addition, in fiscal 1994 the Company adopted FAS 109 and recorded a net
deferred tax asset for the cumulative temporary differences between financial
reporting and tax reporting of $1,899, which increased fiscal 1994 net income
by the same amount. The deferred tax asset was based on the cumulative
temporary differences at the date of termination of S Corporation status.
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>
                                                                1995     1996
                                                               -------  -------
   <S>                                                         <C>      <C>
   Deferred tax assets:
     Stock option compensation................................ $ 2,800  $ 2,800
     Inventory reserve........................................     524      376
     Allowance for doubtful accounts..........................     359      292
     Inventory capitalization.................................     158      153
                                                               -------  -------
                                                                 3,841    3,621
   Valuation allowance for deferred tax assets................  (2,800)  (2,800)
                                                               -------  -------
   Total deferred tax assets..................................   1,041      821
   Deferred tax liabilities:
     Depreciation.............................................      71       91
                                                               -------  -------
   Total deferred tax liabilities.............................      71       91
                                                               -------  -------
   Net deferred tax assets.................................... $   970  $   730
                                                               =======  =======
</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. The stock option compensation, discussed in Note 8, will be
deductible for tax reporting only upon the exercise of the option. The
ultimate amount of the compensation deduction cannot be determined currently
as it is not certain when, if ever, the holder of the option will ultimately
exercise the option, or the value of the tax deduction that the Company would
realize.
 
  Significant components of the provision for income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                           1994    1995    1996
                                                          ------  ------  ------
   <S>                                                    <C>     <C>     <C>
   Current:
     Federal............................................. $1,830  $3,183  $3,011
     State...............................................    696     859     378
                                                          ------  ------  ------
   Total current.........................................  2,526   4,042   3,389
                                                          ======  ======  ======
   Deferred:
     Federal.............................................   (695)   (130)    204
     State...............................................   (122)    (23)     36
                                                          ------  ------  ------
   Total deferred........................................   (817)   (153)    240
                                                          ------  ------  ------
                                                          $1,709  $3,889  $3,629
                                                          ======  ======  ======
</TABLE>
 
 
                                      27
<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
rates to the effective income tax rate is as follows:
 
<TABLE>
<CAPTION>
                                                                1994  1995  1996
                                                                ----  ----  ----
   <S>                                                          <C>   <C>   <C>
   U.S. statutory rate.........................................  34%   34%   34%
   Previously unrecognized S Corporation tax benefits..........  (3)  --    --
   State income taxes, net of federal tax benefit..............   6     6     4
                                                                ---   ---   ---
   Effective tax rate..........................................  37%   40%   38%
                                                                ===   ===   ===
</TABLE>
 
10. PROFIT-SHARING PLAN
 
  The Company has a contributory 401(k) profit-sharing plan covering
substantially all employees. 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 $201, $156 and $200 respectively for fiscal years 1994, 1995 and
1996 respectively.
 
11. COMMITMENTS
 
  The Company leases equipment and office and warehouse space under long-term
non-cancelable operating leases which expire at various dates through October
31, 2002. 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, 1996, future minimum payments under such leases were as
follows:
 
<TABLE>
<CAPTION>
                                                              CAPITAL OPERATING
                                                              ------- ---------
   <S>                                                        <C>     <C>
   1997......................................................  $ 168   $  773
   1998......................................................    151      718
   1999......................................................    150      510
   2000......................................................    142      490
   2001......................................................    124      490
   Later years...............................................    --        60
                                                               -----   ------
   Total minimum lease payments..............................    735   $3,041
                                                                       ======
   Amounts representing interest.............................   (124)
                                                               -----
   Capital lease obligation (including current portion)......  $ 611
                                                               =====
</TABLE>
 
  The Company is a licensee under a certain agreement which allows for the
manufacture and sale of various items of footwear. The agreement requires the
payment of royalties on qualified product sales and generally guarantee minimum
royalty payments regardless of sales volumes. The Company had an option to
renew this license through December 31, 2000. This option was exercised on
April 23, 1996 and requires an additional minimum royalty commitment of $3,400.
On October 2, 1995, a first amendment to this license agreement was executed,
adding a second renewal option for the five year period January, 2001 to
December, 2005. This second renewal option period requires a minimum royalty
commitment of $6,250.
 
  The Company has entered into forward exchange contracts in anticipation of
future purchases of inventory denominated in foreign currency, principally the
Spanish peseta. At October 31, 1996, forward exchange contracts totaling $0.5
million were outstanding with settlement dates ranging from November 4, 1996
through December 31, 1996. Maximum risk of loss on these contracts is the
amount of the difference between the spot
 
                                       28
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                (DOLLARS IN THOUSANDS--EXCEPT PER SHARE AMOUNTS)
 
rate at the date of contract delivery and the contracted rate. The Company
expects that future inventory purchases will require sufficient foreign
currency to meet these commitments.
 
12. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
 
  The following is a summary of unaudited quarterly results for the fiscal
years ended October 31, 1995 and October 31, 1996.
 
<TABLE>
<CAPTION>
                                                    QUARTER ENDED
                                      ------------------------------------------
                                      JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
                                      ----------- --------- -------- -----------
   <S>                                <C>         <C>       <C>      <C>
   Fiscal 1995
     Net sales.......................   $21,825    $24,188  $28,557    $27,300
     Gross profit....................     5,974      6,471    6,879      4,634
     Net income......................     1,577      1,894    1,725        638
     Earnings per share..............   $   .19    $   .23  $   .21    $   .08
                                        =======    =======  =======    =======
   Fiscal 1996
     Net sales.......................   $23,705    $26,774  $30,222    $23,636
     Gross profit....................     5,821      5,917    7,009      5,675
     Net income......................     1,452      1,530    1,920      1,019
     Earnings per share..............   $   .18    $   .19  $   .23    $   .12
                                        =======    =======  =======    =======
</TABLE>
 
                                       29
<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
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 March 20, 1997
to be filed with the Securities and Exchange Commission within 120 days after
October 31, 1996 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 March 20, 1997
to be filed with the Securities and Exchange Commission within 120 days after
October 31, 1996 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 March 20, 1997
to be filed with the Securities and Exchange Commission within 120 days after
October 31, 1996 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 March 20, 1997
to be filed with the Securities and Exchange Commission within 120 days after
October 31, 1996 and is incorporated herein by reference.
 
                                      30
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
 
  (a)(1) Consolidated Financial Statements:
 
    The following consolidated financial statements of the Company are
  included in response to Item 8 of this report.
 
<TABLE>
<CAPTION>
                                                                 PAGE REFERENCE
                                                                   FORM 10-K
                                                                 --------------
     <S>                                                         <C>
     Report of Independent Auditors............................        17
     Consolidated Balance Sheets as of October 31, 1995 and
      1996.....................................................        18
     Consolidated Statements of Income for each of the three
      years in the period ended October 31, 1996...............        19
     Consolidated Statements of Cash Flows for each of the
      three years in the period ended October 31, 1996.........        20
     Consolidated Statements of Changes in Stockholders' Equity
      for each of the three years in the period ended October
      31, 1996.................................................        21
     Notes to Consolidated Financial Statements................        22
 
  (a)(2) Consolidated Financial Statements:
 
     Schedule II--Valuation and qualifying accounts for the
      years ended October 31, 1994, 1995 and 1996..............        35
</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
1996.
 
  (c) Exhibits
 
<TABLE>
   <C>    <S>
    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)
   10.1   1994 Stock Incentive Plan (incorporated by reference to exhibit 10.1
          to the registrant's Form S-1 Registration Statement No. 33-74768)
   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)
</TABLE>
 
 
                                      31
<PAGE>
 
<TABLE>
   <C>    <S>
   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   Agreement and Plan of Merger of Maxwell Shoe Co., Inc., a
          Massachusetts corporation, with and into Maxwell Shoe Company Inc., a
          Delaware corporation (incorporated by reference to exhibit 10.6 to
          the registrant's Form S-1 Registration Statement No. 33-74678)
   10.7   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 Co., Inc., as lessee
          (incorporated by reference to exhibit 10.7 to the registrant's Form
          S-1 Registration Statement No. 33-74768)
   10.8   Lease dated as of November 17, 1993 by and between Trustees of
          Bradshaw Westwood Trust, as landlord, and Maxwell Shoe Co., Inc., as
          tenant (incorporated by reference to exhibit 10.8 to the registrant's
          Form S-1 Registration Statement No. 33-74768)
   10.9   Agreement of Lease between Anon Realty Associates, L.P., as successor
          lessor to 1414 Americas Company and Maxwell Shoe Co., Inc., as lessee
          (incorporated by reference to exhibit 10.9 to the registrant's Form
          S-1 Registration Statement No. 33-74768)
   10.10  Loan and Security Agreement dated May 30, 1991 between Maxwell Shoe
          Co., Inc. and The First Bank of Boston, as amended March 11, 1993,
          June 22, 1993, and August 31, 1993 (incorporated by reference to
          exhibit 10.10 to the registrant's Form S-1 Registration Statement No.
          33-74768)
   10.11  Promissory Note dated March 11, 1993 issued by Maxwell Shoe Co., Inc.
          to The First National Bank of Boston (incorporated by reference to
          exhibit 10.11 to the registrant's Form S-1 Registration Statement No.
          33-74768)
   10.12  License Agreement dated July 1, 1993 between Jones Investment Co.,
          Inc. and Maxwell Shoe Co., Inc. (incorporated by reference to exhibit
          10.12 to the registrant's Form S-1 Registration Statement No. 33-
          74768)
   10.13  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)
   10.14  Employment Agreement dated as of January 26, 1994 between Maxwell
          Shoe Co., Inc. and Mark J. Cocozza (incorporated by reference to
          exhibit 10.14 to the registrant's Form S-1 Registration Statement No.
          33-74768)
   10.15  Stock Option and Registration Rights Agreement dated as of January
          26, 1994 between Maxwell Shoe Co., Inc. and Mark J. Cocozza
          (incorporated by reference to exhibit 10.15 to the registrant's Form
          S-1 Registration Statement No. 33-74768)
   10.16  Deferred Incentive Compensation Agreement dated October 31, 1988
          between Maxwell Shoe Co., Inc. and Mark J. Cocozza, as amended
          (incorporated by reference to exhibit 10.16 to the registrant's Form
          S-1 Registration Statement No. 33-74768)
</TABLE>
 
 
                                       32
<PAGE>
 
<TABLE>
   <C>   <S>
   10.17 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)
   10.18 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)
   10.19 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)
   10.20 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)
   10.21 Trademark and Intellectual Property Rights Purchase and Sale Agreement
         dated July 2, 1996 between Sam & Libby, Inc. and Maxwell Shoe Company
         Inc.
   10.22 License Agreement dated January 8, 1997 between Inter-Pacific Trading
         Corporation d/b/a Inter-Pacific Corporation and Maxwell Shoe Company
         Inc.
   21    Subsidiaries of Maxwell Shoe Company Inc.
   23    Consent of Independent Auditors
   27    Financial Data Schedule
</TABLE>
 
                                       33
<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, PRESIDENT AND
                                                  CHIEF OPERATING OFFICER
 
                                                     JANUARY 27, 1997
 
  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.
 
              SIGNATURE                        TITLE                 DATE
 
         /s/ Maxwell V. Blum           Chairman of the          January 27, 1997
-------------------------------------   Board and Chief              
           MAXWELL V. BLUM              Executive Officer
                                        (Principal
                                        Executive Officer)
 
         /s/ Mark J. Cocozza           President and Chief      January 27, 1997
-------------------------------------   Operating Officer            
           MARK J. COCOZZA
 
        /s/ James J. Tinagero          Executive Vice           January 27, 1997
-------------------------------------   President                    
          JAMES J. TINAGERO             (Principal
                                        Financial Officer)
 
        /s/ Richard J. Bakos           Vice President           January 27, 1997
-------------------------------------   Finance and Chief            
          RICHARD J. BAKOS              Financial Officer
                                        (Principal
                                        Accounting Officer)
 
         /s/ Betty Ann Blum            Executive Vice           January 27, 1997
-------------------------------------   President and                
           BETTY ANN BLUM               Director
 
        /s/ Marjorie W. Blum           Vice President Sales     January 27, 1997
-------------------------------------   and Secretary and            
          MARJORIE W. BLUM              Director
 
         /s/ Stephen A. Fine           Director                 January 27, 1997
-------------------------------------                                
           STEPHEN A. FINE
 
        /s/ Jonathan K. Layne          Director                 January 27, 1997
-------------------------------------                                
          JONATHAN K. LAYNE
 
       /s/ Malcolm L. Sherman          Director                 January 27, 1997
-------------------------------------                                
         MALCOLM L. SHERMAN
 
                                      34

<PAGE>
 
                           MAXWELL SHOE COMPANY INC.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                 BALANCE AT CHARGED TO               BALANCE AT
                                 BEGINNING  COSTS AND                  END OF
          DESCRIPTION            OF PERIOD   EXPENSES  DEDUCTIONS(1)   PERIOD
          -----------            ---------- ---------- ------------- ----------
<S>                              <C>        <C>        <C>           <C>
Year ended October 31, 1994
  Allowance for doubtful
   accounts.....................    $702       $--         $(99)        $801
Year ended October 31, 1995
  Allowance for doubtful
   accounts.....................    $801       $150        $ 98         $853
Year End October 31, 1996
  Allowance for doubtful
   accounts.....................    $853       $ 50        $173         $730
</TABLE>
--------
(1)  Uncollectible accounts written off, net of recoveries.
 
                                       35