United States
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K
                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 2004

                        Commission file number: 000-05083

                                  Saucony, Inc.
             (Exact name of registrant as specified in its charter)

       Massachusetts                                      04-1465840
       -------------                                      ----------
 (State or other jurisdiction of            (I.R.S. Employer Identification No.)
  incorporation or organization)

                     13 Centennial Drive, Peabody, MA 01960
          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: (978) 532-9000
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

                    Class A Common Stock, $.33-1/3 par value
                    ----------------------------------------
                                (Title of class)

                    Class B Common Stock, $.33-1/3 par value
                    ----------------------------------------
                                (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 ]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2).    Yes [ X ] No [   ]

The  aggregate  market  value of voting and  non-voting  common  equity  held by
non-affiliates  of the  registrant,  as of  July 2,  2004,  which  was the  last
business  day  of  the   registrant's   second   quarter  of  fiscal  2004,  was
approximately  $101,079,000  (based on the  closing  sale  prices of the Class A
Common  Stock and Class B Common  Stock on such date as  reported  on the Nasdaq
National Market). For purposes of the immediately  preceding sentence,  the term
"affiliate" consists of each director and executive officer of the registrant.

The number of shares of the  registrant's  Class A Common  Stock,  $.33-1/3  par
value, and Class B Common Stock, $.33-1/3 par value, outstanding on February 28,
2005 was 2,520,647 and 4,157,376, respectively.

Portions of the  registrant's  Definitive  Proxy  Statement  for its 2005 Annual
Meeting of  Stockholders  scheduled  to be held on May 18, 2005 (the "2005 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 2004, are  incorporated by reference into
Part III of this Annual Report on Form 10-K.  With the exception of the portions
of the 2005 Proxy Statement  expressly  incorporated  into this Annual Report on
Form 10-K by reference,  such document shall not be deemed filed as part of this
Annual Report on Form 10-K.
<PAGE>


                                                   SAUCONY, INC.
                                        INDEX TO ANNUAL REPORT ON FORM 10-K
                                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004



            Caption                                                         Page

PART I

Item 1.   Business                                                            3
Executive Officers of the Registrant                                         11
Item 2.   Properties                                                         13
Item 3.   Legal Proceedings                                                  13
Item 4.   Submission of Matters to a Vote of Security Holders                13

PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder
             Matters and Issuer Purchases of Equity Securities               14
Item 6.    Selected Financial Data                                           16
Item 7.    Management's Discussion and Analysis of Financial
             Condition and Results of Operations                             17
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk        41
Item 8.    Financial Statements and Supplementary Data                       42
Item 9.    Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosure                          42
Item 9A.   Controls and Procedures                                           42
Item 9B    Other Information                                                 43

PART III
Item 10.   Directors and Executive Officers of the Registrant                44
Item 11.   Executive Compensation                                            44
Item 12.   Security Ownership of Certain Beneficial Owners and Management
             and Related Stockholder Matters                                 44
Item 13.   Certain Relationships and Related Transactions                    44
Item 14.   Principal Accountant Fees and Services                            44

PART IV
Item 15.   Exhibits and Financial Statement Schedules                        45
Signatures                                                                   46
Index to Consolidated Financial Statements                                   53
Exhibit Index                                                                80

<PAGE>

PART I


ITEM 1 - BUSINESS

Overview

We design, develop and market  performance-oriented  athletic footwear, athletic
apparel and casual leather footwear. Our principal products are:

     o    technical running, walking, cross-training and outdoor trail shoes and
          athletic apparel, which we sell under the Saucony brand name;

     o    technical  running  shoe  models  from  the  early  1980's,  which  we
          reintroduced  in 1998 as Saucony  "Originals",  our  classic  footwear
          line;

     o    athletic apparel, which we sell under the Hind brand name; and

     o    shoes for coaches and officials,  cleated  football and  multi-purpose
          footwear and casual leather walking and workplace  footwear,  which we
          sell under the Spot-bilt brand name.


Our products are sold in the United  States at more than 5,500 retail  locations
and at our 19 factory outlet stores.  Outside the United States our products are
sold in 53 countries through 24 independent  distributors located throughout the
world and through our  subsidiaries  located in Canada,  The Netherlands and the
United Kingdom and at our two factory outlet stores in Canada.

For the fiscal  year ended  December  31,  2004,  we  generated  total  sales of
$166,200,000.  In March 2004 we paid a special  dividend  on our  common  stock,
amounting  to  $25,990,000.  On August 2, 2004,  we announced  the  retention of
Chestnut Securities, Inc., Boston, Massachusetts,  to assist in our analysis and
consideration  of various  strategic  alternatives  that may be available to us,
including a possible  sale of our company.  As of the date of this Annual Report
on Form 10-K, we have not determined whether to pursue any particular  strategic
alternative.  In addition, there can be no assurance that, if any transaction is
commenced, it will be completed or as to the value that any transaction may have
to our shareholders.

We are a Massachusetts  corporation,  founded in 1920. Our  headquarters  are in
Peabody, Massachusetts.

Saucony(R),  GRID(R),  Hind(R),  Spot-bilt(R),  and Hyde(R)  are our  registered
trademarks.  This Annual Report on Form 10-K also includes  other service marks,
trademarks  and trade names of ours and of companies  other than us.  Unless the
context indicates otherwise,  we use the terms "we", "us", "our",  "Saucony" and
the "Company" in this Annual  Report on Form 10-K to refer to Saucony,  Inc. and
its consolidated subsidiaries.

Segments

Our business is organized into two operating  segments,  the Saucony segment and
the Other Products  segment.  The Saucony segment consists of Saucony  technical
and Originals footwear and Saucony apparel.  The Other Products segment consists
of Hind athletic apparel and Spot-bilt shoes for coaches and officials,  cleated
football and  multi-purpose  footwear and casual  leather  walking and workplace
footwear,  together  with sales of our and other  companies'  products at our 21
factory outlet stores.
<PAGE>

The following  table sets forth the  approximate  contribution  to net sales (in
dollars and as a  percentage  of  consolidated  net sales)  attributable  to our
Saucony  segment and our Other  Products  segment for the periods and geographic
areas indicated.
<TABLE>
<CAPTION>

                                                          Net Sales
                                                    (dollars in thousands)

                                 Fiscal 2004                    Fiscal 2003                  Fiscal 2002
                            ---------------------          ---------------------        --------------------
                                 $           %                  $           %                $           %
                                 -           -                  -           -                -           -
<S>                         <C>               <C>          <C>               <C>        <C>              <C>
   Saucony
      Domestic..............$  103,820        63%          $   81,720        60%        $   83,182       62%
      International.........    36,929        22%              30,991        23%            27,647       21%
                            ----------       ----          ----------       ----        ----------      ----
      Total.................$  140,749        85%          $  112,711        83%        $  110,829       83%
                            ----------       ----          ----------       ----        ----------      ----

   Other Products
      Domestic..............$   23,995        14%          $   21,901        16%        $   20,171       15%
      International.........     1,408         1%               1,454         1%             2,196        2%
                            ----------       ----          ----------       ----        ----------      ----
      Total.................$   25,403        15%          $   23,355        17%        $   22,367       17%
                            ----------       ----          ----------       ----        ----------      ----

   Total....................$  166,152       100%          $  136,066       100%        $  133,196      100%
                            ==========       ====          ==========       ====        ==========      ====

_________________

For further financial information  concerning geographic areas and our operating
segments,  please see Notes 17 and 18 to our consolidated  financial  statements
included in Item 8 of this Annual Report on Form 10-K.
</TABLE>


Products

Footwear

Technical Footwear. We sell performance running, walking and outdoor trail shoes
for athletes under the Saucony brand name, which has been marketed in the United
States for over 30 years.  A  substantial  majority  of sales are in the running
shoe  category.  We have several  different  products  within each Saucony brand
category.  These  products have  different  designs and  features,  resulting in
different cushioning, stability, support characteristics and prices.

We design and market  separate  lines for men and women  within  most  technical
footwear categories. In keeping with our emphasis on performance,  we market and
sell our  technical  footwear to athletes  who have a high  participation  rate,
meaning they actively and regularly  participate,  in their sport of choice.  We
address this market through our "Loyal to the Sport"  advertising  campaign.  We
believe  that  consumers  in this market are more brand loyal than those who buy
athletic footwear for casual use. The suggested  domestic retail prices for most
of our technical footwear products are in the range of $50 to $90 per pair, with
our top-of-the-line  running shoes having suggested domestic retail prices of up
to $120 per pair.  During fiscal 2004, we introduced  several new shoes targeted
at the  mid-priced  running  footwear  segment,  which  we have  defined  as the
"cross-over" category with retail prices ranging from $60 to $80 per pair.

The Saucony brand is recognized for its technical innovation and performance. As
a result of our application of  biomechanical  technology in the design process,
we believe that our Saucony  footwear has a  distinctive  "fit and feel" that is
attractive  to  athletic  users.  A key element in the design of our shoes is an
anatomically  correct  toe and heel  configuration  that  provides  support  and
comfort for the particular activity for which the shoe is designed.

We build a variety of technical  features into our shoes.  Most of our technical
running and other athletic shoes incorporate  either our Ground Reaction Inertia
Device, or GRID, system, or our Custom Ride Management technology.

Our GRID system is an  innovative  midsole  system that employs  molded  strings
engineered  to create a feeling  similar to that of the "sweet spot" of a tennis
racquet. In contrast with conventional  athletic shoe midsoles,  the GRID system
is designed to react to various stress forces  differently,  thereby  working to
maximize  shock  absorption and minimize rear foot motion.  We have  continually
improved the GRID system since it was first introduced in 1991.
<PAGE>

Custom Ride  Management  technology  allows us to tailor shoes to the individual
characteristics of a runner, including height, weight, foot size, foot types and
gait cycles.  By doing so, it allows athletes to select a level of cushioning or
stability based on their needs or preferences.  We have incorporated Custom Ride
Management into several running models and a walking model, all of which shipped
in fiscal 2004.

We design our Saucony  technical  cross  training,  women's  walking and outdoor
technical  trail shoes with many of the same  performance  features and "fit and
feel"  characteristics  as are found in Saucony technical running shoes.  During
fiscal 2004, our most popular non-running  technical athletic shoe was a woman's
performance walking shoe.

Technical  footwear,  inclusive of full margin and closeout technical  footwear,
accounted for  approximately  72% of our fiscal 2004 consolidated net sales, 71%
of  our  fiscal  2003  consolidated  net  sales  and  70%  of  our  fiscal  2002
consolidated net sales.

Originals  Footwear.  In 1998, we reintroduced a number of our technical running
shoe models from the early  1980's under the name  "Originals."  These shoes are
designed  to appeal to  younger  consumers  who do not  generally  wear them for
athletic  purposes.  We believe our Originals  shoes have benefited from a trend
toward  "retro"  products in  footwear  and  apparel.  We offer these shoes in a
variety  of styles  with over 100  combinations  of colors  and  materials.  The
suggested  retail  prices for our  Originals  are in the range of $40 to $65 per
pair.

Our initial Originals offering consisted of two models, the "Jazz Originals" and
the  "Shadow  Originals."  In light of the  success of these  products,  we then
expanded the Originals product line to include color and material  variations on
our initial Originals and also introduced children's models. During fiscal 2004,
we  introduced  additional  Originals  products  including   contemporary-styled
reintroductions  of our technical  running shoe models from the early 1980's and
other casual footwear designed for the 12 to 25-year old footwear consumer,  and
expanded our offering of children's models.

Originals  footwear,  inclusive of full margin and closeout originals  footwear,
accounted for  approximately  12% of our fiscal 2004 consolidated net sales, 11%
of  our  fiscal  2003  consolidated  net  sales  and  12%  of  our  fiscal  2002
consolidated net sales.

Spot-bilt

We sell shoes for coaches and  officials,  cleated  football  and  multi-purpose
footwear,  casual  leather  walking and workplace  footwear  under the Spot-bilt
brand name through similar distribution channels as our Saucony brand shoes.

Athletic Apparel

Hind

We sell a full line of technical  apparel under the Hind brand name for use in a
variety of sports, including running, fitness and bicycling. We believe that our
Hind  products  have a  reputation  among  athletes for  delivering  comfort and
performance.  Most of our Hind  products  incorporate  our  moisture  management
technology,  which  transfers  moisture  away from the wearer's  skin to enhance
comfort.  We  frequently  add  innovations  to our  Hind  product  offerings  to
incorporate  the latest  available  fabric  technology.  During  fiscal 2004, we
introduced an innovative  line of performance  sport bras,  designed for women's
fitness activities.

Saucony

We also market athletic  apparel,  internationally,  under the Saucony label. We
target our Saucony apparel line at the mainstream  running consumer.  We believe
that our  Saucony  athletic  apparel  supports  our  Saucony  athletic  footwear
products by enhancing the visibility of the Saucony brand.
<PAGE>

Product Design and Development

We believe  that the  technical  performance  of our Saucony  footwear and other
product  lines is  important  to the  ultimate  consumers  of our  products.  We
continually  strive to produce  products that improve  athletic  performance and
maximize comfort.  We use the consulting  services of professional  designers as
well as podiatrists, orthopedists, athletes, trainers and coaches as part of our
product  development  program. We maintain a staff of ten design and development
specialists  in  Peabody,   Massachusetts   to  undertake   continuing   product
development.

In fiscal 2004, we spent  approximately  $1,956,000  on our product  development
programs,  compared to approximately $1,673,000 in fiscal 2003 and $1,611,000 in
fiscal 2002. Most of our research and development expenditures relate to Saucony
brand footwear products.

Sales and Marketing

Saucony

We sell our Saucony  footwear  products at more than 5,500 retail outlets in the
United States,  primarily  higher-end and full-margin sporting goods chains, but
also independent  sporting goods stores,  athletic  footwear  specialty  stores,
athletic  mall,   fashion  mall,  family  footwear  and  department  stores  and
off-priced  value chains.  One of our domestic Saucony  customers  accounted for
approximately  15% of our domestic  Saucony segment net sales in fiscal 2004, 9%
of our domestic  Saucony segment net sales in fiscal 2003 and 9% of our domestic
Saucony  segment  net sales  fiscal  2002.  We did not derive 10% or more of our
consolidated  revenue from sales to one  customer in any of fiscal 2004,  fiscal
2003 or fiscal 2002.

We maintain a corporate  sales group that is directly  responsible for the sales
activity  in our  largest  accounts.  We also sell our  footwear  and apparel to
retail  outlets  in the United  States  through  14  independent  manufacturers'
agents, whose organizations employ  approximately 42 sales  representatives.  We
coordinate  the  efforts  of  these  representatives  through  our  field  sales
management group. Our web site, saucony.com, receives thousands of "hits" weekly
from ad displays for new product information and race and event data, as well as
general Saucony information.

We sell our Saucony products  outside the United States in 53 countries  through
22 independent  distributors  located throughout the world, through our Canadian
subsidiary,  in which we hold a 95% ownership  interest,  and through our wholly
owned subsidiaries located in the Netherlands and the United Kingdom.

We strive to enhance our  reputation and image in the  marketplace  and increase
recognition of the Saucony brand name by advertising our products  through print
media and  television  advertising.  For our  technical  footwear,  we advertise
primarily  in  magazines  such as "Shape",  "Runner's  World",  "Self",  "Sports
Illustrated on Campus" and "Men's Health",  as well as several  regional running
periodicals. We also sponsor sporting events to increase brand awareness and the
image of our technical footwear to athletes. Examples include sponsorship of the
Los Angeles  Marathon and our  participation  as the  official  shoe and apparel
supplier of USA Triathlon.  To build in-store presence,  we use account-specific
and  in-store  promotions,  such as  athlete  appearances,  special  events  and
discounts for store employee purchases of our products.  For our Originals line,
we generally advertise in "lifestyle"  magazines that target 12 to 25 year olds,
such as "Seventeen" and "Teen People".

Most of our  advertising  and  promotional  programs  for our Saucony  brand are
directed toward the ultimate consumer.  We also promote the Saucony brand to the
retail trade through attendance at trade shows and similar events. During fiscal
2004,  we  introduced  our  "Saucony 26"  marketing  program  which  profiled 26
competitors,  based on the individual's  contributions to the running  community
and society, at the Los Angeles, Boston, Chicago and New York City marathons. We
employ  a  cooperative  advertising  program,  which  is  intended  to  maximize
advertising resources by having our retailers share in the cost of promoting our
Saucony  brand  in  print   advertising,   while  affording  our  retailers  the
opportunity to promote their stores.

Our local  distributors  direct our advertising and promotion efforts in foreign
markets,  subject to our  approval of the nature and  content of those  efforts.
<PAGE>

Hind

We sell our Hind products  domestically at independent sporting goods stores and
athletic footwear specialty stores through 14 independent manufacturers' agents,
whose organizations employ approximately 42 sales  representatives.  We sell our
Hind  products  outside  the  United  States  in  five  countries,  through  two
independent distributors and our subsidiaries in Canada, The Netherlands and the
United Kingdom.

Spot-bilt

We market our Spot-bilt line through our Saucony brand distribution channels and
directly to customers through our website at Spotbilt.com.

Factory Stores

We currently operate 19 factory outlet stores in the United States and 2 factory
outlet  stores  in  Canada  at  which we sell our  Saucony,  Hind and  Spot-bilt
products,  as well as the products of third parties.  To avoid competing against
full margin  retail  outlets for these  products,  we generally  limit the items
offered  at  these  stores  to  products  with  cosmetic  defects,  discontinued
merchandise,  slow moving products,  special make-up footwear products and delay
the offering of first quality  products  offered at these stores for a period of
six months from the product  introduction  date. As part of our growth strategy,
we plan to open  factory  stores in selected  factory  outlet  malls in areas in
which we believe the Saucony brand is underdeveloped  and there is a significant
potential  for sales and profit  growth.  We  believe  that this  approach  will
strengthen Saucony brand name recognition. During fiscal 2004, we opened two new
factory  outlet  stores.  During  fiscal 2005, we expect to open two new factory
outlet stores and close one factory outlet store.

Suppliers

Independent  overseas   manufacturers  produce  all  of  our  Saucony  products,
including  our Originals  products,  and our  Spot-bilt  products.  The overseas
footwear  manufacturers  that  supply  products  to  us  are  located  in  Asia,
principally  in China.  We select  footwear  manufacturers  in large part on the
basis of our prior  experience  with the  manufacturer  and the  availability of
production capacity. We have developed long-term relationships with key footwear
manufacturers  that we believe  have yielded many  benefits,  including  quality
control,   favorable  costs,   flexible  working  arrangements  and  predictable
production  capacity.  Although to date we have not  experienced  difficulty  in
obtaining  manufacturing  services, we do not have long-term agreements with any
of  our  foreign  suppliers,   and  we  seek  to  develop  additional   overseas
manufacturing  sources from time to time, both to increase our sourcing capacity
and to obtain alternative sources of supply.

We perform  an array of  quality  control  procedures  at various  stages of the
production process, from testing of product prototypes prior to manufacture,  to
inspection of finished goods prior to shipment.  Our quality  control program is
designed   to  ensure  that   finished   goods  meet  our   established   design
specifications  and high quality standards.  We employ  approximately 23 Saucony
footwear  quality control  personnel in China.  Our personnel in China regularly
visit our footwear manufacturers throughout Asia to monitor, oversee and improve
the quality control and production processes.

We contract with third  parties for the  manufacture  of our Hind  apparel,  the
majority of which is  manufactured in Taiwan,  Canada,  Sri Lanka and Vietnam of
fabrics sourced primarily from the United States and Taiwan.

Raw materials  required for the manufacture of our products,  including leather,
rubber, nylon and other fabrics, are generally available in the country in which
our  products  are  manufactured.  We and our  suppliers  have  not  experienced
difficulty in satisfying raw material needs to date.

The number of our foreign suppliers and the percentage of products sourced by us
from particular  foreign suppliers varies from time to time. During fiscal 2004,
we purchased footwear products from five overseas suppliers.  One such supplier,
located in China, accounted for approximately 33% of our total overseas footwear
purchases by dollar volume.
<PAGE>

Although we compete with other  athletic shoe and apparel  companies,  including
companies that are much larger than we are, for access to production facilities,
we believe that our  relationships  with our footwear  and other  suppliers  are
strong.  We also  believe  that we have  the  ability  to  develop,  over  time,
alternative sources in various countries for footwear and other products that we
source  from  our  current  suppliers.   However,  in  the  event  of  a  supply
interruption,  our operations  could be materially  and adversely  affected if a
substantial  delay  occurred in locating  and  securing  alternative  sources of
supply.

Our operations are subject to compliance with the laws and regulations  enforced
by the United States  Customs  Service and to the customary  risks of conducting
business abroad,  including currency  fluctuations,  increases in customs duties
and related fees,  import  controls and trade barriers such as the 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.
To date, these factors have not had a material adverse affect on our operations.

Distribution and Inventory

We distribute our products from our owned warehouses in Massachusetts and leased
warehouses  in  Canada  and The  Netherlands,  as well as  through  third  party
operated  warehouse  facilities  located in California,  The Netherlands and the
United Kingdom.

To accommodate our domestic customers' requirements and plan for our own product
needs,  we employ a "futures" order program for most of our products under which
we take orders in advance of the  selling  season for a  particular  product and
commit to ship the product to the  customer in time for the selling  season.  We
offer our customers price  discounts and extended  payment terms as an incentive
for using  this  ordering  program.  Our  futures  order  program  is similar to
programs offered by other athletic footwear companies.

We also  maintain an  open-stock  inventory on several core  technical  footwear
styles, a limited number of Originals  footwear styles and Hind apparel products
so that we can satisfy  retailers' orders on an "at once" basis. The majority of
our  Originals  line of  footwear  is sold on a "futures"  basis,  with  limited
planned inventory position, because we believe that demand for products from our
Originals  line is more closely tied to style and fashion trends than demand for
our other products.  By maintaining  only limited  inventory for the majority of
our Originals line, we seek to minimize the risk of inventory  obsolescence that
can result from unanticipated changes in consumer preferences.  We are, however,
subject to inventory risk for our Originals and technical  footwear products and
our Hind apparel products in the event of significant order cancellations.

Backlog

The athletic and casual  footwear and athletic  apparel  industries  in which we
compete  are subject to seasonal  sales  fluctuations.  Sales of our Saucony and
other footwear  brands are generally  highest in the first and second  quarters.
Sales of our Hind athletic apparel are generally  highest in the first and third
quarters.  Because products sold on an "at once" basis are generally  shipped as
orders are  received,  our  backlog  relates  primarily  to  products  sold on a
"futures" basis. The mix of "future" and "at once" orders can vary significantly
from quarter to quarter and year to year.

Our backlog of unfilled  orders was  approximately  $61,350,000  at December 31,
2004 and  $59,901,000  at January 2, 2004.  We expect that all of our backlog at
December  31,  2004  will  be  shipped  in  fiscal  2005,  subject  to  customer
cancellations. However, our backlog does not necessarily represent actual future
shipments  because  orders may be cancelled by our customers  without  financial
penalty.  The rate of customer order  cancellations  can vary quarter to quarter
and year to year. Customers may also reject nonconforming products.

We did not  derive  10% or more of our  consolidated  revenue  from sales to one
customer in any of fiscal 2004, fiscal 2003 or fiscal 2002. Approximately 48% of
our gross trade receivables  balance was represented by 15 customers at December
31, 2004. We anticipate  that our results of operations in any given period will
depend to a significant  extent upon sales to major customers.  The loss of or a
reduction in the level of sales to one or more major customers or the failure of
a major  customer to proceed  with a large order or to timely pay us for a large
order could materially reduce our sales.
<PAGE>

Trade Policy

Our practice of sourcing products overseas, with subsequent importation into the
United States,  exposes us to possible product supply  disruptions and increased
costs in the event of actions by United  States or foreign  government  agencies
adverse to continued trade or the enactment of legislation that restricts trade.
We are unable to predict whether additional United States customs duties, quotas
or other  restrictions  may be imposed in the future upon the importation of our
products. Any such occurrences might have a material adverse effect on our sales
or profitability.

For  example,  we import the majority of our footwear  products  from China.  On
December 11, 2001, China acceded to the World Trade  Organization (WTO) and thus
now enjoys Permanent  Normal Trade Relations with the United States.  Therefore,
China  receives  the same  favorable  tariff  treatment  that the United  States
extends to its other  "normal"  trading  partners.  However,  even though it has
joined the WTO,  scrutiny of China's trading practices is not likely to subside.
There will be  continuing  pressure  on China to honor its WTO  commitments.  If
China does not abide by WTO rules,  the United States may come under pressure to
impose  sanctions,  such as duties or quotas, on imports from China. If any such
action  were to include  imports  of  footwear  products  from  China,  it could
significantly  add to the cost of our products and could  restrict our supply of
products from that country.

Competition

Competition is intense in the markets in which we sell our products.  We compete
with a large number of other  companies,  both  domestic  and  foreign.  Several
competitors are large organizations with diversified  product lines,  well-known
brands and financial, distribution and marketing resources substantially greater
than ours. The principal  competitors for our Saucony  products are Nike,  Asics
and Brooks. The principal competitors for our Hind products are Nike, Adidas and
Sugoi. We compete based on a variety of factors, including price, product style,
durability and quality,  product design and technical  performance,  brand image
and  awareness,  marketing  and  promotion  and our  ability  to  meet  delivery
commitments  to retailers.  We believe that we are  competitive  in all of these
areas.  However, we may not be able to retain our market share or respond timely
to changing consumer preferences.

Trademarks

We use  trademarks  on  nearly  all of our  products  and  believe  that  having
distinctive  marks is an important  factor in marketing  our  products.  We have
registered our Saucony(R),  GRID(R),  Hind(R),  Spot-bilt(R)  and Hyde(R) marks,
among others,  in the United States. We have also registered some of these marks
in a  number  of  foreign  countries.  Although  we  have  a  foreign  trademark
registration  program for selected  marks, we may not be able to register or use
such marks in each foreign country in which we seek registration.

Employees

As of December 31, 2004,  we employed  approximately  343 people  worldwide.  Of
these employees,  approximately  267 were in the United States and approximately
76 were in  foreign  locations.  We  believe  that our  employee  relations  are
excellent.   We  have  never  experienced  a  strike  or  other  work  stoppage.
Approximately  26  employees  in  our  Peabody,   Massachusetts  warehouse  were
represented  by a union as of  December  31,  2004.  The  collective  bargaining
agreement  with the union which  represents our warehouse  employees  expires on
April 30, 2008.  None of our other  employees are  represented by a union or are
subject to a collective bargaining agreement.

Environmental Matters

In December 2004, we discovered  environmental  contamination at our facility in
East  Brookfield,  Massachusetts.  We acquired this facility as part of an asset
purchase  in  March  1985.  We  believe  the  contamination  is  the  result  of
manufacturing  activities  that  took  place in the  facility  in the  early and
mid-1900s  when this facility was owned and operated by an unrelated  party.  We
have hired  environmental  consultants,  engineers and attorneys to assist us in
investigating and addressing our obligations under  environmental  laws. We have
notified  state  and  local   environmental  and  health  authorities  and  will
coordinate our further investigations with them. We will continue to investigate
the extent to which our  property  is affected  by this  contamination  and what
measures we must take to address those conditions.
<PAGE>

In fiscal 2004, we recorded a charge of $2,275,000 to address the  environmental
conditions at our East Brookfield,  Massachusetts  facility.  The  environmental
charge  includes  the  estimated  direct  costs to  investigate  and address the
conditions on the property and the associated engineering,  legal and consulting
costs we  expect  to incur  as we  address  the  environmental  conditions.  Our
assessment of our liability and the  associated  costs is an estimate based upon
currently available information after consultation with environmental engineers,
consultants and attorneys assisting us in addressing these environmental issues.
Our actual  costs to address the  environmental  conditions  may change based on
further investigations, based on the conclusions of regulatory authorities about
information   gathered  in  those   investigations   and  due  to  the  inherent
uncertainties involved in estimating conditions in the environment and the costs
of addressing such conditions.

The  environmental  charge is included  in  operating  expenses  for our Saucony
segment.  At  December  31,  2004,  our accrual  for  environmental  charges was
$2,275,000  and was  included on our balance  sheet under  current  liabilities.
However,  our  costs  to  address  the  environmental  conditions  at  our  East
Brookfield,  Massachusetts  facility  could  vary  materially  from our  current
estimate.  Estimated costs to address the  environmental  conditions  range from
$1,242,000 to $4,621,000.

Available Information

We maintain a website at www.sauconyinc.com.  We make available,  free of charge
on our website,  our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current  Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section  13(a) or 15(d) of the  Securities  Exchange  Act of 1934 as
soon as reasonably  practicable after we electronically file those reports with,
or furnish them to, the  Securities and Exchange  Commission.  We also similarly
make available, free of charge on our website, the reports filed with the SEC by
our executive  officers,  directors and 10% stockholders  pursuant to Section 16
under the Exchange Act as soon as reasonably  practicable  after copies of those
filings  are  provided  to us  by  those  persons.  We  are  not  including  the
information  contained  at  www.sauconyinc.com,  www.saucony.com,  www.hind.com,
www.spotbilt.com  or at any other Internet  address as part of, or incorporating
it by reference into, this Annual Report on Form 10-K.
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers, as of February 28, 2005 are as follows:

      Name                  Age                      Position
--------------------        ---       ----------------------------------------

John H. Fisher              57        Chairman of the Board, President and
                                      Chief Executive Officer

Charles A. Gottesman        54        Vice Chairman of the Board and
                                      Executive Vice President,
                                      Business Development

Michael Umana               42        Executive Vice President, Finance,
                                      Chief Operating and Financial Officer,
                                      Treasurer and Assistant Clerk

Michael Jeppesen            45        Senior Vice President, Manufacturing
                                      and Development

Samuel S. Ward              42        Senior Vice President, Operations
                                      and Technology

Brian J. Enge               34        Senior Vice President and General Manager,
                                      Saucony Apparel Division

Roger P. Deschenes          46        Vice President, Controller,
                                      Chief Accounting Officer and
                                      Assistant Treasurer


John H. Fisher has served as one of our directors  since 1980 and as Chairman of
the Board since 1991. Mr. Fisher has served as our Chief Executive Officer since
1991 and as our President  since 1985. Mr. Fisher served as our Chief  Operating
Officer from 1985 to 1991, our Executive Vice President from 1981 to 1985 and as
our Vice  President,  Sales  from  1979 to 1981.  He is a  member  of the  World
Federation of Sporting Goods Industries,  is the former Chairman of the Athletic
Footwear Council of the Sporting Goods Manufacturers Association and is a member
of various civic  associations.  Mr. Fisher is the  brother-in-law of Charles A.
Gottesman, our Vice Chairman of the Board and Executive Vice President, Business
Development.

Charles  A.  Gottesman  has  served  as one of our  directors  since  1983.  Mr.
Gottesman  has  served as our Vice  Chairman  of the Board  and  Executive  Vice
President,  Business  Development  since July 2001. Mr.  Gottesman served as our
Executive Vice  President,  Chief  Operating  Officer and Treasurer from 1992 to
June 2001, our Executive Vice  President,  Finance from 1989 to 1992, our Senior
Vice  President  from 1987 to 1989,  our Vice  President  from 1985 to 1987, our
Treasurer from 1983 to 1989 and in several other  capacities  beginning in 1977.
Mr.  Gottesman  is the  brother-in-law  of John H.  Fisher,  our Chairman of the
Board, President and Chief Executive Officer.

Michael  Umana has  served  as our  Executive  Vice  President,  Finance,  Chief
Operating Officer, Chief Financial Officer,  Treasurer and Assistant Clerk since
May 2003,  after  having  served as our Senior Vice  President,  Finance,  Chief
Operating  Officer,  Chief Financial Officer and Treasurer from July 2001 to May
2003 and our Senior Vice President, Finance and Chief Financial Officer from May
2000 to July 2001.  Mr. Umana joined us in 1999 as our Vice  President,  Finance
and  Chief  Financial  Officer.  From  1997 to 1999,  Mr.  Umana  served as Vice
President and Chief Financial Officer of the Analytical Instrument Business Unit
at  PerkinElmer,  Inc., a high technology  manufacturer.  From 1985 to 1997, Mr.
Umana held various  auditing  and  consulting  positions,  the most recent being
Senior  Manager,  Business  Consulting,  at Arthur  Andersen LLP, a professional
services company. Mr. Umana is a Certified Public Accountant.
<PAGE>


Michael  Jeppesen joined us in May 2001 as Senior Vice President,  Manufacturing
and  Development.  From 1999 to May 2001,  Mr.  Jeppesen  was  employed  as Vice
President  of  Operations  for  Coach   Leatherware   Inc,  a  leather  products
manufacturer,   where  he  was   responsible  for   manufacturing   and  product
development.  From 1996 to 1999,  Mr.  Jeppesen held various  senior  management
positions  at Adidas  AG, an  athletic  footwear  manufacturer,  including  Vice
President of European Operations and Vice President - Global Materials, the most
recent being Vice President of European  Operations,  which he held beginning in
1997.  Mr.  Jeppesen was  employed as General  Manager of Prime Asia, a footwear
manufacturer, from 1994 to 1996.

Samuel  S.  Ward  has  served  as our  Senior  Vice  President,  Operations  and
Technology  since  October  2002.  Mr. Ward  joined us in February  2001 as Vice
President,  Enterprise  Solutions,  in which  capacity  he was  responsible  for
leading a  continuous  program to improve  operational  efficiency  through  the
redesign of business processes and supporting  information systems. From 1994 to
2001,  Mr. Ward held  various  supply  chain and  business  process  improvement
consulting positions,  including Senior Consultant,  Manager and Senior Manager,
which he held  from 2000 to 2001,  in the  Business  Consulting  Group at Arthur
Andersen LLP, a  professional  services  company.  Mr. Ward  graduated from Duke
University's  Fuqua School of Business in 1994. From 1987 to 1992, Mr. Ward held
various  finance  and  operations  positions  at General  Electric  Company  and
completed General Electric's Financial Management Program.

Brian J. Enge has served as our  Senior  Vice  President  and  General  Manager,
Saucony Apparel Division since November 2004. Mr. Enge joined us in July 2002 as
Vice President and General  Manager,  Hind Apparel.  From 1998 to 2002, Mr. Enge
was employed as the  President of Schoffel  North  America,  an outdoor  apparel
manufacturer   where  he  was   responsible  for  managing  the  North  American
operations.  Mr. Enge graduated from Harvard  Business School in 1998. From 1993
to 1996, Mr. Enge held various  leadership  positions at Cyrk, Inc., a promotion
services company, including General Manager, Retail Brands, during 1996.

Roger  P.  Deschenes  has  served  as  our  Vice  President,  Controller,  Chief
Accounting  Officer and  Assistant  Treasurer  since  December 2002 after having
served as our Vice President,  Controller and Chief Accounting Officer from 1997
to December 2002 and our  Controller and Chief  Accounting  Officer from 1995 to
1997. Mr. Deschenes joined us in 1990 as Corporate  Accounting  Manager.  He was
employed  at a division  of  Allen-Bradley  Company,  a  subsidiary  of Rockwell
International,  Corp.,  from  1987 to  1990  as  Financial  and  Cost  Reporting
Supervisor. Mr. Deschenes is a Certified Management Accountant.

Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
<PAGE>

ITEM 2 - PROPERTIES

Our general and executive offices and our main distribution facility are located
in  Peabody,  Massachusetts  and are  owned by us.  This  facility  consists  of
approximately  141,000  square feet, of which  107,000  square feet is warehouse
space and 1,000 square feet is used for a factory  outlet  store.  During fiscal
2004,  we  expended  approximately  $3,325,000  for  the  initial  phase  of the
expansion and  renovation  of our Peabody,  Massachusetts  facility.  During the
second and third  quarters of 2005,  we plan to continue the  renovation at this
facility, at an estimated cost of approximately $2,750,000 to $3,050,000.

We  also  own  a  facility   in  East   Brookfield,   Massachusetts   containing
approximately   109,000  square  feet,   which  we  use  for   warehousing   and
distribution.  During  fiscal  2004,  we  recorded  an  environmental  charge of
$2,275,000  to  address  previously  unknown  environmental  conditions  at this
facility.

We lease  space  for our  retail  stores  at  factory  outlet  malls  and  other
locations. These stores have an aggregate of approximately 39,500 square feet of
retail space at 19  locations in several  states and in the Province of Ontario.
The terms of these leases range from three to ten years. The aggregate effective
annual   commitment  for  our  factory  outlet  store  leases  is  approximately
$1,367,000.  We also own a factory outlet store containing  approximately  3,000
square feet of retail space in Bangor,  Maine and operate a factory outlet store
at our Peabody, Massachusetts facility.

We also lease  approximately  16,000  square  feet of space in The  Netherlands,
approximately 26,000 square feet of space in Canada, which we use for office and
warehouse space and approximately 4,000 square feet of office space in China.

We believe that our properties are reasonably  well-maintained  and are adequate
for our present requirements.


ITEM 3 - LEGAL PROCEEDINGS

We are  involved  in routine  litigation  incident  to our  business.  We do not
believe that any of these proceedings will have a material adverse effect on our
financial position, operations or cash flows.


ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During  the  fiscal  quarter  ended  December  31,  2004,  there were no matters
submitted to a vote of security holders of Saucony,  through the solicitation of
proxies or otherwise.
<PAGE>


PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
     ISSUER PURCHASES OF EQUITY SECURITIES

Our Class A Common Stock trades on the NASDAQ  National  Market under the symbol
"SCNYA", and our Class B Common Stock trades on the NASDAQ National Market under
the symbol "SCNYB".  The following table sets forth, for the periods  indicated,
the actual high and low sales  prices per share of the Class A Common  Stock and
the Class B Common Stock as reported by the NASDAQ National Market.
<TABLE>
<CAPTION>

                                                                     Class A                        Class B
                                                                  Common Stock                   Common Stock
                                                            ----------------------      --------------------------
                                                              High          Low            High             Low
                                                            --------     ----------     ----------       ---------
<S>                                                        <C>           <C>            <C>              <C>
     Fiscal Year ended December 31, 2004
     -----------------------------------

     First quarter.........................................$  25.540     $  16.560      $   26.000       $  16.820
     Second quarter........................................   21.240        17.700          21.650          18.260
     Third quarter.........................................   25.100        19.840          24.690          19.800
     Fourth quarter........................................   27.960        22.950          27.190          22.750

     Fiscal Year ended January 2, 2004
     ---------------------------------

     First quarter.........................................$  11.250     $   8.500      $   11.350       $   8.710
     Second quarter........................................   12.320         9.800          12.340          10.100
     Third quarter.........................................   15.460        12.260          15.200          12.270
     Fourth quarter........................................   17.400        13.440          17.500          13.410


</TABLE>

On  February  28,  2005,  there were 220  shareholders  of record of the Class A
Common  Stock and 239  shareholders  of record of the Class B Common  Stock.  In
general, only the Class A Common Stock has voting rights.

Dividend Policy

On May 21, 2003,  our Board of Directors  adopted a regular  quarterly  dividend
plan with dividends payable at an annual rate of $0.160 per share on our Class A
Common  Stock and $0.176  per share on our Class B Common  Stock.  In 2003,  the
board declared regular quarterly cash dividends on May 21, 2003, August 21, 2003
and  November  6, 2003,  in the amount of $0.040 per share on our Class A Common
Stock and $0.044 per share on our Class B Common  Stock.  Prior to May 2003,  we
had never declared or paid any cash dividends on either our Class A Common Stock
or Class B Common Stock.

On February 17, 2004 our Board of  Directors  adopted an increase in our regular
quarterly  dividend  to an annual rate of $0.200 per share on our Class A Common
Stock and  $0.220  per share on our Class B Common  Stock.  Commencing  with the
quarterly  dividend  declared  on  February  17,  2004,  the Board of  Directors
increased the regular  quarterly  dividend on our Class A Common Stock to $0.050
per share and the  regular  quarterly  dividend  on our Class B Common  Stock to
$0.055 per share.  Following  the dividends  declared on February 17, 2004,  the
Board of Directors declared regular quarterly dividends in 2004 on May 19, 2004,
August 2, 2004 and  November 4, 2004,  each in the amount  announced on February
17, 2004.

Also,  on February  17,  2004,  our Board of  Directors  declared a special cash
dividend  of $4.00  per  share on each of our  Class A Common  Stock and Class B
Common Stock. The special dividend,  which amounted to $25,990,000,  was paid on
March 17,  2004 to  stockholders  of record at the close of business on March 3,
2004.
<PAGE>

As provided in the our corporate  charter,  regular cash  dividends  paid on our
Class B Common  Stock are to be in an amount equal to 110% of the amount paid on
our Class A Common  Stock.  This  charter  provision  does not apply to  special
dividends.

Our  declaration of future cash dividends will be at the discretion of our Board
of  Directors  and is  dependent  upon,  among other  things,  future  earnings,
operations,  capital  requirements,  our general financial  position and general
business  conditions.  The terms of our credit facility  generally  restrict our
ability to pay cash  dividends,  together with other  repurchases or redemptions
of, or other  specified  distributions  with respect to, our capital  stock,  in
excess of $5,000,000 in any fiscal year.  This  limitation  did not apply to our
special dividend declared in February 2004, which was specifically excluded from
this limitation.

Purchases of Equity Securities

In May 1998, our Board of Directors approved a stock repurchase plan authorizing
the repurchase of up to an aggregate of 750,000 shares of our outstanding common
stock,  either Class A or Class B or a combination  thereof.  Unless  terminated
earlier by a resolution of our Board of Directors,  the plan will expire when we
have  repurchased  all  shares  authorized  for  repurchase  under the plan.  We
announced  this plan publicly on June 4, 1998.  We did not make any  repurchases
under this plan during the quarter ended  December 31, 2004,  and as of December
31, 2004 a maximum of 168,376  shares of our  outstanding  common stock,  either
Class A or Class B or a combination thereof, may be purchased under the plan.

<PAGE>

ITEM 6 - SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below should be read together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
in this Annual Report on Form 10-K.

The selected consolidated financial data set forth below as of December 31, 2004
and January 2, 2004 and for the years ended  December 31, 2004,  January 2, 2004
and  January  3,  2003 are  derived  from  the  audited  consolidated  financial
statements  of Saucony  included in this Annual  Report on Form 10-K.  All other
selected  consolidated  financial  data set forth below is derived  from audited
financial statements of Saucony not included in this Annual Report on Form 10-K.
Our  historical  results  are  not  necessarily  indicative  of our  results  of
operations to be expected in the future.
<TABLE>
<CAPTION>

                                                          Year         Year        Year        Year        Year
                                                          Ended        Ended       Ended       Ended       Ended
                                                         Dec 31,      Jan. 2,     Jan. 3,     Jan. 4,     Jan. 5,
                                                          2004        2004(1)      2003        2002        2001
                                                          ----        -------      ----        ----        ----
                                                                   (in thousands except per share amounts)

<S>                                                    <C>           <C>         <C>         <C>         <C>
Selected Income Statement Data

Revenues ..............................................$ 166,676     $136,445    $133,499    $132,364    $ 167,920

Operating income (loss) (2), (3), (4)..................   18,177       12,997       8,943        (269)      16,123

Net income (loss)......................................   10,418        8,488       5,243        (940)       8,963

Earnings (loss) per common share - basic
   Class A common stock................................$    1.51     $   1.31    $   0.81    $  (0.15)   $    1.37
                                                       =========     ========    ========    ========    =========
   Class B common stock................................$    1.66     $   1.44    $   0.89    $  (0.16)   $    1.51
                                                       =========     ========    ========    ========    =========

Earnings (loss) per common share - diluted
   Class A common stock................................$    1.38     $   1.26    $   0.80    $  (0.15)   $    1.34
                                                       =========     ========    ========    ========    =========
   Class B common stock................................$    1.52     $   1.38    $   0.88    $  (0.16)   $    1.47
                                                       =========     ========    ========    ========    =========

Weighted average common shares and
   equivalents outstanding
   Basic:
     Class A common stock .............................    2,521        2,521       2,563       2,567        2,606
     Class B common stock .............................    3,972        3,583       3,544       3,513        3,586
                                                       ---------     --------    --------    --------    ---------
                                                           6,493        6,104       6,107       6,080        6,192
                                                       =========     ========    ========    ========    =========
   Diluted: (5)
     Class A common stock .............................    2,521        2,521       2,563       2,567        2,606
     Class B common stock..............................    4,559        3,850       3,623       3,513        3,735
                                                       ---------     --------    --------    --------    ---------
                                                           7,080        6,371       6,186       6,080        6,341
                                                       =========     ========    ========    ========    =========
Cash dividends per share of common stock:
     Class A common stock..............................$   4.200     $  0.120          --          --           --
                                                       =========     ========    ========    ========    =========

     Class B common stock..............................$   4.220     $  0.132          --          --           --
                                                       =========     ========    ========    ========    =========
</TABLE>
<TABLE>
<CAPTION>

Selected Balance Sheet Data
                                                          Dec 31,      Jan. 2,     Jan. 3,     Jan. 4,     Jan. 5,
                                                           2004         2004        2003        2002        2001
                                                           ----         ----        ----        ----        ----
                                                                              (in thousands)

<S>                                                    <C>           <C>         <C>         <C>         <C>
Current assets.........................................$  84,637     $ 92,801    $ 80,670    $ 69,538    $  73,531
Current liabilities....................................   24,071       18,992      16,343      12,325       15,919
Working capital........................................   60,566       73,809      64,327      57,213       57,612
Total assets...........................................   96,257      100,688      87,540      78,100       83,285
Capitalized lease
   obligations, net of current portion.................      138           --          --          --           34
Stockholders' equity...................................   68,691       79,054      68,696      63,162       64,620

---------------------------

(1)  See Note 1 to our Consolidated  Financial  Statements  regarding  reporting
     period.

(2)  See Note 16 to our Consolidated  Financial Statements regarding our Bangor,
     Maine plant closing and other charges incurred in fiscal 2001.

(3)  In fiscal 2000 we sold  substantially all of the assets and business of our
     former cycling division.  In connection with the sale we recorded a pre-tax
     loss of $2,661 which is included in the operating income for fiscal 2000.

(4)  Includes  environmental  charge of $2,275  which is included  in  operating
     income for fiscal 2004.

(5)  Includes  common stock and dilutive  options and stock  warrants,  with the
     exception  of  fiscal  2001,  since  the  common  stock   equivalents  were
     anti-dilutive.
</TABLE>

<PAGE>




ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS

Introduction

In the following management's discussion and analysis of financial condition and
results of  operations:  (1) when we refer to the 2004 fiscal year,  we mean the
fiscal year ended  December 31, 2004, (2) when we refer to the 2003 fiscal year,
we mean the  fiscal  year ended  January 2, 2004,  (3) when we refer to the 2002
fiscal year,  we mean the fiscal year ended  January 3, 2003 and (4) all amounts
are in thousands, except share and per share amounts.

Business Overview

Our core business  focus is to design,  develop and market  performance-oriented
athletic  footwear and athletic  apparel,  which we sell under the Saucony brand
name, and athletic  apparel,  which we sell under the Hind brand name.  Sales of
Saucony brand products  accounted for  approximately 85% of our consolidated net
sales for fiscal 2004 and 83% of our  consolidated net sales for fiscal 2003 and
fiscal 2002,  the  significant  majority of which are sales of Saucony  footwear
products.  Our  results of  operations,  financial  position  and cash flows are
heavily  dependent upon our Saucony footwear  business.  Our ability to increase
Saucony  footwear  sales is dependent in  significant  part upon  increasing our
share of the market for athletic footwear sales.

We pursue different  strategies for our two Saucony footwear product categories,
technical footwear and Originals footwear.  For our technical footwear category,
we combine  high  quality  materials  and  components  with  technical  features
designed  to meet  the  performance  requirements  of  athletes  who have a high
participation  rate, meaning they actively and regularly  participate,  in their
choice of sport. We incorporate  either our Ground Reaction  Inertia Device,  or
GRID system,  or our proprietary  footwear  technology,  Custom Ride Management,
into a majority of our technical and mid-priced  cross-over  footwear  products.
For  our  Originals  footwear  category,  we  design  fashion-oriented  footwear
intended to appeal to younger  consumers  who generally do not wear the footwear
for athletic purposes.

Because our primary footwear focus is in technical  footwear,  we direct most of
our design and development  efforts and working capital  investments towards our
Saucony  technical  footwear.  We  view  our  Originals  footwear  as  a  market
opportunity  which we must  carefully  manage  due to rapid  shifts in  consumer
preferences.  Accordingly,  we limit our investment in working  capital for, and
our spending on marketing, design and development of, our Originals footwear.

Our Saucony  technical  footwear and  Originals  footwear,  along with  athletic
apparel we sell under the Saucony brand name,  constitute one operating segment.
We have another  operating  segment which  consists of athletic  apparel we sell
under the Hind brand name, shoes for coaches and officials, cleated football and
multi-purpose  footwear,  casual leather walking and workplace  footwear we sell
under  the  Spot-bilt  brand  name and  sales of all of our and  third  parties'
products at our 21 factory outlet stores.  We refer to this segment as our Other
Products   segment.   Sales  from  our  Other  Products  segment  accounted  for
approximately  15% our  consolidated  net sales for  fiscal  2004 and 17% of our
consolidated  net sales for each of fiscal 2003 and fiscal  2002.  A majority of
these sales are sales of our Hind athletic apparel.

We compete in intensely competitive markets. Our ability to achieve sales growth
is dependent  upon  several  factors  including,  product  design and  technical
performance,  product  quality,  price,  styling  and our  ability to market and
promote  our brand and our  products.  Our  business  is  sensitive  to consumer
spending patterns, which in turn are subject to prevailing regional and national
economic patterns,  such as employment levels and consumer confidence.  Economic
uncertainty and decreased  consumer  confidence may restrict consumer  spending,
thereby negatively affecting our sales and results of operations.

<PAGE>



Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated  financial statements,  which have been prepared
in  accordance  with  accounting  principles  generally  accepted  in the United
States.  The  preparation  of these  financial  statements  requires  us to make
estimates  and  judgments  that  affect  the  reported  amounts  of  assets  and
liabilities  at the date of the financial  statements  and revenues and expenses
during the reporting  period.  Actual results may differ  materially  from these
estimates.  Our significant  accounting  policies are described in Note 1 to the
consolidated  financial  statements  included in Item 8 of this Annual Report on
Form  10-K.  Critical  accounting  policies  are  those  policies  that  reflect
significant   judgments  and  uncertainties  and  could  potentially  result  in
materially  different  results under different  assumptions and conditions.  Our
most critical accounting policies are as follows:

-    Revenue Recognition

     We  recognize  revenue  from  product  sales when title  passes and all the
     rewards and risk of loss have been  transferred  and all the  criteria  for
     revenue  recognition  described in SEC Staff Accounting  Bulletin (SAB) No.
     104, Revenue  Recognition in Financial  Statements.  Title generally passes
     upon  shipment or upon  receipt by the  customer.  We record  retail  store
     revenues at the time of sale. We recognize  royalty  revenue as we earn the
     royalties during the terms of our license agreements.

     As part of our  revenue  recognition  policy,  we must make  estimates  for
     defective  product returns and other  allowances  related to current period
     product  revenue.  We record a provision for defective  product returns and
     other allowances based upon past experience and the receipt of notification
     of pending  returns.  While the returns have  historically  been within our
     expectations  and the provisions  established,  the product return rate may
     not remain  constant.  Any significant  increase in the product return rate
     would  require  that we increase  our  reserves.  This would reduce our net
     sales and could have a material adverse effect on our results of operations
     and cash flows for the period in which the returns  materialize.  If actual
     or expected  future returns and allowances  were  significantly  greater or
     lower than the  reserves we  established,  we would  record a reduction  or
     increase  to our  reserves  in the period in which such  determination  was
     made.

-    Accounts Receivable - Allowances for Doubtful Accounts

     We maintain  allowances  for doubtful  accounts and therefore must estimate
     losses  resulting  from the  inability of our  customers  to make  required
     payments.  We analyze our accounts receivable,  historical bad debt trends,
     customer  creditworthiness,  economic  trends and  changes in our  customer
     payment  terms when  evaluating  the adequacy of the allowance for doubtful
     accounts.  As noted  in Note 18 of our  consolidated  financial  statements
     included  in Item 8 of this  Annual  Report on Form 10-K,  we have a credit
     risk  concentration  due  to the  concentration  of  our  domestic  Saucony
     footwear sales within a relatively small customer base. If the liquidity or
     financial  condition of any of our larger  customers  were to  deteriorate,
     resulting in an  impairment of their ability to make payments due us, or if
     payment  schedules of our customers are otherwise  delayed from  historical
     trends,  we  would be  required  to  record  additional  allowances  to our
     provision  for  doubtful  accounts.  This would  increase  our  general and
     administrative  expenses  and could have a material  adverse  effect on our
     results of operations and cash flows.

-    Cooperative Advertising

     We engage in  cooperative  advertising  programs  whereby our retailers are
     allowed to receive a set  percentage of their  purchases of our products as
     reimbursement for their advertising or marketing costs in jointly promoting
     our  products  within  their  businesses.  The  purpose of our  cooperative
     advertising  programs is to encourage  advertising  and  promotions for the
     sale of our products.  We acquire costs as selling  expense on the basis of
     sales to qualifying retailers at the time of the revenue  recognition.  Our
     retailers  will  develop  specific  marketing  programs,   subject  to  our
     approval,  to utilize the funds in a manner  intended to best  promote both
     themselves and our products. On a quarterly basis, we evaluate the adequacy
     of  our  cooperative   advertising   accrual.   Further,  we  evaluate  the
     classification of these costs in accordance with Emerging Issues Task Force
     Issue 01-09,  "Accounting for Consideration Given by a Vendor to a Customer
     (Including  a  Reseller  of  the  Vendor's   Products)."   We  account  for
     cooperative  advertising  costs  as a  selling  expense  provided  that the
     cooperative  advertising costs meet the requirements defined in EITF 01-09.
     EITF 01-09 requires that we account for  consideration  given to a retailer
     as a reduction of revenue unless we receive an identifiable benefit,  which
     is separable  from the  retailer's  original  purchase  and can  reasonably
     estimate the fair value of this benefit.  For the arrangements  that do not
     meet these requirements,  we account for the cooperative  advertising costs
     as a reduction of net sales.
<PAGE>

     At December 31, 2004, our cooperative  advertising accruals totaled $1,281,
     compared  to $1,002 at January 2, 2004.  The  increase  in the  cooperative
     advertising  reserves at December  31, 2004 was due  primarily to increased
     participation  by our  retailers  in fiscal  2004.  As part of our  reserve
     valuation,  we must make estimates for retailer participation and determine
     the  income  statement   classification  of  the  cooperative   advertising
     allowances.  Our estimates are based  primarily on our past experience with
     the retailers.  When possible,  we base these  estimates on past experience
     with the  specific  retailers,  as well as our  experience  with  retailers
     generally.  If retailer  participation were to increase,  selling costs and
     cooperative advertising accruals would increase.

-    Volume Incentive Reserves

     We utilize volume  incentive  rebates whereby certain  retailers  receive a
     volume incentive rebate equal to a specified percentage of shipments to the
     retailer  provided that the retailer achieves a cumulative level of revenue
     transactions  with us. The purpose of our volume incentive rebates programs
     is to encourage our retailers to increase the amount of their  purchases of
     our  products.  We recognize  the rebate  obligation  as a reduction of net
     sales based on a systematic and rational allocation of the cost of honoring
     the  rebates  earned  and  claimed  to  each  of  the  underlying   revenue
     transactions  that results in progress by the retailer  toward  earning the
     rebate.  During fiscal 2004 and fiscal 2003 we recorded  $1,442 and $522 of
     volume incentive rebates, respectively, as a reduction of net sales.

     At December 31, 2004, our volume  incentive  rebate  reserve  totaled $843,
     compared to $442 at January 2, 2004.  The increase in the volume  incentive
     rebates  reserve at December 31, 2004 was due primarily to offering  volume
     incentive rebates to additional  domestic retailers in fiscal 2004. As part
     of our reserve valuation, we must make estimates for anticipated cumulative
     revenue  transactions with our retailers.  We estimate  cumulative  revenue
     levels by adding  period-to-date  net sales and  expected  future net sales
     based on our order backlog,  as well as our past  experience  with specific
     retailers and our experience with retailers generally. If net sales were to
     exceed our  estimated net sales,  we would be required to record  adjusting
     entries to increase our volume incentive rebate reserves. This would reduce
     our net sales and could have a material  adverse  effect on our  results of
     operation, financial position and cash flows.

-    Inventories

     We value our  inventory  at the lower of the actual cost to purchase or the
     current  estimated  market value. We calculate the provision for excess and
     obsolete  inventory as the difference between the cost of the inventory and
     our estimated market value of the inventory. We estimate market value based
     upon  estimated  product  demand  and  market  conditions.  We  record  the
     provision as a charge to cost of sales.  If actual  future demand or market
     conditions are less favorable than those we project,  the estimated  market
     value of our inventory  would decrease and  additional  provisions to write
     down inventory may be required.  This could materially reduce our amount of
     current  assets  and  increase  our cost of goods  sold  and  could  have a
     material adverse effect on our results of operations and cash flows.

-    Property, Plant and Equipment

     We record property,  plant and equipment,  including  buildings,  leasehold
     improvements,  equipment and computer  equipment at cost and  depreciate it
     over the applicable  estimated useful life. Changes in circumstances,  such
     as technological advances or changes to our business operations, can result
     in  differences  between the actual and estimated  useful  lives.  In those
     cases where we determine that the useful life of a long-lived  asset should
     be decreased, we would increase depreciation over the remaining useful life
     to depreciate the asset's net book value to its salvage  value.  Decreasing
     an assets' estimated useful life would increase general and  administrative
     expenses  and  could  have a  material  adverse  effect on our  results  of
     operations and financial position.
<PAGE>

-    Impairment of Long-Lived Assets

     We review the recoverability of our long-lived assets (property,  plant and
     equipment  and deferred  charges)  when events or changes in  circumstances
     occur  that  indicate  that the  carrying  value of the  assets  may not be
     recoverable.  We  recognize  an  impairment  of a  long-lived  asset if the
     carrying  value  of the  long-lived  asset  is  not  recoverable  from  its
     estimated  future  cash  flows.  We  measure  an  impairment  loss  as  the
     difference  between the carrying amount of the asset and its estimated fair
     value.  During  both fiscal 2004 and fiscal  2003,  we recorded  impairment
     charges of $15 to reduce the carrying  amount of long-lived  assets used in
     our retail operations, which carrying value we deemed to be not recoverable
     from its  future  cash  flows.  The  charge  is  included  in  general  and
     administrative expenses.  Should future events and circumstances cause cash
     flows associated with any of our long-lived assets to decline significantly
     from our  estimates,  we may  need to  record  charges  for  impairment  of
     long-lived  assets,  which would  increase  our general and  administrative
     expenses  and  could  have a  material  adverse  effect on our  results  of
     operations and financial position.

     We no  longer  amortize  goodwill  and  other  indefinite-lived  intangible
     assets.  Rather,  we  review  them  for  impairment.  We  would  record  an
     impairment  if the carrying  value of the asset exceeds our estimate of its
     fair market value. We record  impairment  charges as a component of general
     and  administrative  expenses.  We  test  the  impairment  of our  goodwill
     annually.  We completed an annual test for  impairment at December 31, 2004
     and  determined  that goodwill was not impaired.  At December 31, 2004, the
     carrying value of goodwill was $912. Our estimates of future cash flows may
     differ  materially  from actual cash flows due to,  technological  changes,
     economic  conditions  or changes to our business  operations.  A charge for
     impairment  of goodwill  may be necessary  if we  experience a  significant
     decline in our future cash flows.  Such a charge  could have a  significant
     adverse effect on our results of operations and financial position.

-    Income Taxes

     We estimate our income taxes in each of the jurisdictions  that we operate.
     This  process  requires us to estimate our current tax  exposure,  together
     with assessing temporary  differences,  which result in deferred tax assets
     and liabilities.  We recognize deferred tax assets and liabilities based on
     the difference between the financial statement carrying amounts and the tax
     bases of assets and  liabilities.  We  regularly  review our  deferred  tax
     assets  for  recoverability  and  establish  valuation  allowances  when we
     determine  that it is more  likely  than not that the  deferred  tax assets
     resulting  from  operating  losses  will not be  realized.  Realization  of
     deferred tax assets (such as net operating loss carryforwards) is dependent
     upon future  taxable  earnings and is therefore  uncertain.  During  fiscal
     2003,  we  reversed  $613 of  deferred  tax  valuation  allowances  on loss
     carryforwards that we expect to realize,  decreasing our tax expense in the
     period we made that  reversal.  At  December  31,  2004,  we have  provided
     valuation  allowances  in an amount  equal to our  long-term  deferred  tax
     assets which have resulted from net operating losses in certain foreign and
     state tax jurisdictions.

     In evaluating  exposures  associated with various tax filing positions,  we
     have accrued $951 for probable tax  contingencies  as of December 31, 2004.
     In 2004,  we  provided  an  additional  $235  related  to 2004  tax  filing
     positions.  We  believe  that our tax  contingencies  have been  adequately
     provided for in the accompanying financial statements. To the extent the we
     prevail in matters for which accruals have been established or are required
     to pay amounts in excess of these  accruals,  our  effective  tax rate in a
     given financial statement period could be materially affected.

     U.S. generally accepted accounting  principles allow companies to defer the
     recognition  of  tax  liability  on   undistributed   earnings  of  foreign
     subsidiaries that are indefinitely  reinvested in the foreign operation. At
     December 31, 2004, we had approximately $9,522 of undistributed earnings of
     foreign subsidiaries that are indefinitely reinvested in foreign operations
     for which we have not recorded deferred income taxes. Were we to repatriate
     foreign  earnings which have been  designated as  indefinitely  invested in
     foreign  operations,  we would record additional tax expense at the time of
     repatriation.
<PAGE>

     In  December   2004,  the  FASB  issued  FASB  Staff  Position  No.  109-1,
     Application of FASB Statement No. 109,  Accounting for Income Taxes, to the
     Tax Deduction on Qualified  Production  Activities Provided by the American
     Jobs  Creation Act of 2004.  FSP 109-1  clarifies  that the  manufacturer's
     deduction  provided for under the American Jobs Creation Act of 2004 should
     be accounted for as a special deduction in accordance with SFAS 109 and not
     as a tax rate  reduction.  The adoption of FSP 109-1 will have no impact on
     our results of operations or financial position for fiscal 2005 because the
     manufacturer's  deduction is not available to us until fiscal year 2006. We
     are  evaluating the effect that the  manufacturer's  deduction will have in
     subsequent years.

     The FASB  also  issued  FASB  Staff  Position  No.  109-2,  Accounting  and
     Disclosure Guidance for the Foreign Earnings Repatriation  Provision within
     the  American  Jobs  Creation  Act of 2004.  The AJCA  introduces a special
     one-time  dividends  received  deduction  on the  repatriation  of  foreign
     earnings to a U.S. taxpayer, provided specified criteria are met. FSP 109-2
     provides accounting and disclosure guidance with respect to this deduction.
     Until the Treasury  Department or Congress provides  additional  clarifying
     guidance on key elements,  the amount of foreign earnings to be repatriated
     by us, if any, cannot be determined;  however,  the  presumption  that such
     unremitted  earnings  will be  repatriated  cannot be  overcome.  FSP 109-2
     grants an  enterprise  additional  time beyond the year ended  December 31,
     2004, in which the AJCA was enacted, to evaluate the effects of the AJCA on
     its plan for reinvestment or repatriation of unremitted earnings.

-    Stock-Based Compensation

     We have  elected to continue to measure  stock-based  compensation  expense
     using the intrinsic value method. Accordingly, we measure compensation cost
     for stock options and restricted stock awards as the excess, if any, of the
     quoted market price of our stock at the date of the grant over the exercise
     price an employee must pay to acquire the stock. We calculate  compensation
     cost for common stock  purchase  warrants  based upon the fair value at the
     grant date. We amortize stock-based  compensation arising from the issuance
     of  restricted  stock  warrants,   below  market  options  and  stock-based
     compensation resulting from common stock purchase warrants over the vesting
     period of the stock grant, option term or the warrant term. Amortization of
     stock-based  compensation amounted to $0 for 2004, $37 for 2003 and $43 for
     2002,  respectively.  In fiscal  2003,  we  accelerated  the vesting of the
     common  stock  purchase  warrants  which  required  us to  record  $416  of
     stock-based   compensation  expense.  Had  we  determined  the  stock-based
     compensation expense for our stock options based upon the fair value at the
     grant date for stock option  awards our reported net income would have been
     reduced by $1,400 in fiscal 2004,  $1,138 in fiscal 2003 and $684 in fiscal
     2002.

     In December 2004, the Financial  Accounting Standards Board issued SFAS No.
     123R,  "Share-Based Payment". This statement is a revision of SFAS No. 123,
     "Accounting for Stock-Based  Compensation,"  and supersedes APB Opinion No.
     25,  "Accounting  for Stock Issued to  Employees."  SFAS 123R  requires all
     share-based  payments to  employees,  including  grants of  employee  stock
     options,  to be recognized in the financial  statements based on their fair
     values.  The  provisions  of this  statement  are  effective for interim or
     annual  periods  beginning  after  June 15,  2005.  We are  evaluating  the
     provisions  of this  revision to determine  its effect on our  consolidated
     financial  statements.  We expect that the adoption of this  statement will
     have a material adverse effect on our results of operations.

-    Hedge Accounting for Derivatives

     We enter into forward  currency  exchange  contracts  to hedge  anticipated
     foreign  currency   exchange   transactions,   as  well  as  the  resulting
     intercompany liabilities which are denominated in currencies other than the
     functional currency of our foreign operations. These contracts economically
     function as effective hedges of the underlying  exposures;  however, we are
     required  to record  changes  in the fair value of these  foreign  currency
     contracts against earnings in the period of the change.
<PAGE>

     We estimate the fair value of our foreign currency exchange contracts based
     on foreign  exchange  rates as of December 31, 2004.  At December 31, 2004,
     the notional value of our foreign currency  exchange  contracts to purchase
     U.S. dollars was $8,570.  The fair value of our foreign  currency  exchange
     contracts at December 31, 2004 was $8,150.  We recorded a charge in 2004 of
     $420 against earnings to adjust our derivatives to their fair value.  Since
     December 31, 2004, the value of the U.S.  dollar has  strengthened  against
     the Canadian  dollar,  the Euro and the Pound Sterling.  If the U.S. dollar
     were to weaken in comparison to the Pound Sterling,  the Canadian dollar or
     the Euro, we would record  additional  charges in fiscal 2005 to adjust our
     derivatives  to their fair  value.  The amount of the  potential  charge is
     dependent  upon the change in foreign  exchange rates from the December 31,
     2004 rates to the time that the forward exchange contract matures or to the
     foreign  exchange rates as of the period end reporting date.  These charges
     could have a material  adverse  effect on our future results of operations,
     financial position and cash flows.

-    Environmental Costs

     We accrue for costs  associated with  environmental  obligations when these
     costs are probable and  reasonably  estimable in  accordance  with American
     Institute  of Certified  Public  Accountants  Statement  of Position  96-1,
     "Environmental  Remediation Liabilities (Including Auditing Guidance)".  We
     generally  recognize  accruals to address estimated costs for environmental
     obligations no later than the date when we learn what cleanup measures,  if
     any, are likely to occur to address the environmental  conditions at issue.
     In the year ended  December  31,  2004,  we  recorded a charge of $2,275 to
     address  environmental  conditions  at our East  Brookfield,  Massachusetts
     distribution  facility.  SoP 96-1  defines the costs to be  included  among
     environmental  liabilities.  In accordance with SoP 96-1, the environmental
     charge  includes the estimated  direct costs to investigate and address the
     conditions  on  the  East  Brookfield,   Massachusetts   property  and  the
     associated engineering, legal and consulting costs we expect to incur as we
     address  those  environmental  conditions.  We  discovered  the  conditions
     resulting in this accrual in December  2004.  Our  investigation  is in its
     early stage. Our assessment of our liability and the associated costs is an
     estimate based upon currently-available information after consultation with
     environmental   consultants,   engineers  and  attorneys  assisting  us  in
     addressing  these  environmental  issues.  Our actual  costs to address the
     environmental conditions may change based on further investigations,  based
     on the conclusions of regulatory  authorities about information gathered in
     those  investigations  and due to the  inherent  uncertainties  involved in
     estimating  conditions in the  environment and the costs of addressing such
     conditions.  We do not discount  costs of  expenditures  for  environmental
     obligation  to their  present  value.  At December 31, 2004 our accrual for
     environmental  charges was $2,275.  Our costs to address the  environmental
     conditions at our East Brookfield, Massachusetts could vary materially from
     our  current  estimate.   Estimated  costs  to  address  the  environmental
     conditions  range  from  $1,242  to  $4,621.   If,  based  upon  additional
     investigation  and study,  our actual  costs to address  the  environmental
     conditions  were to exceed our  estimate,  we would be  required  to record
     additional  environmental  charges,  which  could have a  material  adverse
     effect on our  results of  operations  and cash flows.  As of December  31,
     2004, we have not identified or made a claim against parties that caused or
     are otherwise  responsible for the conditions at our facility,  and we have
     not  determined  whether such parties exist;  nor does our accrual  include
     legal  costs to  investigate  or  pursue  potential  recoveries  from  such
     parties.
<PAGE>



Highlights
                                                    Increase (Decrease)
                                         ---------------------------------------
                                           2004 vs. 2003         2003 vs. 2002
                                           -------------         -------------

  Net sales..............................$ 30,086    22.1%      $ 2,870     2.2%
  Gross profit...........................  15,490    29.5         6,607    14.4
  Selling, general and
    administrative expenses..............   7,816    19.4         2,921     7.8


                                                      $ Change
                                      ------------------------------------------
                                      2004 vs. 2003               2003 vs. 2002
                                      -------------               -------------

  Operating income.......................$ 5,180                   $   4,054
  Income before income taxes
    and minority interest................  4,185                       4,293
  Net income.............................  1,930                       3,245


                                                   Percent of Net Sales
                                           ------------------------------------
                                            2004          2003            2002
                                            ----          ----            ----

  Gross profit...........................   40.9%          38.5%          34.4%
  Selling, general and
    administrative expenses..............   28.9           29.5           28.0
  Operating income ......................   10.9            9.6            6.7
  Income before income taxes
    and minority interest................   10.7           10.0            7.0
  Net income ............................    6.3            6.2            3.9


Consolidated Net Sales

Net sales increased $30,086, or 22%, to $166,152 in fiscal 2004 from $136,066 in
fiscal 2003. Net sales increased  $2,870, or 2%, to $136,066 in fiscal 2003 from
$133,196 in fiscal 2002.

On a geographic basis,  domestic sales increased $24,194, or 23%, to $127,815 in
fiscal 2004 from $103,621 in fiscal 2003.  International sales increased $5,892,
or 18%, to $38,337 in fiscal  2004 from  $32,445 in fiscal  2003.  $2,623 of our
international sales increase in fiscal 2004 is attributable to favorable changes
in foreign exchange rates, as compared to fiscal 2003.  Domestic sales increased
$268,  to $103,621 in fiscal 2003 from  $103,353 in fiscal  2002.  International
sales increased  $2,602, or 9%, to $32,445 in fiscal 2003 from $29,843 in fiscal
2002. $2,925 of our international  sales increase in fiscal 2003 is attributable
to favorable changes in foreign exchange rates, as compared to fiscal 2002.

Saucony Segment

                         2004                    2003
                    Total / Change          Total / Change            2002
                   from Prior Year         from Prior Year           Total
                   ---------------         ---------------           -----

Net Sales           $140,749 / 25%           $112,711 / 2%          $110,829

<PAGE>

Net Sales:  2004 Compared to 2003

Worldwide  net sales of Saucony  branded  footwear and Saucony  branded  apparel
increased  $28,038,  or 25%, to $140,749 in fiscal 2004 from  $112,711 in fiscal
2003, due to $27,942 of increased sales of Saucony footwear and $96 of increased
sales of Saucony  apparel.  In addition,  favorable  changes in foreign exchange
rates  resulting  from a  weaker  U.S.  dollar  against  European  and  Canadian
currencies  in fiscal  2004,  as  compared  to fiscal  2003,  increased  Saucony
footwear  sales by $2,503.  The  increase in sales of Saucony  footwear  was due
primarily to a 20% increase in footwear  unit volumes  partially  offset by a 3%
decrease in average  wholesale per pair footwear  selling prices.  The volume of
footwear  sold in fiscal  2004  increased  29%, to 4,841 pair from 3,761 pair in
fiscal 2003, primarily due to increased domestic mid-priced  cross-over footwear
unit volumes and increased  domestic  Originals  footwear unit volumes and, to a
lesser extent,  increased  domestic  closeout  footwear unit volumes,  increased
domestic  technical  footwear unit volumes,  increased  international  technical
footwear  unit volumes and  increased  special  makeup  footwear  unit  volumes,
partially offset by lower international Originals footwear unit volumes. Average
domestic and international  wholesale per pair footwear selling prices in fiscal
2004  decreased  3%,  compared to fiscal 2003.  The increase in sales of Saucony
apparel was due  primarily  to favorable  currency  exchange,  resulting  from a
weaker U.S. dollar against European and Canadian currencies, partially offset by
lower  domestic  apparel  sales  and  decreased  apparel  sales at our Dutch and
Canadian subsidiaries.

Domestic net sales increased $22,100, or 27%, to $103,820 from $81,720 in fiscal
2003,  due  primarily to $11,312 of  increased  sales of  mid-priced  cross-over
footwear,  $5,791 of increased sales of Originals footwear,  $2,926 of increased
sales of technical  footwear and $2,700 of increased sales of closeout footwear,
offset  partially by $598 of decreased  sales of special makeup footwear and $31
of decreased sales of Saucony apparel.  The volume of domestic  footwear sold in
fiscal  2004  increased  36% to 3,857  pair  from  2,833  pair in  fiscal  2003,
including a 66% increase in mid-priced cross-over footwear unit volumes to 1,130
pair,  a 57%  increase in Originals  footwear  unit volumes to 904 pair,  an 11%
increase in technical  footwear  unit  volumes to 864 pair,  a 151%  increase in
closeout  footwear unit volumes to 243 pair and a 2% increase in special  makeup
footwear unit volumes to 715 pair. The cross-over  footwear  volume increase was
due  primarily  to the  introduction  of  several  mid-priced  models  in  2004,
including  the  Grid T4 and the Grid  Aura  TR6,  along  with  additional  color
variations  of the Grid Aura TR5,  which we  introduced  in 2003,  sold into the
athletic mall,  fashion mall,  sporting goods and value channels.  The Originals
footwear  volume  increase  was  due  primarily  to our  introduction  of  color
variations of the Jazz Original and Shadow Original models,  for both adults and
children,  sold into the athletic mall,  sporting goods and value channels.  The
average  domestic  wholesale  per pair  footwear  selling  price in fiscal  2004
decreased 4%, as compared to fiscal 2003.  The lower average  wholesale  selling
price  per  pair  was due to a  change  in the  product  mix of our  cross-over,
technical,  Originals and special  makeup  footwear sold to lower price products
and increased  cross-over,  special makeup and Originals  footwear unit volumes,
both of which sell at prices below our first quality  technical  footwear.  Also
contributing to the decreased domestic wholesale per pair selling price decrease
in fiscal  2004 were a $923  increase  in volume  rebates  provided  to domestic
customers and a $434 increase in cooperative advertising allowances that did not
meet  the  requirements  of EITF  01-09,  which  costs  are  accounted  for as a
reduction of net sales.

During  the fourth  quarter of fiscal  2004,  our sales  into the  athletic  and
fashion mall channels of our cross-over footwear decreased 11% and our Originals
footwear  decreased  6% from the  comparable  period in fiscal  2003.  We expect
further significant  declines in sales of cross-over and Originals footwear into
these channels through the first half of fiscal 2005.

Sales of  closeout  footwear  accounted  for  approximately  4%, or  $4,394,  of
domestic  Saucony net sales in fiscal 2004 compared to 2%, or $1,694,  in fiscal
2003.  The increase in closeout  footwear sales in fiscal 2004 was primarily due
to increased  closeout unit volume sold in the fourth  quarter of 2004 to reduce
excess inventory supply of cross-over footwear.

Originals  footwear  accounted  for  approximately  23% of fiscal 2004  domestic
footwear  unit volume  versus 20% in fiscal  2003.  The unit volume  increase in
Originals  footwear in fiscal 2003 was primarily due to increased unit volume of
Jazz Originals and Shadow Originals, for both adults and children, sold into the
athletic mall, sporting goods and value channels.

Our domestic order  cancellation  rate for fiscal 2004 was  comparable  with our
historical averages.
<PAGE>

International net sales increased $5,938, or 19%, to $36,929 in fiscal 2004 from
$30,991  in  fiscal  2003,  due to $2,503  attributable  to  favorable  currency
exchange,  primarily  resulting from a weaker U.S.  dollar against  European and
Canadian currencies,  $2,225 of increased footwear sales at our subsidiaries due
primarily to higher footwear unit volume and, to a lesser extent, higher average
wholesale per pair footwear  selling  prices,  and a $1,291 increase in footwear
sales at our international  distributor business due to higher average wholesale
per pair footwear selling prices and a $127 increase in Saucony apparel sales at
our Canadian and British  subsidiaries due to favorable currency  exchange.  The
volume of international  footwear sold in fiscal 2004 increased 6%, to 984 pair,
from 928 pair in fiscal 2003.  Footwear unit volumes  increased 8%, to 620 pair,
from 571 pair, sold at our  subsidiaries in fiscal 2004 compared to fiscal 2003.
Our  international  distributor  footwear unit volume increased 2%, to 364 pair,
from 356 pair in fiscal 2004,  compared to fiscal 2003. The footwear unit volume
increase at our subsidiaries was due primarily to increased  technical  footwear
unit  volume at our  Canadian  subsidiary  and,  to a lesser  extent,  increased
technical footwear unit volume sold at our Dutch subsidiary, partially offset by
a  decrease  in  special  makeup  footwear  unit  volume  sold  at  our  British
subsidiary.  The international footwear average wholesale per pair selling price
increased due to a change in the product mix to higher priced technical footwear
and  decreased  unit  volume of  special  makeup  footwear  sold at our  British
subsidiary  and a  change  in the  international  distributors  product  mix for
technical footwear to higher priced product.

The footwear unit volume increase at our international  distributor  business in
fiscal 2004 was due  primarily  to the  expansion by three new  distributors  of
distribution into China,  Taiwan and Russia and increased  technical unit volume
sold to European  distributors.  Footwear unit volume sold into Japan  decreased
12% due to a 77% decrease in Originals footwear unit volume, partially offset by
an  increase in  technical  footwear  unit  volume.  Distributor  sales into the
Japanese footwear market accounted for $1,364, or 4%, of international  sales in
fiscal 2004, compared to $1,357, or 4%, in fiscal 2003.

Net Sales:  2003 Compared to 2002

Worldwide  net sales of Saucony  branded  footwear and Saucony  branded  apparel
increased  $1,882,  or 2%, to $112,711  in fiscal  2003 from  $110,829 in fiscal
2002,  due to  $1,073  of  increased  sales of  Saucony  footwear  and,  $809 of
increased sales of Saucony  apparel.  The increase in sales of Saucony  footwear
was  due to  $2,859  attributable  to  favorable  currency  exchange,  resulting
primarily from a weaker U.S.  dollar against  European and Canadian  currencies,
partially offset by a $1,456 decrease in domestic  footwear sales. The volume of
footwear  sold in fiscal  2003  increased  1%, to 3,761  pair from 3,707 pair in
fiscal  2002,  primarily  due to  increased  domestic  technical  footwear  unit
volumes,  increased  domestic  Originals  footwear  unit  volumes and  increased
special makeup footwear unit volumes,  partially  offset by lower  international
technical and lower  international  Originals  footwear  unit  volumes.  Average
domestic and  international  wholesale per pair footwear  selling prices in 2003
decreased 3% as compared to 2002.  The increase in sales of Saucony  apparel was
due primarily to sales of new products by our Canadian and British subsidiary.

Domestic net sales  decreased  $1,462,  or 2%, to $81,720 from $83,182 in fiscal
2002, due primarily to $2,565 of decreased sales of closeout  footwear,  $168 of
decreased  sales of special makeup footwear and $6 of decreased sales of Saucony
apparel,  offset partially by $995 of increased sales of technical  footwear and
$284 of increased sales of Originals  footwear.  The volume of domestic footwear
sold in fiscal 2003  increased  2% to 2,833 pair from 2,775 pair in fiscal 2002,
including a 12% increase in technical footwear unit volumes to 1,460 pair, an 8%
increase in  Originals  footwear  unit  volumes to 578 pair and a 2% increase in
special  makeup  footwear  unit volumes to 698 pair,  partially  offset by a 61%
decrease in closeout  footwear unit volumes to 97 pair.  The technical  footwear
volume  increase was due primarily to our  introduction of the Grid Aura TR 5, a
mid-priced  model,  in 2003.  The average  domestic  wholesale per pair footwear
selling  price in 2003  decreased 7% in fiscal 2003, as compared to fiscal 2002.
The lower  average  wholesale  selling price per pair was due to a change in the
product mix of our  technical,  Originals  and special  makeup  footwear sold to
lower price  products  and  increased  special  makeup  footwear  and  increased
Originals  footwear unit  volumes,  both of which sell at prices below our first
quality technical footwear.

Sales of  closeout  footwear  accounted  for  approximately  2%, or  $1,694,  of
domestic  Saucony net sales in fiscal 2003 compared to 5%, or $4,249,  in fiscal
2002.  The  decrease  in  closeout  footwear  sales  was due to lower  inventory
quantities  of past  season  footwear  available  for sale in fiscal 2003 due to
improvements in our supply chain.
<PAGE>

Originals  footwear  accounted  for  approximately  20% of fiscal 2003  domestic
footwear  unit volume  versus 19% in fiscal  2002.  The unit volume  increase in
Originals  footwear was primarily due to increased unit volume of Jazz Originals
sold into the mall channel.

Our domestic order  cancellation  rate for fiscal 2003 was  comparable  with our
historical averages.

International net sales increased $3,344, or 12%, to $30,991 in fiscal 2003 from
$27,647  in  fiscal  2002,  due to $2,859  attributable  to  favorable  currency
exchange,  primarily  resulting from a weaker U.S.  dollar against  European and
Canadian  currencies,  $815 of  increased  sales of Saucony  apparel  and $13 of
increased footwear sales at our subsidiaries due to higher footwear unit volume,
partially  offset by a $343  decrease  in  footwear  sales at our  international
distributor   business.   Our  international  Saucony  apparel  sales  increased
primarily due to sales of new products by our Canadian and British subsidiaries.
The  footwear  unit volume  increase at our  subsidiaries  was due  primarily to
increased  special makeup  footwear unit volume sold by our British  subsidiary,
partially  offset by decreased  technical  footwear  unit volume at our Canadian
subsidiary  and, to a lesser extent,  decreased  technical  footwear unit volume
sold at our Dutch subsidiary.  The overall volume of international footwear sold
in fiscal 2003 decreased to 928 pair from 932 pair in fiscal 2002. Footwear unit
volumes  decreased 3%, to 357 pair, at our international  distributor  business,
partially offset by a 1% increase in footwear unit volume,  to 571 pair, sold at
our subsidiaries in fiscal 2003 compared to fiscal 2002. Footwear unit volume at
our international distributor business decreased in fiscal 2003 due primarily to
a 5% decrease in Originals  footwear  unit volume sold in the Japanese  footwear
market  partially  offset by a 29% increase in technical  footwear  unit volumes
sold in  Australia,  Israel and  Sweden.  Distributor  sales  into the  Japanese
footwear market accounted for $1,357,  or 4%, of  international  sales in fiscal
2003,  compared to $2,494,  or 9%, in fiscal 2002.  The  international  footwear
average  wholesale  per pair  selling  price  decreased  due to a change  in the
product mix to lower  priced  technical  footwear and  increased  unit volume of
special  makeup  footwear sold at our British  subsidiary and by a change in the
international  distributors  product mix for technical  footwear to lower priced
product.

Other Products Segment

                           2004                    2003
                      Total / Change          Total / Change              2002
                      from Prior Year         from Prior Year             Total
                      ---------------         ---------------             -----

Net Sales              $25,403 / 9%             $23,355 / 4%             $22,367

The Other Products  segment  consists of our Hind athletic  apparel,  twenty-one
factory outlet stores, Spot-bilt coaches' and officials' shoes, cleated football
and multi-purpose  footwear,  casual walking and workplace footwear and sales of
our Hyde Authentic casual footwear, the distribution of which we discontinued in
fiscal 2002. Each of the businesses represented less than 10% of total revenues.
In the aggregate,  these businesses represented 15% of consolidated net sales in
fiscal 2004.

Net Sales:  2004 Compared to 2003

Worldwide sales of Other Products  increased $2,048, or 9%, to $25,403 in fiscal
2004 from $23,355 in fiscal 2003 due  primarily to $2,250 of increased  sales at
our factory outlet division,  $135 of increased domestic sales of our Hind brand
apparel and, to a lesser extent,  $133 of increased sales of our Spot-bilt brand
footwear  and  $120  attributable  to  favorable  currency  exchange,  primarily
resulting from a weaker U.S.  dollar against  European and Canadian  currencies,
partially  offset by $583 of  decreased  international  sales of our Hind  brand
apparel  and  $7 of  decreased  sales  due  to the  discontinuance  of our  Hyde
Authentics footwear line.
<PAGE>

Domestic net sales of Other  Products  increased  $2,094,  or 10%, to $23,995 in
fiscal 2004 from $21,901 in fiscal 2003 due primarily to a 22% increase in sales
at our factory outlet division,  to $10,152 in 2004, compared to $8,318 in 2003,
resulting  primarily  from the addition of two outlet stores in fiscal 2004 and,
to a lesser  extent,  a 1% increase in Hind brand apparel  sales,  to $12,861 in
2004,  compared  to $12,726  in 2003.  Hind  apparel  sales  increased  $135 due
primarily to a 1% increase in the average  wholesale  unit selling  price of our
Hind apparel brand.  Unit volumes of our Hind apparel  decreased to 874 units in
fiscal 2004,  compared to 877 units in fiscal 2003.  The increase in the average
wholesale per item selling price for our Hind apparel brand was due primarily to
increased  special  makeup unit volumes sold in fiscal 2003,  which  products we
sell at unit prices below our first quality  apparel,  and increased unit volume
in our running and fitness product categories,  which carry lower selling prices
than our  cycling  category.  The  decreased  Hind  apparel  unit volume was due
primarily to decreased special makeup unit volumes sold in fiscal 2004. Both the
decrease in Hind apparel  unit volume and the increase in the average  wholesale
per item selling price of our Hind apparel are due to lower special  makeup unit
volumes sold in fiscal 2004,  compared to fiscal 2003.  Sales of special  makeup
apparel  accounted for  approximately  10% of Hind apparel domestic net sales in
fiscal 2004,  compared to 23% of Hind  domestic  net sales in fiscal  2003.  The
decrease in special  makeup  sales in fiscal 2004 is due to the  production  and
sale  during  fiscal  2003 of  surplus  special  makeup  closeout  apparel  from
remaining  raw  materials  in  connection  with our change in product  sourcing.
Domestic  sales  at our  factory  outlet  stores  open  for  more  than one year
increased 6%, or $497, in fiscal 2004, compared to fiscal 2003.  Spot-bilt brand
sales increased 16% in fiscal 2004 to $982, compared to $850 in fiscal 2003, due
primarily to a 42% increase in footwear unit volumes, primarily due to increased
cleated  and  walking/duty  footwear  unit  volumes,  partially  offset by a 19%
decrease  in  wholesale  per pair  selling  prices  due to closing  out  certain
walking/duty styles.

International  net sales of Other  Products  decreased  $46, or 3%, to $1,408 in
fiscal  2004  compared  to $1,454  in  fiscal  2003,  due  primarily  to $583 of
decreased  Hind  apparel  sales,  due  primarily to  discontinuing  Hind apparel
distribution  at our Dutch  subsidiary  and decreased  Hind apparel sales at our
Canadian and British  subsidiaries,  partially offset by $416 of increased sales
at our Canadian factory outlet stores and, to a lesser extent, $120 attributable
to favorable  currency  exchange  primarily  resulting from a weaker U.S. dollar
against European and Canadian currencies.

Net Sales:  2003 Compared to 2002

Worldwide  sales of Other Products  increased  $988, or 4%, to $23,355 in fiscal
2003 from $22,367 in fiscal 2002 due  primarily to $1,439 of increased  sales at
our factory outlet division,  $599 of increased domestic sales of our Hind brand
apparel and, to a lesser extent,  $89 of increased  sales of our Spot-bilt brand
footwear  and  $66  attributable  to  favorable  currency  exchange,   primarily
resulting from a weaker U.S.  dollar against  European and Canadian  currencies.
These effects were partially offset by $808 of decreased  international sales of
our Hind brand apparel and $397 of decreased sales due to the  discontinuance of
our Hyde Authentics footwear line.

Domestic  net sales of Other  Products  increased  $1,730,  or 9%, to $21,901 in
fiscal 2003 from  $20,171 in fiscal  2002,  due  primarily  to a 21% increase in
sales at our factory outlet division,  to $8,318 in 2003,  compared to $6,879 in
2002, resulting primarily from the addition of five outlet stores in fiscal 2003
and, to a lesser extent,  a 5% increase in Hind brand apparel sales,  to $12,726
in 2003,  compared to $12,127 in 2002.  Hind apparel  sales  increased  $599 due
primarily  to an 18%  increase  in unit  volume of our Hind  apparel,  partially
offset by an 11% decrease in the average  wholesale  unit  selling  price of our
Hind apparel brand.  The increased Hind apparel unit volume was due primarily to
increased  special  makeup unit volumes and increased  volume of our running and
fitness product  categories.  The decrease in the average wholesale unit selling
price for our Hind apparel brand was due primarily to increased  special  makeup
unit volumes sold in fiscal  2003,  which  products we sell at unit prices below
our first quality apparel,  and increased unit volume in our running and fitness
product categories,  which carry lower selling prices than our cycling category.
2003 results also reflect $397 of decreased sales of Hyde Authentics footwear as
a result of our discontinuing this product line.  Partially offsetting the sales
increase at our factory  outlet stores were a $124, or 2%,  decrease in 2003, as
compared to 2002,  in sales at our factory  outlet stores open for more than one
year and $203 of decreased  sales as a result of closing a factory  outlet store
in May  2002.  Spot-bilt  brand  sales  increased  12% in  fiscal  2003 to $850,
compared to $760 in fiscal 2002,  due primarily to increased  wholesale per pair
selling prices, partially offset by a decrease in footwear unit volumes.

International  net sales of Other Products  decreased $742, or 34%, to $1,454 in
fiscal  2003  compared  to $2,196  in  fiscal  2002,  due  primarily  to $808 of
decreased  Hind  apparel  sales  at  our  European  and  Canadian  subsidiaries,
partially offset by $66 attributable to favorable  currency  exchange  primarily
resulting from a weaker U.S. dollar against European and Canadian currencies.
<PAGE>


Cost and Expenses

2004 Compared to 2003

Our gross margin percentage increased 2.4% to 40.9% in fiscal 2004 from 38.5% in
fiscal 2003 due primarily to a reduction in our product costs. Our product costs
decreased  primarily due to a $2.973 decrease in international  footwear product
costs due to favorable currency exchange  reflecting the impact of a weaker U.S.
dollar  against  European and Canadian  currencies,  a $929  decrease in Saucony
domestic footwear product costs reflecting negotiated price reductions and lower
mold costs,  $639 of volume  rebates  provided  by two of our  Saucony  footwear
suppliers,  a $287  decrease in Hind  product  costs  reflecting a change in our
product  sourcing  to finished  goods,  a $193  decrease  in our factory  outlet
product costs reflecting increased factory direct footwear purchases, and a $179
decrease in Spot-bilt  inventory  provisions taken in fiscal 2004. Other factors
contributing  to our gross margin  increase in fiscal 2004 are a 57% increase in
lower margin Hind special  makeup  closeout  apparel sales and a 27% increase in
Saucony  domestic  footwear at once  shipments,  which  carry  lower  discounts.
Offsetting  these  decreases  in cost of sales  were a $923  increase  in volume
rebates provided to Saucony domestic customers in 2004, a $732 increase in sales
discounts  at  our  International  subsidiaries,   due  primarily  to  increased
incentives  offered by our British and Dutch subsidiaries to increase sales, and
a $434 increase in cooperative  advertising  allowances which were accounted for
as a reduction  of net sales.  Other  factors  offsetting  the increase in gross
margin in  fiscal  2004  were  increased  footwear  unit  volume  of  mid-priced
cross-over  footwear  sold  into the  athletic  mall,  sporting  goods and value
channels at lower gross margins and increased closeout footwear unit volume sold
in the fourth  quarter of fiscal  2004 at lower gross  margins.  Included in our
fiscal  2003 gross  margin is a charge of $416  recorded in cost of sales due to
accelerating the vesting on common stock purchase warrants held by five footwear
suppliers.

Selling,  general  and  administrative  expenses  as a  percentage  of net sales
decreased to 28.9% in fiscal 2004 compared to 29.5% in fiscal 2003. The decrease
in the  percentage  resulted  from net sales  increasing at higher rate than the
increased  advertising,  selling and  administrative  expenses  in fiscal  2004.
Selling,  general and administrative expenses increased to $48,015, or 19%, from
$40,199 in fiscal 2003, due primarily to a $1,854 increase in professional fees,
$1,095  increase  in  administrative  and selling  payroll  and  related  fringe
benefits due to increased  staffing,  $881  increase in bad debt  expense,  $702
increase in incentive compensation,  $550 increase in advertising,  primarily in
print  media,  $440 of operating  expenses  associated  with the factory  outlet
division expansion, $432 increase in variable selling expenses, $400 increase in
marketing communication costs, $380 increase in promotion costs due to increased
participation   at  running  and  triathlon   events  and  a  $197  increase  in
depreciation. The effects of foreign exchange rate changes increased selling and
administrative  expenses  by $575 in  fiscal  2004,  compared  to  fiscal  2003.
Included in professional  fees in fiscal 2004 were $1,119 of  professional  fees
associated  with our  assessment of internal  controls as required under Section
404 of the  Sarbanes-Oxley  Act of 2002 and $592 of legal and professional  fees
related to our review of strategic  alternatives and related  matters.  Bad debt
expense  increased  primarily due to the favorable  litigation  settlement which
reduced bad debt  expense by $566 in fiscal 2003 and the  bankruptcy  filings by
two accounts.

2003 Compared to 2002

Our gross margin percentage increased 4.1% to 38.5% in fiscal 2003 from 34.4% in
fiscal 2002 due primarily to a reduction in our product costs. Our product costs
decreased  primarily due to a $1,930 decrease in international  footwear product
costs reflecting  favorable currency exchange due to the impact of a weaker U.S.
dollar  against  European and  Canadian  currencies,  a $1,311  decrease in Hind
product costs,  reflecting a change in our product sourcing to finished goods, a
$996 decrease in Saucony domestic footwear product costs,  reflecting negotiated
price  reductions  and lower mold  costs,  a $395  reduction  in Hind  inventory
reserve  provisions  taken in 2003 and a $225  decrease  in our  factory  outlet
product  costs,   reflecting   increased  factory  direct  footwear   purchases.
Offsetting  these  decreases  in cost of sales  were a  pre-tax  charge  of $416
recorded  in cost of sales due to  accelerating  the  vesting  on  common  stock
purchase warrants held by five footwear suppliers,  a $139 increase in Spot-bilt
inventory reserve provisions taken on slow-moving  Spot-bilt brand inventory and
a $300  increase  in volume  incentive  rebates  provided  to  Saucony  domestic
customers in 2003.
<PAGE>

Selling,  general  and  administrative  expenses  as a  percentage  of net sales
increased to 29.5% in fiscal 2003 compared to 28.0% in fiscal 2002. The increase
in  the   percentage   resulted   from   increased   advertising,   selling  and
administrative  expenses in fiscal  2003.  Selling,  general and  administrative
expenses increased to $40,199, or 8%, from $37,278 in fiscal 2002, due primarily
a $1,636 increase in administrative  and selling payroll and related  employment
taxes, a $480 increase in employee healthcare costs, $426 in increased incentive
compensation,  $424 of increased  operating expenses associated with the factory
outlet  division  expansion,  $363 in increased  print media  advertising,  $217
increase in severance  costs,  $220 in increased  professional  fees and $175 in
increased business insurance costs. The effects of foreign exchange rate changes
increased selling and administrative  expenses by $674 in fiscal 2003,  compared
to fiscal 2002.  These increases were partially  offset by lower  provisions for
bad debt expense, due to the favorable  litigation  settlement which reduced bad
debt  expense by $566,  and, to a lesser  extent,  a $300  reduction in variable
selling  expense,  $260 in lower  depreciation  expense  and a $257  decrease in
account specific advertising and promotion expense.

Environmental Charge

In  fiscal  2004,  we  recorded  a charge of  $2,275  to  address  environmental
conditions  at our East  Brookfield,  Massachusetts  distribution  facility.  We
acquired  this  facility as part of an asset  purchase in March 1985. We believe
the  contamination is the result of manufacturing  activities that took place in
the  facility  in the  early and  mid-1900s  when  this  facility  was owned and
operated by an unrelated  party. In accordance with SoP 96-1, the  environmental
charge  includes  the  estimated  direct  costs to  investigate  and address the
conditions on the East  Brookfield,  Massachusetts  property and the  associated
engineering,  legal and  consulting  costs we expect to incur as we address  the
environmental conditions.  The following table summarizes the estimated expenses
associated with our environmental charge:

              Environmental response costs................$   1,538
              Engineering and risk assessment.............      375
              Legal.......................................      352
              Post-remedy monitoring......................       10
                                                          ---------
              Total.......................................$   2,275
                                                          =========


Our  assessment of our liability and the  associated  costs is an estimate based
upon currently  available  information  after  consultation  with  environmental
engineers,   consultants  and  attorneys   assisting  us  in  addressing   these
environmental  issues.  Estimated costs to address the environmental  conditions
range from  $1,242 to  $4,621.  Our actual  costs to address  the  environmental
conditions may change based on further investigations,  based on the conclusions
of regulatory authorities about information gathered in these investigations and
due to the  inherent  uncertainties  involved in  estimating  conditions  in the
environment  and the costs of addressing  those  conditions.  We do not discount
costs of expenditures  for  environmental  obligations  their present value. The
environmental  charge is included in operating expenses for the Saucony segment.
At December  31, 2004 our accrual for  environmental  charges was $2,275 and was
included on our balance sheet under current liabilities.

Plant Closing and Other Credits

On November 9, 2001 we announced the cessation of manufacturing  and the closing
of our Bangor,  Maine  facility.  During the fourth  quarter of fiscal 2001,  we
relocated our Asian sourcing and quality  control office to China,  resulting in
the closure of our Taiwan office,  and negotiated an early  termination and exit
of a retail  store  lease.  As a result of these  actions,  we recorded  pre-tax
charges of $2,108 in fiscal 2001.

During fiscal 2002, we recorded a pre-tax net benefit of $214 to reduce expenses
accrued in the fourth quarter of fiscal 2001  associated with the closing of our
Bangor,  Maine  manufacturing  facility and the early  termination and exit of a
retail  store lease.  Partially  offsetting  this pre-tax  benefit was a pre-tax
charge of $142  incurred  to close an  underperforming  retail  store.  Expenses
associated  with  the  store  closing  included  lease   termination  and  other
contractual costs of $51 and $91 to write-off leasehold improvements.
<PAGE>

A  pre-tax  benefit  of $35  was  recorded  in  fiscal  2003  to  terminate  the
plant-closing accrual. The benefits recorded for the Bangor, Maine plant closing
was included in income before tax for the Saucony segment,  and the retail store
closing charge was included in income before tax for the Other Products segment.

Gain on Sale of Former Manufacturing Facility

On November 7, 2003,  we completed  the sale of our Bangor,  Maine real property
which had previously been used in the assembly of domestic Saucony footwear. The
following table summarizes the sale of the Bangor, Maine real property:

              Gross proceeds..............................$  763
              Transaction expenses........................    77
                                                          ------
              Net proceeds................................   686
              Net book value of facility..................   357
                                                          ------
              Gain on sale................................$  329
                                                          ======

We recorded the gain realized from the sale in operating  income for the Saucony
segment.

Non-Operating Income (Expense)

Interest  income  increased to $314 in fiscal 2004 from $245 in fiscal 2003, due
to higher  interest  rates earned on cash balances and  short-term  investments.
Interest  income  decreased to $245 in fiscal 2003 from $332 in fiscal 2002, due
to lower interest rates on invested cash balances and short-term investments.

Interest  expense  increased to $8 in fiscal 2004 from $5 in fiscal 2003, due to
interest  expense  recorded  on  capital  lease  obligations.  Interest  expense
remained constant at $5 in fiscal 2003 and fiscal 2002.

Foreign currency  (losses) gains decreased to an expense of $734 in fiscal 2004,
compared to income of $288 in fiscal 2003.  Foreign  currency gains increased to
$288 in fiscal  2003 from $20 in fiscal  2002.  The changes in fiscal  2004,  as
compared to fiscal 2003,  and in fiscal 2003,  as compared to fiscal 2002,  were
primarily due to gains and losses on forward foreign currency contracts.

Income (Loss) Before Taxes and Minority Interest

         Segment                       2004          2003            2002

     Saucony........................$ 15,373       $ 11,910        $ 10,288
     Other Products.................   2,386          1,664          (1,007)
                                    --------       --------        --------
     Consolidated...................$ 17,759       $ 13,574        $  9,281
                                    ========       ========        ========

We evaluate  segment  performance  and the  performance of key managers based on
profit or loss before income taxes and minority interest.  Income before tax and
minority interest increased $4,185 in fiscal 2004 to $17,759 compared to $13,574
in fiscal 2003 due primarily to increased pre-tax income realized by our Saucony
segment and, to a lesser extent,  increased pre-tax income realized by our Other
Products  segment.  The  improvement  in pre-tax  income at our Saucony  segment
reflected  increased  domestic and  international  net sales,  due  primarily to
increased  footwear  unit volume and  increased  gross  margins due to favorable
currency exchange and lower product costs, both of which improved gross margins.
The  improvement  in our Other  Products  segment income before tax and minority
interest was due primarily to improved  profitability  at our Hind apparel brand
due to increased sales, improved gross margins and lower operating expenses and,
to a lesser extent,  improved profitability at our factory outlets stores due to
increased sales and improved gross margins.
<PAGE>

Income  before tax and  minority  interest  increased  $4,293 in fiscal  2003 to
$13,574  compared to $9,281 in fiscal 2002 due  primarily to  increased  pre-tax
income realized by our Other Products segment and, to a lesser extent, increased
pre-tax income  realized by our Saucony  segment.  The  improvement in our Other
Products  segment  income before tax and minority  interest was due primarily to
improved  profitability  at our  Hind  apparel  brand  due to  increased  sales,
improved  gross margins and lower  operating  expenses and, to a lesser  extent,
improved  profitability at our factory outlets stores due to increased sales and
improved gross margins.  Pre-tax income at our Saucony segment  increased due to
lower product  costs and favorable  currency  exchange,  both of which  improved
gross margins.

Income Taxes

The provision for income taxes increased to $7,237 in fiscal 2004 from $4,940 in
fiscal 2003 due  primarily  to  increased  domestic  and  international  pre-tax
income.  The effective tax rate  increased to 40.8% in fiscal 2003,  compared to
36.4% in fiscal 2003,  due primarily to a shift in the  composition  of domestic
and  international  pre-tax income,  higher marginal  domestic tax rates and the
reversal of  valuation  allowances  on foreign  loss  carryforwards  recorded in
fiscal 2003,  which  reduced the fiscal 2003 tax  provision by 2.4%. We credited
income tax benefit of options  exercised of $1,394  during  fiscal 2004 and $162
during fiscal 2003 to additional paid-in capital. Therefore that benefit did not
impact  our  provision  for  income  taxes or the  effective  tax rate in either
period. The increase in the income tax benefit of options credited to additional
paid-in  capital  in  fiscal  2004  is due to the  significant  increase  in the
exercise of stock options prior to the record date for our special cash dividend
paid on our common stock in the first quarter of fiscal 2004.

During fiscal 2004, we provided $235, for probable tax contingencies.

The provision for income taxes increased to $4,940 in fiscal 2003 from $3,865 in
fiscal 2002 due  primarily  to  increased  domestic  and  international  pre-tax
income.  The effective tax rate  decreased to 36.4% in fiscal 2003,  compared to
41.6% in fiscal 2002,  due primarily to the reversal of valuation  allowances on
foreign loss carryforwards that we expect to realize in fiscal 2004. We credited
income tax  benefit of options  exercised  of $162  during  fiscal  2003 and $21
during fiscal 2002 to additional paid-in capital. Therefore that benefit did not
impact  our  provision  for  income  taxes or the  effective  tax rate in either
period. During fiscal 2003, we provided $250 for probable tax contingencies.

Minority Interest in Income of Consolidated Subsidiary

Minority interest expense represents a minority shareholders' allocable share of
our Canadian subsidiary's earnings after deducting for income tax. In July 2003,
we entered into a Share  Purchase  Agreement  with the minority  shareholder  of
Saucony Canada,  Inc.  whereby we increased our ownership  percentage of Saucony
Canada, Inc. to 95% from 85% effective as of July 4, 2003. The purchase price of
$547 equaled the net book value of Saucony Canada, Inc. as of July 4, 2003.

Minority interest  decreased to $104 in fiscal 2004 from $146 in fiscal 2003 due
primarily to increasing our ownership in Saucony Canada,  Inc. Minority interest
decreased  to $146 in fiscal  2003 from $173 in  fiscal  2002 due  primarily  to
increasing our ownership in Saucony Canada, Inc.

Net Income

Net income for fiscal 2004 was $10,418, or $1.38 per Class A share and $1.52 per
Class B share on a diluted basis, compared to $8,488, or $1.26 per Class A share
and  $1.38 per Class B share on a  diluted  basis  for  2003.  We used  weighted
average  common  shares and common stock  equivalents  of 2,521,000  Class A and
4,559,000  Class B shares for fiscal 2004 and  2,521,000  Class A and  3,850,000
Class B shares for fiscal 2003 to calculate diluted earnings per share.

Net income for fiscal 2003 was $8,488,  or $1.26 per Class A share and $1.38 per
Class B share on a diluted basis, compared to $5,243, or $0.80 per Class A share
and  $0.88 per Class B share on a  diluted  basis  for  2003.  We used  weighted
average  common  shares and common stock  equivalents  of 2,521,000  Class A and
3,850,000  Class B shares for fiscal 2004 and  2,563,000  Class A and  3,623,000
Class B shares for fiscal 2002 to calculate diluted earnings per share.

<PAGE>
Liquidity and Capital Resources

Fiscal 2004

As of December  31,  2004,  our cash and cash  equivalents  totaled  $12,042,  a
decrease of $29,739 from January 2, 2004.  The decrease was due primarily to the
payment  of a  special  cash  dividend  of  $25,990  in March  2004 and  regular
quarterly  cash  dividends of $1,299,  an increase in short term  investments of
$14,948,  cash  outlays  for  capital  assets of $4,541,  due  primarily  to the
expansion of our corporate offices, and $59 expended in payment of capital lease
obligations.  This  decrease in cash was offset in part by the receipt of $3,966
of cash from the  issuance  of shares of our common  stock as a result of option
and common stock purchase  warrant  exercises and cash provided by operations of
$12,580.

Our  accounts  receivable  at December  31, 2004  increased  $3,014,  net of the
provision for bad debts and  discounts,  as compared to at January 2, 2004,  due
primarily to increased net sales of our Saucony and Other products in the fourth
quarter of fiscal 2004. Our days' sales outstanding for our accounts  receivable
decreased  to 49 days in fiscal  2004 from 51 days in fiscal  2003.  Days' sales
outstanding  is defined as the number of average daily net sales in our accounts
receivable  as of the period end date and is  calculated  by dividing the end of
period  accounts  receivable  by the  average  daily net sales.  Our days' sales
outstanding decreased in fiscal 2004 due to increased at-once footwear shipments
which involve  shorter  payment terms.  The provision for bad debts and doubtful
accounts increased to $6,019 in fiscal 2004 from $4,453 in fiscal 2003 due to an
increase in the provision for doubtful  accounts and increased sales  discounts,
both  domestically  and at our  international  subsidiaries  in fiscal 2004. The
increase in the provision for doubtful accounts in fiscal 2004 was due primarily
to a favorable  litigation  settlement that reduced the provision in fiscal 2003
and the fiscal 2004 bankruptcy filings by two significant accounts.

Inventories  increased  $2,702,  at December 31, 2004, as compared to January 2,
2004, due primarily to increased levels of domestic Saucony cross-over footwear,
which we expect to ship at discounted  margins in fiscal 2005, and higher levels
of domestic  Saucony special makeup footwear and Hind apparel which we expect to
ship in fiscal 2005 at customary margins. Our inventory turns ratio increased to
4.1 turns in fiscal  2004 from 3.4  turns in fiscal  2003.  The  number of days'
sales in  inventory  decreased  to 95 days in fiscal 2004 from 98 days in fiscal
2003. The inventory turns ratio represents our net sales for a period divided by
our  inventory at the end of the period.  Days' sales in inventory is defined as
the number of average  daily cost of sales in our inventory as of the period end
date and is calculated by dividing the end of period  inventories by the average
daily cost of sales.

Other  factors  affecting our  operating  cash flows in fiscal 2004,  included a
$1,009  increase in accrued  expenses due  primarily  to increased  accruals for
freight and inventory  importation and higher levels of operating  expenses,  an
increase of $1,179 in accounts  payable due to the timing of footwear  purchases
in the fourth quarter of fiscal 2004 and a $340 increase in accrued income taxes
payable on higher pre-tax income.

Since May 2003,  we have paid  regular  quarterly  dividends  on our Class A and
Class B Common  Stock.  In February  2004,  our Board of Directors  announced an
increase in our regular  quarterly  dividends  from $0.040 to $0.050 per Class A
Common share and from $0.044 to $0.055 per Class B Common share. During 2004, we
paid  regular  quarterly  dividends of a total of $0.19 per Class A Common share
and $0.209 per Class B Common share, for aggregate  regular dividend payments of
$1,299.  These payments  included one dividend payment in January 2004 of $0.040
per Class A Common  share and  $0.044  per  Class B Common  share,  prior to the
February 2004 announced increase in the dividend rates.

On February 17, 2004, our Board of Directors declared a special cash dividend of
$4.00 per share on each of our  Class A Common  Stock and Class B Common  Stock.
The special dividend was paid on March 17, 2004 to stockholders of record at the
close of  business  on March 3,  2004.  The  aggregate  dividend  payout for the
special dividend amounted to approximately $25,990.

As of December 31, 2004, we recorded $351 in current liabilities,  under accrued
expenses, representing the dividend liability for the January 13, 2005 dividend.
<PAGE>

Our corporate  charter  provides that regular cash dividends paid on our Class B
Common  Stock are to be in an  amount  equal to 110% of the  amount  paid on our
Class A  Common  Stock.  This  charter  provision  does  not  apply  to  special
dividends.

In January 2004, we amended our credit  facility to reduce the  restrictions  in
the facility on our ability to pay cash dividends,  make other  distributions on
our common stock and  repurchase or redeem our capital  stock.  As amended,  the
credit  facility  permits  us to pay cash  dividends,  and make  repurchases  or
redemptions  of, or other specified  distributions  with respect to, our capital
stock, in a total amount of up to $5,000 in any fiscal year. This limitation did
not  apply  to our  special  dividend  declared  in  February  2004,  which  was
specifically excluded from this limitation.

Our  declaration of future cash dividends will be at the discretion of our Board
of  Directors  and is  dependent  upon,  among other  things,  future  earnings,
operations,  capital  requirements,  our general financial  position and general
business conditions.

During fiscal 2004,  we did not make any  repurchases  of our common  stock.  In
fiscal  2003,  we  repurchased  12,000  shares of our  common  stock for a total
expenditure of $126. Since the approval of our stock  repurchase  program by our
Board of Directors in May 1998, we have repurchased a total of 574,000 shares of
our common stock for a total  expenditure of $5,370. As of December 31, 2004, we
remained  authorized to repurchase up to 168,376 shares under the May 1998 stock
repurchase program.

Fiscal 2003

As of  January  2,  2004,  our cash and cash  equivalents  totaled  $41,781,  an
increase of $7,298 from January 3, 2003.  The increase was due  primarily to the
generation  of $15,045 of cash from  operations  and,  to a lesser  extent,  the
receipt of $686 from the sale of our former  manufacturing  facility  in Bangor,
Maine and the receipt of $644 from the issuance of shares of our common stock as
a result of option  exercises,  partially  offset by the  purchase  of $5,769 of
short-term investments,  cash outlays for purchases of capital assets of $1,667,
the purchase of additional  common shares of Saucony  Canada,  Inc. of $547, the
payment of cash  dividends  of $518 on our common  stock and the  repurchase  of
shares of our common stock of $126.

Our  accounts  receivable  at  January  2,  2004  increased  $3,075,  net of the
provision  for bad debts  and  discounts  (which  was  reduced  by $566 due to a
litigation  settlement),  as compared to at January 3, 2003,  due  primarily  to
increased net sales of our Saucony products in the fourth quarter of fiscal 2003
and an increase in our days' sales outstanding for our accounts receivable.  Our
days' sales  outstanding  for our  accounts  receivable  increased to 51 days in
fiscal 2003 from 42 days in fiscal 2002.  Days' sales  outstanding is defined as
the  number of  average  daily net sales in our  accounts  receivable  as of the
period  end  date and is  calculated  by  dividing  the end of  period  accounts
receivable by the average daily net sales. Our days' sales outstanding increased
in fiscal 2003 due to the timing of our shipments in the fourth quarter of 2003,
much of which shipped in December 2003. The provision for bad debts and doubtful
accounts  decreased to $4,453 in fiscal 2003 from $4,752 in fiscal 2002 due to a
decrease in the provision for doubtful  accounts and was partially  offset by an
increase in discounts in fiscal 2003. The decrease in the provision for doubtful
accounts in fiscal 2003 was due primarily to the favorable litigation settlement
with a former customer.

Inventories  decreased  $6,163, at January 2, 2004, as compared to at January 3,
2003,  due primarily to continued  improvements  in our supply chain intended to
reduce on hand inventory and lower Hind brand apparel  inventory due to sourcing
changes.  Our inventory  turns ratio  increased to 3.4 turns in fiscal 2003 from
3.1 turns in fiscal 2002. The number of days' sales in inventory decreased to 98
days in fiscal  2003 from 113 days in fiscal  2002.  The  inventory  turns ratio
represents our net sales for a period divided by our inventory at the end of the
period.  Days' sales in inventory is defined as the number of average daily cost
of sales in our  inventory  as of the  period  end  date  and is  calculated  by
dividing the end of period inventories by the average daily cost of sales.

Other factors  affecting our  operating  cash flows in fiscal 2003,  included an
increase of $638 in accounts  payable due to extended  payment terms provided by
our footwear  suppliers,  a $121 decrease in accrued income taxes payable due to
the  timing of tax  payments  and a $1,567  increase  in  accrued  expenses  due
primarily to increased accruals for incentive compensation.
<PAGE>

On May 21, 2003,  our Board of Directors  adopted a regular  quarterly  dividend
plan with dividends payable at an annual rate of $0.160 per share on our Class A
Common  Stock and $0.176  per share on our Class B Common  Stock.  In 2003,  the
board declared regular quarterly cash dividends on May 21, 2003, August 21, 2003
and  November  6, 2003,  in the amount of $0.040 per share on our Class A Common
Stock and $0.044 per share on our Class B Common Stock.  We paid a total of $518
in dividends in 2003.  On January 15, 2004, we paid the regular  quarterly  cash
dividends  declared by the Board on November 6, 2003.  As of January 2, 2004, we
recorded $260 in current liabilities,  under accrued expenses,  representing the
dividend liability for the January 15, 2004 dividend.

Credit Facility

In August 2002, we entered into a revolving  credit agreement under the terms of
which a bank committed up to a maximum of $15,000 to us for cash  borrowings and
letters  of  credit.  On August  31,  2004,  we  amended  our  revolving  credit
agreement,  pursuant  to the  amendment,  the term of the credit  agreement  was
extended to August 31, 2005.  Maximum  borrowings  under the credit facility are
limited to the lesser of $15,000 or the sum of 65% of eligible  receivables plus
20% of eligible  finished goods inventory.  Borrowings under the credit facility
are made at our  election at the bank's  prime rate of interest  less 1.0% or at
the LIBOR rate plus 1.5%.  In  addition,  we pay a quarterly  commitment  fee of
0.25% on the average  daily unused  credit line.  The credit  facility  contains
restrictions  and  financial  covenants  including:  restrictions  on additional
indebtedness,  restrictions  on the annual  amount of  equipment  financing  and
capital lease  indebtedness  and limits on repurchases of our common stock.  The
credit  facility  permits  us to pay cash  dividends,  and make  repurchases  or
redemptions  of, or other specified  distributions  with respect to, our capital
stock, in a total amount of up to $5,000 in any fiscal year. This limitation did
not  apply  to our  special  dividend  declared  in  February  2004,  which  was
specifically excluded from this limitation.  Furthermore, for any fiscal quarter
during the term of the credit facility,  any  consolidated  pre-tax loss may not
exceed $2,500, and for any two consecutive fiscal quarters, consolidated pre-tax
loss may not exceed $1,000.

The terms of our primary credit  facility  expires on August 31, 2005.  Upon its
expiration,  we intend  either  to extend  this  facility  or enter  into a new,
similar facility. However, we will evaluate our liquidity needs again around the
time the facility is scheduled to  terminate,  and we may elect not to extend or
replace the facility or to delay any extension or  replacement  of the facility.
In  addition,  we may not be able to extend or replace  the  facility or similar
terms or on terms acceptable to us.

We were in compliance  with all covenants of the credit facility at December 31,
2004. As of December 31, 2004 we had open commitments under letters of credit of
$2,022.  As of December 31, 2004,  $12,978 was available for borrowing under the
credit facility.

One of our foreign subsidiaries  maintains a credit facility for cash borrowings
and letters of credit in the amount of $1,251.  At December 31, 2004, $1,251 was
available for borrowing under the facility.

Capital Expenditures

We anticipate  capital  expenditures to range between $3,500 to $4,000 in fiscal
2005.  Of this  amount,  we expect to expend  approximately  $2,750 to $3,050 to
expand  and  renovate  our  Peabody,  Massachusetts  facility,  $600  to $750 on
computer  hardware  and  software  and $150 to $200 to open two  factory  outlet
stores.

<PAGE>

Contractual Obligations

Below is a table which presents our  contractual  obligations and commitments at
December 31, 2004.
<TABLE>
<CAPTION>

                                                                     Payments due by period
                                            ------------------------------------------------------------------
                                                               Less            One         Three       More
        Contractual                                          than one       to three      to five      than
        Obligations                            Total           year           years        years    five years
        -----------                            -----           ----           -----        -----    ----------

<S>                                         <C>             <C>            <C>          <C>          <C>
Operating leases............................$   4,071       $   1,275      $  1,906     $    648     $   242
Capital leases..............................      213              69           138            6          --
Other long-term obligations (1).............    1,298           1,203            90            5          --
Purchase obligations (2)....................   20,355          20,355            --           --          --
                                            ---------       ---------      --------     --------     -------
Total contractual obligations...............$  25,937       $  22,902      $  2,134     $    659     $   242
                                            =========       =========      ========     ========     =======
_______________

(1)  Other  long-term  obligations  include  athlete and event  sponsorship  and
     employment  contracts  with two key  executives.  The amounts  included for
     athlete sponsorship represent base compensation and consist of $98 for less
     than one year and $40 for one to three years. Actual payments may be higher
     than the amounts included as these contracts  provide for bonus payments to
     the athletes based upon athletic  achievements in future  periods.  Maximum
     aggregate  bonus  payments to athletes are as follows:  less than one year,
     $103 and one to three years, $85.

(2)  Purchase  order  obligations  consist of open  purchase  orders for sourced
     footwear and apparel and open purchase orders for U.S.  operating  expenses
     ordered in the normal course of business.
</TABLE>


Off-Balance Sheet Arrangements

We had letters of credit  outstanding of $2,022 at December 31, 2004 and $747 at
January 2, 2004.  All of the letters of credit  were issued for the  purchase of
inventory.  We had forward foreign exchange  contracts of $8,570 at December 31,
2004 and $7,448 at January  2, 2004,  all of which are due to settle  within the
next 12 months (see Note 20 to the consolidated financial statements included in
Item 8 to this Annual Report Form 10-K).

                                                            Amounts
                                                           Committed
                                                       December 31, 2004
                                                       -----------------

          Letters of credit...............................$   2,022
          Forward foreign exchange contracts..............    8,570
                                                          ---------
          Total...........................................$  10,592
                                                          =========


We use letters of credit to facilitate a limited number of supplier arrangements
for our Hind apparel  inventory.  We do not believe our use of letters of credit
materially  affects our liquidity.  If we did not use letters of credit we would
make alternative  arrangements with these Hind apparel inventory suppliers.  Our
primary market risk is the risk of exposure to unfavorable movements in exchange
rates  between  the U.S.  dollar and the  Canadian  dollar,  the  British  Pound
Sterling  and the Euro.  We use  forward  exchange  contracts  to hedge firm and
anticipated  purchase and sale commitments  denominated in currencies other than
our  subsidiaries'  local  currencies.  The  purpose  of  our  currency  hedging
activities  is to protect our local  subsidiaries'  cash flows  related to these
commitments  from  fluctuations in currency  exchange  rates,  the loss of which
would expose us to increased market risk and fluctuations in our liquidity.
<PAGE>

Overall Liquidity

Our liquidity is  contingent  upon a number of factors,  principally  our future
operating results.  Our liquidity fluctuates during the course of a fiscal year.
For instance, we generally use cash from operations in the first quarter, due to
working capital requirements,  but generate cash from operations for the balance
of the fiscal  year.  We believe  that our  current  cash and cash  equivalents,
credit  facilities and internally  generated  funds will be adequate to meet our
working  capital  requirements  and  other  operating  expenses  and to fund our
capital  investment needs and dividend  payments for at least the next 12 months
and for the foreseeable future.  During fiscal 2004 we generated $12,580 in cash
from operating cash flows due to our operating profit and an increase in accrued
expenses and in accounts  payable.  In 2003,  we generated  $15,045 in cash from
operating cash flows, due primarily to our operating  profit, an increase in our
accrued expenses and accounts payable.

As of  December  31,  2004,  we had  $12,042  in  cash,  $20,694  in  short-term
investments, $22,484 in accounts receivable and $25,645 in inventories.

At December 31, 2004, we had $201 in capital lease  obligations  outstanding and
had no borrowings outstanding and $14,229 available under our credit facilities.
Our short-term  liquidity could potentially be adversely  impacted should demand
for our products decline significantly,  which, among other things, could result
in extended  payment  terms for our  customers  and the  increased  use of price
concessions to induce customers to purchase our products.

Inflation and Currency Risk

The effect of inflation on our results of  operations  over the past three years
has been  minimal.  The  impact of  currency  fluctuations  on our  purchase  of
inventory  from  foreign  suppliers  has been minimal as the  transactions  were
denominated in U.S. dollars.  We are, however,  subject to currency  fluctuation
risk with  respect to the  operating  results of our  foreign  subsidiaries  and
foreign currency denominated  payables.  During fiscal 2004 the gross margins of
our European and Canadian subsidiaries increased due to currency fluctuation. We
have  entered  into  forward  foreign  exchange  contracts  to minimize  various
transaction  currency  risks.  We  believe  that our  forward  foreign  currency
contracts  function  as  economic  hedges of our cash flows and that our foreign
exchange management program effectively  minimizes various transaction  currency
risks.

Accounting Pronouncements

In November 2004, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 151, "Inventory Costs", an amendment of ARB
No. 43,  Chapter 4. SFAS 151 clarifies the  accounting  for abnormal  amounts of
idle facility expense,  freight, handling costs and wasted material. SFAS 151 is
effective for inventory  costs incurred during fiscal years beginning after June
15, 2005. We do not believe the adoption of SFAS 151 will have a material effect
on its financial position, results of operations or cash flows.

In December 2004,  the FASB issued SFAS No. 123R,  "Share-Based  Payment".  This
statement  is  a  revision  of  SFAS  No.  123,   "Accounting   for  Stock-Based
Compensation,"  and supersedes APB Opinion No. 25,  "Accounting for Stock Issued
to  Employees."  SFAS 123R  requires  all  share-based  payments  to  employees,
including  grants of employee stock  options,  to be recognized in the financial
statements  based on their fair values.  The  provisions  of this  statement are
effective for interim or annual  periods  beginning  after June 15, 2005. We are
currently  evaluating the provisions of this revision to determine the impact on
our consolidated financial statements.  We expect the adoption of this statement
to have a negative effect on consolidated net income.

In December 2004, the FASB decided to defer the issuance of their final standard
on earnings per share  entitled  "Earnings per Share - an Amendment to FAS 128."
The final  standard  will be effective  in 2005 and will  require  retrospective
application for all prior periods presented. The significant proposed changes to
the EPS  computation  are changes to the treasury  stock  method and  contingent
share guidance for computing year-to-date diluted EPS, removal of the ability to
overcome the  presumption of share  settlement  when computing  diluted EPS when
there is a choice  of share or cash  settlement  and  inclusion  of  mandatorily
convertible  securities in basic EPS. We are currently  evaluating  the proposed
provisions  of this  amendment  to  determine  the  impact  on our  consolidated
financial statements.
<PAGE>

In December 2004, the FASB issued FASB Staff Position No. 109-1,  Application of
FASB  Statement No. 109,  Accounting  for Income Taxes,  to the Tax Deduction on
Qualified  Production  Activities  Provided by the American Jobs Creation Act of
2004. FSP 109-1 clarifies that the  manufacturer's  deduction provided for under
the American  Jobs  Creation  Act of 2004 should be  accounted  for as a special
deduction  in  accordance  with  SFAS 109 and not as a tax rate  reduction.  The
adoption  of FSP  109-1  will have no impact on our  results  of  operations  or
financial position for fiscal 2005 because the  manufacturer's  deduction is not
available to us until fiscal year 2006.  We are  evaluating  the effect that the
manufacturer's deduction will have in subsequent years.

The FASB also issued FASB Staff  Position No. 109-2,  Accounting  and Disclosure
Guidance for the Foreign  Earnings  Repatriation  Provision  within the American
Jobs  Creation Act of 2004.  The AJCA  introduces a special  one-time  dividends
received  deduction on the repatriation of foreign earnings to a U.S.  taxpayer,
provided  specified  criteria  are  met.  FSP  109-2  provides   accounting  and
disclosure  guidance  with  respect  to  this  deduction.   Until  the  Treasury
Department or Congress provides additional  clarifying guidance on key elements,
the  amount of  foreign  earnings  to be  repatriated  by us, if any,  cannot be
determined;  however,  the  presumption  that such  unremitted  earnings will be
repatriated cannot be overcome.  FSP 109-2 grants an enterprise  additional time
beyond the year ended  December  31,  2004,  in which the AJCA was  enacted,  to
evaluate the effects of the AJCA on its plan for reinvestment or repatriation of
unremitted earnings.


Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K and the documents  incorporated  by reference in
this Annual Report on Form 10-K contain forward-looking  statements that involve
substantial  risks  and  uncertainties.  In some  cases you can  identify  these
statements by forward-looking  words such as "anticipate",  "believe",  "could",
"estimate", "expect", "intend", "may", "should", "will", and "would", or similar
words.  You should read statements  that contain these words  carefully  because
they discuss  future  expectations,  contain  projections  of future  results of
operations   or  of   financial   position  or  state  other   "forward-looking"
information.  The  important  factors  listed below,  as well as any  cautionary
language  elsewhere  in this  Annual  Report on Form 10-K,  provide  examples of
risks,  uncertainties  and events  that may cause our  actual  results to differ
materially from the expectations described in these forward-looking  statements.
You should be aware that the  occurrence  of the  events  described  in the risk
factors  below and  elsewhere  in this Annual  Report on Form 10-K could have an
adverse effect on our business, results of operations and financial position.

Any  forward-looking  statements  in this  Annual  Report  on Form  10-K are not
guarantees of future performance, and actual results,  developments and business
decisions may differ from those  envisaged by such  forward-looking  statements,
possibly  materially.  We  disclaim  any  duty  to  update  any  forward-looking
statements.
<PAGE>

Certain Factors That May Affect Future Results

We face intense competition

Competition is intense in the markets in which we sell our products.  We compete
with a large number of other  companies,  both domestic and foreign,  several of
which are large organizations with diversified product lines,  well-known brands
and financial,  distribution and marketing resources  substantially greater than
ours. The principal  competitors  for our Saucony  products are Nike,  Asics and
Brooks.  The principal  competitors  of our Hind  products are Nike,  Adidas and
Sugoi. We compete based on a variety of factors, including price, product style,
durability and quality,  product design and technical  performance,  brand image
and  awareness,  marketing  and  promotion  and the  ability  to  meet  delivery
commitments  to  retailers.   A  technological   breakthrough  or  marketing  or
promotional  success  by one of  our  competitors  could  adversely  affect  our
competitive position and harm our business.


We depend on foreign suppliers

A number of manufacturers  located in Asia,  primarily in China, supply products
to us. During fiscal 2004, one of our suppliers, located in China, accounted for
approximately  33% of our total  footwear  purchases  by dollar  volume.  We are
subject to the usual risks of a business  involving foreign  suppliers,  such as
currency  fluctuations,  government  regulation  of fund  transfers,  export and
import duties,  import quotas,  administrative  trade cases,  trade  limitations
imposed by the United  States or foreign  governments  and  political  and labor
instability,  as  well as  potential  disruptions  in our  supply  chain  due to
transportation,   geographic   and  other   factors.   There  are  a  number  of
trade-related  and  other  issues  creating  significant  friction  between  the
governments  of the United  States and China,  and the  imposition  of  punitive
import duties on certain  categories of Chinese  products has been threatened in
the past and may be implemented in the future. In addition, we have no long-term
manufacturing  agreements  with our foreign  suppliers  and  compete  with other
athletic shoe and apparel  companies,  including  companies that are much larger
than us, for access to production facilities.


We need to anticipate and respond to consumer preferences and merchandise trends

The footwear  and apparel  industries  are subject to rapid  changes in consumer
preferences.  Demand for our products,  particularly our Originals line has been
and may  continue  to be  affected  adversely  by  changing  fashion  trends and
consumer style  preferences.  We believe that our success depends in substantial
part on our  ability  to  anticipate,  gauge and  respond to  changing  consumer
demands  and fashion  trends in a timely  manner.  In  addition,  our  decisions
concerning  new product  designs often need to be made several  months before we
can  determine  consumer  acceptance.  As a result,  our failure to  anticipate,
identify or react  appropriately  to changes in styles or features could lead to
problems such as excess  inventories and higher  markdowns,  lower gross margins
due to the  necessity of providing  discounts to retailers  and the inability to
sell such products through our own factory outlet stores.

Our quarterly results may fluctuate

Our revenues and quarterly operating results may vary significantly depending on
a number of factors, including:

o        the timing and shipment of individual orders;
o        market acceptance of footwear and other products offered by us;
o        changes in our operating expenses;
o        personnel changes;
o        mix of products sold;
o        changes in product pricing;
o        costs of addressing environmental conditions;
o        general economic conditions; and,
o        weather.
<PAGE>

In addition,  a substantial  portion of our revenue is realized  during the last
few weeks of each  quarter.  As a result,  any delays in orders or shipments are
more  likely to result in  revenue  not  being  recognized  until the  following
quarter, which could adversely impact our results of operations for a particular
quarter.

Our  current  expense  levels  are based in part on our  expectations  of future
revenue. As a result, net income for a given period could be  disproportionately
affected by any reduction in revenue. It is possible that in some future quarter
our revenue or operating  results will be below the expectations of stock market
securities  analysts and investors.  If that were to occur,  the market price of
our common stock could be materially adversely affected.


Our revenues are subject to foreign currency exchange fluctuations

We conduct operations in various international  countries,  and a portion of our
sales is transacted in local currencies.  As a result,  our revenues are subject
to foreign exchange rate fluctuations.  From time to time, our financial results
have been affected by fluctuations in foreign currency  exchange rates. We enter
into  forward  currency  exchange  contracts  to  protect  us from the effect of
changes in foreign  exchange  rates.  However,  our  efforts to reduce  currency
exchange losses may not be successful,  and currency  exchange rates may have an
adverse impact on our future operating results and financial condition.


Our business is affected by seasonal consumer buying patterns

The athletic and casual  footwear and athletic  apparel  industries  in which we
compete are generally  characterized  by  significant  seasonality  of sales and
results of  operations.  Sales of our Saucony brand and Hind brand products have
historically  been  seasonal  in  nature,  with the  strongest  sales  generally
occurring in the first and second  quarters for our Saucony  brand and the first
and third  quarters  for our Hind brand.  We believe  that sales of our products
will  continue  to  follow  this  seasonal  cycle.  Therefore,  our  results  of
operations for any one quarter may not  necessarily be indicative of the results
that we may achieve for a full fiscal year or any future quarter.


Our operating results may be affected by order cancellations

Customers  may  cancel  orders of our  products  at any time  without  financial
penalty.  As a result, our backlog does not necessarily  represent actual future
shipments.  The rate of customer  cancellations  can vary quarter to quarter and
year to year. If the retail market  continues to be weak or weakens again in the
future,  our customers could cancel further orders of our products,  which could
have a material adverse effect on our operating results.


We are susceptible to financial difficulties of retailers

We sell our products primarily to major retailers, some of whom have experienced
financial difficulties,  including bankruptcy. We cannot predict what effect the
future  financial  condition of such  retailers  will have on our  business.  In
particular,  we cannot guarantee that our bad debt expenses will not be material
in future periods.


We need effective marketing and advertising programs

Because  consumer demand for our products is heavily  influenced by brand image,
our business  requires  substantial  investments  in marketing and  advertising.
Failure of such  investments to achieve the desired effect in terms of increased
retailer  acceptance or consumer purchase of our products could adversely affect
our financial results. In addition,  we believe that our success depends in part
upon our ability to periodically launch new marketing and advertising  programs.
If  we  are  unable  to  successfully   design  or  execute  new  marketing  and
advertising, or if such programs are ineffective, we may not be able to increase
or maintain our sales and our brand image.
<PAGE>

We depend on key customers

Approximately 48% of our gross trade  receivables  balance was represented by 15
customers at December 31, 2004. We anticipate  that our results of operations in
any  given  period  will  depend to a  significant  extent  upon  sales to major
customers. The loss of or a reduction in the level of sales to one or more major
customers or the failure of a major customer to proceed with a large order or to
timely pay us for a large order could materially reduce our sales.


Declines in revenue in our retail stores could adversely affect profitability

We have made significant  capital investments in opening retail stores and incur
significant  expenditures in operating  these stores.  The higher level of fixed
costs related to our retail  organization  can adversely  affect  profitability,
particularly in the first half of the year, as our revenue historically has been
more heavily weighted to the second half of the year. Our ability to recover the
investment  in and  expenditures  of our retail  organization  can be  adversely
affected  if sales at our retail  stores are lower than  anticipated.  Our gross
margin could be adversely  affected if off-price  sales increase as a percentage
of revenue.


We  depend  on the  strength  of our  intellectual  property  protection  of our
products

We use  trademarks  on  nearly  all of our  products  and  believe  that  having
distinctive  marks is an important  factor in marketing  our  products.  We have
registered our marks in the United States and in a number of foreign  countries.
We may not be able to register or use our marks in each foreign country in which
we seek to register them. Moreover,  the registrations we seek and secure may be
inadequate. We may incur significant expense in any legal proceedings to protect
our trademarks.


Changes in general economic conditions may adversely affect our business

Our business is sensitive to  consumers'  spending  patterns,  which in turn are
subject  to  prevailing  regional  and  national  economic  conditions,  such as
interest and taxation rates, employment levels and consumer confidence.  Adverse
changes in these  economic  factors  may  restrict  consumer  spending,  thereby
negatively affecting our growth and profitability.

<PAGE>

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are  exposed  to market  risk from  changes  in  interest  rates and  foreign
exchange  rates,  which  could  affect our  future  results  of  operations  and
financial position. Our objective in managing our exposure to interest rates and
foreign  currency  rate changes is to limit the impact of these  changes on cash
flows and earnings and to lower our overall borrowing costs. In order to achieve
these  objectives  we identify the risks and manage them by adjusting  fixed and
variable rate debt positions and  selectively  hedging  foreign  currency risks.
Borrowings under our credit facilities are based on floating rates,  which would
increase  interest  expense in an  environment  of rising  interest  rates.  Our
primary market risk is the risk of exposure to unfavorable movements in exchange
rates  between  the U.S.  dollar and the  Canadian  dollar,  the  British  Pound
Sterling  and the Euro.  Our  functional  currency is the U.S.  dollar.  We have
international operations resulting in receipts and payments that differ from our
functional  currency.  We attempt to reduce foreign  currency  exchange risks by
using  financial  instruments,  including  derivatives  pursuant  to our hedging
policy.  We enter into forward exchange  contracts to hedge firm and anticipated
purchase  and  sale  commitments   denominated  in  currencies  other  than  our
subsidiaries' local currencies.  We do not enter into forward exchange contracts
for  speculation  or  trading  purposes.  The  purpose of our  currency  hedging
activities  is to protect our local  subsidiaries'  cash flows  related to these
commitments from  fluctuations in currency  exchange rates. Our forward exchange
contracts  principally  hedge U.S.  denominated  transactions with our Canadian,
Dutch and British  subsidiaries.  Generally these contracts have maturities that
do not exceed one year.  Our forward  exchange  contracts  function as effective
hedges of our underlying exposure; however, we are required to record changes in
the fair value of these  foreign  currency  contracts  against  earnings  in the
period of the change in other  income  and  expense.  We  include  all gains and
losses  related  to foreign  exchange  contracts  in cash  flows from  operating
activities in our  consolidated  statement of cash flows.  Our losses on forward
exchange  contracts  in 2004 were $690 and in 2003  were  $368.  While we have a
policy of selectively hedging foreign currency risks, this program may not fully
insulate us against short-term fluctuations in financial results.


Foreign Exchange Risk

We conduct operations in various  international  countries,  which exposes us to
changes  in  foreign  exchange  rates.  The  financial  results  of our  foreign
subsidiaries  may be  materially  impacted by exposure to  fluctuating  exchange
rates. Reported sales and costs and expenses at our foreign  subsidiaries,  when
translated into U.S. dollars for financial reporting purposes, can fluctuate due
to exchange rate movement.  While exchange rate fluctuations can have a material
impact on reported revenues and earnings,  this impact is principally the result
of the  translation  effect and does not materially  impact our short-term  cash
flows.
<PAGE>

Currency Risk

In the ordinary  course of  business,  we enter into  forward  foreign  exchange
contracts  to  hedge  firm  and  anticipated   intercompany  purchase  and  sale
commitments  denominated  in  currencies  other  than  our  subsidiaries'  local
currencies.   Our  foreign   subsidiaries   footwear  inventory   purchases  are
denominated  in U.S.  dollars,  which exposes us to changes in foreign  exchange
rates. The purpose of our currency hedging is to protect our local currency cash
flows  related  to these  commitments  from  fluctuations  in  foreign  currency
movements.   Transactions   covered  by  hedge  contracts  include  intercompany
payables.  The principal  currencies we hedge are the Canadian  dollar,  British
Pound Sterling and Euro. The contracts have no cash requirements  until maturity
and we record them at fair value on our consolidated  balance sheet. Credit risk
is  minimal  as  the  foreign   exchange   contracts   are  with  major  banking
institutions.  The fair value of our forward exchange  contracts is sensitive to
changes in currency exchange rates. The fair value of forward exchange contracts
is the  estimated  amount that we would pay or receive upon  termination  of the
contract,  taking into account the change in the currency  exchange rates. As of
January 2, 2004,  the fair value of our forward  exchange  contracts was $8,150,
and as of January 3, 2003, the fair value of our forward exchange  contracts was
$7,028.  We have  calculated  the effect of a 10%  depreciation  in the year-end
currency exchange rates related to the forward exchange  contracts as of January
2, 2004 and January 3, 2003.  This  depreciation  would result in an increase in
the unrealized  losses on forward exchange  contracts of  approximately  $781 at
December 31, 2004 and $684 at January 2, 2004, which would materially affect our
results of operations and financial position.  The increase in the fair value of
our forward  exchange  contracts at December 31, 2004, as compared to at January
2, 2004, was due primarily to the amount of foreign  currency  contracts held at
December  31, 2004,  compared  with  January 2, 2004.  Unrealized  losses on our
forward  exchange  contracts  resulting from changes in currency  exchange rates
will  be  partially  offset  by  gains  on  the  exposures  being  hedged.   The
calculations of the hypothetical 10% depreciation in the year-end exchange rates
assume that each rate changed in the same direction at the same time relative to
the U.S. dollar. The calculations reflect only those differences  resulting from
mechanically  replacing  on  exchange  rate for another and do not factor in any
potential  effects that changes in currency rates may have on the translation of
the statement of income, sales volume and prices and on local currency costs.


Interest Risk

At December 31, 2004, we had $201 in capitalized lease obligations  outstanding.
We did not have any debt  outstanding  at January 2, 2004. At December 31, 2004,
we had available  unsecured  committed  lines of credit as sources for financing
our working  capital  needs.  Borrowings  under  these  credit  agreements  bear
interest at variable rates, which would subject us to credit based interest rate
risks.  We have also  calculated  the effect of a 10%  depreciation  in year end
interest rates and have  determined the effects to our results of operations and
financial position to be immaterial.  We are also subject to interest rate risks
on our current cash, cash  equivalents and short-term  investments.  We minimize
credit risk  associated  with our  short-term  investments  by using  investment
grade,  highly  liquid  securities.  We have  classified  all of our  short-term
investments as available for sale securities. Our short-term investments consist
primarily of  obligations of United States  governmental  agencies and state and
municipal  bonds with original  maturities of 91 days to one year. Cash and cash
equivalents  include all short-term  deposits with an original maturity of three
months or less.

We do not expect to make any  significant  changes in our  management of foreign
currency or interest  rate  exposures or in the  strategies  we employ to manage
these exposures in the foreseeable future.


ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See  the  Index  to our  Consolidated  Financial  Statements  in Item 15 and the
consolidated financial statements, notes and schedules that are filed as part of
this Annual Report on Form 10-K  following the signature  page and  incorporated
herein by this reference.


ITEM 9 -  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
     FINANCIAL DISCLOSURE

None.


ITEM 9A - CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our management,  with the participation of our chief executive officer and chief
financial  officer,  evaluated the effectiveness of our disclosure  controls and
procedures  as  of  December  31,  2004.  The  term  "disclosure   controls  and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means  controls  and other  procedures  of a company that are designed to ensure
that  information  required to be  disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded,  processed,  summarized and
reported,  within  the time  periods  specified  in the SEC's  rules and  forms.
Disclosure  controls and procedures include,  without  limitation,  controls and
procedures  designed to ensure that  information  required to be  disclosed by a
company  in the  reports  that it files or  submits  under the  Exchange  Act is
accumulated  and  communicated  to  the  company's  management,   including  its
principal executive and principal  financial  officers,  as appropriate to allow
timely decisions regarding required disclosure.  Management  recognizes that any
controls and procedures,  no matter how well designed and operated,  can provide
only  reasonable   assurance  of  achieving  their   objectives  and  management
necessarily applies its judgment in evaluating the cost-benefit  relationship of
possible  controls and  procedures.  Based on the  evaluation of our  disclosure
controls and procedures as of December 31, 2004, our chief executive officer and
chief financial officer concluded that, as of such date, our disclosure controls
and procedures were effective at the reasonable assurance level.
<PAGE>

Management's Annual Report on Internal Control Over Financial Reporting

We are  not  including  in  this  Annual  Report  on  Form  10-K  at  this  time
"Management's  annual  report on internal  control  over  financial  reporting",
required by Item 308(a) of Regulation S-K, and the related  "Attestation  report
of the registered public accounting firm", required by Item 308(b) of Regulation
S-K, as permitted by paragraph (b) of the  conditions of the Order Under Section
36 of the  Securities  Exchange Act of 1934 Granting an Exemption from Specified
Provisions of Exchange Act Rules 13a-1 and 15d-1 (Release No. 34-50754, November
30, 2004). We expect to file the management  report and the  attestation  report
described  above by amendment to this Annual  Report on Form 10-K not later than
May 2, 2005, in accordance  with  paragraph (e) of the conditions of Release No.
34-50754 and applicable SEC rules.

Changes in internal control over financial reporting

No change in our internal control over financial  reporting (as defined in Rules
13a-15(f)  and 15d-15(f)  under the Exchange  Act)  occurred  during the quarter
ended December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial

ITEM 9B - OTHER INFORMATION

None.
<PAGE>

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required to be disclosed by this Item  pursuant to Item 401 of
Regulation S-K with respect to our executive  officers is contained in Part I of
this Annual  Report on Form 10-K under the caption,  "Executive  Officers of the
Registrant."  The  remaining  information  required to be disclosed by this Item
pursuant to Item 401 of Regulation S-K will be contained in our proxy  statement
for our 2005 Annual  Meeting of  Stockholders  under the  caption,  "Election of
Directors," and is incorporated in this Annual Report on Form 10-K by reference.

The  information  required to be disclosed by this Item  pursuant to Item 405 of
Regulation  S-K will be  contained  in our proxy  statement  for our 2005 Annual
Meeting of Stockholders under the caption,  "Section 16(a) Beneficial  Ownership
Reporting Compliance," and is incorporated in this Annual Report on Form 10-K by
reference.

We have  adopted a Code of  Business  Conduct  and  Ethics  that  applies to our
principal executive officer,  principal financial officer,  principal accounting
officer or controller,  or persons performing similar functions. The text of our
Code of  Business  Conduct  and Ethics is posted in the  "Corporate  Governance"
section of our website, www.sauconyinc.com. We intend to disclose on our website
any amendments to, or waivers from, our Code of Business Conduct and Ethics that
are required to be disclosed pursuant to the disclosure  requirements of Item 10
of Form 8-K.


ITEM 11 - EXECUTIVE COMPENSATION

The  information  required to be disclosed by this Item  pursuant to Item 402 of
Regulation  S-K will be  contained  in our proxy  statement  for our 2005 Annual
Meeting of Stockholders under the captions, "Compensation of Executive Officers"
and "Election of  Directors--Compensation  of Directors," and is incorporated in
this Annual Report on Form 10-K by reference.


ITEM 12 - SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
     RELATED STOCKHOLDER MATTERS

The  information  required to be disclosed by this Item  pursuant to Item 403 of
Regulation  S-K will be  contained  in our proxy  statement  for our 2005 Annual
Meeting  of  Stockholders  under  the  caption,   "Stock  Ownership  of  Certain
Beneficial  Owners and Management," and is incorporated in this Annual Report on
Form 10-K by reference.

The information required to be disclosed by this Item pursuant to Item 201(d) of
Regulation  S-K will be  contained  in our proxy  statement  for our 2005 Annual
Meeting  of  Stockholders   under  the  caption,   "Compensation   of  Executive
Officers--Equity  Compensation  Plan  Information,"  and is incorporated in this
Annual Report on Form 10-K by reference.


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required to be disclosed by this Item  pursuant to Item 404 of
Regulation  S-K will be  contained  in our proxy  statement  for our 2005 Annual
Meeting  of  Stockholders   under  the  captions,   "Compensation  of  Executive
Officers--Other Executive Compensation," "--Employment Contracts" and "--Related
Party  Transactions,"  and is incorporated in this Annual Report on Form 10-K by
reference.


ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

The  information  required to be disclosed by this Item pursuant to Item 9(e) of
Schedule  14A will be  contained  in our  proxy  statement  for our 2005  Annual
Meeting of  Stockholders  under the caption,  "Ratification  of  Appointment  of
Independent  Auditors--Independent  Auditor's Fees," and "--Pre-Approval  Policy
and  Procedures,"  and is  incorporated  in this  Annual  Report on Form 10-K by
reference.
<PAGE>


PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (a)1. Index to Consolidated Financial Statements

     The following  consolidated  financial statements of Saucony,  Inc. and its
     subsidiaries  are  included  in  this  report  immediately   following  the
     signature page:

          -    Report  of  Independent   Registered  Public  Accounting  Firm  -
               Deloitte & Touche LLP

          -    Consolidated  balance  sheets at December 31, 2004 and January 2,
               2004

          -    Consolidated  statements  of income for the years ended  December
               31, 2004, January 2, 2004 and January 3, 2003

          -    Consolidated  statements  of  stockholders'  equity for the years
               ended December 31, 2004, January 2, 2004 and January 3, 2003

          -    Consolidated  statements  of  cash  flows  for  the  years  ended
               December 31, 2004,  January 2, 2004,  and January 3, 2003 - Notes
               to the Consolidated Financial Statements


          2.   Index to Consolidated Financial Statement Schedules

               Schedule II -- Valuation and Qualifying Accounts

               All other  schedules are omitted because they are not applicable,
               not required,  or because the required information is included in
               the consolidated  financial  statements or notes thereto included
               in this Annual Report on Form 10-K.

          3.   Index to Exhibits

               The exhibits filed as part of this Annual Report on Form 10-K are
               listed on the Exhibit Index immediately  preceding such exhibits,
               which Exhibit  Index is  incorporated  herein by this  reference.
               Documents  listed on such  Exhibit  Index,  except for  documents
               identified  by footnotes,  are being filed as exhibits  herewith.
               Documents  identified by footnotes  are not being filed  herewith
               and, pursuant to Rule 12b-32 under the Securities Exchange Act of
               1934,  reference is made to such documents as previously filed as
               exhibits with the  Securities and Exchange  Commission.  Our file
               number under the Securities Exchange Act of 1934 is 000-05083.
<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.


                                          SAUCONY, INC.
                                          (Registrant)


                                          By: /s/ John H. Fisher
                                          ----------------------
                                          John H. Fisher
                                          President and Chief Executive Officer

Date:    March 16, 2005

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

       NAME                                                     CAPACITY                            DATE
------------------                                 ------------------------------------        --------------

<S>                                                <C>                                         <C>
/s/ John H. Fisher                                 Chairman of the Board,                      March 16, 2005
John H. Fisher                                     President and
                                                   Chief Executive Officer
                                                   (Principal Executive Officer)

/s/ Charles A. Gottesman                           Vice Chairman of the Board,                 March 16, 2005
Charles A. Gottesman                               and Executive Vice President,
                                                   Business Development

/s/ Michael Umana                                  Executive Vice President,                   March 16, 2005
Michael Umana                                      Chief Operating and Financial Officer
                                                   (Principal Financial Officer)

/s/ Roger P. Deschenes                             Vice President, Controller and              March 16, 2005
Roger P. Deschenes                                 Chief Accounting Officer
                                                   (Principal Accounting Officer)

/s/ Jonathan O.  Lee                               Director                                    March 16, 2005
Jonathan O. Lee

/s/ Robert J. LeFort, Jr.                          Director                                    March 16, 2005
Robert J. LeFort, Jr.

/s/ John J. Neuhauser                              Director                                    March 16, 2005
John J. Neuhauser

</TABLE>

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Saucony, Inc.
Peabody, Massachusetts

We have audited the accompanying  consolidated  balance sheets of Saucony,  Inc.
and  subsidiaries  (the  "Company") as of December 31, 2004 and January 2, 2004,
and the related  consolidated  statements of income,  stockholders'  equity, and
cash flows for each of the three years in the period  ended  December  31, 2004.
Our audits also included the financial statement schedule listed in the Index at
Item 15 (a) 2. These financial  statements and financial  statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial position of Saucony,  Inc. and subsidiaries as
of December  31, 2004 and January 2, 2004,  and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 2004, in conformity with  accounting  principles  generally  accepted in the
United  States of  America.  Also,  in our  opinion,  such  financial  statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements  taken  as a whole,  present  fairly  in all  material  respects  the
information set forth therein.


/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 16, 2005

<PAGE>
<TABLE>





                                          SAUCONY, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                    AS OF DECEMBER 31, 2004 AND JANUARY 2, 2004
<CAPTION>

                                (in thousands, except share and per share amounts)

                                                      ASSETS

                                                                                       December 31,    January 2,
                                                                                           2004           2004
                                                                                           ----           ----
<S>                                                                                    <C>             <C>
Current assets:
   Cash and cash equivalents...........................................................$   12,042      $  41,781
   Short-term investments .............................................................    20,694          5,788
   Accounts receivable, net of allowance for doubtful accounts
     and discounts (2004,$1,181; 2003,$1,108)..........................................    22,485         19,167
   Inventories ........................................................................    25,645         22,421
   Deferred income taxes...............................................................     2,455          2,126
   Prepaid expenses and other current assets...........................................     1,316          1,518
                                                                                       ----------      ---------
     Total current assets..............................................................    84,637         92,801
                                                                                       ----------      ---------

Property, plant and equipment, net ....................................................     9,570          6,201
                                                                                       ----------      ---------

Other assets:
   Goodwill............................................................................       912            912
   Deferred charges, net...............................................................        91            124
   Other ..............................................................................     1,047            650
                                                                                       ----------      ---------
     Total other assets................................................................$    2,050      $   1,686
                                                                                       ==========      =========

Total assets...........................................................................$   96,257      $ 100,688
                                                                                       ==========      =========


                                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Current portion of capitalized lease obligations....................................$       63      $      --
   Accounts payable....................................................................    10,484          9,259
   Accrued expenses and other current liabilities......................................    11,249          9,733
   Environmental accrual...............................................................     2,275             --
                                                                                       ----------      ---------
       Total current liabilities.......................................................    24,071         18,992
                                                                                       ----------      ---------

Long-term obligations:
   Capitalized lease obligations, net of current portion...............................       138             --
   Other...............................................................................       932            520
   Deferred income taxes...............................................................     1,964          1,802
                                                                                       ----------      ---------
       Total long-term obligations.....................................................     3,034          2,322
                                                                                       ----------      ---------

Commitments and contingencies

Minority interest in consolidated subsidiary...........................................       461            320
                                                                                       ----------      ---------

Stockholders' equity:
   Preferred stock, $1.00 par value per share; authorized 500,000 shares; none issued..        --             --
   Common stock:
     Class A, $.333 par value per share; authorized 20,000,000 shares
       (issued 2004, 2,520,647 and 2003, 2,711,129)....................................       840            904
     Class B, $.333 par value per share; authorized 20,000,000 shares
       (issued 2004, 4,094,445 and 2003, 4,210,560)....................................     1,365          1,403
   Additional paid-in capital..........................................................    18,049         19,010
   Retained earnings...................................................................    46,693         63,655
   Accumulated other comprehensive income..............................................     1,744            505
   Common stock held in treasury, at cost
     (January 2, 2004, Class A, 190,480, Class B, 582,326).............................        --         (6,423)
                                                                                       ----------      ---------
       Total stockholders' equity......................................................    68,691         79,054
                                                                                       ----------      ---------
Total liabilities and stockholders' equity.............................................$   96,257      $ 100,688
                                                                                       ==========      =========

              The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<TABLE>

                                          SAUCONY, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003
<CAPTION>

                                     (in thousands, except per share amounts)


                                                                            2004           2003          2002
                                                                            ----           ----          ----

<S>                                                                      <C>           <C>           <C>
Net sales................................................................$  166,152    $  136,066    $  133,196
Other revenue............................................................       524           379           303
                                                                         ----------    ----------    ----------
Total revenue............................................................   166,676       136,445       133,499
                                                                         ----------    ----------    ----------

Costs and expenses:
   Cost of sales.........................................................    98,209        83,613        87,350
   Selling expenses......................................................    21,695        18,574        17,790
   General and administrative expenses...................................    26,320        21,625        19,488
   Environmental charge..................................................     2,275            --            --
   Plant closing and other credits ......................................        --           (35)          (72)
   Gain on sale of former manufacturing facility.........................        --          (329)           --
                                                                         ----------    ----------    ----------
   Total costs and expenses..............................................   148,499       123,448       124,556
                                                                         ----------    ----------    ----------
Operating income.........................................................    18,177        12,997         8,943
Non-operating income (expense):
   Interest income.......................................................       314           245           332
   Interest expense......................................................        (8)           (5)           (5)
   Foreign currency (losses) gains.......................................      (734)          288            20
   Other.................................................................        10            49            (9)
                                                                         ----------    ----------    ----------
Income before income taxes and minority interest.........................    17,759        13,574         9,281
Provision for income taxes...............................................     7,237         4,940         3,865
Minority interest in income of consolidated subsidiary...................       104           146           173
                                                                         ----------    ----------    ----------
Net income...............................................................    10,418         8,488         5,243
                                                                         ==========    ==========    ==========


Earnings per share:
   Basic:
     Class A common stock................................................$     1.51    $     1.31    $     0.81
                                                                         ==========    ==========    ==========
     Class B common stock................................................$     1.66    $     1.44    $     0.89
                                                                         ==========    ==========    ==========
   Diluted:
     Class A common stock................................................$     1.38    $     1.26    $     0.80
                                                                         ==========    ==========    ==========
     Class B common stock................................................$     1.52    $     1.38    $     0.88
                                                                         ==========    ==========    ==========

Weighted-average shares outstanding:
   Basic:
     Class A common stock................................................     2,521         2,521         2,563
     Class B common stock................................................     3,972         3,583         3,544
                                                                         ----------    ----------    ----------
     Total...............................................................     6,493         6,104         6,107
                                                                         ==========    ==========    ==========
   Diluted:
     Class A common stock................................................     2,521         2,521         2,563
     Class B common stock................................................     4,559         3,850         3,623
                                                                         ----------    ----------    ----------
     Total...............................................................     7,080         6,371         6,186
                                                                         ==========    ==========    ==========

Cash dividends per share of common stock:
   Class A common stock..................................................$   4.200     $    0.120    $    0.000
                                                                         =========     ==========    ==========
   Class B common stock..................................................$   4.220     $    0.132    $    0.000
                                                                         =========     ==========    ==========


              The accompanying notes are an integral part of these consolidated financial statements

</TABLE>
<TABLE>

                                                 SAUCONY, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003

<CAPTION>
                                              (in thousands, except share amounts)

                                                                       Additional
                                                       Common Stock      Paid-in   Retained      Treasury Stock
                                                     Class A   Class B   Capital   Earnings    Shares     Amount
                                                     -------   -------   -------   --------    ------     ------

<S>                                                  <C>      <C>       <C>        <C>         <C>        <C>
Balance, January 4, 2002.............................$  904   $ 1,346   $ 17,398   $50,702     665,976    $(5,417)

Issuance of 68,944 shares of common stock upon
   exercise of stock options and the employee
   stock purchase plan...............................    --        23        306        --         --         --
Stock compensation on stock warrants.................    --        --         44        --         --         --
Amortization of unearned compensation................    --        --         --        --         --         --
Tax benefit related to stock options.................    --        --         21        --         --         --
Repurchase of 94,830 shares of common stock,
   at cost...........................................    --        --         --        --     94,830       (880)
Interest income on notes receivable..................    --        --         --        --         --         --
Payment of principal and interest on notes
   receivable........................................    --        --         --        --         --         --
Net income...........................................    --        --         --     5,243         --         --
Foreign currency translation adjustments.............    --        --         --        --         --         --
                                                     ------   -------   --------   -------    -------    -------

Balance, January 3, 2003.............................$  904   $ 1,369   $ 17,769   $55,945    760,806    $(6,297)

Issuance of 104,217 shares of common stock upon
   exercise of stock options and the employee
   stock purchase plan...............................    --        34        610        --         --         --
Stock compensation on stock warrants.................    --        --        469        --         --         --
Amortization of unearned compensation................    --        --         --        --         --         --
Tax benefit related to stock options.................    --        --        162        --         --         --
Repurchase of 12,000 shares of common stock,
   at cost...........................................    --        --         --        --     12,000       (126)
Net income...........................................    --        --         --     8,488         --         --
Dividends ...........................................    --        --         --      (778)        --         --
Foreign currency translation adjustments.............    --        --         --        --         --         --
                                                     ------   -------   --------   -------    -------    -------

Balance, January 2, 2004.............................$  904   $ 1,403   $ 19,010   $63,655    772,806    $(6,423)

Issuance of 423,179 shares of common stock upon
   exercise of stock options and the employee
   stock purchase plan...............................    --       141      3,615        --         --         --
Issuance of 50,250 shares of common stock upon
   exercise of warrants..............................    --        17        335        --         --         --
Treasury stock retirement............................   (64)     (196)    (6,305)       --    (780,024)    6,565
Tax benefit related to stock options.................    --        --      1,394        --         --         --
Repurchase of 7,218 shares of common stock,
   at cost...........................................    --        --         --        --      7,218       (142)
Net income...........................................    --        --         --    10,418         --         --
Dividends ...........................................    --        --         --   (27,380)        --         --
Foreign currency translation adjustments.............    --        --         --        --         --         --
                                                     ------   -------   --------   -------     ------     ------

Balance, December 31, 2004...........................$  840   $ 1,365   $ 18,049   $46,693     $   --     $   --
                                                     ======   =======   ========   =======     ======     ======


                  The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<PAGE>
<TABLE>

                                              SAUCONY, INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
                     FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003
<CAPTION>

                                           (in thousands, except share amounts)

                                                                              Accumulated
                                                                                 Other         Total
                                                     Note        Unearned    Comprehensive Stockholders' Comprehensive
                                                  Receivable   Compensation  Income (Loss)    Equity     Income (Loss)
                                                  ----------   ------------  -------------    ------     -------------


<S>                                                <C>          <C>           <C>            <C>           <C>
Balance, January 4, 2002...........................$  (303)     $  (167)      $(1,301)       $63,162       $ (1,449)

Issuance of 68,944 shares of common stock upon
   exercise of stock options and the employee
   stock purchase plan.............................     --           --            --            329             --
Stock compensation on stock warrants...............     --           --            --             44             --
Amortization of unearned compensation..............     --           43            --             43             --
Tax benefit related to stock options...............     --           --            --             21             --
Repurchase of 94,830 shares of common stock,
   at cost.........................................     --           --            --           (880)            --
Interest income on note receivable.................     (9)          --            --             (9)            --
Payment of principal and interest on
   notes receivable................................    312           --            --            312             --
Net income.........................................     --           --            --          5,243          5,243
Foreign currency translation adjustments ..........     --           --           431            431            431
                                                   -------      -------       -------        -------       --------

Balance, January 3, 2003...........................$    --      $  (124)      $  (870)       $68,696       $  5,674


Issuance of 104,217 shares of common stock upon
   exercise of stock options and the employee
   stock purchase plan.............................     --           --            --            644             --
Stock compensation on stock warrants...............     --           --            --            469             --
Amortization of unearned compensation..............     --          124            --            124             --
Tax benefit related to stock options...............     --           --            --            162             --
Repurchase of 12,000 shares of common stock,
   at cost.........................................     --           --            --           (126)            --
Net income.........................................     --           --            --          8,488          8,488
Dividends..........................................     --           --            --           (778)            --
Foreign currency translation adjustments ..........     --           --         1,375          1,375          1,375
                                                   -------      -------       -------        -------       --------

Balance, January 2, 2004...........................$    --      $    --       $   505        $79,054       $  9,863

Issuance of 423,179 shares of common stock upon
   exercise of stock options and the employee
   stock purchase plan.............................     --           --            --          3,756             --
Issuance of 50,250 shares of common stock upon
   exercise of warrants............................     --           --            --            352             --
Treasury stock retirement..........................     --           --            --             --             --
Tax benefit related to stock options...............     --           --            --          1,394             --
Repurchase of 7,218 shares of common stock,
   at cost.........................................     --           --            --           (142)            --
Net income.........................................     --           --            --         10,418         10,418
Dividends .........................................     --           --            --        (27,380)            --
Foreign currency translation adjustments...........     --           --         1,239          1,239          1,239
                                                   -------      -------       -------        -------      ---------

Balance, December 31, 2004.........................$    --      $    --       $ 1,744        $68,691       $ 11,657
                                                   =======      =======       =======        =======       ========

                  The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<PAGE>

<TABLE>



                                              SAUCONY, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                     FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003

                                                  (in thousands)


                                                                              2004           2003           2002
                                                                              ----           ----           ----

<S>                                                                        <C>            <C>             <C>
Cash flows from operations:
   Net income .............................................................$  10,418      $   8,488       $  5,243
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Plant closing and other credits ......................................       --            (35)          (123)
     Depreciation and amortization.........................................    1,534          1,337          1,597
     Provision for bad debt and discounts..................................    6,014          5,019          4,752
     Environmental charge..................................................    2,275             --             --
     Deferred income tax (benefit) provision...............................     (167)          (267)            91
     Compensation from stock grants and options............................       --            593             87
     Tax benefit from stock options........................................    1,394            162             --
     Litigation settlement benefit.........................................       --           (566)            --
     Minority interest in income of consolidated subsidiaries..............      104            146            173
     Gain on sale of former manufacturing facility.........................       --           (329)            --
     Other.................................................................       (8)             3            (20)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
   Accounts receivable.....................................................   (9,028)        (7,528)        (5,374)
   Inventories.............................................................   (2,702)         6,163          1,848
   Prepaid expenses and other current assets...............................      218           (225)            45
Increase (decrease) in liabilities:
   Accounts payable........................................................    1,179            638          1,862
   Accrued expenses........................................................    1,009          1,567          1,295
   Income taxes............................................................      340           (121)         1,754
                                                                           ---------       --------       --------
Total adjustments..........................................................    2,162          6,557          7,987
                                                                           ---------       --------       --------
Net cash provided by operating activities..................................   12,580         15,045         13,230
                                                                           ---------       --------       --------

Cash flows from investing activities:
   Purchases of property, plant and equipment..............................   (4,541)        (1,667)          (777)
   Change in deposits and other............................................      (58)          (159)           193
   Purchases of short-term investments.....................................  (31,648)        (5,769)            --
   Sales of short-term investments.........................................   16,699             --             --
   Proceeds from the sale of property, plant and equipment.................       28            686             90
   Share purchase - Saucony Canada, Inc....................................       --           (547)            --
   Proceeds from the sale of marketable securities.........................       --             --            197
                                                                           ---------        -------        --------
Net cash used by investing activities......................................  (19,520)        (7,456)          (297)
                                                                           ---------        -------        --------

Cash flows from financing activities:
   Repayment of long-term debt and capital lease obligations...............      (59)            --            (88)
   Common stock repurchased................................................       --           (126)          (880)
   Issuances of common stock, stock option exercises.......................    3,614            644            329
   Issuances of common stock, warrant exercises............................      352             --             --
   Dividends on common stock...............................................  (27,289)          (518)            --
   Debt financing costs....................................................       --             --            (87)
   Receipt of payment on notes receivable..................................       --             --            312
Net cash used by financing activities......................................  (23,382)            --           (414)
                                                                           ---------      ---------      ---------
Effect of exchange rate changes on cash and cash equivalents...............      583           (291)          (263)
                                                                           ---------      ---------      ---------
Net (decrease) increase in cash and cash equivalents.......................  (29,739)         7,298         12,256
Cash and cash equivalents at beginning of period...........................   41,781         34,483         22,227
                                                                           ---------      ---------      ---------
Cash and cash equivalents at end of period.................................$  12,042      $  41,781      $  34,483
                                                                           =========      =========      =========


              The accompanying notes are an integral part of these consolidated financial statements

</TABLE>
<PAGE>

                         SAUCONY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   For the Years Ended December 31, 2004, January 2, 2004 and January 3, 2003

     (in thousands, except percentages, employee data and per share amounts)


1.   Summary of Significant Accounting Policies
--   ------------------------------------------

     Business Activity
     -----------------

     The Company  designs,  develops and markets  performance-oriented  athletic
     footwear, athletic apparel and casual leather footwear. The Company markets
     its  products  principally  to domestic  and  international  retailers  and
     distributors.

     Reporting Period
     ----------------

     The  Company's  fiscal  year ends on the first  Friday  falling on or after
     December 31,  resulting in fiscal years of 52 or 53 weeks. The consolidated
     financial statements and notes for 2004, 2003 and 2002 represent the fiscal
     years  ended  December  31,  2004,  January  2, 2004 and  January  3, 2003,
     respectively.  There were 52 weeks in each of fiscal 2004,  fiscal 2003 and
     fiscal 2002.

     Principles of Consolidation
     ---------------------------

     The consolidated financial statements include the accounts of Saucony, Inc.
     and all of its wholly owned and majority-owned subsidiaries.

     All  intercompany   accounts  and  transactions  have  been  eliminated  in
     consolidation.

     Use of Estimates
     ----------------

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported  amounts of assets and liabilities at
     the date of the financial  statements and the reported  amounts of revenues
     and expenses during the reporting period.  Actual results could differ from
     those estimates.

     Revenue Recognition
     -------------------

     Revenue is  recognized  from  product  sales when title  passes and all the
     rewards and risk of loss have been  transferred  and all the  criteria  for
     revenue  recognition  described in SEC Staff  Accounting  Bulletin No. 104,
     "Revenue Recognition in Financial  Statements",  are met. Sales and related
     costs of sales are recognized  upon shipment when title and all the rewards
     and  risks  of loss  have  been  transferred  to the  buyer,  there  are no
     uncertainties regarding acceptance,  there exists persuasive evidence of an
     arrangement, the sales price is fixed or determinable and collection of the
     related  accounts  receivable  is  reasonably  assured.  Title  passes upon
     shipment  or upon  receipt  by the  customer.  Retail  store  revenues  are
     recorded at the time of sale.  Royalty  revenue is recognized as earned for
     the terms of our license agreements.

     The Company  records a provision  for defective  product  returns and other
     allowances  related  to  current  period  product  revenue  based upon past
     experience and the receipt of notification of pending returns.
<PAGE>

     Co-operative Advertising
     ------------------------

     The Company  engages in  cooperative  advertising  programs with  retailers
     whereby  retailers  receive  reimbursement  for the cost of advertising and
     promoting the Company's  products.  In accordance with Emerging Issues Task
     Force ("EITF") Issue 01-09, "Accounting for Consideration Given by a Vendor
     to a Customer (Including a Reseller of the Vendor's Products)", cooperative
     advertising  costs are accounted for as a selling expense provided that the
     cooperative  advertising costs meet the requirements defined in EITF 01-09.
     EITF 01-09  requires  the Company to account for  consideration  given to a
     retailer  as  a  reduction  of  revenue  unless  the  Company  receives  an
     identifiable  benefit,  which is  separable  from the  retailer's  original
     purchase, in exchange for the consideration and can reasonably estimate the
     fair value of this benefit and receives  documentation from the retailer to
     support  the amounts  spent.  For the  arrangements  that do not meet these
     requirements,  the  cooperative  advertising  costs are  accounted for as a
     reduction  of net sales.  During  fiscal  2004,  2003 and 2002 the  Company
     recorded $1,105, $1,160 and $1,469 respectively, of cooperative advertising
     expense in selling expenses and recorded $738, $303 and $0, respectively of
     cooperative  advertising  as a reduction  of net sales.  As of December 31,
     2004  and  January  2,  2004,  the  Company   accrued  $1,281  and  $1,002,
     respectively, for cooperative advertising not reimbursed to retailers.

     Volume Incentive Rebate Programs
     --------------------------------

     The  Company  provides  volume  incentive  rebates  to  certain  retailers.
     Retailers receive a volume incentive rebate equal to a specified percentage
     of  shipments  to the  retailer  provided  that  the  retailer  achieves  a
     cumulative level of revenue  transactions  with the Company.  In accordance
     with EITF Issue 01-09,  the Company  recognizes the rebate  obligation as a
     reduction of net sales based on a systematic and rational allocation of the
     cost of honoring the rebates  earned and claimed to each of the  underlying
     revenue  transactions  that  results in  progress  by the  retailer  toward
     earning the rebate. During fiscal 2004 and 2003 the Company recorded $1,442
     and $522,  respectively  of volume  incentive  rebates as  reduction of net
     sales.  As of December 31, 2004 and January 2, 2004,  our volume  incentive
     rebate reserves  totaled $843 and $442,  respectively.  The Company did not
     provide volume incentive rebates in fiscal 2002.

     Vendor Allowances
     -----------------

     The Company  receives  funds from footwear  manufacturers  associated  with
     volume  purchase  rebates.  The  allowances  have  underlying   contractual
     commitments  and are  recognized  by the  Company  as they are  earned.  In
     accordance with EITF Issue 02-16,  vendor  allowances are earned as related
     inventory  is sold and  over the  contractual  term of the  allowance.  The
     Company  recognizes  vendor  allowances  as a  reduction  in cost of sales.
     During  fiscal  2004  and  2003,   the  Company   recorded  $639  and  $60,
     respectively, of vendor allowances as a reduction of cost of goods sold.

     Shipping and Handling Revenues and Expenses
     -------------------------------------------

     Shipping and handling costs are accounted for in accordance with EITF Issue
     00-10,  "Accounting  for  Shipping and  Handling  Fees and Costs."  Amounts
     billed to customers for shipping and handling are recorded in net sales and
     the related costs are included in cost of sales.

     Revenues  of $1,363,  $1,196 and $1,117 from  customers  for  shipping  and
     handling  are  included  in  net  sales  in the  accompanying  consolidated
     statements  of income for fiscal  year 2004,  2003 and 2002,  respectively.
     Related  costs of $1,280,  $1,055 and $1,059 are  included in cost of sales
     for fiscal year 2004, 2003, and 2002, respectively.

     Cash and Cash Equivalents
     -------------------------

     Cash and cash equivalents  include all short-term deposits with an original
     maturity of three months or less.
<PAGE>

     Short-Term Investments
     ----------------------

     Short-term  investments  consist  primarily of obligations of United States
     governmental agencies, state and municipal bonds, and commercial paper with
     original  maturities of 91 days to one year.  The securities are classified
     as  available  for sale  securities,  which are carried at fair value based
     upon the quoted  market prices of those  investments  at December 31, 2004.
     Net  realized  gains and losses are  included in the  determination  of net
     income and are reported in non-operating income.

     Inventories
     -----------

     Inventories  include materials,  labor and overhead and are stated at lower
     of cost or market. Cost is determined using the first-in,  first-out "FIFO"
     method. Inventories are regularly reviewed and, where necessary, provisions
     to reduce the inventory to its estimated net realizable  value are recorded
     based on the Company's forecast of product demand, selling price and market
     conditions.

     Property, Plant and Equipment
     -----------------------------

     Land,  buildings  and  equipment,  including  significant  improvements  to
     existing facilities,  are recorded at cost. The assets are depreciated over
     their  estimated  useful  lives or  lease  terms,  if  shorter,  using  the
     straight-line  method.  The  estimated  useful  lives of the assets are: 33
     years  for  buildings,  15 years  for  building  improvements  and three to
     fifteen years for machinery and equipment.  Major additions and betterments
     are capitalized. Maintenance and repairs are expensed as incurred. The cost
     and related accumulated  depreciation of all property,  plant and equipment
     retired or otherwise  disposed of are removed from the  accounts.  Gains or
     losses resulting from the retirement or disposition of property,  plant and
     equipment are included in income from operations.

     Deferred Charges
     ----------------

     Deferred  charges  consist   primarily  of  acquired   software   licenses,
     trademarks and debt financing costs.  Software  licenses and trademarks are
     amortized over five years.  Debt financing costs are amortized over the two
     year term of the financing  agreement,  using the  effective  interest rate
     method.

     Deferred  charges are  amortized  over their  estimated  useful lives which
     range from two to five years. The Company has recorded no intangible assets
     with indefinite  lives other than goodwill.  The Company  reviews  deferred
     charges  when  indications  of  potential   impairment  exist,  such  as  a
     significant  reduction in cash flows  associated with the assets.  Deferred
     charges as of December 31, 2004 and January 2, 2004 are as follows:
<TABLE>
<CAPTION>

                                                          2004                                   2003
                                                       Accumulated                             Accumulated
                                             Cost     Amortization     Net            Cost    Amortization     Net
                                             ----     ------------     ---            ----    ------------     ---


<S>                                        <C>         <C>           <C>            <C>         <C>          <C>
          Software licenses................$  1,135    $  (1,057)    $   78         $  1,060    $    (992)   $    68
          Capitalized debt
             financing costs...............      87          (87)        --               87          (76)        11
          Other............................     444         (431)        13              444         (399)        45
                                           --------    ---------     ------         --------    ---------    -------
          Total............................$  1,666    $  (1,575)    $   91         $  1,591    $  (1,467)   $   124
                                           ========    =========     ======         ========    =========    =======

</TABLE>

     Amortization of deferred charges was $108, $149 and $117, respectively,  in
     fiscal 2004, fiscal 2003 and fiscal 2002.

     The  estimated  future  amortization  expense  of  deferred  charges  is as
     follows:

                2005................................$    44
                2006................................     16
                2007................................     15
                2008................................     15
                2009 and thereafter.................      1
                                                    -------
                Total...............................$    91
                                                    =======


<PAGE>



     Goodwill
     --------

     Goodwill  represents  the excess of the purchase  price over the  estimated
     fair value of the net assets of the acquired business.

     The Company adopted  Statement of Financial  Accounting  Standards No. 142,
     "Goodwill  and Other  Intangible  Assets",  (SFAS 142), on January 5, 2002.
     Under  SFAS 142,  the  amortization  of  goodwill  ceased  and the  Company
     assesses the  realizability  of this asset annually and whenever  events or
     changes in  circumstances  indicate  that it may be  impaired.  The Company
     estimates  the fair  value of its  reporting  units by using  forecasts  of
     discounted cash flows.

     The Company  completed annual tests for impairment at December 31, 2004 and
     January 2, 2004 and determined that goodwill was not impaired.

     Cost of Sales
     -------------

     Cost of sales  includes  costs related to the  manufacture of the Company's
     products including the product costs, import duties, inbound freight costs,
     receiving,   inspection,   procurement,   production  planning,  operations
     management,  warehousing  costs,  freight to customers,  internal  transfer
     freight costs and other distribution costs.

     Selling Expenses
     ----------------

     Selling expenses include  advertising costs,  sales commissions,  sales and
     marketing  administration  costs (including  payroll and related benefits),
     product  samples,  travel  and  entertainment  related  expenses,   athlete
     sponsorship  costs,  cooperative  advertising  programs,  account  specific
     promotion  costs and costs to participate  at expositions  and trade shows,
     public  relations,  product  literature,  package design expense and market
     research costs.

     General and Administrative Expenses
     -----------------------------------

     General and administrative  expenses include  administration  payroll costs
     and   related   benefits,   depreciation   and   amortization,   insurance,
     professional  and other  consulting  fees, legal fees, bad debt expense and
     costs related to temporary administrative staff.

     Retail Store Construction Allowances and Pre-operating Costs
     ------------------------------------------------------------

     Commencing in fiscal 2004  construction  allowances  received upon entering
     into certain  store leases are  recognized  on a  straight-line  basis as a
     reduction to rent expense  over the original  lease term.  Prior years have
     not been restated due to its immateriality. The Company expenses all of the
     costs that are incurred  prior to the opening of new retail  stores as they
     occur.

     Income Taxes
     ------------

     Income taxes are provided for the amount of taxes  payable or refundable in
     the current year and for the  expected  future tax  consequences  of events
     that have been recognized in the financial  statements or tax returns. As a
     result of  recognition  and  measurement  differences  between tax laws and
     financial  accounting  standards,  temporary  differences arise between the
     amount of taxable income and pretax financial income for a year and the tax
     bases of assets or liabilities  and their reported  amount in the financial
     statements. The deferred tax assets and liabilities reported as of December
     31,  2004 and  January 2, 2004  reflect  the  estimated  future tax effects
     attributable  to  temporary  differences  and  carryforwards  based  on the
     provisions of enacted tax law. See Note 14 for further discussion on income
     taxes.

<PAGE>

     Earnings per Share
     ------------------

     The  Company  presents  basic and  diluted  earnings  per  share  using the
     two-class method.  The two-class method is an earnings  allocation  formula
     that determines earnings per share for each class of common stock according
     to dividends declared and participation rights in undistributed earnings.

     Basic earnings per share for the Company's Class A and Class B common stock
     is  calculated  by dividing  net income by the weighted  average  number of
     shares of Class A and Class B common stock  outstanding.  Diluted  earnings
     per share for the Company's  Class A and Class B common stock is calculated
     similarly,  except that the calculation includes the dilutive effect of the
     assumed  exercise of options  issuable under the Company's  stock incentive
     plans and the assumed exercise of stock warrants.

     Net income  available to the  Company's  common  stockholders  is allocated
     among our two  classes of common  stock,  Class A common  stock and Class B
     common stock.  The allocation among each class was based upon the two-class
     method.  Under the two-class  method,  earnings per share for each class of
     common stock are  presented.  See Note 12 for the  calculation of basic and
     diluted earnings per share under the two-class method.

     Comprehensive Income
     --------------------

     Comprehensive  income  encompasses  net  income  and  other  components  of
     comprehensive income that are excluded from net income under U.S. generally
     accepted  accounting  principles,   comprising  items  previously  reported
     directly in shareholders' equity.

     The financial statements of the Company's foreign subsidiaries are measured
     using the current  rate method.  Under the current rate method,  assets and
     liabilities  of these  subsidiaries  are translated at exchange rates as of
     the balance  sheet date.  Revenues and expenses are  translated  at average
     rates of  exchange  in effect  during the year.  The  resulting  cumulative
     foreign currency translation  adjustments have been recorded in Accumulated
     Other  Comprehensive  Income (Loss), a component of  shareholders'  equity.
     Foreign  currency  translation  adjustments  amounted to $1,239 and $1,375,
     respectively,  for 2004 and 2003. Losses from foreign currency  translation
     adjustments  amounted to $431 in 2002 and is recorded in Accumulated  Other
     Comprehensive Income (Loss).

     Stock-Based Compensation
     ------------------------

     The Company  accounts for employee stock options and share awards under the
     intrinsic-value  method  prescribed by Accounting  Principles Board Opinion
     No.  25,  "Accounting  for  Stock  Issued  to  Employees",   "APB  25",  as
     interpreted,  with  pro-forma  disclosures of net earnings and earnings per
     share,  as if the fair value method of  accounting  defined in Statement of
     Financial  Accounting Standards No. 123, "SFAS 123". SFAS 123 establishes a
     fair value based method of accounting for stock-based employee compensation
     plans.  Under the fair value method,  compensation  cost is measured at the
     grant  date  based on the  value of the award  and is  recognized  over the
     service period, which is usually the vesting period.

     Had the Company  determined the  stock-based  compensation  expense for the
     Company's  stock  options  based  upon the fair value at the grant date for
     stock  option  awards,  consistent  with the  provisions  of SFAS 123,  the
     Company's net income  (loss) and net income (loss) per share in 2004,  2003
     and 2002 would have been reduced to the pro forma amounts  indicated below.
     Pro forma net income  available to the  Company's  common  shareholders  is
     allocated  among our two classes of common stock,  Class A common stock and
     Class B common stock.  The  allocation  among each class was based upon the
     two-class method.  Under the two-class method, pro forma earnings per share
     for each  class  of  common  stock is  determined  according  to  dividends
     declared.
<PAGE>

     Pro forma net income  allocated to Class A common  stockholders and Class B
     common  shareholders  and the  calculation  of pro forma  basic and diluted
     earnings per share are as follows:
<TABLE>
<CAPTION>

                                                   2004                       2003                     2002
                                                   ----                       ----                     ----
                                              Basic      Diluted        Basic      Diluted        Basic      Diluted
                                              -----      -------        -----      -------        -----      -------
<S>                                        <C>         <C>            <C>         <C>           <C>         <C>
       Net income:
       As reported.........................$ 10,418    $ 10,418       $ 8,488     $ 8,488       $  5,243    $  5,243
       Add:   Stock-based compensation
        expense included in reported net
        income (loss), net of related tax
        benefit............................      --          --            23          23             26          26
       Less:  Total stock-based compensation
        expense determined under the fair
        value based method for all awards,
        net of related tax benefit.........  (1,400)     (1,400)       (1,161)     (1,161)          (710)       (710)
                                             ======      ======        ======      ======           ====        ====
       Pro forma net income ...............   9,018       9,018       $ 7,350     $ 7,350       $  4,559    $  4,559
                                              =====       =====       =======     =======       ========    ========


       Pro forma net income allocated:
         Class A common stock..............$  3,301    $  3,021       $ 2,868     $ 2,743       $  1,808    $  1,784
         Class B common stock..............   5,717       5,997         4,482       4,607          2,751       2,775
                                              -----       -----         -----       -----          -----       -----
                                           $  9,018    $  9,018       $ 7,350     $ 7,350       $  4,559    $  4,559
                                           ========    ========       =======     =======       ========    ========

       Pro forma earnings per share:
       Class A common stock
       As reported.........................$   1.51    $   1.38       $  1.31     $  1.26       $   0.81    $  0.80
       Add:   Stock-based compensation
        expense included in reported net
        income (loss), net of related tax..    0.00        0.00          0.00        0.00           0.00       0.00
       Less:  Total stock-based compensation
        expense determined under the fair
        value based method for all awards,
        net of related tax benefit.........   (0.20)      (0.19)        (0.17)      (0.17)         (0.10)     (0.10)
                                              -----       -----         -----       -----          -----      -----
       Pro forma net income
        per share..........................$   1.31    $   1.19       $  1.14     $  1.09       $   0.71    $  0.70
                                           ========    ========       =======     =======       ========    =======

       Class B common stock
       As reported.........................$   1.66    $   1.52       $  1.44     $   1.38      $  0.89     $  0.88
       Add:   Stock-based compensation
        expense included in reported net
        income (loss), net of related tax..    0.00        0.00          0.00         0.00         0.00        0.00
       Less:  Total stock-based compensation
        expense determined under the fair
        value based method for all awards,
        net of related tax benefit.........   (0.22)      (0.20)        (0.19)       (0.18)       (0.11)      (0.11)
                                              -----       -----         -----        -----        -----       -----
       Pro forma net income (loss)
        per share..........................$   1.44    $   1.32       $  1.25     $   1.20      $  0.78     $  0.77
                                           ========    ========       =======     ========      =======     =======
</TABLE>

     See  Note 13 for the  weighted-average  assumptions  incorporated  into the
     Black-Scholes  option-pricing  model,  used to  calculate  the  fair  value
     stock-based employee compensation.

     Derivative Instruments and Hedging Activities

     The Company  accounts for its  derivative  instruments  in accordance  with
     Statement  of  Financial  Accounting  Standards  No. 133,  "Accounting  for
     Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 defines
     the accounting for derivative  instruments,  including  certain  derivative
     instruments  embedded in other contracts and hedging  activities.  SFAS 133
     requires  that all  derivatives  must be recognized on the balance sheet at
     fair value.

     SFAS 133 requires  companies to recognize  adjustments to the fair value of
     derivatives  that are not hedges currently in earnings when they occur. For
     derivatives  that  qualify  as  hedges,  changes  in the fair  value of the
     derivatives  can  be  recognized  currently  in  earnings,  along  with  an
     offsetting  adjustment  against the basis of the underlying hedged item, or
     can be deferred in other comprehensive income, depending on the exposure of
     the underlying transaction.
<PAGE>

     From  time to time,  the  Company  enters  into  forward  foreign  currency
     exchange contracts to hedge certain foreign currency denominated  payables.
     Gains or losses on forward contracts which do not qualify for special hedge
     accounting are recorded in current earnings in other  non-operating  income
     or expense.  Gains and losses that qualify for special hedge accounting are
     recorded  in  "Accumulated  Other  Comprehensive   Income  (Loss)"  in  the
     statement of shareholders' equity.

     Advertising and Promotion
     -------------------------

     Advertising and promotion costs,  including print media  production  costs,
     are expensed as incurred.  Advertising  and promotion  expense  amounted to
     $8,741, $7,308 and $7,313 for 2004, 2003 and 2002, respectively.

     Impairment Accounting
     ---------------------

     The Company reviews the  recoverability of its long-lived assets (property,
     plant and  equipment  and  deferred  charges)  when  events or  changes  in
     circumstances occur that indicate that the carrying value of the assets may
     not be  recoverable.  This  review  is based on the  Company's  ability  to
     recover the carrying value of the assets from expected  undiscounted future
     cash flows.  If an impairment is indicated,  the Company  measures the loss
     based on the fair value of the asset using various valuation techniques. If
     an  impairment  exists,  the  amount  of the loss will be  recorded  in the
     consolidated statements of operations. It is possible that future events or
     circumstances could cause these estimates to change. During fiscal 2004 and
     2003 we determined  that certain of our factory outlet division assets were
     impaired and resulted in a charge of $15,  each fiscal year,  to reduce the
     assets to their estimated realizable value.

     Research and Development Expenses
     ---------------------------------

     Expenditures  for  research  and  development  of products  are expensed as
     incurred.  Research  and  development  expenses  amounted to  approximately
     $1,956, $1,673 and $1,611 for 2004, 2003 and 2002, respectively.

     Environmental Accrual
     ---------------------

     The Company  accrues for costs  associated with  environmental  obligations
     when such costs are probable and  reasonably  estimable in accordance  with
     SoP  96-1,  "Environmental   Remediation  Liabilities  (Including  Auditing
     Guidance)".   Accruals  to  address   estimated  costs  for   environmental
     obligations  generally  are  recognized  no later  than  the date  when the
     Company  learns  what  cleanup  measures,  if any,  are  likely to occur to
     address the environmental conditions at issue. In accordance with SoP 96-1,
     included in such  obligations are the estimated direct costs to investigate
     and  address  the  conditions  on  Company   property  and  the  associated
     engineering,  legal and  consulting  costs.  Such  accruals are adjusted as
     further  information  develops  or  circumstances  change.  Cost of  future
     expenditures for environmental  remediation  obligations are not discounted
     to their present value.

     Related Party Transactions
     --------------------------

     On July 24, 2003, the Company entered into a Share Purchase  Agreement with
     the  minority  shareholder  of Saucony  Canada,  Inc.  whereby  the Company
     increased its ownership  percentage of Saucony Canada, Inc. to 95% from 85%
     effective as of July 4, 2003.  The  purchase  price of $547 equaled the net
     book value of Saucony Canada,  Inc., as of July 4, 2003. The net book value
     approximated the fair value of the assets acquired.

     Reclassifications
     -----------------

     Certain amounts in prior years' consolidated financial statements have been
     reclassified to conform with current year presentation.
<PAGE>

     Recent Accounting Pronouncements
     --------------------------------

     In  November  2004,  the FASB issued SFAS No.  151,  "Inventory  Costs,  an
     amendment  of ARB No. 43,  Chapter 4 "SFAS  151".  SFAS 151  clarifies  the
     accounting for abnormal amounts of idle facility expense, freight, handling
     costs and  wasted  material.  SFAS 151 is  effective  for  inventory  costs
     incurred  during fiscal years  beginning  after June 15, 2005.  The Company
     does not  believe the  adoption of SFAS 151 will have a material  effect on
     its financial position, results of operations or cash flows.

     In December  2004,  the FASB issued SFAS No.  123R,  "Share-Based  Payment"
     "SFAS 123R". This statement is a revision of SFAS No. 123,  "Accounting for
     Stock-Based  Compensation,"  and supersedes APB Opinion No. 25, "Accounting
     for Stock Issued to Employees." SFAS 123R requires all share-based payments
     to employees,  including grants of employee stock options, to be recognized
     in the financial  statements based on their fair values.  The provisions of
     this statement are effective for interim or annual periods  beginning after
     June 15, 2005.  The Company is currently  evaluating the provisions of this
     revision to determine the impact on its consolidated  financial statements.
     The  adoption of this  statement  is expected to have a negative  effect on
     consolidated net income.

     In December  2004,  the FASB  decided to defer the  issuance of their final
     standard on  earnings  per share (EPS)  entitled  "Earnings  per Share - an
     Amendment  to FAS 128." The final  standard  will be  effective in 2005 and
     will require retrospective application for all prior periods presented. The
     significant  proposed  changes to the EPS  computation  are  changes to the
     treasury  stock  method  and   contingent   share  guidance  for  computing
     year-to-date   diluted  EPS,   removal  of  the  ability  to  overcome  the
     presumption of share settlement when computing  diluted EPS when there is a
     choice of share or cash settlement and inclusion of mandatorily convertible
     securities in basic EPS. The Company is currently  evaluating  the proposed
     provisions of this  amendment to determine  the impact on its  consolidated
     financial statements.

     In  December   2004,  the  FASB  issued  FASB  Staff  Position  No.  109-1,
     Application of FASB Statement No. 109,  Accounting for Income Taxes, to the
     Tax Deduction on Qualified  Production  Activities Provided by the American
     Jobs  Creation Act of 2004.  FSP 109-1  clarifies  that the  manufacturer's
     deduction  provided for under the American Jobs Creation Act of 2004 should
     be accounted for as a special deduction in accordance with SFAS 109 and not
     as a tax rate  reduction.  The adoption of FSP 109-1 will have no impact on
     the Company's  results of operations or financial  position for fiscal 2005
     because the manufacturer's  deduction is not available to the Company until
     fiscal  year  2006.   The  Company  is  evaluating   the  effect  that  the
     manufacturer's deduction will have in subsequent years.

     The FASB  also  issued  FASB  Staff  Position  No.  109-2,  Accounting  and
     Disclosure Guidance for the Foreign Earnings Repatriation  Provision within
     the  American  Jobs  Creation  Act of 2004.  The AJCA  introduces a special
     one-time  dividends  received  deduction  on the  repatriation  of  foreign
     earnings to a U.S. taxpayer,  provided specific criteria are met. FSP 109-2
     provides accounting and disclosure guidance with respect to this deduction.
     Until the Treasury  Department or Congress provides  additional  clarifying
     guidance on key  elements  with  respect to this  deduction,  the amount of
     foreign  earnings  to be  repatriated  by the  Company,  if any,  cannot be
     determined;  however, the presumption that such unremitted earnings will be
     repatriated cannot be overcome.  FSP 109-2 grants an enterprise  additional
     time  beyond  the year  ended  December  31,  2004,  in which  the AJCA was
     enacted,  to evaluate the effects of the AJCA on its plan for  reinvestment
     or repatriation of unremitted earnings.


2.   Short-Term Investments
--   ----------------------

     As of December 31, 2004, the Company's  holdings in short-term  investments
     consisted primarily of obligations of United States governmental  agencies,
     state and municipal bonds, and commercial paper with original maturities of
     91 days to one year, which are classified as available for sale securities.
<PAGE>

     The following table summarizes the fair market value and cost of short-term
     investments as of December 31, 2004 and January 2, 2004:
<TABLE>
<CAPTION>

                                                      2004                                      2003
                                   ---------------------------------------       ---------------------------------
                                       Fair                                        Fair
                                      Market                         Gain         Market                     Gain
                                       Value          Cost          (Loss)         Value        Cost        (Loss)
                                       -----          ----          ------         -----        ----        ------

<S>                                 <C>            <C>             <C>           <C>          <C>           <C>
       U.S. government and
         agencies...................$  11,829      $   11,805      $    24       $ 4,988      $ 4,969       $    19
       State and municipal
         governments................    8,638           8,682          (44)           --           --            --
       U.S. corporate...............      227             231           (4)          800          800            --
                                    ---------      ----------      -------       -------      -------       -------
       Total........................$  20,694      $   20,718      $   (24)      $ 5,788      $ 5,769       $    19
                                    =========      ==========      =======       =======      =======       =======

</TABLE>

     Included in the determination of net income for the year ended December 31,
     2004 were net  realized  losses of $48 and for the year  ended  January  2,
     2004, realized gains of $74.


3.   Inventories

     Inventories  at  December  31, 2004 and  January 2, 2004  consisted  of the
     following:

                                                 2004                  2003
                                                 ----                  ----

         Finished goods.......................$  25,503            $   22,322
         Raw materials and supplies...........      142                    34
         Work-in-process......................       --                    65
                                              ---------            ----------
         Total................................$  25,645            $   22,421
                                              =========            ==========


4.   Property, Plant and Equipment

     Major  classes of  property,  plant and  equipment at December 31, 2004 and
     January 2, 2004 were as follows: 2004 2003

          Land and improvements................$     695            $      494
          Buildings and improvements...........    8,798                 6,068
          Machinery and equipment..............   13,441                11,796
          Leasehold improvements...............      845                   719
                                                     ---                   ---
                                               $  23,779            $   19,077
                                               =========            ==========
          Less accumulated depreciation
          and amortization.....................  (14,546)              (13,352)
                                                --------               --------
                                                   9,233                 5,725
          Construction in progress.............      337                   476
                                                     ---                   ---
          Total................................$   9,570            $    6,201
                                               =========            ==========
<PAGE>

5.   Accrued Expenses
--   ----------------

     Accrued  expenses at December 31, 2004 and January 2, 2004 consisted of the
     following:

                                                          2004           2003
                                                          ----           ----

       Payroll and incentive compensation..............$   2,620     $   3,244
       Income taxes....................................    1,228           856
       Inventory freight and duty......................    2,191           891
       Professional fees...............................      857           316
       Sales commissions...............................      333           370
       Selling and advertising.........................      105           356
       Dividends.......................................      351           260
       Forward contracts - fair value adjustment.......      420           420
       Other...........................................    3,144         3,020
                                                           -----         -----
       Total...........................................$  11,249     $   9,733
                                                       =========     =========

6.   Capital Lease Obligations
--   -------------------------

     The following is a schedule of future  minimum lease payments under capital
     leases together with the present value of the net minimum lease payments as
     of December 31, 2004:

              2005....................................................$   69
              2006....................................................    69
              2007....................................................    69
              2008....................................................     6
              2009 and thereafter.....................................    --
                                                                      ------
              Total minimum lease payments............................   213
              Less amounts representing interest......................    12
                                                                      ------
              Present value of minimum lease payments.................   201
              Less current portion....................................    63
                                                                      ------
              Long-term portion.......................................$  138
                                                                      ======

7.   Employee Retirement Plans
--   -------------------------

     The Company has  maintained  a qualified  retirement  savings  plan "401(k)
     Plan" since 1991.  All United States  employees of the Company who meet the
     minimum age and service  requirements  are eligible to  participate  in the
     401(k) Plan. The Company may make discretionary contributions to the 401(k)
     Plan  equal  to  a  certain  percentage  of  the  participating  employees'
     contributions,  subject to the  limitations  imposed by the 401(k) Plan and
     the Internal  Revenue Code. The Company's  contributions  amounted to $232,
     $197 and $155 for 2004, 2003 and 2002, respectively.

     The  Company  has  a  deferred  compensation  plan  "DCP"  to  provide  key
     executives and highly  compensated  employees with supplemental  retirement
     benefits.  This plan  allowed  these  employees to defer a portion of their
     salary and bonus  until  retirement  or  termination  of their  employment.
     Eligibility is determined by the Company's  Board of Directors.  The DCP is
     not qualified  under Section 401 of the Internal  Revenue Code. The Company
     may make  discretionary  contributions  to the DCP  representing  a certain
     percentage of the  participant's  contributions.  Participants may elect to
     have their  deferred  compensation  invested in selected  money  market and
     mutual funds.  The Company's  contributions  made to the plan were $12, $16
     and $17 for 2004, 2003 and 2002, respectively. As of December 31, 2004, the
     deferred  compensation  liability  was  $934,  which has been  included  in
     long-term  liabilities and as of January 2, 2004, the deferred compensation
     liability  was  $709,  of which  $189 has been  included  in other  current
     liabilities and $520 has been included in long-term liabilities. The assets
     under  the plan are  invested  in money  market  and  mutual  funds.  As of
     December  31,  2004,  $934 is included in other assets and as of January 2,
     2004,  $189 is  included  in other  current  assets and $520 is included in
     other assets.

<PAGE>


     The  Company  has a 2001  Employee  Stock  Purchase  Plan  "Employee  Stock
     Purchase  Plan",  under  which an  aggregate  of 250,000  shares of Class B
     Common  Stock,  $0.33-1/3 par value per share,  of Saucony,  Inc. have been
     reserved  by the  Company  and may be  issued,  of which a total of 198,752
     shares  remained  available for issuance as of December 31, 2004.  The plan
     provides  employees of the Company and its designated  subsidiaries with an
     opportunity  to purchase  common stock of the Company  through  accumulated
     payroll  deductions,  at a price per share  equal to 85% of the fair market
     value of a share of common stock on the enrollment  date or on the purchase
     date, whichever is lower. The plan qualifies as an "Employee Stock Purchase
     Plan" under Section 423 of the Internal Revenue Code and its provisions are
     construed so as to extend and limit  participation  in a manner  consistent
     with the requirements of that section of the code.

     All employees who meet minimum age and service requirements are eligible to
     participate  in  the  Employee  Stock  Purchase  Plan.   Employee   payroll
     deductions  associated  with the  Employee  Stock  Purchase  Plan  began in
     September 2001. There were 15,005, 24,949 and 11,294 shares of common stock
     purchased under the plan, respectively, in 2004, 2003, and 2002. There were
     no purchases of common stock made under the plan in 2001.

8.   Commitments and Contingencies
--   -----------------------------

     Operating Lease Commitments
     ---------------------------

     The Company is obligated under various  operating  leases for equipment and
     rental space through 2010.  Total  equipment and rental  expenses for 2004,
     2003 and 2002 were $1,881, $1,715 and $1,602, respectively.

     Future minimum equipment and rental payments:

                  2005 ..............................$   1,275
                  2006 ..............................$   1,052
                  2007...............................$     854
                  2008...............................$     523
                  2009 and thereafter................$     367

     For lease contracts that contain step-rent  provisions,  the aggregate rent
     obligation is expensed on the straight-line basis over the base lease term.

     Capital  improvement  funding  provided  by lessors is  accounted  for as a
     reduction of the rental expense over the base lease term.

     Lease payments that depend on existing index or rate,  such as the consumer
     price index or prime  interest rate, are included in minimum lease payments
     based on the  index or rate  existing  at the  inception  of the  lease and
     recognized on a straight-line basis over the minimum lease term.

     Short-Term Borrowing Arrangements
     ---------------------------------

     The Company has a revolving credit agreement,  as amended,  under the terms
     of which a bank  committed  up to a maximum of $15,000 to the  Company  for
     cash borrowings and letters of credit.  In August 2004, the Company amended
     the existing credit agreement,  extending the term, to expire on August 31,
     2005.  Maximum  borrowings  under the credit  facility  are  limited to the
     lesser of $15,000  or the sum of 65% of  eligible  receivables  plus 20% of
     eligible finished goods inventory. Borrowings under the credit facility are
     made at our election at the bank's  prime rate of interest  less 1.0% or at
     the LIBOR  rate plus  1.5%.  In  addition,  the  Company  pays a  quarterly
     commitment fee of 0.25% on the average daily unused credit line. The credit
     facility   contains   restrictions  and  financial   covenants   including:
     restrictions  on additional  indebtedness  and  restrictions  on the annual
     amount of equipment financing and capital lease indebtedness. As amended in
     January  2004,  the  credit  facility  permits  the  Company  to  pay  cash
     dividends,  and make  repurchases  or  redemptions  of, or other  specified
     distributions  with respect to, its capital stock,  in a total amount of up
     to $5,000 in any  fiscal  year.  The  Company  was in  compliance  with all
     covenants  of the credit  facility at December  31,  2004.  At December 31,
     2004, there were no borrowings  outstanding under the facility. We had open
     commitments under letters of credit in the amount of $2,022 at December 31,
     2004.
<PAGE>

     Saucony Canada,  Inc.  maintains a credit facility with a Canadian  lender.
     The agreement  provides Saucony Canada with a credit line of 1,500 Canadian
     Dollars for cash  borrowings  and letters of credit.  At December 31, 2004,
     there were no borrowings or letters of credit outstanding under this credit
     facility.

     Employment Agreements
     ---------------------

     The Company has entered into employment agreements with two key executives.
     The  employment  agreements  provide  for  minimum  aggregate  annual  base
     salaries of $1,004, annual consumer price index adjustments, life insurance
     coverage,  cash  bonuses  calculated  as  a  percentage  of  the  Company's
     consolidated  pre-tax  income.  The employment  agreements  were originally
     scheduled to expire in August 2003,  but were  extended  automatically  for
     additional  one-year terms beginning upon such scheduled  expiration unless
     prior  notice is given by the  Company or the  employee.  The  Company  has
     included an aggregate bonus expense to these executives of $1,005, $681 and
     $511 in  general  and  administrative  expenses  for  2004,  2003 and 2002,
     respectively.   The  Compensation  Committee  of  the  Company's  Board  of
     Directors excluded the effects of the environmental  charge recorded by the
     Company in the fourth quarter of 2004 in the  determination of cash bonuses
     for 2004.  Included in accrued expenses at December 31, 2004 and January 2,
     2004, are accrued bonus expense of $349 and $681, respectively.

     Retention Agreements
     --------------------

     In  September  2004  in  conjunction   with  the  Company's   analysis  and
     consideration of various strategic  alternatives,  the Company entered into
     retention  agreements  with thirteen  officers.  The  agreements  generally
     provide that: (1) if the officer remains continuously employed full-time by
     the Company  and the  Company  completes a change in control on or prior to
     June 30, 2005 (or December 31, 2005 for certain officers), the Company will
     pay the officer an initial retention bonus (amounts range from $31 to $150)
     and (2) if the  officer  remains  continuously  employed  full-time  by the
     Company during the period ending six months after the change in control, or
     if the officer's  employment at Saucony is terminated during that period by
     the Company  without  cause or by the officer for good reason,  the Company
     will pay the officer an additional  retention bonus (amounts range from $31
     to $150).  Agreements for four of the officers  provide that if a change in
     control  occurs  on or  after  December  31,  2005,  fifty  percent  of the
     respective  officer's  unvested  stock  options will become  fully  vested.
     Further,  the Company  entered into a severance  agreement  with an officer
     that  provides a $300  severance  payment if the  officer's  employment  is
     terminated by the Company without cause or after a change in control by the
     officer for good reason.

     Litigation
     ----------

     The Company is involved in routine litigation incident to its business.  In
     management's  opinion,  none of these  proceedings  is  expected  to have a
     material adverse effect on the Company's financial position,  operations or
     cash  flows.  See  Note  15  for  discussion  of  the  Company's  favorable
     litigation settlement in fiscal 2003.
<PAGE>

     Environmental Charge
     --------------------

     In the year ended  December  31,  2004,  the  Company  recorded a charge of
     $2,275 to address environmental  conditions at a Company owned distribution
     facility.  The assessment of the liability and the  associated  costs is an
     estimate based upon currently available information after consultation with
     environmental engineers, consultants and attorneys assisting the Company in
     addressing these  environmental  issues. The following table summarizes the
     estimated expenses associated with our environmental charge:

                  Environmental response costs................$   1,538
                  Engineering and risk assessment.............      375
                  Legal.......................................      352
                  Post-remedy monitoring......................       10
                                                              ---------
                  Total.......................................$   2,275
                                                              =========

     Actual costs to address the  environmental  conditions  may change based on
     further investigations,  based on the conclusions of regulatory authorities
     about information  gathered in those investigations and due to the inherent
     uncertainties  involved in estimating conditions in the environment and the
     costs  of  addressing  such  conditions.  Estimated  costs to  address  the
     environmental conditions range from $1,242 to $4,621. Costs of expenditures
     for environmental  obligation are not discounted to their present value due
     to uncertainty  of when the recorded  amounts will be paid. At December 31,
     2004,  $2,275 was included as a short term  liability  in the  accompanying
     consolidated balance sheet.

9.   Common Stock
--   ------------

     The Company has two classes of Common  Stock.  The Class A Common Stock has
     voting rights. The Class B Common Stock is non-voting,  except with respect
     to  amendments  to the  Company's  Articles of  Organization  that alter or
     change the  powers,  preferences  or  special  rights of the Class B Common
     Stock so as to affect them adversely and as otherwise  required by law. The
     Class B Common Stock has certain features, including a "Class B Protection"
     feature  and a  feature  pursuant  to which  the  Class B  Common  Stock is
     entitled to receive  regular  cash  dividends  equal to 110% of the regular
     cash dividends  payable on Class A Common Stock, if any, which are intended
     to minimize the economic reasons for the Class A Common Stock to trade at a
     premium  compared to the Class B Common Stock. The other terms of the Class
     A Common Stock and Class B Common Stock,  including  rights with respect to
     special  cash  dividends,  stock  dividends,  stock  splits,  consideration
     payable in a merger or consolidation  and  distributions  upon liquidation,
     generally are the same.

     The following  table  summarizes  the activity for the Class A Common Stock
     and Class B Common Stock, for the periods ended January 3, 2003, January 2,
     2004 and December 31, 2004:

                                                      Class A          Class B
                                                   Common Stock     Common Stock
                                                   ------------     ------------

       Shares outstanding at January 4, 2002........ 2,566,747       3,515,803
       Shares issued................................        --          68,944
       Shares repurchased...........................   (41,700)        (53,130)
                                                       -------         -------
       Shares outstanding at January 3, 2003........ 2,525,047       3,531,617
       Shares issued................................        --         104,217
       Shares repurchased...........................    (4,400)         (7,600)
                                                        ------          ------
       Shares outstanding at January 2, 2004........ 2,520,647       3,628,234
       Shares issued................................        --         473,429
       Shares repurchased...........................        --          (7,218)
                                                       -------          ------
       Shares outstanding at December 31, 2004...... 2,520,647       4,094,445
                                                     =========       =========

     Effective July 1, 2004,  companies  incorporated  in  Massachusetts  became
     subject  to the  Massachusetts  Business  Corporation  Act,  Chapter  156D.
     Chapter 156D provides that shares that are  reacquired by a company  become
     authorized but unissued  shares.  As a result,  Chapter 156D eliminates the
     concept of  "treasury  shares" and  provides  that shares  reacquired  by a
     company become "authorized but unissued" shares. Accordingly, at October 1,
     2004, the Company  retired the existing  treasury  shares,  at an aggregate
     cost of $6,565, as authorized but unissued and allocated this amount to the
     common stock's par value and additional paid in capital.

<PAGE>

10.  Dividends
---  ---------

     Commencing with the quarterly  dividend  declared on February 17, 2004, the
     Board of Directors  increased the regular quarterly dividend on our Class A
     Common Stock to $0.050 per share and the regular quarterly  dividend on our
     Class B Common  Stock to  $0.055  per  share.  The Board  declared  regular
     quarterly cash dividends on February 17, 2004, May 19, 2004, August 2, 2004
     and  November  4,  2004,  in the  amount of $0.050 per share on our Class A
     Common Stock and $0.055 per share on our Class B Common Stock.

     On  February  17,  2004,  our Board of  Directors  declared a special  cash
     dividend of $4.00 per share on each of our Class A Common Stock and Class B
     Common  Stock.  The  special  dividend  was  paid  on  March  17,  2004  to
     shareholders of record at the close of business on March 3, 2004.

     We paid $25,990 in a special cash dividend and $1,299 of regular  quarterly
     cash dividends in 2004. On January 13, 2005, we paid the regular  quarterly
     cash  dividends  declared by the Board on November 4, 2004.  As of December
     31,  2004,  the  Company  had accrued  $351 in current  liabilities,  under
     accrued expenses,  representing the dividend  liability for the January 13,
     2005 dividend.

     The Company's  corporate  charter provides that regular cash dividends paid
     on the Company's  Class B common stock are to be in an amount equal to 110%
     of the dividend  amount paid on the Company's  Class A common  stock.  This
     charter provision does not apply to special dividends.

11.  Stock Options and Stock Purchase Warrants
---  -----------------------------------------

     On  February  17th,  the Company  declared a special  dividend of $4.00 per
     share on its outstanding  shares of Class A and Class B Common Stock to its
     shareholders  of record on March 1, 2004.  The special  dividend  payout of
     $25,990 was a  substantial  restructuring  of the  Company's  equity.  As a
     result of this restructuring the Company made customary adjustments to both
     the exercise price and the number of shares of outstanding stock subject to
     the  Company's  outstanding  stock  options to give  effect to the  special
     dividend. The adjustments to the stock options awards ensured that both the
     aggregate intrinsic value of the award immediately after the change was not
     greater than the aggregate  intrinsic  value of the award before the change
     and that the ratio of the exercise  price per share to the market value per
     share was not  reduced.  The  option  information  presented  reflects  the
     adjustment  to the number of shares and the  exercise  price as a result of
     the restructuring.

     1993 Equity Incentive Plan

     Under the Company's  1993 Equity  Incentive Plan "Equity  Incentive  Plan",
     approved by the  Company's  stockholders  on May 25, 1993,  the Company may
     grant stock options and restricted stock awards to officers,  key employees
     and Directors of, and consultants and advisors to, the Company.

     The Equity Incentive Plan is administered by the Board of Directors, which,
     at its sole  discretion,  grants options to purchase shares of Common Stock
     and makes  awards of  restricted  stock.  The  purchase  price per share of
     Common  Stock  shall be  determined  by the Board of  Directors,  provided,
     however,  that in the case of incentive  stock options,  the purchase price
     may not be less than  100% of the fair  market  value of such  stock at the
     time of grant of the option (or less than 100% of the fair market value for
     certain  significant  shareholders).  The  terms of option  agreements  are
     established  by the Board of  Directors,  except  in the case of  incentive
     stock  options,  the term of which may not  exceed ten years (or five years
     for certain  significant  shareholders.  The vesting schedule is subject to
     the discretion of the Board of Directors.

     Restricted  stock awards  granted under the Equity  Incentive  Plan entitle
     recipients to purchase shares of the Company's  Common Stock subject to the
     Company's right to repurchase such shares and  restrictions  concerning the
     sale,  transfer  and other  disposition  of the shares  issued,  until such
     shares are vested.  The Board of Directors  determines the purchase  price,
     which may be less than the fair market value of the Common  Stock,  and the
     vesting schedule for such awards.
<PAGE>

     The Board of Directors has delegated its powers under the Equity  Incentive
     Plan to the Compensation  Committee of the Board of Directors.  At December
     31, 2004, a total of 1,900,000 shares, in the aggregate,  of Class A Common
     Stock and Class B Common Stock have been reserved by the Company and may be
     issued under the Plan.

     The following  table  summarizes  the awards  available for grant under the
     Company's 1993 Equity  Incentive Plan for the three-year  reporting  period
     ended December 31, 2004:

                                                                  Shares

        Shares available at January 4, 2002...................    658,577
        Awards granted........................................   (160,000)
        Options expired or cancelled..........................    128,621
                                                                  -------
        Shares available at January 3, 2003...................    627,198
        Awards granted........................................   (157,750)
        Options expired or cancelled..........................     39,112
                                                                   ------
        Shares available at January 2, 2004...................    508,560
        Conversion adjustment.................................   (140,968)
                                                                 --------
        Shares available at December 31, 2004.................    367,592
                                                                 ========

     The Equity  Incentive  Plan  expired  on April 7, 2003 and no  further  new
     awards may be made under the plan.  However,  awards  outstanding under the
     plan remain outstanding in accordance with their terms.

     2003 Equity Plan

     On May  21,  2003  the  Company's  stockholders  approved  the  2003  Stock
     Incentive Plan "Stock Incentive Plan",  which had been adopted by the Board
     of  Directors on February 20, 2003.  Under the Stock  Incentive  Plan,  the
     Company may grant stock  options and  restricted  stock awards to officers,
     key employees and Directors of, and advisors to, the Company.

     The Stock Incentive Plan is administered by the Board of Directors,  which,
     at its sole  discretion,  grants options to purchase shares of Common Stock
     and makes  awards of  restricted  stock.  The  purchase  price per share of
     Common  Stock  shall be  determined  by the Board of  Directors,  provided,
     however,  that in the case of incentive  stock options,  the purchase price
     may not be less than 100% of the fair  market  value of such stock (or less
     than 110% of the fair market value for certain significant shareholders) at
     the  time of grant of the  option.  The  terms  of  option  agreements  are
     established  by the Board of  Directors,  except  in the case of  incentive
     stock  options,  the term of which may not  exceed ten years (or five years
     for certain significant  shareholders).  The vesting schedule is subject to
     the discretion of the Board of Directors.

     Restricted  stock awards  granted  under the Stock  Incentive  Plan entitle
     recipients to purchase shares of the Company's  Common Stock subject to the
     Company's right to repurchase such shares and  restrictions  concerning the
     sale,  transfer  and other  disposition  of the shares  issued,  until such
     shares are vested.  The Board of Directors  determines the purchase  price,
     which may be less than the fair market value of the Common  Stock,  and the
     vesting schedule for such awards.

     The Board of Directors has  delegated its powers under the Stock  Incentive
     Plan to the Compensation Committee of the Board of Directors. At January 2,
     2004,  a total of 1,750,000  shares,  in the  aggregate,  of Class A Common
     Stock and Class B Common Stock have been reserved by the Company and may be
     issued under the Stock Incentive Plan. No award may be made under the Stock
     Incentive Plan after February 19, 2013.
<PAGE>

     The following  table  summarizes  the awards  available for grant under the
     Stock Incentive Plan for the period ended December 31, 2004:



                                                                    Shares
                                                                    ------

            Shares reserved.....................................  1,750,000
            Awards granted......................................   (602,785)
            Options expired or cancelled........................         --
                                                                  ---------
            Shares available at January 2, 2004.................  1,147,215
            Conversion adjustment, prior awards granted.........   (147,276)
            Awards granted......................................    (55,250)
            Options expired or cancelled........................      3,574
                                                                  ---------
            Shares available at December 31, 2004...............    948,263
                                                                  =========


     The following table  summarizes the Company's stock option activity for the
     periods ended January 3, 2003, January 2, 2004 and December 31, 2004:
<TABLE>
<CAPTION>

                                                                                  Weighted
                                                                                   Average
                                                                                  Exercise             Option
                                                                Shares              Price            Price Range
                                                                ------              -----            -----------

<S>                               <C>                            <C>             <C>           <C>         <C>
           Outstanding at January 4, 2002.....................   833,083         $  8.89       $  4.00   - $  19.88
                Granted.......................................   160,000         $  6.67       $  5.90   - $   9.30
                Exercised.....................................   (57,650)        $  4.78       $  4.00   - $   7.06
                Forfeited.....................................   (96,771)        $  9.45       $  4.00   - $  14.69
                Expired.......................................   (35,850)        $  4.84       $  4.44   - $   5.36
                                                               ---------
           Outstanding at January 3, 2003.....................   802,812         $  8.85       $  4.00   - $  19.88
                Granted.......................................   760,535         $ 14.67       $  5.50   - $  17.88
                Exercised.....................................   (79,268)        $  6.52       $  4.13   - $  12.50
                Forfeited.....................................   (37,212)        $ 11.39       $  4.13   - $  19.88
                Expired.......................................    (1,900)        $  4.71       $  4.44   - $   6.50
                                                               ---------
           Outstanding at January 2, 2004..................... 1,444,967         $ 11.98       $  4.00   - $  17.88
                Granted.......................................    55,250         $ 20.08       $ 17.39   - $  24.26
                Conversion adjustment.........................   288,244         $ 10.58       $  4.38     $  15.88
                Exercised.....................................  (408,174)        $  8.85       $  4.00   - $  14.69
                Forfeited.....................................    (5,300)        $ 10.88       $  5.54   - $  18.45
                Expired.......................................   (27,978)        $  5.50       $  4.78   - $  11.69
                                                               ---------
           Outstanding at December 31, 2004................... 1,347,009         $ 10.86       $  4.38   - $  24.26
                                                               =========
</TABLE>

     The conversion  adjustment in the table above  represents the impact of the
     special dividend declared on February 17, 2004.

     Options  exercisable for shares of the Company's Class A and Class B Common
     Stock as of January 2, 2004 and December 31, 2004 are as follows:
<TABLE>
<CAPTION>

                                                                 Options Exercisable
                                         --------------------------------------------------------------------

                                                                                          Weighted Average
                                                                                           Exercise Price
                                         Class A         Class B                       Class A        Class B
                                         Common          Common                        Common         Common
                                          Stock           Stock          Total          Stock          Stock
                                          -----           -----          -----          -----          -----

<S>                                      <C>             <C>             <C>             <C>        <C>
          January 2, 2004................  --            513,123         513,123          --        $    9.60
          December 31, 2004..............  --            473,305         473,305          --        $   10.76

</TABLE>
<PAGE>
<TABLE>

     The following table summarizes  information about stock options outstanding
     at December 31, 2004:
<CAPTION>

                                                   Options Outstanding                      Options Exercisable
                                       ------------------------------------------        --------------------------
                                          Shares          Weighted                          Shares
                                        Outstanding        Average       Weighted         Exercisable      Weighted
                                            at            Remaining       Average             at            Average
                     Range of          December 31,      Contractual     Exercise        December 31,      Exercise
                  Exercise Prices          2004         Life (Years)       Price             2004            Price
                  ---------------          ----         ------------       -----             ----            -----

<S>           <C>                         <C>             <C>          <C>                 <C>           <C>
              $  4.38   - $  4.93           88,892          6.93         $  4.74             18,408        $  4.66
              $  5.25   - $  7.97          113,972          5.49         $  5.85             50,177        $  5.72
              $  8.08     $  8.96          320,543          6.18         $  8.54            159,058        $  8.80
              $  9.36   - $ 11.54          101,632          4.10         $ 10.33             61,955        $ 10.06
              $ 12.94   - $ 12.94          650,278          8.80         $ 12.94            137,659        $ 12.94
              $ 13.02   - $ 24.26           71,692          8.15         $ 18.56             46,048        $ 19.92
                                         ---------                                          -------
                                         1,347,009                                          473,305
                                         =========                                          =======

</TABLE>

     Stock Purchase Warrants

     On March 12, 2001,  the Company  issued common stock  purchase  warrants to
     purchase,  in the aggregate,  50,250 shares of the Company's Class B Common
     Stock at a per share price of $7.00 to five footwear  suppliers.  The stock
     purchase  warrants  vest in five equal annual  installments,  commencing on
     March 12,  2002.  The stock  purchase  warrant  grant was  approved  by the
     Company's Board of Directors on February 27, 2001. The warrants were issued
     for no cash consideration;  but rather as an incentive to the recipients of
     the warrants to satisfy  specific  performance  criteria  which support the
     Company's financial and operating goals. On December 31, 2003, the Board of
     Directors  amended the terms of the stock purchase warrants to provide that
     the  warrants  vested  in full as of  December  31,  2003.  See Note 13 for
     further  discussion of the stock warrant fair value and annual  stock-based
     compensation  expense.  On March 2, 2004,  all of the common stock purchase
     warrants were exercised for proceeds of $352.
<PAGE>

12.  Earnings Per Share
---  ------------------

     The following table sets forth the computation of basic earnings per common
     share and diluted  earnings per common  share for the years ended  December
     31, 2004, January 2, 2004 and January 3, 2003:
<TABLE>
<CAPTION>

                                                    2004                      2003                      2002
                                           ----------------------    ----------------------    ---------------------

                                              Basic       Diluted       Basic       Diluted       Basic      Diluted
                                              -----       -------       -----       -------       -----      -------

<S>                                        <C>          <C>           <C>          <C>          <C>          <C>
       Net income available for
         common shares and
         assumed conversions...............$ 10,418     $ 10,418      $ 8,488      $ 8,488      $  5,243     $  5,243
                                           ========     ========      =======      =======      ========     ========

       Weighted-average common shares
         and equivalents outstanding:

       Weighted-average shares
          outstanding......................   6,493        6,493        6,104        6,104         6,107        6,107

         Effect of dilutive securities:
         Stock options.....................      --          587           --          245            --           76
         Stock purchase warrants...........      --           --           --           22            --            3
                                           --------     --------      -------      -------      --------     --------
                                              6,493        7,080        6,104        6,371         6,107        6,186
                                              =====        =====        =====        =====         =====        =====

       Net income allocated:
         Class A common stock..............$  3,812     $  3,485      $ 3,312      $ 3,168      $  2,080     $  2,052
         Class B common stock..............   6,606        6,933        5,176        5,320         3,163        3,191
                                              -----        -----        -----        -----         -----        -----
                                           $ 10,418     $ 10,418      $ 8,488      $ 8,488      $  5,243     $  5,243
                                           ========     ========      =======      =======      ========     ========

       Weighted-average common shares
         and equivalents outstanding:
          Class A common stock.............   2,521        2,521        2,521        2,521         2,563        2,563
          Class B common stock ............   3,972        4,559        3,583        3,850         3,544        3,623
                                              -----        -----        -----        -----         -----        -----
                                              6,493        7,080        6,104        6,371         6,107        6,186
                                              =====        =====        =====        =====         =====        =====

       Earnings per share:
         Class A common stock..............$   1.51     $   1.38      $  1.31      $  1.26      $  0.81      $   0.80
                                           ========     ========      =======      =======      =======      ========
         Class B common stock..............$   1.66     $   1.52      $  1.44      $  1.38      $  0.89      $   0.88
                                           ========     ========      =======      =======      =======      ========
</TABLE>

     Options to purchase  336,000  shares of common  stock were  outstanding  at
     January 2, 2004 were not included in the computations of earnings per share
     since the options were anti-dilutive. All of the options to purchase shares
     of common  stock  outstanding  at December  31,  2004 were  included in the
     computation  of diluted  earnings  per share.  Stock  warrants  to purchase
     47,000  shares of common  stock  outstanding  at January 2, 2004,  were not
     included in the  computation  of earnings per share since the warrants were
     anti-dilutive.

13.  Accounting for Stock-Based Compensation
---  ---------------------------------------

     The Company has  elected to  continue to measure  stock-based  compensation
     expense  using  the  intrinsic   value  method   prescribed  by  Accounting
     Principles   Board  Opinion  No.  25,   "Accounting  for  Stock  Issued  to
     Employees", "APB 25". Accordingly,  compensation cost for stock options and
     restricted  stock  awards is measured as the excess,  if any, of the quoted
     market  price of the  Company's  stock at the  date of the  grant  over the
     exercise price an employee must pay to acquire the stock.

     The Company recognizes  stock-based  compensation arising from the issuance
     of below  market  options  over the  vesting  period of the stock  grant or
     option  term.  Stock-based  compensation  related to below  market  options
     granted amounted to $0, $0 and $1 for 2004, 2003 and 2002, respectively.
<PAGE>

     The Company  issued  common stock  purchase  warrants to  purchase,  in the
     aggregate,  50,250  shares of the  Company's  Class B Common Stock at a per
     share  price of $7.00 to five  footwear  suppliers.  Fair  value at date of
     grant for the warrants was $3.93 per share  issuable  upon exercise of each
     warrant.   Stock-based  compensation  resulting  from  the  stock  purchase
     warrants   amounted  to  $0,  $603  and  $86  for  2004,   2003  and  2002,
     respectively,  and is recorded as a  component  of cost of goods sold.  The
     2003  stock-based   compensation   expense  includes  $416  of  stock-based
     compensation  expense  recorded as a result of accelerating  the vesting on
     the common stock  purchase  warrants.  On March 2, 2004,  all of the common
     stock purchase warrants were exercised for $352 of proceeds.

     The  weighted  average  fair value at date of grant for options  granted in
     2004,  2003 and 2002 was  $8.00,  $7.53 and $3.18 per share  issuable  upon
     exercise of each option,  respectively.  The weighted-average fair value of
     these  options at the date of grant was estimated  using the  Black-Scholes
     option-pricing  model with the following  weighted-average  assumptions for
     2004, 2003 and 2002, respectively:
<TABLE>
<CAPTION>

                                                                      2004            2003               2002
                                                                      ----            ----               ----

<S>                                                                    <C>              <C>               <C>
               Weighted-average expected life (years)............      5.0              5.0               3.3
               Risk free interest rate...........................      3.0%             3.0%              3.7%
               Expected volatility...............................     45.8%            62.8%             67.3%
               Expected dividend yield...........................      0.8%             1.0%              0.0%

</TABLE>

14.  Income Taxes
---  ------------

     The provision for income taxes was based on pre-tax income from  operations
     before  minority  interest  which was subject to taxation by the  following
     jurisdictions:

                                        2004         2003          2002
                                        ----         ----          ----
      Pre-tax income:
          United States...............$ 13,143     $ 10,316      $ 7,502
          Foreign.....................   4,616        3,258        1,779
                                         -----        -----        -----
          Total.......................$ 17,759     $ 13,574      $ 9,281
                                      ========     ========      =======

       The provision (benefit) for income taxes consists of the following:

                                         2004         2003           2002
                                         ----         ----           ----
           Current:
               Federal.................$ 4,508      $ 3,442        $ 2,293
               State...................  1,122          770            686
               Foreign.................  1,819          999            795
                                         -----          ---            ---
                                         7,449        5,211          3,774
                                         -----        -----          -----
           Deferred:
               Federal.................   (261)         101            144
               State...................   (133)          36            (81)
               Foreign.................    206          205            (66)
                                           ---          ---            ---
                                          (188)         342             (3)
                                          ----          ---             --
           Change in valuation
             allowance.................    (24)        (613)            94
                                           ---         ----             --
             Total.....................$ 7,237      $ 4,940        $ 3,865
                                       =======      =======        =======
<PAGE>

     The net  deferred  tax  asset or  liability  reported  on the  consolidated
     balance sheet  consists of the following  items as of December 31, 2004 and
     January 2, 2004:
<TABLE>
<CAPTION>

                                                                                        2004             2003
                                                                                        ----             ----
<S>                                                                                   <C>            <C>
         Net current deferred tax assets:
           Allowance for doubtful accounts and discounts..............................$     523      $     373
           Inventory allowances and tax costing adjustments...........................      365            516
           Other accrued expenses.....................................................    1,361            242
           Deferred compensation......................................................      206            671
           Foreign loss carryforwards.................................................       --            324
                                                                                          -----            ---
              Total...................................................................$   2,455      $   2,126
                                                                                      ---------      ---------

         Net long-term deferred tax assets:
           Deferred compensation......................................................$     315      $     214
           Foreign loss carryforwards.................................................      157            166
           State loss carryforward....................................................       47             49
           Valuation allowance........................................................     (204)          (215)
                                                                                           ----           ----
              Total...................................................................$     315      $     214
                                                                                      =========      =========

         Net long-term deferred tax liabilities:
           Investment in limited partnership..........................................$   1,331      $   1,246
           Property, plant and equipment..............................................      948            770
                                                                                            ---            ---
              Total...................................................................$   2,279      $   2,016
                                                                                      ---------      ---------

         Net deferred tax asset ......................................................$     491      $     324
                                                                                      =========      =========
</TABLE>

     The foreign loss carryforwards  relate to operating losses of approximately
     $384, which may be carried forward  indefinitely.  At December 31, 2004 the
     Company has  determined  that it is more likely than not that the  deferred
     tax assets  resulting from foreign and state  operating  losses will not be
     realized against future taxable income.

     The Company has not recorded  deferred  income  taxes on the  undistributed
     earnings  of  foreign  subsidiaries  that are  indefinitely  reinvested  in
     foreign  operations.  These earnings  amounted to  approximately  $9,522 at
     December 31, 2004.

     A reconciliation of the expected tax computed at the U.S. statutory federal
     income tax rate to the total provision for income taxes follows:
<TABLE>
<CAPTION>

                                                                                 2004         2003        2002
                                                                                 ----         ----        ----

<S>                                                                           <C>          <C>           <C>
         Expected tax at 35% (34% for 2003 and 2002).........................$   6,216    $   4,615     $  3,155
         Federal rate credit.................................................     (100)          --           --
         State income tax, net of federal benefit............................      643          532          399
         Non-deductible expenses and tax-exempt income.......................      171           78          121
         International tax rate differences, net.............................       94           81          100
         Valuation allowance relating to foreign and state
           operating losses..................................................      (24)        (613)          94
         Other...............................................................        2           (3)          (4)
         Adjustment of tax reserves..........................................      235          250           --
                                                                             ---------    ---------     --------
         Provision for income taxes..........................................$   7,237    $   4,940     $  3,865
                                                                             =========    =========     ========
</TABLE>

     In evaluating exposures  associated with various tax filing positions,  the
     Company has accrued $951 for probable tax  contingencies as of December 31,
     2004. In 2004 and 2003, the Company  provided $235 and $250,  respectively,
     related to exposures on tax filing positions.  Management believes that the
     Company's  tax  contingencies  have  been  adequately  provided  for in the
     accompanying  financial  statements.  To the extent the Company prevails in
     matters for which  accruals  have been  established  or are required to pay
     amounts in excess of these accruals,  the Company's effective tax rate in a
     given financial statement period could be materially affected.

15.  Litigation Settlement
---  ---------------------

     On May 6, 2003,  the United  States  Bankruptcy  Court for the  District of
     Delaware,  upon  consideration  of the Trustee's  Motion for Entry of Order
     Approving  Settlement  with  Saucony,   Inc.,  ordered  that  the  proposed
     settlement entered into on March 11, 2003,  between the trustee,  appointed
     to oversee the  liquidation  of assets of a former  customer of the Company
     which filed for bankruptcy  protection on November 4, 1999, and the Company
     was  approved.  On May 16,  2003,  the  Company  paid  $530 to  settle  all
     preferential  claims.  As a  consequence  of the  court's  approval  of the
     settlement,  the  Company  recorded  a pre-tax  benefit  of $566 in 2003 to
     reduce the amount  accrued as of January 2, 2004.  The benefit was recorded
     in general and administrative expenses under the Saucony segment.

16.  Plant Closing, Other Charges and Gain on Sale
---  ---------------------------------------------

     During  fiscal  2002,  we  recorded a pre-tax net benefit of $214 to reduce
     expenses accrued in the fourth quarter of fiscal 2001,  associated with the
     closing  of  our  Bangor,  Maine  manufacturing   facility  and  the  early
     termination  and exit of a retail store lease.  Partially  offsetting  this
     pre-tax  benefit was a pre-tax  charge of $142 to close an  underperforming
     retail store.  Expenses  associated  with the store closing  included lease
     termination  and  other  contractual  costs  of $51  and  $91 to  write-off
     leasehold  improvements.  A pre-tax  benefit of $35 was  recorded in fiscal
     2003 to eliminate the plant-closing accrual.

     The charge  recorded  for the Bangor,  Maine  plant  closing is included in
     income before tax for the Saucony  segment,  while the retail store closing
     is included in income before tax for the Other Products segment.

     The following table  summarizes the activity in the plant closing and other
     charge accruals:
<TABLE>
<CAPTION>

                                      Employee          Facility         Writedown
                                    Severance and      Closure and     of Equipment      Professional
                                     Termination       Contractual     and Disposal        Fees and
                                      Benefits         Commitments         Costs          Other Costs         Total
                                      --------         -----------         -----          -----------         -----

<S>                                    <C>              <C>               <C>               <C>             <C>
       Balance, January 4, 2002........$    893         $   428           $     90          $   50          $  1,461
         Payments / utilization........    (787)           (320)               (89)            (15)           (1,211)
         Expense reversal..............     (79)            (99)                (1)            (35)             (214)
                                            ---             ---                 --             ---              ----
       Balance, January 3, 2003........$     27         $     9           $     --          $   --          $     36
         Payments / utilization........      (1)             --                 --              --                (1)
         Expense reversal..............     (26)             (9)                --              --               (35)
                                           -----        -------           --------          ------          --------
       Balance, January 2, 2004........$     --         $    --           $     --          $   --          $     --
                                        =======         =======           ========          ======          ========
</TABLE>

     On  November  7, 2003,  the sale of the  Bangor,  Maine real  property  was
     completed. The following table summarizes the sale of the real property:

                  Gross proceeds...................................$    763
                  Transaction expenses.............................      77
                                                                   --------
                  Net proceeds.....................................     686
                  Net book value of facility.......................     357
                                                                   --------
                  Gain on sale.....................................$    329
                                                                   ========

     The gain  realized  from the sale was recorded in operating  income for the
     Saucony segment for the year ending January 3, 2003.
<PAGE>

17.  Geographic Segment Data
---  -----------------------

     The following table summarizes the Company's  operations by geographic area
     for the years ended December 31, 2004,  January 2, 2004 and January 3, 2003
     and assets as of December  31,  2004,  January 2, 2004 and January 3, 2003:
     2004 2003 2002 Revenues:
<TABLE>
<CAPTION>

<S>                                                                      <C>            <C>             <C>
         United States...................................................$   127,917    $   103,718     $   103,444
         Canada..........................................................     15,340         12,745          11,700
         Other international.............................................     23,419         19,982          18,355
                                                                              ------         ------          ------
                                                                         $   166,676    $   136,445     $   133,499
                                                                         ===========    ===========     ===========
       International revenues:

         United States - sales to foreign distributors...................$     8,245    $     6,813     $     7,048
         Canada..........................................................     15,340         12,745          11,700
         Other international.............................................     15,174         13,169          11,307
                                                                              ------         ------          ------
                                                                         $    38,759    $    32,727     $    30,055
                                                                         ===========    ===========     ===========
       Inter-area revenues:

         United States...................................................$       253    $       253     $       247
         Canada..........................................................      6,915          5,419           6,386
         Other international.............................................      4,778          5,399           5,191
                                                                               -----          -----           -----
                                                                         $    11,946    $    11,071     $    11,824
                                                                         ===========    ===========     ===========
       Total revenues:

         United States...................................................$   128,170    $   103,971     $   103,691
         Canada..........................................................     22,255         18,164          18,086
         Other international.............................................     28,197         25,381          23,546
         Less:  Inter-area eliminations..................................    (11,946)       (11,071)        (11,824)
                                                                             -------        -------         -------
                                                                         $   166,676    $   136,445     $   133,499
                                                                         ===========    ===========     ===========
       Operating income:

         United States...................................................$     9,846    $     8,303     $     5,531
         Canada..........................................................      3,522          2,323           1,931
         Other international.............................................      4,831          2,473           1,659
         Less:  Inter-area eliminations..................................        (22)          (102)           (178)
                                                                                 ---           ----            ----
                                                                         $    18,177    $    12,997     $     8,943
                                                                         ===========    ===========     ===========
       Assets:

         United States...................................................$    86,031    $    92,643     $    81,538
         Canada..........................................................     12,728          9,117           6,906
         Other international.............................................     11,071          9,668           9,396
         Less:  Inter-area eliminations..................................    (13,573)       (10,740)        (10,300)
                                                                             -------        -------         -------
                                                                         $    96,257    $   100,688     $    87,540
                                                                         ===========    ===========     ===========
       Purchases of property, plant and equipment:

         United States...................................................$     4,374    $     1,361     $       717
         Canada..........................................................         81             48              27
         Other International.............................................         86            258              32
                                                                                  --            ---              --
                                                                         $     4,541    $     1,667     $       777
                                                                         ===========    ===========     ===========
       Long-lived assets:

         United States...................................................$    11,226    $     7,469     $     6,751
         Canada..........................................................        146            107              27
         Other international.............................................        248            311              92
                                                                                 ---            ---              --
                                                                         $    11,620    $     7,887     $     6,870
                                                                         ===========    ===========     ===========
</TABLE>

<PAGE>

     Revenues are classified based on customer location.  Other revenue consists
     primarily  of royalty  income.  Inter-area  revenues  consist  primarily of
     inventory  shipments to the  Company's  international  subsidiaries.  These
     inter-area  sales are generally  priced to recover cost plus an appropriate
     mark-up for profit and are eliminated in the  determination of consolidated
     net sales and cost of sales.  Operating  income  consists of revenue,  less
     cost of sales, selling expenses, general and administrative expenses, plant
     closing and other credits, environmental charge and the gain on the sale of
     our former manufacturing facility.

18.  Operating Segment Data
---  ----------------------

     The  Company's  operating  segments  are  organized  based on the nature of
     products. The operating segments of the Company are as follows:

     Saucony Segment
     ---------------

     Consists of Saucony technical running, walking, outdoor trail and Originals
     footwear and athletic apparel.

     Other Products Segment
     ----------------------

     Consists  of  Hind  athletic  apparel,  Spot-bilt  shoes  for  coaches  and
     officials,  cleated football and multi-purpose  footwear and casual leather
     walking and  workplace  footwear,  together with sales of the Company's and
     other company's products at the factory outlet stores.

     The  following  table  summarizes  the results of the  Company's  operating
     segments for the years ended December 31, 2004, January 2, 2004 and January
     3, 2003 and  identifiable  assets as of December 31, 2004,  January 2, 2004
     and January 3, 2003:
<TABLE>
<CAPTION>


                                                                     2004           2003           2002
                                                                     ----           ----           ----
<S>                                                             <C>             <C>            <C>
           Revenues:
              Saucony...........................................$   141,171     $  112,993     $   111,035
              Other Products....................................     25,505         23,452          22,464
                                                                     ------         ------          ------
              Total.............................................$   166,676     $  136,445     $   133,499
                                                                ===========     ==========     ===========
           Pre-tax income (loss):
              Saucony...........................................$    15,373     $   11,910     $    10,288
              Other Products....................................      2,386          1,664          (1,007)
              Total segment pre-tax income (loss)...............     17,759         13,574           9,281
              Provision for income taxes........................      7,237          4,940           3,865
              Minority interest.................................        104            146             173
                                                                        ---            ---             ---
           Net income...........................................$    10,418     $    8,488     $     5,243
                                                                ===========     ==========     ===========
           Assets:
              Saucony...........................................     86,644     $   92,007     $    75,918
              Other Products....................................      9,613          8,681          11,622
                                                                      -----          -----          ------
              Total.............................................$    96,257     $  100,688     $    87,540
                                                                ===========     ==========     ===========
           Depreciation and amortization:
              Saucony...........................................$     1,214     $    1,064     $     1,332
              Other Products....................................        320            273             265
                                                                        ---            ---             ---
              Total.............................................$     1,534     $    1,337     $     1,597
                                                                ===========     ==========     ===========
           Goodwill, net:
              Saucony...........................................$        19     $       19     $        19
              Other Products....................................        893            893             893
                                                                        ---            ---             ---
              Total.............................................$       912     $      912     $       912
                                                                ===========     ==========     ===========
           Interest, net income:
              Saucony...........................................$       306     $      240     $       327
              Other Products....................................         --             --              --
                                                                     ------         ------         -------
              Total.............................................$       306     $      240     $       327
                                                                ===========     ==========     ===========
           Components of interest, net
              Interest expense..................................$        (8)    $       (5)    $        (5)
              Interest income...................................        314            245             332
                                                                        ---            ---             ---
                Interest, net...................................$       306     $      240     $       327
                                                                ===========     ==========     ===========
</TABLE>

<PAGE>

19.  Concentration of Credit Risk
---  ----------------------------

     Financial  instruments which potentially subject the Company to credit risk
     consist  primarily of cash, cash  equivalents,  short-term  investments and
     trade receivables.

     The Company maintains cash and cash equivalents and short-term  investments
     with various major financial institutions.  Cash equivalents and short-term
     investments  include investments in commercial paper of companies with high
     credit  ratings,  investments  in money market  securities  and  securities
     backed by the U.S. Government. At times such amounts may exceed the Federal
     Deposit  Insurance  Corporation  limits.  The Company  limits the amount of
     credit  exposure  with any one financial  institution  and believes that no
     significant  concentration  of credit  risk  exists  with  respect  to cash
     investments.

     Trade receivables subject the Company to the potential for credit risk with
     customers in the retail and distributor sectors. To reduce credit risk, the
     Company performs ongoing evaluations of its customers'  financial condition
     but does not generally require collateral. Approximately 48% and 44% of the
     Company's gross trade  receivables  balance was represented by 15 customers
     at December 31, 2004 and January 2, 2004,  respectively,  which exposes the
     Company to a concentration  of credit risk. The Company did not derive more
     that 10% of its  consolidated  revenue from one  customer in 2004,  2003 or
     2002.


20.  Financial Instruments
---  ---------------------

     The carrying value of cash, cash equivalents,  receivables, and liabilities
     approximates  fair value due to their short term nature.  The fair value of
     marketable  securities  is estimated  based upon quoted  market  prices for
     these securities.

     The Company  enters  into  forward  currency  exchange  contracts  to hedge
     intercompany   liabilities   denominated  in  currencies   other  than  the
     functional  currency.  The fair  value of the  Company's  foreign  currency
     exchange  contracts is based on foreign  exchange  rates as of December 31,
     2004. At December 31, 2004 and January 2, 2004,  the notional  value of the
     Company's foreign currency exchange  contracts to purchase U.S. dollars was
     $8,570 and $7,448,  respectively.  Consistent  with the  provisions of SFAS
     133, all derivatives  must be recognized on the balance sheet at their then
     fair value and  adjustments to the fair value of  derivatives  that are not
     hedges must be recognized currently in earnings when they occur.

     The  Company  believes  that  these  contracts   economically  function  as
     effective  hedges of the  underlying  exposures  but, the foreign  currency
     contracts  do not meet the  specific  criteria  as defined in SFAS 133 thus
     requiring  the  Company to record all changes in the fair value in earnings
     in the period of the  change.  The  Company  recorded  charges of $420,  at
     December 31, 2004 and January 2, 2004,  against fiscal 2004 and fiscal 2003
     earnings,  to  record  the  unrealized  loss on  certain  foreign  currency
     contracts  outstanding  as of those  dates.  The  charges  are  recorded in
     non-operating  expenses.  At December  31,  2004 and  January 2, 2004,  the
     unrealized loss on derivatives is recorded in accrued expenses.

<PAGE>

21.  Quarterly Information
<TABLE>
<CAPTION>

                                                                                    (Unaudited)

              2004                                                Quarter 1    Quarter 2    Quarter 3  Quarter 4(1)
              ----                                                ---------    ---------    ---------  ------------

<S>                                                             <C>          <C>          <C>           <C>
              Net sales.........................................$   46,969   $   43,979   $   42,266    $   32,938
              Gross profit......................................    19,057       18,071       17,469        13,346
              Net income (loss).................................     4,231        3,045        3,458          (316)
              Earnings (loss) per share:
                Basic:
                Class A.........................................      0.63         0.44         0.50        (0.05)
                Class B.........................................      0.69         0.49         0.55        (0.05)

                Diluted:
                Class A.........................................      0.58         0.41         0.45        (0.05)
                Class B.........................................      0.64         0.45         0.49        (0.05)

              2003                                                Quarter 1  Quarter 2(2)   Quarter 3   Quarter 4 (3)(4)
              ----                                                ---------  ------------   ---------    --------------

              Net sales.........................................$   39,068   $   34,472   $   31,978    $   30,548
              Gross profit......................................    15,196       13,428       12,995        10,834
              Net income........................................     2,603        2,232        2,179         1,474
              Earnings per share:
                Basic:
                Class A.........................................      0.41         0.35         0.34         0.23
                Class B.........................................      0.45         0.38         0.37         0.25
                Diluted:
                Class A.........................................      0.39         0.33         0.32         0.21
                Class B.........................................      0.43         0.37         0.35         0.24


       Earnings  per share  amounts for each quarter are  required to be computed  independently  and, as a result,
       their sum may not equal the total earnings per share amounts for fiscal 2004 and 2003.

       _________________
         (1)  The Company  recorded a charge of $2,275 to address  environmental  conditions at the Company's  East
              Brookfield,  Massachusetts  distribution  facility.  See Note 8 for further  information  relating to
              this charge.

         (2)  The  Company  settled  litigation  with the court  appointed  transfer  of a former  customer  of the
              Company which had filed for bankruptcy  protection.  The Company  recorded a pre-tax  benefit of $566
              to  reduce  general  and  administrative  expenses.  See  Note  15  for  further  discussion  on  the
              litigation settlement.

         (3)  The Company  recorded a charge of $416 to cost of goods sold due to the  acceleration  of the vesting
              of stock  warrants  issued  to five of the  Company's  footwear  suppliers.  See Note 13 for  further
              discussion of the stock warrant vesting acceleration.

         (4)  The Company  recorded a tax benefit of $325 on the reversal of valuation  reserves in certain foreign
              deferred tax assets.

</TABLE>
<PAGE>



22.  Supplemental Cash Flow Disclosure
---  ---------------------------------

     The  following  table  summarizes   additional   disclosure  of  cash  flow
     information  for the years ended  December  31,  2004,  January 2, 2004 and
     January 3, 2003:
<TABLE>
<CAPTION>


                                                                              2004           2003           2002
                                                                              ----           ----           ----


<S>                                                                        <C>            <C>             <C>
          Supplemental disclosure of cash flow information:
              Cash paid during the period for:
              Income taxes, net of refunds.................................$   5,798      $   5,243       $   2,036
                                                                           =========      =========       =========
              Interest.....................................................$       5      $       5       $       4
                                                                           =========      =========       =========

          Non-cash Investing and Financing Activities:
              Property purchased under capital leases......................$     260      $      --       $      --
                                                                           =========      =========       =========

          Plant closing and other related charges (credits)................$      --      $     (35)      $     (72)
              Cash received................................................       --             --              --
              Severance and other payments.................................       --             --             (51)
                                                                           ---------      ---------       ---------
                                                                           $      --      $     (35)      $    (123)
                                                                           =========      =========       =========
          Non-cash portion:
              Accrued expenses.............................................$      --      $     (35)      $    (214)
              Property, plant and equipment................................       --             --              91
                                                                           ---------      ---------       ----------
                                                                           $      --      $     (35)      $    (123)
                                                                           =========      =========       =========
</TABLE>


     In February 2004, two officers who are also directors and principal holders
     of the Company's  Class A common stock,  each delivered 3,609 mature shares
     of Class B common stock in payment of their respective  option exercises to
     purchase 9,999 shares each of the Company's Class B common stock.
<PAGE>
<TABLE>


                                           SAUCONY, INC. AND SUBSIDIARIES
                                   SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>

                     For the Years Ended December 31, 2004, January 2, 2004 and January 3, 2003

                                                  (in thousands)



                                                                                  Additions
                                                                     Balance     charged to    Deductions      Balance
                                                                    beginning    costs and        from           end
                                                                    of year        expenses      reserve       of year
                                                                    -------        --------      -------       -------
<S>                                                                <C>            <C>           <C>           <C>
Allowance for doubtful accounts and discounts:

  Year ended December 31, 2004....................................$   1,108      $  6,014      $   5,941     $   1,181

  Year ended January 2, 2004......................................$   2,406      $  4,453      $   5,751     $   1,108

  Year ended January 3, 2003......................................$   2,457      $  4,752      $   4,803     $   2,406


Environmental accrual:

  Year ended December 31, 2004....................................$      --      $  2,275      $      --     $   2,275

  Year ended January 2, 2004......................................$      --      $     --      $      --     $      --

  Year ended January 3, 2003......................................$      --      $     --      $      --     $      --


</TABLE>
<PAGE>





                                                   Exhibit Index
Exhibit
Number                              Description

3.1  Restated  Articles of  Organization,  as  amended,  of the  Registrant  are
     incorporated  herein by reference to Exhibit 3.1 to the Registrant's Annual
     Report on Form 10-K for the  fiscal  year ended  January 2, 2004,  as filed
     with the Securities and Exchange Commission on April 1, 2004.

3.2  By-Laws, as amended, of the Registrant.

10.1 Amended and Restated  Credit  Agreement,  dated  August 30,  2002,  between
     Saucony,  Inc. and State Street Bank and Trust Company,  is incorporated by
     reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
     for the fiscal  quarter ended October 4, 2002, as filed with the Securities
     and Exchange Commission on November 14, 2002.

10.2 Amendment to Amended and Restated Credit Agreement,  dated August 30, 2002,
     between Saucony,  Inc. and HSBC Bank USA (as successor in interest to State
     Street Bank and Trust Company) is incorporated by reference to Exhibit 10.3
     to the  Registrant's  Quarterly  Report on Form 10-Q for the fiscal quarter
     ended July 4, 2003, as filed with the Securities and Exchange Commission on
     August 18, 2003.

10.3 Amendment to Amended and Restated Credit Agreement,  dated August 30, 2002,
     between  Saucony,  Inc.  and HSBC  Bank  USA,  dated  January  26,  2004 is
     incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual
     Report on Form 10-K for the  fiscal  year ended  January 2, 2004,  as filed
     with the Securities and Exchange Commission on April 1, 2004.

10.4*1993  Equity  Incentive  Plan,  as  amended,   is  incorporated  herein  by
     reference to Exhibit 10.4 to the  Registrant's  Annual  Report on Form 10-K
     for the fiscal year ended January 2, 2004, as filed with the Securities and
     Exchange Commission on April 1, 2004.

10.5* Vice President Bonus.

10.6*2001 Employee  Stock Purchase Plan is  incorporated  herein by reference to
     Exhibit 99.1 to the Registrant's  Registration  Statement on Form S-8 (File
     No.  333-65974),  as filed with the Securities  and Exchange  Commission on
     July 27, 2001.

10.7*2003 Stock  Incentive Plan is  incorporated  herein by reference to Exhibit
     10.1 to the  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
     quarter  ended July 4,  2003,  as filed with the  Securities  and  Exchange
     Commission on August 18, 2003.

10.8*Employment  Agreement  dated as of August  17,  2000,  by and  between  the
     Registrant  and John H.  Fisher  is  incorporated  herein by  reference  to
     Exhibit  10.1 to the  Registrant's  Quarterly  Report  on Form 10-Q for the
     fiscal  quarter ended  September 29, 2000, as filed with the Securities and
     Exchange Commission on November 13, 2000.

10.9*Executive  Retention  Agreement dated as of August 17, 2000, by and between
     the  Registrant and John H. Fisher is  incorporated  herein by reference to
     Exhibit  10.2 to the  Registrant's  Quarterly  Report  on Form 10-Q for the
     fiscal  quarter ended  September 29, 2000, as filed with the Securities and
     Exchange Commission on November 13, 2000.

10.10*  Employment  Agreement  dated as of August 17,  2000,  by and between the
     Registrant and Charles A. Gottesman is incorporated  herein by reference to
     Exhibit  10.3 to the  Registrant's  Quarterly  Report  on Form 10-Q for the
     fiscal  quarter ended  September 29, 2000, as filed with the Securities and
     Exchange Commission on November 13, 2000.

10.11* Executive Retention Agreement dated as of August 17, 2000, by and between
     the Registrant and Charles A. Gottesman is incorporated herein by reference
     to Exhibit 10.4 to the  Registrant's  Quarterly Report on Form 10-Q for the
     fiscal  quarter ended  September 29, 2000, as filed with the Securities and
     Exchange Commission on November 13, 2000.
<PAGE>

10.12*  Severance  Agreement  dated as of  January  7, 2004 by and  between  the
     Registrant  and  Wolfgang  Schweim is  incorporated  herein by reference to
     Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal
     year ended  January 2, 2004,  as filed  with the  Securities  and  Exchange
     Commission on April 1, 2004.

10.13* Saucony,  Inc.  Non-Qualified  Retirement Plan is incorporated  herein by
     reference to Exhibit  10.13 to the  Registrant's  Quarterly  Report on Form
     10-Q  for the  fiscal  quarter  ended  July 4,  2003,  as  filed  with  the
     Securities and Exchange Commission on August 18, 2003.

10.14* Amendment  to  Employment  Agreement  dated as of July 31,  2003,  by and
     between  the  Registrant  and John H.  Fisher  is  incorporated  herein  by
     reference to Exhibit 10.14 to the  Registrant's  Annual Report on Form 10-K
     for the fiscal year ended January 2, 2004, as filed with the Securities and
     Exchange Commission on April 1, 2004.

10.15* Amendment  to  Employment  Agreement  dated as of July 31,  2003,  by and
     between the Registrant and Charles A. Gottesman is  incorporated  herein by
     reference to Exhibit 10.15 to the  Registrant's  Annual Report on Form 10-K
     for the fiscal year ended January 2, 2004, as filed with the Securities and
     Exchange Commission on April 1, 2004.

10.16* Form of  Incentive  Stock  Option  Agreement  Granted  Under  2003  Stock
     Incentive Plan,  dated December 22, 2003, by and between the Registrant and
     each of Michael  Umana,  Michael  Jeppesen,  Samuel  Ward and Brian Enge is
     incorporated  herein  by  reference  to  Exhibit  10.1 to the  Registrant's
     Quarterly  Report on Form 10-Q for the fiscal  quarter ended April 2, 2004,
     as filed with the Securities and Exchange Commission on May 15, 2004.

10.17Amendment to Amended and Restated Credit Agreement,  dated as of August 30,
     2002, by and between Saucony, Inc. and HSBC Bank USA, National Association,
     dated August 31, 2004 is  incorporated  herein by reference to Exhibit 10.1
     to the  Registrant's  Quarterly  Report on Form 10-Q for the fiscal quarter
     ended October 1, 2004, as filed with the Securities and Exchange Commission
     on November 15, 2004.

10.18*  Retention  Agreement  dated as of  September  9, 2004 by and between the
     Registrant  and Brian Enge is  incorporated  herein by reference to Exhibit
     10.2 to the  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
     quarter ended October 1, 2004,  as filed with the  Securities  and Exchange
     Commission on November 15, 2004.

10.19*  Retention  Agreement  dated as of  September  9, 2004 by and between the
     Registrant  and Michael  Jeppesen is  incorporated  herein by  reference to
     Exhibit  10.3 to the  Registrant's  Quarterly  Report  on Form 10-Q for the
     fiscal  quarter  ended October 1, 2004,  as filed with the  Securities  and
     Exchange Commission on November 15, 2004.

10.20*  Retention  Agreement  dated as of  September  9, 2004 by and between the
     Registrant and Samuel Ward is  incorporated  herein by reference to Exhibit
     10.4 to the  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
     quarter ended October 1, 2004,  as filed with the  Securities  and Exchange
     Commission on November 15, 2004.

10.21*  Retention  Agreement  dated as of  September  9, 2004 by and between the
     Registrant and Michael Umana is incorporated herein by reference to Exhibit
     10.5 to the  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
     quarter ended October 1, 2004,  as filed with the  Securities  and Exchange
     Commission on November 15, 2004.

10.22*  Retention  Agreement  dated as of  September  9, 2004 by and between the
     Registrant  and Roger  Deschenes  is  incorporated  herein by  reference to
     Exhibit  10.6 to the  Registrant's  Quarterly  Report  on Form 10-Q for the
     fiscal  quarter  ended October 1, 2004,  as filed with the  Securities  and
     Exchange Commission on November 15, 2004.
<PAGE>

10.23* Letter  Agreement  dated  as of  September  9,  2004 by and  between  the
     Registrant and Michael Umana is incorporated herein by reference to Exhibit
     10.7 to the  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
     quarter ended October 1, 2004,  as filed with the  Securities  and Exchange
     Commission on November 15, 2004.

10.24* Severance  Benefit  Plan is  incorporated  herein by reference to Exhibit
     10.8 to the  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
     quarter ended October 1, 2004,  as filed with the  Securities  and Exchange
     Commission on November 15, 2004.

10.25* Summary of Non-Employee Director Compensation.


21   Subsidiaries of Registrant.

23.1 Consent of Deloitte & Touche LLP.

31.1 Certification of President and Chief Executive Officer pursuant to Exchange
     Act Rule 13a-14(a).

31.2 Certification of the Chief Financial  Officer pursuant to Exchange Act Rule
     13a-14(a).

32.1 Certification  of  President  and Chief  Executive  Officer  pursuant to 18
     U.S.C.   Section  1350,   as  adopted   pursuant  to  Section  906  of  the
     Sarbanes-Oxley Act of 2002.

32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.  Section
     1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


____________________


*    Management  contract or compensatory  plan or arrangement filed herewith in
     response to Item 15(a)(3) of Form 10-K.