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, 1999
                       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)

       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 ]

The aggregate market value of voting and non-voting stock held by non-affiliates
of the registrant, as of March 10, 2000, was approximately $53,894,220 (based on
the closing  prices of the Class A Common Stock and Class B Common Stock on such
date as reported on the Nasdaq National Market).

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 March 10,
2000 was 2,618,827 and 3,557,769, respectively.

Portions of the  following  documents  are  incorporated  by  reference  in this
Report.

                       Documents Incorporated by Reference

      Document                                             Form 10-K Part

Proxy Statement for Annual Meeting of Stockholders             Part III
of the Registrant to be  held  on May  18,  2000,
to be  filed  with  the  Securities  and  Exchange
Commission.

PART I

ITEM 1 - BUSINESS

OVERVIEW

We  design,  manufacture  and  market  performance-oriented  athletic  footwear,
athletic apparel and bicycles. Our principal products are:

o running, walking, cross training and outdoor trail shoes, 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;

o high-performance bicycles, bicycle frames and component parts, which we
  sell under the Quintana Roo, Merlin and Real Design brand names; and

o shoes for coaches and officials, 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 eight  factory  outlet  stores and outside the United States in 23 countries
through 17 distributors  located throughout the world. For the fiscal year ended
December 31, 1999, we generated total sales of $154.1 million.

Saucony(R),  Spot-bilt(R),  GRID(R),  Quintana Roo(R), Merlin(R) and Hind(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.

PRODUCTS

Our  principal  products are  Saucony(R)  athletic  footwear,  Hind(R)  athletic
apparel,  Quintana  Roo(R) and  Merlin(R)  bicycles  and  bicycle  frames,  Real
Design(R)  bicycle  component  parts  and  Spot-bilt(R)  shoes for  coaches  and
officials.

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  product line and our other product lines for the periods and geographic
areas indicated. "Other" consists of the Hind, Quintana Roo, Merlin, Real Design
and  Spot-bilt  businesses,  together  with sales of our  products  at our eight
factory outlets.

<TABLE>
<CAPTION>
                                                             Net Sales
                                                        (dollars in thousands)

                                   Fiscal 1999                   Fiscal 1998                 Fiscal 1997
                            ----------------------         ---------------------        --------------------
                                 $           %                  $           %                $           %
                                 -           -                  -           -                -           -
<S>                         <C>              <C>           <C>              <C>         <C>             <C>
   Saucony
      Domestic..............$  115,118        75%          $   67,774        64%        $  56,050        60%
      International.........    16,780        11%              18,558        18%           22,580        24%
                            ----------    -------          ----------    -------        ---------    -------
      Total.................$  131,898        86%          $   86,332        82%        $  78,630        84%
                            ----------    -------          ----------    -------        ---------    -------

   Other
      Domestic..............$   19,910        13%          $   15,590        15%        $   9,552        10%
      International.........     2,250         1%               3,152         3%            5,429         6%
                            ----------    -------          ----------    -------        ---------    -------
      Total.................$   22,160        14%          $   18,742        18%        $  14,981        16%
                            ----------    -------          ----------    -------        ---------    -------

   Total....................$  154,058       100%          $  105,074       100%        $  93,611       100%
                            ==========       ====          ==========    =======        =========    =======
</TABLE>

FOOTWEAR

SAUCONY

TECHNICAL FOOTWEAR.  We sell performance  running,  walking,  cross training 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  product offerings
within each Saucony brand category.  These offerings 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.  We currently sell  approximately  the same  percentage of
technical  shoes to men and women.  In keeping with our emphasis on performance,
we  market  and  sell  our  technical  footwear  to  athletes  who  have  a high
participation  rate in their sport of choice. We address this market through our
"Loyal to the Sport" advertising  campaign.  We believe that these consumers 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 $85 per pair,  with our  top-of-the-line  running  shoes
having suggested domestic retail prices of up to $140 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 our Ground Reaction Inertia Device,
or GRID  system,  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  maximizing
shock absorption and minimizing rear foot motion.  We have continually  improved
the GRID system since it was first introduced in 1991.

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.
Currently,  our most popular  non-running  technical  athletic shoe is a women's
performance walking shoe.

ORIGINALS LINES. In 1998, we reintroduced a number of our technical running shoe
models from the early 1980's under the name  "Originals."  These shoes appeal to
younger  consumers  who do not  generally  wear them for athletic  purposes.  We
believe  our  Originals  shoes  have  benefited  from the trend  toward  "retro"
products in footwear  and  apparel.  We offer these lines in a variety of styles
with over one hundred combinations of colors and materials. The suggested retail
prices for our Originals are in the range of $40 to $80 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 are
expanding the Originals  product line to include color variations on our initial
Originals.  We also plan to introduce additional  Originals products,  including
"retro"  footwear  products,  or  contemporary-styled   reintroductions  of  our
technical  running shoe models from the early  1980's and "new school"  footwear
products,  or  athletic  footwear  designed  for the 12 to 25 year old  footwear
consumer.  For spring and fall 2000  seasons,  we plan to  introduce  additional
models of "Originals" including Matrix, Jazz Fade Ice, Jazz Pleather and Hornet.

Originals accounted for 37% of fiscal 1999 consolidated net sales.


SPOT-BILT

We sell shoes for coaches and officials  under the Spot-bilt  brand name through
the same distribution channels for 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  bicycling,  swimming and running. 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 maximize
comfort.  In  addition,  we  frequently  add  innovations  to our  Hind  product
offerings in an effort to incorporate the latest fabric technology. For example,
our fall 2000 cold weather  collection  features Hind's exclusive Rain Jammer(R)
and Wind Jammer(R) fabrics, which are both flexible, polyurethane membranes that
provide protection against the elements while enabling specific activities.

OTHER BRANDS

We also market  athletic  apparel 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.

We also sell triathlon wet suits under the Quintana Roo brand.  Our Quintana Roo
wet  suits  feature  3Generation,  a  flexible,  buoyant  rubber/jersey  complex
manufactured for us by Yamamoto Rubber Company.


BICYCLES

QUINTANA ROO

We manufacture and distribute a line of performance  bicycles for the triathlete
and road/mountain  racing enthusiast under the Quintana Roo brand name. Quintana
Roo bicycles have  suggested  retail prices  ranging from $1,500 to over $3,500.
This line includes:

o triathlon bicycles featuring distinctive 26-inch wheels, steep seat angles and
  aerodynamic handlebars that are appropriate for triathlon racing; and

o road bicycles made principally from lightweight aluminum and carbon fiber that
  offer advanced design features at competitive prices.

We also offer a line of Quintana Roo bicycle accessories, such as shoes and seat
covers.


MERLIN

We are a leading manufacturer of titanium road and mountain bicycles and bicycle
frames which we sell under the Merlin brand name. Merlin bicycles have suggested
retail prices ranging from $3,000 to over $5,000. All of our Merlin bicycles are
designed  for  exhilarating   performance,   exceptional  comfort  and  lifetime
durability.  All of our Merlin frames are  manufactured in  Massachusetts  using
materials that are certified through advanced quality control procedures.


REAL DESIGN

We design and market  precision  bicycle  components under the Real Design brand
name. Our Real Design products include chainrings, cogsets, cranksets, x-levers,
hubs and brake  shoes.  We also offer a  selection  of bicycle  accessories  and
apparel that feature our distinctive Real Design logo.


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  also  maintain  a  staff  of 16  design  and
development  specialists  in Peabody,  Massachusetts  and  Boulder,  Colorado to
undertake continuing product development.

In fiscal 1999 and fiscal  1998,  we spent  approximately  $1.68  million on our
product development programs,  compared to $1.44 million in fiscal 1997. Most of
our research and development expenditures relate to Saucony brand products.


SALES AND MARKETING

SAUCONY BRAND

We sell our Saucony  footwear  products at more than 5,500 retail outlets in the
United  States,   primarily  higher-end,   full-margin  sporting  goods  chains,
independent  sporting  goods  stores,  athletic  footwear  specialty  stores and
department  stores.  Retail outlets include Foot  Locker/Lady  Foot Locker,  The
Athlete's Foot, The Sports Authority, Road Runner Sports, Foot Action and Finish
Line.

We maintain a corporate  sales team that is directly  responsible  for the sales
activity in our largest 48  accounts.  We also sell our  footwear and apparel to
retail outlets in the United States through 13 independent  manufacturer  agents
whose organizations employ approximately 41 sales representatives. Our web sites
(saucony.com  and  sock-a-knee.com)  receive  thousands  of "hits"  weekly  from
consumers  looking for new product  profiles and race and event data, as well as
general Saucony information.

We sell our Saucony products  outside the United States in 23 countries  through
17 distributors located throughout the world, including a Canadian subsidiary in
which  we hold an 85%  ownership  interest  and our  wholly  owned  subsidiaries
located in the United Kingdom and the Netherlands.

To accommodate our customers'  requirements  and plan for our own product needs,
we employ a "futures" order program for our Saucony,  Hind and bicycle  products
under  which  we take  orders  well  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.

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  sport-specific  magazines such as "Runner's  World," "Walking" and
"Triathlete."  We also  sponsor  sporting  events and  telecasts  to drive brand
awareness  and image of our  technical  footwear to athletes.  Examples  include
"Saucony Running and Racing" seen monthly on ESPN, as well as sponsorship of the
L.A.  Marathon and Chase  Corporate  Challenge  race series.  To build  in-store
presence,  we use  account-specific  and  in-store  promotions,  such as athlete
appearances, special events, gift with purchase programs 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 "Teen
People," "Vibe" and "Spin."

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 and 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.

OTHER BRANDS

We  sell  our  Hind,   Quintana  Roo  and  Merlin  products   domestically   and
internationally  at specialty sporting equipment stores. We service Quintana Roo
and Merlin  retailers with our corporate  sales team and through six independent
manufacturer   agents  whose  organizations   employ   approximately  ten  sales
representatives. We sell Real Design products through a select number of dealers
covering  regional  territories  throughout  the  United  States.  We market our
Spot-bilt line through our Saucony brand  distribution  channels and directly to
customers  through our E-Commerce  web-site at Spotbilt.com.  We advertise these
other  brands in  magazines  and through  promotions  at trade shows and similar
events.

FACTORY STORES

We currently operate eight factory outlet stores at which we sell Saucony, Hind,
Quintana Roo and Spot-bilt products.  To avoid competing against the full-margin
retail outlets, we generally limit the items offered at these stores to products
with  cosmetic  defects,   discontinued   merchandise  and  certain  slow-moving
products. As part of our growth strategy, we intend to expand our factory stores
to target regions where we believe the Saucony brand is underdeveloped.  We plan
to expand by  establishing  clusters of factory  stores,  which we believe  will
strengthen Saucony brand name recognition.  We intend to open approximately four
additional factory stores during fiscal 2000.

MANUFACTURING

We assemble  most of our  domestically  sold Saucony  technical  footwear at our
manufacturing  facility in Bangor,  Maine,  largely with components sourced from
independent  manufacturers  located  overseas.  We believe that  assembly at our
Bangor facility  enables us to produce and deliver finished  technical  footwear
more quickly than most of our competitors.  Independent  overseas  manufacturers
produce the balance of our Saucony products,  including our Originals lines, and
all of our Spot-bilt products.

The overseas  footwear  manufacturers  that supply products and components to us
are located in Asia,  primarily in China,  but also in Taiwan and  Thailand.  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
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 quality high standards.  We employee approximately 27 Saucony
footwear  quality  control  personnel  in  Taiwan  as  well as  quality  control
specialists at our manufacturing  facilities in the United States. Our personnel
in Taiwan 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 Quintana Roo bicycle
products,  Real Design bicycle components and Hind apparel. Most of our Quintana
Roo bicycle  products and Real Design  bicycle  components are  manufactured  in
Taiwan.  Most of our Hind  apparel  is  manufactured  in the United  States.  We
manufacture  our Merlin bicycle  products  ourselves at a facility in Cambridge,
Massachusetts and manufacture our Quintana Roo wet suits ourselves at a facility
in San Marcos, California.

SUPPLIERS

Raw materials  required for the manufacture of our products,  including leather,
rubber, titanium,  aluminum, nylon and other fabrics, are generally available in
the country in which our products are  manufactured.  We and our suppliers  have
not experienced any 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 1999,
we purchased  footwear products from  approximately 21 overseas  suppliers.  One
such supplier,  located in China,  accounted for  approximately 62% of our total
overseas footwear purchases by dollar volume.

Although  we  have no  long-term  manufacturing  agreements  with  our  overseas
suppliers and compete with other athletic shoe,  apparel and bicycle  companies,
including  companies  that are much  larger  than us, 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, footwear components
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.

DISTRIBUTION AND INVENTORY

We  distribute  our  Saucony  and Hind  products  from our  owned  warehouse  in
Massachusetts  and a leased warehouse in Canada and The Netherlands,  as well as
through third-party  operated warehouse facilities located in California and the
United Kingdom.  We distribute our Quintana Roo and Real Design products through
our leased  warehouse  in  California  and Merlin  products  through  our leased
warehouse in Massachusetts.

We generally  maintain an  open-stock  inventory  on most of our products  which
permits us to ship to  retailers  on an "at once"  basis in  response to orders.
However,  we sell our Originals line of footwear only on a "futures"  basis with
no planned  inventory  position.  We have  adopted  this  two-pronged  inventory
strategy  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 no planned inventory of our Originals line, we seek to
minimize the risk of inventory  obsolescence that can result from  unanticipated
changes in consumer preferences.

BACKLOG

Our backlog of unfilled orders was  approximately  $65.4 million at December 31,
1999 and $55.1  million at January 1, 1999. We expect that all of our backlog at
December  31, 1999 will be shipped in fiscal 2000.  While we have not  generally
experienced  material  cancellations  of  orders,  orders  may be  cancelled  by
customers without financial penalty, and backlog does not necessarily  represent
actual future shipments.

During 1999, we derived approximately 15% of our consolidated revenue from sales
to one customer,  Venator,  which operates Foot Locker,  Lady Foot Locker,  Kids
Foot Locker and Eastbay Running stores.

TRADE POLICY

Our  practice of sourcing  products and  components  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.

As an example, we import significant amounts of our products and components from
China.  The United  States  extends to China  non-discriminatory  "normal  trade
relations"  status,  formerly known as "most favored  nation"  status,  allowing
China to receive the same tariff treatment that the United States extends to its
other "normal"  trading  partners.  Despite this current policy,  Congress could
seek to revoke normal trade relations  status for China or condition its renewal
on factors such as China's  human rights  record or relations  with Taiwan.  The
cancellation  of, or the  imposition of conditions  upon,  China's  normal trade
relations status could significantly add to our cost of goods and could restrict
our supply of products and components from that country. The failure of Congress
to extend permanent normal trade relations status to China could also negatively
affect our ability to source products and components from China.

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 or components. Any such occurrences might adversely affect our sales or
profitability, possibly materially.

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  resources  substantially  greater than ours. The principal
competitors  for our Saucony  products  are Nike,  New  Balance  and ASICS.  The
principal  competitors for our Hind products are Nike,  Pearl Izumi and TYR. The
principal  competitors  for our Quintana Roo and Merlin products are Cannondale,
Trek and Litespeed.  We believe that the key competitive  factors for all of our
products are technical performance,  styling, durability, product identification
through promotion, brand awareness and price. We believe that we are competitive
in all of these areas.

TRADEMARKS

We use  trademarks  on  nearly  all of our  products  and  believe  that  having
distinctive  marks is an  important  factor  in  marketing  our  goods.  We have
registered our Saucony(R), Spot-bilt(R), GRID(R), Quintana Roo(R), Merlin(R) and
Hind(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 cannot guarantee that we
will be able to register or use such marks in each  foreign  country in which we
seek registration.

EMPLOYEES

As of December 31, 1999,  we employed  approximately  494 people  worldwide.  Of
these employees,  approximately  419 were in the United States and approximately
75 were in  foreign  locations.  We  believe  that our  employee  relations  are
excellent.   We  have  never  experienced  a  strike  or  other  work  stoppage.
Approximately 34 employees in our Massachusetts  warehouse were represented by a
union as of December 31, 1999.  None of our other employees are represented by a
union or are subject to a collective bargaining agreement.


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  175,000  square feet, of which  145,000  square feet is warehouse
space.

We also own a facility in Bangor,  Maine containing  approximately 82,000 square
feet of  space,  substantially  all of  which is used  for the  assembly  of our
Saucony  running shoes.  We also own an inactive  warehouse in East  Brookfield,
Massachusetts containing approximately 109,000 square feet.

We lease  approximately  15,000 square feet of manufacturing and office space in
San Marcos, California,  13,600 square feet of manufacturing and office space in
Cambridge,  Massachusetts and an additional 4,000 square feet of office space in
Boulder, Colorado.


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

Not applicable.


EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers are as follows:

            Name                     Age                              Position


John H. Fisher                52              President, Chief Executive Officer
                                              and Director


Charles A. Gottesman          49              Executive Vice President,
                                              Chief Operating Officer, Treasurer
                                              and Director

Michael Umana                 37              Vice President, Finance and
                                              Chief Financial Officer


Arthur E. Rogers, Jr.         37              President, Saucony North America


Wolfgang Schweim              47              President, Saucony International


Kenneth W. Graham             46              Senior Vice President,
                                              Research & Development


Roger P. Deschenes            41              Vice President, Controller and
                                              Chief Accounting Officer


Daniel J. Horgan              44              Vice President, Operations


Andrew M. James               43              Vice President, MIS


John H. Fisher has served as our Chief  Executive  Officer  since  1991.  He was
elected  President  and Chief  Operating  Officer in 1985 after having served as
Executive  Vice President  from 1981 to 1985 and as Vice  President,  Sales from
1979 and 1981. Mr. Fisher 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 became a director in 1980.

Charles  A.  Gottesman  has served as our  Executive  Vice  President  and Chief
Operating  Officer since 1992, and served as Executive Vice  President,  Finance
from 1989 to 1992,  Senior Vice President from 1987 to 1989, Vice President from
1985 to 1987, and Treasurer since 1983. Mr.  Gottesman became a director in 1983
and is the brother-in-law of John H. Fisher.

Michael  Umana  joined us in October 1999 as 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. Prior 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
from 1985 to 1997. Mr. Umana is a Certified Public Accountant.

Arthur E. Rogers,  Jr.  became the President of Saucony North America in January
1998. Mr. Rogers  re-joined us as Senior  Director of Global  Marketing in 1994,
having  previously served as Brand Manager from 1990 to 1992. From 1992 to 1994,
Mr. Rogers held various sales and marketing positions at Converse Shoe, Inc., an
athletic shoe company. From 1994 to 1997, Mr. Rogers served as Vice President of
North  American Sales and Worldwide  Marketing.  Prior to joining us, Mr. Rogers
held  various  sales and  marketing  positions  at  Proctor &  Gamble,  Inc.,  a
diversified consumer products company.

Wolfgang  Schweim became the President of Saucony  International in January 1998
after serving as President of our athletic  footwear  division from June 1994 to
January 1998.  From 1993 to 1994, Mr.  Schweim  served as Managing  Director for
Saucony Europe.  From 1989 to 1993, Mr. Schweim was the German Managing Director
and Marketing Sales Manager for Europe at Asics, an athletic shoe  manufacturer.
Prior to 1989, Mr. Schweim worked in sales and marketing  positions with various
shoe manufacturers, including Nike International, Le Coq Sportif and Adidas AG.

Kenneth W. Graham became our Senior Vice  President of Research and  Development
in  January  1998  after  serving  as Senior  Vice  President  of  Research  and
Development/Manufacturing  since 1996. Mr. Graham  previously served as our Vice
President  of  Research  and  Development/Manufacturing  from 1991 to 1994.  Mr.
Graham joined us in 1984. Prior to joining us, Mr. Graham worked for seven years
with New Balance Athletic Shoe, Inc.

Roger P. Deschenes has served as Vice President, Controller and Chief Accounting
Officer  since  August  1997,  after  having  served  as  Controller  and  Chief
Accounting  Officer from October 1995 to August 1997. Mr. Deschenes joined us in
1990 as Corporate Accounting Manager. He was employed at 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.

Daniel J. Horgan became Vice  President of  Operations  in September  1995 after
serving as Senior  Director of Operations from September 1994 to September 1995.
Mr. Horgan joined us in 1982 as Manager of Import and Export Operations,  served
as Product  Procurement and Distribution  Manager from 1985 to 1988,  Manager of
Production from 1988 to 1992, and Director of  International  Trade from 1992 to
1994.

Andrew M. James joined us in February 1984. He served as Accounting Manager from
1984 to 1988;  Assistant  Controller  from  1989 to  1993;  Senior  Director  of
Information Systems from 1994 to 1997; and became Vice President, MIS in 1997.


PART II


ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Class A Common Stock and Class B Common  Stock trade on the Nasdaq  National
Market under the symbols "SCNYA" and "SCNYB," respectively.  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
                                                              ----           ---             ----            ---

     FISCAL YEAR ENDED DECEMBER 31, 1999

<S>                                                         <C>           <C>           <C>              <C>
     First quarter..........................................$ 9-3/4       $      5      $        9       $   4-5/8
     Second quarter......................................... 24-1/8          6-1/2          24-1/2           6-1/4
     Third quarter..........................................     26             12          28-1/2          12-5/8
     Fourth quarter......................................... 19-3/4         10-3/4          19-3/4          10-3/4



     FISCAL YEAR ENDED JANUARY 1, 1999

     First quarter..........................................$     5       $  3-3/4      $        5       $   3-7/8
     Second quarter.........................................  7-3/4          4-3/8           6-1/8          4-5/16
     Third quarter..........................................      8          4-3/4           8-1/2           4-1/4
     Fourth quarter.........................................  7-1/2          3-5/8           6-7/8               4


</TABLE>

There were 295 and 281  stockholders  of record of the Class A Common  Stock and
Class B Common Stock,  respectively,  on March 10, 2000. Only the Class A Common
Stock has voting rights.

We do not anticipate paying any cash dividends in the foreseeable  future on the
shares of Class A Common Stock or Class B Common Stock.  We currently  intend to
retain future earnings to fund the  development and growth of its business.  Our
credit facility agreement  restricts the payment or declaration of any dividend.
Each share of Class B Common Stock is entitled to a regular cash dividend  equal
to 110% of the  regular  cash  dividend,  if any,  payable on a share of Class A
Common Stock.

ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>

SELECTED INCOME STATEMENT DATA
<CAPTION>
                                                                    (in thousands; except per share amounts)

                                                           Year         Year         Year         Year          Year
                                                           Ended        Ended        Ended        Ended         Ended
                                                         Dec. 31,      Jan. 1,      Jan. 2,      Jan. 3,       Jan. 5,
                                                           1999         1999         1998         1997          1996
                                                           ----         ----         ----         ----          ----

<S>                                                    <C>           <C>          <C>           <C>          <C>
Revenues............................................... $154,691     $105,810     $ 93,962      $ 91,879     $ 78,840

Operating income (loss)................................   18,196        5,741       (1,935)        2,345          491

Income (loss) from continuing operations...............   10,319        3,579       (4,032)        1,349          522

Discontinued operations: (2)
   Income (loss) from discontinued operations..........       --           --         (394)         (243)         863
   Gain on disposal of Brookfield business.............       --           --           96            --           --

Net income (loss)......................................   10,319        3,579       (4,330)        1,106        1,385

Earnings per common share - basic
   Income (loss) from continuing operations............ $   1.64     $   0.57     $   0.65)     $   0.22      $  0.08
   Income (loss) from discontinued operations..........     0.00         0.00        (0.05)        (0.04)        0.14
                                                        --------     --------     ---------     ---------     -------
Net income (loss) per common share - basic............. $   1.64     $   0.57     $  (0.70)     $   0.18      $  0.22
                                                        ========     ========     =========     =========     =======

Earnings per common share - diluted
   Income (loss) from continuing operations............ $   1.57    $    0.56     $  (0.65)     $   0.22      $  0.08
   Income (loss) from discontinued operations..........     0.00         0.00        (0.05)        (0.04)        0.14
                                                        --------    ---------     ---------     --------      -------
Net income (loss) per common share - diluted .......... $   1.57    $    0.56     $  (0.70)     $   0.18      $  0.22
                                                        ========    =========     =========     ========      =======

Weighted average common shares and
   equivalents outstanding ............................    6,568        6,373        6,240         6,268        6,244

Cash dividends per share of common stock...............       --           --           --            --           --


SELECTED BALANCE SHEET DATA
                                                         Dec. 31,      Jan. 1,      Jan. 2,      Jan. 3,       Jan. 5,
                                                           1999         1999         1998         1997          1996
                                                           ----         ----         ----         ----          ----

Current assets(1)...................................... $ 66,480    $  58,963     $ 50,091      $ 57,896     $ 58,984

Current liabilities....................................   15,403       18,840       13,315        13,963       14,728

Working capital........................................   51,077       40,123       36,776        43,933       44,256

Total assets...........................................   77,181       69,879       61,316        70,752       69,265

Long-term debt and capitalized lease
   obligations, net of current portion.................      292          559          771         4,893        4,205

Stockholders' equity...................................   58,962       48,250       45,072        49,484       48,160

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

(1) Certain marketable securities have been reclassified from current assets to
    long-term assets to conform with the 1999 financial statement presentation.

(2) See Note 14 of the Notes to Consolidated Financial Statements regarding
    discontinued operations.


</TABLE>






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

Dollar  amounts  throughout  this Item 7 are in  thousands,  except  per  shares
amounts.

HIGHLIGHTS
<TABLE>
<CAPTION>

                                                                 Percent Change Increase (Decrease)
                                                                 ----------------------------------
                                                                 1999 vs. 1998         1998 vs. 1997
                                                                 -------------         -------------

<S>                                                                  <C>                   <C>
         Net sales...............................................    46.6%                 12.2%
         Gross profit............................................    57.1                  24.4
         Selling, general and administrative expenses............    27.2                   7.8


                                                                             $ Change

         Operating income.......................................$   12,455             $   7,676
         Income before income taxes.............................    12,351                 9,038
         Net income.............................................     6,740                 7,909



                                                                        Percent of Net Sales
                                                                        --------------------
                                                                   1999         1998         1997
                                                                   ----         ----         ----

<S>                                                               <C>           <C>          <C>
         Gross profit..............................................38.2%        35.6%        32.2%
         Selling, general and administrative expenses..............26.8         30.9         32.2
         Operating income (loss)...................................11.8          5.5         (2.1)
         Income (loss) before income taxes.........................11.4          5.0         (4.1)
         Net income..............................................   6.7          3.4         (4.6)

</TABLE>

CONSOLIDATED NET SALES

Net sales increased 47% to $154,058 in fiscal 1999 from $105,074 in fiscal 1998.
The impact of foreign  exchange rate changes on sales was negligible.  Net sales
increased  12% to  $105,074  in 1998 from  $93,611 in fiscal  1997.  At constant
exchange  rates,  fiscal 1998 net sales would have been $2,317,  or 15%,  higher
than fiscal 1997.

On a geographic basis,  domestic sales increased $51,664, or 62%, to $135,028 in
fiscal 1999 from $83,364 in fiscal 1998.  International  sales decreased $2,681,
or 12%, to $19,030 in fiscal 1999 from $21,710 in fiscal 1998. Domestic sales in
fiscal 1998 increased  $17,762,  or 27%, to $83,364 from $65,602 in fiscal 1997.
International  sales  decreased  $6,299,  or 22%, to $21,710 in fiscal 1998 from
$28,009 in fiscal 1997. At constant  exchange  rates,  the  international  sales
decrease in 1999 would have been 14%.


SAUCONY BRAND SEGMENT

                           1999                   1998                 1997
                           ----                   ----                 ----

      Net Sales        $131,898 (+53%)        $86,332 (+10%)         $78,630


Worldwide  net sales of Saucony  branded  footwear and apparel  increased 53% to
$131,898 in fiscal 1999 from $86,332 in fiscal 1998 primarily due to an 82% unit
volume growth in the footwear  category.  The average domestic wholesale selling
price per pair of domestic  footwear  decreased 14% in fiscal 1999 versus fiscal
1998 due to a higher proportion of more moderately-priced  Originals and special
make-up footwear in our domestic product mix.

Domestic  net sales  increased  70% to $115,118  in fiscal 1999 from  $67,774 in
fiscal 1998.  Domestic  sales  increased  primarily due to the continued  strong
demand for the Originals  footwear which accounted for 58% of domestic  footwear
unit volume for the year and, to a lesser extent,  increased special make-up and
technical footwear volume.

International  net sales decreased 10% to $16,780 in fiscal 1999 from $18,558 in
fiscal 1998 due  primarily due to the  cessation of  Australian  operations  and
decreased distributor unit volume, partially offset by increased direct sales by
us in Canada  and  Western  Europe  due to  increased  unit  volume in these two
geographic areas.

Worldwide  net sales of Saucony  branded  footwear and apparel  increased 10% to
$86,332 in fiscal  1998 from  $78,630 in fiscal 1997  primarily  due to 12% unit
volume growth in the footwear  category.  The average domestic wholesale selling
price per pair of  technical  footwear  increased 4% versus  fiscal 1997,  but a
higher  proportion  of more  moderately-priced  Jazz  Originals  in our domestic
product mix  contributed to an 8% decline in overall  selling prices compared to
1997.

Domestic  net sales  increased  21% to  $67,774 in fiscal  1998 from  $56,050 in
fiscal 1997. Domestic sales benefited from the introduction of Jazz Originals in
the second quarter of fiscal 1998, which accounted for 21% of domestic  footwear
unit volume for the year.

International  net sales decreased 18% to $18,558 in fiscal 1998 from $22,580 in
fiscal 1997 primarily due to the cessation of Australian operations in July 1998
and reduced distributor unit volumes, partially offset by higher direct sales by
us in Canada and Western Europe.


OTHER PRODUCTS SEGMENT
                           1999                     1998                  1997
                           ----                     ----                  ----

    Net Sales         $22,160 (+18%)           $18,742 (+25%)           $14,981

The Other Products segment consists of our Hind athletic  apparel,  Quintana Roo
and Merlin bicycles and frames,  Real Design bicycle components and Quintana Roo
wetsuits, Spot-bilt coaches shoes and eight factory outlet stores. Each of these
businesses  represented  less than 10% of our  revenues  and, in the  aggregate,
represented 14% of our net sales in fiscal 1999.

Worldwide  sales of Other Products  increased 18% to $22,160 in fiscal 1999 from
$18,742 in fiscal  1998 due to  increased  domestic  net sales.  Other  Products
segment  domestic sales  increased 28% to $19,910 in fiscal 1999 from $15,590 in
fiscal 1998 due  primarily to increased  unit volume for our Hind apparel  brand
and, to a lesser  extent,  increased  unit volume in both  bicycles  and related
products. This sales increase also reflects increased retail sales at our outlet
division due to the addition of two factory  outlet  stores.  International  net
sales of Other  Products  decreased  29% to $2,250 in fiscal 1999 from $3,152 in
fiscal 1998 due to the cessation of operations in Australia.

Worldwide  sales of Other Products  increased 25% to $18,742 in fiscal 1998 from
$14,981 in fiscal  1997 due to  increased  domestic  net sales.  Other  Products
segment  domestic  sales  increased 63% in fiscal 1998 to $15,590 from $9,552 in
fiscal  1997,  reflecting  significantly  higher  revenues in both  bicycles and
related products as well as higher sales of our Hind apparel brand. The increase
in net sales in fiscal 1998 also reflected the acquisition of the Merlin bicycle
business  in  February  1998 and of the Real  Design  business  in August  1998.
International net sales of Other Products decreased 42% to $3,152 in fiscal 1998
from $5,429 in fiscal 1997 due to the cessation of Australian operations in July
1998.

COSTS AND EXPENSES

For the 1999 fiscal year, the gross margin  improved 2.6% to 38.2% from 35.6% in
fiscal 1998.  The  improvement  in the fiscal 1999 margin was due to a change in
product mix, purchasing economies, lower levels of product returns and markdowns
and lower levels of closeout  product sales. For the 1998 fiscal year, the gross
margin  improved  3.4% to 35.6% from 32.2% in fiscal  1997 due to the  favorable
impact of reduced  levels of  close-out  goods and other  product  markdowns  in
fiscal 1998.  Gross margins in fiscal 1997 were negatively  impacted by declines
in gross margin realized by our Australian  subsidiary on close-out sales during
the fourth  quarter of fiscal  1997,  in  addition to the  Australian  inventory
write-down of $1,340 taken in the fourth quarter of fiscal 1997.

Our SG&A expense ratio  improved to 26.8% of net sales in fiscal 1999 from 30.9%
in fiscal  1998.  The  improvement  in the  ratio  resulted  from our  continued
management of advertising, selling and administrative expenses below the rate of
sales growth. In absolute dollars,  selling, general and administrative expenses
increased  to $41,261  in fiscal  1999,  or 27%,  from  $32,446 in fiscal  1998.
Increased    spending   in   fiscal   1999   was   attributable   to   increased
performance-based incentive compensation, increased staffing, an increase in the
provision for doubtful  accounts due primarily to the bankruptcy  filing by Just
for Feet,  Inc.,  increased  volume driven  advertising and selling expenses and
increased athlete and event sponsorship.

For the 1998 fiscal year,  the SG&A expense ratio  improved 1.3% to 30.9% of net
sales versus 32.2% in fiscal 1997.  The  improvement  in the ratio resulted from
cost management on selling and  administrative  expenses below the rate of sales
growth and reduced spending on advertising and promotions.  In absolute dollars,
selling,  general and administrative  expenses increased 8% to $32,446 in fiscal
1998 from $30,110 in fiscal 1997.  Increased  spending in fiscal 1998 was due to
increased   variable  selling   expenses,   increased   staffing  and  incentive
compensation,  increased  professional  fees,  as well as increased  selling and
administrative  expenses associated with the Hind apparel brand and the Quintana
Roo and Merlin businesses.

No non-recurring  charges were recorded in either fiscal 1999 or fiscal 1998. In
fiscal 1997,  we recorded a  non-recurring  charge of $850 ($508  after-tax,  or
$0.08 per diluted share) to recognize the impairment of an inactive distribution
facility.

Also, in fiscal 1997, we wrote down the assets of our  Australian  subsidiary to
their net  realizable  values.  This resulted in our  recording a  non-recurring
pre-tax charge of $2,766 (or $0.44 per share).  Inventory,  accounts  receivable
and other assets were written down by $1,340, $858 and $568,  respectively.  The
inventory write-down was included in cost of sales. In addition we also recorded
a deferred tax valuation allowance of $999 ($0.16 per diluted share) relating to
the loss carryforwards of our Australian  subsidiary,  which are not expected to
be realized.

Net  interest  expense  totaled  $683 and $707 in  fiscal  years  1999 and 1998,
respectively.  Interest expense decreased 3% in fiscal 1999 due to lower average
debt levels and, to a lesser  extent,  lower  interest  rates compared to fiscal
1998. In fiscal 1998,  net interest  expense  decreased 13% to $707 from $817 in
fiscal 1997 due to lower  average debt levels,  due  primarily to the paydown of
our senior debt, and to a lesser extent, lower interest rates compared to 1997.


INCOME BEFORE TAXES

      Segment                 1999             1998              1997
      -------                 ----             ----              ----

  Saucony Brand            $  18,965         $  5,497         $  (2,946)
  Other Products              (1,376)            (259)             (854)
                           ----------        ---------        ----------
  Consolidated             $  17,589         $  5,238         $  (3,800)
                           =========         ========         ==========


Income  before tax  improved  by $12,351 in fiscal  1999 to $17,589  compared to
$5,238 in fiscal  1998,  due  primarily to the  significant  increase in pre-tax
income realized by the domestic  Saucony Brand Segment and achieving  profitable
international operations.  The Other Products Segment recorded a pre-tax loss of
$1,376  in  fiscal  1999  compared  to a  loss  of  $259  in  fiscal  1998.  The
deterioration  in the Other Products  Segment  pre-tax income in fiscal 1999 was
due  principally  to losses  incurred  at  Quintana  Roo,  due in large  part to
inventory writedowns and a high level of administrative overhead.

Income before taxes was $5,238 in fiscal 1998, or $9,038  higher,  than the loss
of $3,800  incurred in 1997.  This  improvement  reflected  higher income in the
domestic  Saucony Brand Segment and  significantly  reduced  losses  compared to
fiscal 1997 related to the cessation of the our Australian operations. The Other
Products  Segment  recorded a loss before taxes of $259 in 1998 versus a loss of
$854 in  1997.  The  reduction  in  this  loss  reflected  lower  losses  by our
Australian  subsidiary  and lower Hind related losses in fiscal 1998 compared to
fiscal 1997.


INCOME TAXES

The provision for income taxes increased to $7,194 in fiscal 1999 from $1,629 in
fiscal  1998,  due  primarily  to an increase in domestic  pre-tax  income and a
higher  marginal  domestic  tax rate in  fiscal  1999.  The  effective  tax rate
increased  by 9.8% to 40.9% in fiscal  1999 from  31.1% in fiscal  1998 due to a
shift in the composition of domestic and foreign pre-tax earnings and the higher
marginal domestic tax rate.

In fiscal 1998, the provision for income taxes  increased to $1,629 from $355 in
fiscal 1997, due primarily to an increase in domestic pre-tax income over fiscal
1997.  The  effective  tax rate  increased by 21.8% to 31.1% in fiscal 1998 from
9.3% in fiscal 1997 due primarily to a shift in the  composition  of foreign and
domestic pre-tax profits and losses.


NET INCOME

Net income for fiscal 1999 was $10,319, or $1.57 per diluted share,  compared to
$3,579,  or $0.56 per diluted  share,  in fiscal 1998.  Weighted  average common
shares and equivalent  shares used to calculate  diluted earnings per share were
6,568 and 6,373,  respectively,  in fiscal 1999 and 1998. Fiscal 1998 net income
was $3,579 compared to a net loss of $4,330 in fiscal 1997. Diluted earnings per
share was $0.56  compared to a loss of $0.70 per diluted  share in fiscal  1997.
Weighted average common shares and equivalent  shares used to calculate  diluted
earnings per share were 6,373 and 6,240, respectively, in fiscal 1998 and fiscal
1997.



LIQUIDITY AND CAPITAL RESOURCES

FISCAL 1999

As of  December  31,  1999,  our cash and cash  equivalents  totaled  $3,515,  a
decrease of $1,980 from January 1, 1999.  The  decrease  was due  primarily to a
decrease of $5,429 in borrowings against our credit facilities, the repayment of
$375 of long-term debt, the repurchase of shares of the our Common Stock of $514
and $1,661 of cash  expended to acquire  capital  assets.  Offsetting  this cash
outflow was the generation of $5,494 of cash from  operations and the receipt of
$503 from the issuance of shares of our Common Stock.

The increase in accounts receivable of $4,368, net of the provision for bad debt
and discounts  (including a reserve of $1,525 provided for a receivable due from
Just for Feet,  Inc.),  is due  primarily to increased  net sales of our Saucony
products in the fourth  quarter of fiscal 1999. Our days sales  outstanding  for
our  accounts  receivable  decreased  to 57 days in fiscal  1999 from 68 days in
fiscal 1998 due to a reduction in domestic  terms  offered on sales of Originals
footwear  and the reserve  provided for the  receivable  due from Just for Feet,
Inc.  Inventories  increased $4,700 in fiscal 1999 due to increased domestic and
international  Saucony footwear inventory and increased inventory at our factory
outlet  stores,  reflecting  the addition of two stores in 1999.  Our  inventory
turns ratio increased to 2.9 turns in fiscal 1999 from 2.5 turns in fiscal 1998.
The number of days sales in inventory  decreased  19% to 135 days in fiscal 1999
from 167 days in fiscal 1998.

Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory)  affecting our operating cash flows in fiscal
1999 included an increase of $994 in accrued letters of credit (due to increased
in-transit  inventory),  an  increase  of $3,337  in  accrued  expenses  (due to
increased  performance-based   compensation  accruals,  increased  accruals  for
advertising  and  promotional  expenses and increased  levels of  administrative
spending),  a  decrease  of $1,242 in  accounts  payables  (due to the timing of
inventory  purchases) and a decrease of $801 in accrued income taxes payable due
to domestic tax payments made in the fourth quarter of 1999.

FISCAL 1998

As of January 1, 1999, our cash and cash equivalents totaled $5,495, an increase
of $1,063 from January 2, 1998.  The increase was due primarily to net cash from
operating  activities  of $2,477 and increased  borrowings  against our domestic
credit facility,  offset by $1,257 of capital  expenditures and cash outlays for
the  acquisition of  substantially  all of the net assets of Merlin  Metalworks,
Inc. and Real Product  Design,  Inc. for $863,  the  repurchase of shares of our
Common  Stock of $611,  the  receipt of $297 from the  issuance of shares of our
Common Stock and the repayment of $2,364 of long-term debt.

The increase in accounts  receivable of $810,  net of the provision for bad debt
and discounts, was due primarily to increased net sales of our Saucony, Hind and
bicycle  products  in  the  fourth  quarter  of  fiscal  1998.  Our  days  sales
outstanding for our accounts receivable decreased to 68 days in fiscal 1998 from
73 days in  fiscal  1997.  Inventories  increased  $7,002  in  fiscal  1998  due
primarily to the buildup of Saucony  footwear and Hind apparel  inventory in the
latter part of the fourth quarter of fiscal 1998 and increased bicycle inventory
associated  with the  acquisition  and expansion of the Merlin product line. The
inventory  increase was due in part to the  acquisition of inventory in response
to the significant  increase in "futures" orders for Originals  footwear models.
As a consequence of the fiscal 1998 year-end inventory  increase,  our inventory
turns ratio decreased to 2.5 turns in fiscal 1998 from 2.6 turns in fiscal 1997.
The number of days sales in inventory  increased  24% to 167 days in fiscal 1998
from 135 days in fiscal 1997.

Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory)  affecting our operating cash flows in fiscal
1998  included a  decrease  of $176 in prepaid  expenses  (due to a decrease  in
advance payments for inventory and certain administrative expenses), an increase
of $1,589 in accrued letters of credit (due to increased in-transit  inventory),
an increase of $714 in accounts payable (due to increased inventory  purchases),
an increase of $1,921 in accrued  expenses  (due to increased  performance-based
compensation  accruals and increased  income tax accruals  resulting from higher
pre-tax earnings in fiscal 1998).

CREDIT FACILITY

We maintain a revolving  credit line of $20,000 for cash  borrowings and letters
of credit.  As of March 10, 2000,  $7,504 was available for borrowing  under the
credit facility.

Several of the Company's foreign subsidiaries  maintain credit facilities in the
aggregate  principal  amount of approximately  $3,514.  At February 25, 2000, an
aggregate  of  approximately  $2,319  was  available  for  borrowing  under  the
facilities of our foreign subsidiaries. See Note 9 to the Consolidated Financial
Statements.

CAPITAL EXPENDITURES COMMITMENTS

At  December  31,  1999,  our  commitments  for  capital  expenditures  were not
material.

OVERALL LIQUIDITY

Our liquidity is  contingent  upon a number of factors,  principally  our future
operating  results.   Management   believes  that  our  current  cash  and  cash
equivalents,  credit  facilities and internally  generated funds are adequate to
meet our working capital  requirements and to fund our capital  investment needs
and debt service payments.


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  fluctuation  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
certain  foreign  currency  denominated  payables.  We have entered into forward
foreign exchange contracts to minimize certain transaction currency risk.


YEAR 2000

We have not  experienced  any  problems  with our computer  systems  relating to
distinguishing  twenty-first  century dates from twentieth century dates,  which
generally  are referred to as year 2000  problems.  We are also not aware of any
material year 2000 problems with our clients or vendors.  Accordingly, we do not
anticipate  incurring material expenses or experiencing any material operational
disruptions  as a result of any year 2000  problems in the  future.  We incurred
year 2000  costs of  approximately  $20 and $177  during  fiscal  1998 and 1999,
respectively, in prevention costs relating to anticipated year 2000 problems.


ACCOUNTING PRONOUNCEMENTS

SFAS 133 AND SFAS 137

In  June  1998,  the  Financial  Accounting  Standards  Board  issued  Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (SFAS 133) (as amended by Financial Accounting Standards No. 137, a
deferral of the effective date of FASB  statement No. 133 (SFAS 137)),  which is
effective for fiscal  quarters of fiscal years  commencing  after June 15, 2000,
with early  adoption  permitted.  SFAS 133 defines the accounting for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts and hedging  activities.  Upon  adoption of SFAS 133, all  derivatives
must be  recognized  on the  balance  sheet at their  then  fair  value  and any
deferred  gains  or  losses  remaining  on  the  balance  sheet  under  previous
hedge-accounting  rules must be removed from the balance sheet. In the period of
adoption,  the transition adjustments may effect current earnings and may effect
other comprehensive income. 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 be
deferred in other  comprehensive  income. The Company is assessing the impact of
the  provisions  of SFAS 133 on its  hedging  activities,  which  are  currently
limited to forward foreign currency exchange contracts. Because of the Company's
minimal use of derivatives,  management does not anticipate that the adoption of
SFAS 133 will have a significant  effect on current earnings or on the Company's
financial  position,  however,  at this time, the effect of the adoption of SFAS
133 on the Company's future earnings and financial position cannot be estimated.


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  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 and the
documents  incorporated  by reference 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,  all of which  are  expressly  qualified  by the  statement  in this
section.


CERTAIN OTHER 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  have  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, New Balance and ASICS.
The principal  competitors for our Hind products are Nike,  Pearl Izumi and TYR.
The principal  competitors for our Quintana Roo, Merlin and Real Design products
are  Cannondale,  Trek and Litespeed.  We compete based on a variety of factors,
including price, quality,  product design, brand image,  marketing and promotion
and  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. The intensity of the competition that
we face constitutes a significant risk to our business.

WE DEPEND ON FOREIGN SUPPLIERS

A number of  manufacturers  located  in Asia,  primarily  in China,  Taiwan  and
Thailand,  supply products and product components to us. During fiscal 1999, one
of our suppliers, located in China, accounted for approximately 62% of our total
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,  trade  limitations
imposed by the United  States or foreign  governments  and  political  and labor
instability. In particular, 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,  apparel and bicycle
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, may be
adversely affected 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,  as well as the  inability  to sell  such  products  through  our own
factory 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; and,
o        general economic conditions.

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 the 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 adversely 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 footwear,  apparel and bicycle  industries  are generally  characterized  by
significant seasonality of sales and results of operations. Sales of our Saucony
brand  products have  historically  been seasonal in nature,  with the strongest
sales generally occurring in the first and third quarters. In addition, sales of
our Hind brand products are generally strongest in the third and fourth quarters
due to the  popularity of the Hind winter  apparel  collection.  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.

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 may 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, our business will suffer.

WE DEPEND ON CERTAIN KEY CUSTOMERS

During 1999, we derived approximately 15% of our consolidated revenue from sales
to a single major  customer,  Venator,  which  operates  Foot Locker,  Lady Foot
Locker,  Kids Foot Locker and Eastbay  Running  stores.  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  could have a  material  adverse  effect on our
business, financial condition and results of operations. Furthermore, if a major
customer were unable or unwilling to proceed with a large order or to pay us for
a large order on a timely basis, our business,  financial  condition and results
of operations could be materially adversely affected.

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.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are  exposed  to market  risk from  changes  in  interest  rates and  foreign
exchange  rates.  Our  objective in managing our exposure to interest  rates and
foreign  currency  rate  changes is to limit impact of the 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.  Almost all
of our borrowings  are based on floating  rates,  which would increase  interest
expense  in an  environment  of  rising  interest  rates.  We have a  policy  of
selectively  hedging foreign  currency  risks,  but there are no assurances that
this program will fully insulate  against  short-term  fluctuations in financial
results.

We have  calculated  the effect of a 10% change in  interest  rates over a month
period  and also a 10% change in certain  foreign  currency  rates over the same
period and determined the effects to be immaterial. 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  such  exposures  in the
foreseeable future.


ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See  the  Index  to our  Consolidated  Financial  Statements  in Item 14 and the
Consolidated Financial Statements, notes and schedules that are filed as part of
this Form 10-K following the signature page and are incorporated  herein by this
reference.


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

None.


PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required by this item is  contained  in part under the caption
"Executive  Officers of the  Registrant" in PART I hereof,  and the remainder is
contained in the Company's Proxy  Statement for the Company's  Annual Meeting of
Stockholders to be held on May 18, 2000 (the "2000 Proxy  Statement")  under the
captions  "ELECTION  OF  DIRECTORS"  and  "SECTION  16(A)  BENEFICIAL  OWNERSHIP
REPORTING COMPLIANCE" and is incorporated herein by this reference. We expect to
file the 2000 Proxy Statement within 120 days after the close of the fiscal year
ended December 31, 1999.

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


ITEM 11 - EXECUTIVE COMPENSATION

The  information   required  by  this  item  is  contained  under  the  captions
"Compensation   of  Directors,"   "Compensation   of  Executive   Officers"  and
"Compensation  Committee Interlocks and Insider Participation" in the 2000 Proxy
Statement and is incorporated herein by this reference.


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this item is contained in the 2000 Proxy Statement
under the caption "Stock Ownership of Certain  Beneficial Owners and Management"
and is incorporated herein by this reference.


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(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:

              - Reports of Independent Accountants

              - Consolidated balance sheets at December 31, 1999 and January 1,
                1999

              - Consolidated statements of income for the years ended December
                31, 1999, January 1, 1999 and January 2, 1998

              - Consolidated statements of stockholders' equity for the years
                ended December 31, 1999, January 1, 1999 and January 2, 1998

              - Consolidated statements of cash flows for the years ended
                December 31, 1999, January 1, 1999 and January 2, 1998

              - 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,
              or not required,  or because the required  information is included
              in the Consolidated Financial Statements or notes thereto.

              Separate  financial  statements  of the Company  have been omitted
              since it is primarily an  operating  Company and its  subsidiaries
              included in the  Consolidated  Financial  Statements do not have a
              minority  equity interest or indebtedness to any person other than
              the Company in an amount  which  exceeds 5% of the total assets as
              shown by the Consolidated Financial Statements as filed herein.


         3.   Index to Exhibits

              The  exhibits  filed as part of this Form  10-K are  listed on the
              Exhibit Index immediately  preceding such exhibits,  which Exhibit
              Index is incorporated herein by reference.


(b)      1.   Reports on Form 8-K
              -------------------

              No Current Reports on Form 8-K were filed in the fourth quarter of
              fiscal 1999.


                                   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 29, 2000

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.

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


/s/ John H. Fisher              President,                        March 29, 2000
-------------------------       Chief Executive Officer
John H. Fisher                  and Director
                               (Principal Executive Officer)


/s/ Charles A. Gottesman        Executive Vice President,         March 29, 2000
-------------------------       Chief Operating Officer and
Charles A. Gottesman            Director


/s/ Michael Umana               Vice President, Finance and       March 29, 2000
-------------------------       Chief Financial Officer
Michael Umana                  (Principal Financial Officer)


/s/ Roger P. Deschenes          Vice President, Controller and    March 29, 2000
-------------------------       Chief Accounting Officer
Roger P. Deschenes             (Principal Accounting Officer)


/s/ John J. Neuhauser           Director                          March 29, 2000
-------------------------
John J. Neuhauser

/s/ Robert J. LeFort, Jr.       Director                          March 29, 2000
-------------------------
Robert J. LeFort, Jr.

/s/ John M. Connors, Jr.        Director                          March 29, 2000
-------------------------
John M. Connors, Jr.

/s/ Phyllis H. Fisher           Director                          March 29, 2000
-------------------------
Phyllis H. Fisher


REPORT OF INDEPENDENT ACCOUNTANTS


To The Board of Directors and Shareholders of
Saucony, Inc.

         In our  opinion,  based  on our  audits  and the  report  of the  other
auditors, the accompanying consolidated financial statements listed in the index
appearing under Item 14(a)(1)  present  fairly,  in all material  respects,  the
financial  position of Saucony,  Inc. and its  subsidiaries at December 31, 1999
and January 1, 1999 and the results of their operations and their cash flows for
each of the three years in the period ended  December 31,  1999,  in  conformity
with generally accepted accounting  principles  generally accepted in the United
States. In addition,  in our opinion, the financial statement schedule listed in
the index  appearing  under  Item  14(a)(2)  presents  fairly,  in all  material
respects,  the information  set forth therein when read in conjunction  with the
related  consolidated  financial  statements.  These  financial  statements  and
financial statement schedule are the responsibility of the Company's management;
our  responsibility  is to express an opinion on these financial  statements and
financial  statement  schedule  based on our audits.  We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United  States  which  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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall financial  statement  presentation.  We did not audit the
financial  statements  of Saucony SP Pty.  Ltd.,  for the year ended  January 2,
1998, which statements  reflect total revenues of eleven percent of consolidated
revenues for the year ended January 2, 1998.  Those  statements  were audited by
other  auditors  whose report  thereon has been furnished to us, and our opinion
expressed  herein,  insofar as it relates to the amounts included for Saucony SP
Pty. Ltd.(before adjustments to U.S. GAAP), is based solely on the report of the
other auditors.  We also audited the translation of the financial  statements of
Saucony SP Pty.  Ltd.,  in Australian  dollars to U.S.  dollars as well as other
adjustments  required to ensure that the financial  statements are in accordance
with U.S.  GAAP for the year ended  January 2, 1998.  We believe that our audits
and the report of the other auditors  provide a reasonable basis for the opinion
expressed above.





                           PricewaterhouseCoopers LLP


Boston, Massachusetts
February 7, 2000




Grant Thornton
Independent Audit Report to the Members of Saucony S.P. Pty. Ltd.

Scope

We have audited the financial  statements of Saucony S.P. Pty. Ltd.,  comprising
the Australian  statutory accounts (which are not separately  presented herein),
for the year ended 2 January 1998. The company's  directors are  responsible for
the  financial  statements.  We have  conducted  an  independent  audit of these
financial  statements  in order to express an opinion on them to the  members of
the company.

Our audit has been conducted in accordance with Australian  auditing  standards,
which are substantially the same as auditing standards generally accepted in the
United  States,  to provide  reasonable  assurance  as to whether the  financial
statements  are  free  of  material   misstatement.   Our  procedures   included
examination,  on a test  basis,  of  evidence  supporting  the amounts and other
disclosures  in the  financial  statements,  and the  evaluation  of  accounting
policies  and  significant  accounting  estimates.  These  procedures  have been
undertaken  to form an opinion as to  whether,  in all  material  respects,  the
financial  statements are presented fairly in conformity with generally accepted
accounting  principles and so as to present a view which is consistent  with our
understanding of the company's financial position, the results of its operations
and its cash flows.

The audit opinion expressed in this report has been formed on the above basis.

Audit Opinion

In our opinion,  the financial statements of Saucony S.P. Pty. Ltd. are properly
drawn up so as to  present  fairly,  in all  material  respects,  the  company's
financial  position as at 2 January 1998 and the results of their operations and
their cash flows for the year ended 2 January 1998 in accordance with accounting
principles  generally accepted in Australia which differ in certain aspects from
those followed in the United States.

Going Concern Basis of Accounting

Without qualification to the opinion expressed above, attention is drawn to Note
1 of the financial statements. Notwithstanding the deficiency of working capital
and net assets,  the financial  statements have been prepared on a going concern
basis as the  directors  have  received an  undertaking  of continued  financial
support from the directors of Hyde Athletic  Industries,  Inc. and the directors
believe that such financial support will be continued to be made available.



GRANT THORNTON
Chartered Accountants

/s/ B R Gordon
B R GORDON
Partner

2 April 1998
<TABLE>
                                             SAUCONY, INC. AND SUBSIDIARIES
                                               CONSOLIDATED BALANCE SHEETS

                                                         ASSETS
                                          (in thousands, except share amounts)
<CAPTION>
                                                                                       December 31,    January 1,
                                                                                           1999           1999
                                                                                           ----           ----
<S>                                                                                    <C>             <C>
Current assets:
     Cash and cash equivalents.........................................................$    3,515      $   5,495
     Accounts receivable, net of allowance for doubtful accounts
       and discounts (1999, $3,534; 1998, $1,880)......................................    23,968         19,473
     Inventories ......................................................................    35,270         31,072
     Deferred income taxes.............................................................     2,140          1,605
     Prepaid expenses and other current assets.........................................     1,587          1,318
                                                                                       ----------      ---------
       Total current assets............................................................    66,480         58,963
                                                                                       ----------      ---------

Property, plant and equipment, net of accumulated depreciation and amortization........     8,279          8,123
                                                                                       ----------      ---------

Other assets:
     Goodwill, net of accumulated amortization (1999, $352; 1998, $205) ...............     1,327          1,474
     Deferred charges, net of accumulated amortization (1999, $1,569; 1998, $1,472)....       271            223
     Long-term accounts and notes receivable...........................................         7             82
     Marketable securities.............................................................       307            179
     Deferred income taxes.............................................................        99            353
     Other.............................................................................       411            482
                                                                                       ----------      ---------
       Total other assets..............................................................     2,422          2,793
                                                                                       ----------      ---------

Total assets...........................................................................$   77,181      $  69,879
                                                                                       ==========      =========

                                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Letters of credit payable...........................................................$    2,282      $   2,790
   Notes payable.......................................................................     1,928          7,568
   Current portion of long-term debt and capital lease obligations.....................       375            324
   Accounts payable....................................................................     3,615          3,454
   Accrued expenses....................................................................     7,203          4,704
                                                                                       ----------      ---------
     Total current liabilities.........................................................    15,403         18,840
                                                                                       ----------      ---------

Long-term obligations:
     Long-term debt, net of current portion............................................        20             36
   Capital lease obligations, net of current portion ..................................       272            523
   Deferred income taxes...............................................................     2,045          1,851
   Other long-term obligations.........................................................       171            157
                                                                                       ----------      ---------
     Total long-term obligations.......................................................     2,508          2,567
                                                                                       ----------      ---------
Commitments and contingencies..........................................................        --             --

Minority interest in consolidated subsidiaries.........................................       308            222
                                                                                       ----------      ---------

Stockholders' equity:
   Preferred stock, $1.00 par; authorized 500,000 shares; none issued..................        --             --

   Common stock:
      Class A, $.333 par; authorized 20,000,000 shares
     (issued 1999, 2,711,127; 1998, 2,707,027).........................................       904            902
      Class B, $.333 par; authorized 20,000,000 shares
     (issued 1999, 3,955,309; 1998, 3,826,805).........................................     1,318          1,276

   Additional paid-in capital..........................................................    16,815         15,921
   Retained earnings...................................................................    42,679         32,360
   Accumulated other comprehensive income..............................................      (564)          (528)
                                                                                       -----------     ----------
                                                                                           61,152         49,931
                                                                                       ----------      ---------
  Less:
   Common stock held in treasury, at cost (1999, 346,900 shares; 1998, 305,400 shares).    (2,179)        (1,665)
     Unearned compensation.............................................................       (11)           (16)
                                                                                       -----------     ----------
                                                                                           58,962         48,250
                                                                                       ----------      ---------
Total liabilities and stockholders' equity.............................................$   77,181      $  69,879
                                                                                       ==========      =========

                                       See notes to Consolidated Financial Statements
</TABLE>

<TABLE>
                                               SAUCONY, INC. AND SUBSIDIARIES
                                              CONSOLIDATED STATEMENTS OF INCOME
                         FOR THE YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998

                                                 (in thousands, except share amounts)
<CAPTION>
                                                                            1999           1998          1997
                                                                            ----           ----          ----

<S>                                                                      <C>           <C>           <C>
Net sales................................................................$  154,058    $  105,074    $   93,611
Other revenue............................................................       633           736           351
                                                                         ----------    ----------    ----------

Total revenue............................................................   154,691       105,810        93,962
                                                                         ----------    ----------    ----------

Costs and expenses:
   Cost of sales.........................................................    95,234        67,623        63,511
   Selling expenses......................................................    22,511        17,507        16,698
   General and administrative expenses...................................    18,750        14,939        13,412
   Writedown of Australian assets........................................        --            --         1,426
   Writedown of impaired real estate ....................................        --            --           850
                                                                         ----------    ----------    ----------
     Total costs and expenses............................................   136,495       100,069        95,897
                                                                         ----------    ----------    ----------

Operating income (loss)..................................................    18,196         5,741        (1,935)

Non-operating income (expense):
   Interest, net.........................................................      (683)         (707)         (817)
   Foreign currency......................................................       (88)          124        (1,127)
   Other.................................................................       164            80            79
                                                                         ----------    ----------    ----------

Income (loss) before income taxes and minority interest..................    17,589         5,238        (3,800)

Provision for income taxes...............................................     7,194         1,629           355

Minority interest in income (loss) of consolidated subsidiaries..........        76            30          (123)
                                                                         ----------    ----------    -----------

Income (loss) from continuing operations.................................    10,319         3,579        (4,032)

Discontinued operations (net of tax):
   Loss from discontinued operations.....................................        --            --          (394)
   Gain on disposal of Brookfield business...............................        --            --            96
                                                                         ----------    ----------    ----------

Net income (loss)........................................................$   10,319    $    3,579    $   (4,330)
                                                                         ==========    ==========    ===========

Per share amounts:

Earnings per common share - basic:
   Income (loss) from continuing operations..............................$     1.64    $     0.57    $    (0.65)
   Income (loss) from discontinued operations............................      0.00          0.00         (0.05)
                                                                         ----------    ----------    -----------
Net income (loss) per common share - basic...............................$     1.64    $     0.57    $    (0.70)
                                                                         ==========    ==========    ===========

Earnings per common share - diluted:
   Income (loss) from continuing operations..............................$     1.57    $     0.56    $    (0.65)
   Income (loss) from discontinued operations............................      0.00          0.00         (0.05)
                                                                         ----------    ----------    -----------
Net income (loss) per common share - diluted.............................$     1.57    $     0.56    $    (0.70)
                                                                         ==========    ==========    ===========

                 See notes to Consolidated Financial Statements
</TABLE>

<TABLE>
                                                 SAUCONY, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                           FOR THE YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998

                                              (in thousands, except share amounts)

<CAPTION>
                                                                 Common Stock            Paid-In      Retained
                                                             Class A      Class B        Capital      Earnings
                                                             -------      -------        -------      --------

<S>                                                          <C>          <C>           <C>            <C>
Balance, January 3, 1997.....................................$  902       $ 1,243       $ 15,581       $33,111

Issuance of common stock, stock option exercise..............    --             5             34            --

Cancellation of below market options.........................    --            --            (15)           --

Issuance of below market options and
   restricted stock..........................................    --            --             52            --

Amortization of unearned compensation........................    --            --             --            --

Net loss.....................................................    --            --             --        (4,330)

Foreign currency translation adjustments.....................    --            --             --            --
                                                             ------       -------       --------       -------

Balance, January 2, 1998.....................................$  902       $ 1,248       $ 15,652       $28,781

Issuance of common stock, stock options exercised ...........    --            28            269            --

Amortization of unearned compensation........................    --            --             --            --

Repurchasing of common stock, at cost........................    --            --             --            --

Net income...................................................    --            --             --         3,579

Foreign currency translation adjustments.....................    --            --             --            --
                                                             ------       -------       --------       -------

Balance, January 1, 1999.....................................$  902       $ 1,276       $ 15,921       $32,360

Issuance of common stock, stock options exercised............     2            42            459            --

Issuance of non-qualified stock options......................    --            --            113            --

Tax benefit of non-qualified stock options...................    --            --            322            --

Amortization of unearned compensation........................    --            --             --            --

Repurchase of common stock, at cost..........................    --            --             --            --

Net income...................................................    --            --             --        10,319

Foreign currency translation adjustments.....................    --            --             --            --
                                                             ------       -------       --------       -------

Balance, December 31, 1999...................................$  904       $ 1,318       $ 16,815       $42,679
                                                             ======       =======       ========       =======

                                                 See notes to Consolidated Financial Statements
</TABLE>
<TABLE>

                                                 SAUCONY, INC. AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
                           FOR THE YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998

                                              (in thousands, except share amounts)

<CAPTION>
                                                                                          Accumulated
                                                                                             Other         Total
                                                         Treasury Stock       Unearned   Comprehensive Stockholders'
                                                       Shares      Amount   Compensation    Income        Equity
                                                       ------      ------   ------------    ------        ------

<S>                                                   <C>        <C>          <C>         <C>            <C>
Balance, January 3, 1997............................. 198,400    $ (1,054)    $  (65)     $  (234)       $  49,484

Issuance of common stock, stock option exercise......      --          --         --           --               39

Cancellation of below market options.................      --          --         15           --               --

Issuance of below market options and
   restricted stock..................................      --          --        (52)          --               --

Amortization of unearned compensation................      --          --         62           --               62

Net loss ............................................      --          --         --           --           (4,330)

Foreign currency translation adjustments.............      --          --         --         (183)            (184)
                                                     --------    --------     ------      --------       ----------

Balance, January 2, 1998............................. 198,400    $ (1,054)    $  (40)     $  (417)       $  45,072

Issuance of common stock, stock options exercised....      --          --         --           --              297

Amortization of unearned compensation................      --          --         24           --               24

Repurchase of common stock, at cost.................. 107,000        (611)        --           --             (611)

Net income...........................................      --          --         --           --            3,579

Foreign currency translation adjustments.............      --          --         --         (111)            (111)
                                                     --------    --------     ------      --------       ----------

Balance, January 1, 1999............................. 305,400    $ (1,665)    $  (16)     $  (528)       $  48,250

Issuance of common stock, stock options exercised....      --          --         --           --        $     503

Issuance of non-qualified stock options .............      --          --         --           --              113

Tax benefit of non-qualified stock options...........      --          --         --           --              322

Amortization of unearned compensation................      --          --          5           --                5

Repurchase of common stock, at cost..................  41,500        (514)        --           --             (514)

Net income...........................................      --          --         --           --           10,319

Foreign currency translation adjustments.............      --          --         --          (36)             (36)
                                                     --------    --------     ------      --------       ----------

Balance, December 31, 1999........................... 346,900    $ (2,179)    $  (11)     $  (564)       $  58,962
                                                     ========    =========    =======     ========       =========


                                                 See notes to Consolidated Financial Statements

</TABLE>

<TABLE>

                                              SAUCONY, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998

                                                    (in thousands)
<CAPTION>

                                                                              1999           1998           1997
                                                                              ----           ----           ----
<S>                                                                        <C>            <C>             <C>
Cash flows from operating activities:
   Net income (loss).......................................................$  10,319      $   3,579       $ (4,330)
Adjustments to reconcile net income (loss) to net cash
   provided (used) by operating activities:
     Writedown of Australian assets........................................       --             --          2,766
     Discontinued operations...............................................       --             --            298
     Depreciation and amortization.........................................    1,862          1,836          1,594
     Provision for bad debt and discounts..................................    6,880          4,908          4,887
     Deferred income tax provision (benefit)...............................      (99)           461         (1,269)
     Writedown of impaired real estate.....................................       --             --            850
     Compensation from stock grants and options............................      113             --             --
     Minority interest in income (loss) of consolidated subsidiaries.......       76             30           (123)
     Other.................................................................       45            (17)           (29)
Changes in operating  assets and  liabilities,  net of effects of
   acquisitions, dispositions and foreign currency adjustments:
Decrease (increase) in assets:
   Accounts and notes receivable...........................................  (11,248)        (5,718)        (6,711)
   Inventories.............................................................   (4,700)        (7,002)        (1,301)
   Prepaid expenses and other current assets...............................      (42)           176           (539)
Increase (decrease) in liabilities:
   Letters of credit payable...............................................      994          1,589           (612)
   Accounts payable........................................................   (1,242)           714            919
   Accrued expenses........................................................    3,337            977           (296)
   Accrued income taxes....................................................     (801)           944            159
                                                                           ----------     ---------       --------
Total adjustments..........................................................   (4,825)        (1,102)           593
                                                                           ----------     ----------      --------

Net cash provided (used) by continuing operations..........................    5,494          2,477         (3,737)
Net cash provided by discontinued operations...............................       --             --          2,227
                                                                           ---------      ---------       --------
Net cash provided (used) by operating activities...........................    5,494          2,477         (1,510)
                                                                           ---------      ---------       ---------

Cash flows from investing activities:
   Proceeds from the sale of Brookfield business...........................       --             --          6,841
   Purchases of property, plant and equipment..............................   (1,661)        (1,257)        (1,305)
   Proceeds from the sale of equipment.....................................        3             72            511
   Change in deferred charges, deposits and other..........................       (8)            92            (26)
   Marketable securities - realized and unrealized (gain) loss.............     (127)           (31)            88
   Payments for business acquisitions......................................       --           (863)          (140)
                                                                           ---------      ----------      ---------
Net cash provided (used) by investing activities...........................   (1,793)        (1,987)         5,969
                                                                           ----------     ----------      --------

Cash flows from financing activities:
   Net short-term borrowings...............................................   (5,429)         3,426          (1,063)
   Repayment of long-term debt and capital lease obligations...............     (375)        (2,364)         (2,711)
   Common stock repurchased................................................     (514)          (611)             --
   Issuances of common stock, including options............................      503            297              39
                                                                           ---------      ---------       ---------

Net cash provided (used) by financing activities...........................   (5,815)           748          (3,735)
Effect of exchange rate changes on cash and cash equivalents...............      134           (175)            905
                                                                           ---------      ----------      ---------
Net increase (decrease) in cash and cash equivalents.......................   (1,980)         1,063           1,629
Cash and cash equivalents at beginning of period...........................    5,495          4,432           2,803
                                                                           ---------      ---------       ---------
Cash and cash equivalents at end of period.................................$   3,515      $   5,495       $   4,432
                                                                           =========      =========       =========

Supplemental  disclosure of cash flow  information:
  Cash paid during the period for:

     Income taxes, net of refunds..........................................$   8,090      $     257       $     663
                                                                           =========      =========       =========

     Interest..............................................................$     688      $     657       $     887
                                                                           =========      =========       =========

Non-cash Investing and Financing Activities:
   Property purchased under capital leases.................................$     160      $     141       $      86
                                                                           =========      =========       =========

                                    See notes to Consolidated Financial Statements

</TABLE>



                         SAUCONY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   For the Years Ended December 31, 1999, January 1, 1999 and January 2, 1998

                      (in thousands, except share amounts)


1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

       BUSINESS ACTIVITY

       The  Company  is  an  importer  and  manufacturer  of  a  broad  line  of
       high-performance  athletic  footwear,  athletic  apparel and high-quality
       bicycles, bicycle frames and components. 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  1999,  1998 and 1997
       represent the fiscal years ended  December 31, 1999,  January 1, 1999 and
       January 2, 1998, respectively.  In management's opinion, the Consolidated
       Financial Statements for 1999, 1998 and 1997 are comparable.

       PRINCIPLES OF CONSOLIDATION

       The  Consolidated  Financial Statements include  the accounts of Saucony,
       Inc. and all of its majority-owned subsidiaries, domestic and foreign.

       All  significant  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.

       RISKS AND UNCERTAINTIES

       In fiscal 1999,  one of our  suppliers,  located in China,  accounted for
       approximately 62% of our total purchases by dollar volume.  See Footnotes
       18 and 20 for additional disclosure of risks and uncertainties.

       REVENUE RECOGNITION

       Sales, net of discounts and estimated returns and allowances, and related
       costs of sales are recognized  upon shipment of products.  Provisions for
       returns and allowances  are  determined  principally on the basis of past
       experience.

       CASH AND CASH EQUIVALENTS

       Cash  equivalents  include  all  short-term  deposits  with  an  original
       maturity of three months or less.

       INVENTORIES

       Inventories  are  stated at lower of cost or market.  Cost is  determined
       using the first-in, first-out (FIFO) method.

       PROPERTY, PLANT AND EQUIPMENT

       Land,  buildings and equipment,  including  significant  improvements  to
       existing  facilities,  are at the  lower  of cost or  estimated  carrying
       values.  The assets are depreciated  over their estimated useful lives or
       capital lease terms,  if shorter,  using the  straight-line  method.  The
       estimated  useful  lives of the assets  are: 33 years for  buildings  and
       improvements  and  3 to 15  years  for  machinery  and  equipment.  Major
       renewals and betterments are capitalized.  Maintenance, repairs and minor
       property  renewals  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.  Any gain or loss,
       resulting  from the  retirement  or  disposition  of property,  plant and
       equipment, is included in consolidated net income.

       INVESTMENTS IN MARKETABLE SECURITIES

       Investment in marketable securities are categorized as trading securities
       which are reported at fair value,  with changes in fair value recorded in
       consolidated net income. The marketable  securities are included in other
       assets since the Company intends to hold these investments, until certain
       deferred compensation payments are due.

       DEFERRED CHARGES AND GOODWILL

       Deferred  charges  consist   primarily  of  trademarks.   Trademarks  are
       amortized  over five  years;  goodwill,  representing  the  excess of the
       purchase  price  over the  estimated  fair value of the net assets of the
       acquired business, is being amortized over the period of expected benefit
       of fifteen years.

       INCOME TAXES

       The provision  for income taxes is  calculated  according to Statement of
       Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
       Taxes." Under SFAS 109, 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, 1999 and
       January 1, 1999 reflect the estimated future tax effects  attributable to
       temporary  differences  and  carryforwards  based  on the  provisions  of
       enacted tax law.

       EARNINGS PER SHARE

       Earnings per common share is  calculated  in  accordance  with  Financial
       Accounting  Standards  No. 128  "Earnings  Per Share"  (SFAS 128).  Basic
       earnings per share excludes the dilutive effect of options,  warrants and
       convertible securities.  Diluted earnings per share includes the dilutive
       effect of options, warrants and convertible securities.

       STOCK-BASED COMPENSATION

       The Company grants stock options to officers,  key employees,  directors,
       consultants  and  advisors  with the  exercise  price  determined  by the
       Compensation  Committee of the Board of Directors.  The Company  accounts
       for stock option grants in accordance  with Accounting  Principles  Board
       Opinion No. 25, "Accounting for Stock Issued to Employees," which defines
       stock  compensation  as the  excess  of the  quoted  market  price of the
       Company's  stock at the date of the  grant  over  the  exercise  price an
       employee is required to pay. Grants to non-employees are accounted for in
       accordance with SFAS 123. As prescribed  under SFAS 123,  "Accounting for
       Stock-Based  Compensation,"  the Company has disclosed in Notes 11 and 12
       the pro forma effects on net income and earnings per share of determining
       stock-based  compensation  expense based upon the fair value of the stock
       options granted subsequent to December 31, 1994.

       FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

       From time to time,  the Company  enters  into  forward  foreign  currency
       exchange   contracts  to  hedge  certain  foreign  currency   denominated
       payables.  Gains and  losses on  forward  exchange  contracts  are offset
       against  foreign  currency  exchange  gains or losses  on the  underlying
       hedged item.


       RECLASSIFICATIONS

       Certain items in prior years' Consolidated Financial Statements have been
       reclassified to conform to the 1999 presentation.

       ADVERTISING AND PROMOTION

       Advertising and promotion  costs,  including print media production cost,
       are expensed as incurred, with the exception of co-operative advertising,
       which is accrued  and the  advertising  costs  expensed  in the period of
       revenue  recognition.  Advertising  and  promotion  expense  amounted  to
       $10,065, $7,912 and $8,543 for 1999, 1998 and 1997, respectively.

       RESEARCH AND DEVELOPMENT EXPENSES

       Expenditures  for  research and  development  of products are expensed as
       incurred.  Research and development  expenses  amounted to  approximately
       $1,676, $1,681 and $1,438 for 1999, 1998 and 1997, respectively.

       NEW ACCOUNTING PRONOUNCEMENTS

       In June 1998, the Financial  Accounting  Standards Board issued Financial
       Accounting Standards No. 133, "Accounting for Derivative  Instruments and
       Hedging  Activities,"  (SFAS  133) (as  amended by  Financial  Accounting
       Standards No. 137 (SFAS 137), with respect to the delayed  effective date
       of SFAS 133) which is  effective  for  fiscal  quarters  of fiscal  years
       commencing after June 15, 2000, with early adoption  permitted.  SFAS 133
       defines the  accounting  for derivative  instruments,  including  certain
       derivative   instruments   embedded  in  other   contracts   and  hedging
       activities. Upon adoption of SFAS 133, all derivatives must be recognized
       on the balance  sheet at their then fair value and any deferred  gains or
       losses  remaining on the balance  sheet under  previous  hedge-accounting
       rules  must be  removed  from the  balance  sheet.  The  Company is still
       assessing  the  impact  of the  provisions  of  SFAS  133 on its  hedging
       activities,  which are  currently  limited  to forward  foreign  currency
       exchange contracts.  Because of the Company's minimal use of derivatives,
       management  does not  anticipate  that the adoption of the new  Statement
       will have a significant  effect on earnings.  At this time, the effect of
       the adoption of SFAS 133 on the Company's  future  earnings and financial
       position cannot be estimated.


2.     MARKETABLE SECURITIES:
       ---------------------

       As of December 31, 1999, the Company's holdings in marketable  securities
       consisted  primarily of equity securities which are classified as trading
       securities.

       The cost of the securities  held at December 31, 1999 and January 1, 1999
       was $133 and $134,  respectively.  As of December 31, 1999 and January 1,
       1999,   the  market  value  of  such   securities   was  $307  and  $179,
       respectively.

       Included in the  determination of net income for the years ended December
       31, 1999 and January 1, 1999 and January 2, 1998 were: 1999, net realized
       gains of $1 and net unrealized  gains of $127;  1998, net realized losses
       of $3 and net  unrealized  gains of $35; and 1997,  net realized gains of
       $22 and net unrealized gains of $2.




3.     INVENTORIES:
       -----------

       Inventories  at December  31, 1999 and January 1, 1999  consisted  of the
       following (in thousands):

                                                      1999           1998
                                                      ----           ----

           Finished goods..........................$ 30,067        $ 24,194

           Work-in-process.........................     920             834

           Raw materials and supplies..............   4,283           6,044
                                                   --------        --------

           Total...................................$ 35,270        $ 31,072
                                                   ========        ========


4.     PROPERTY, PLANT AND EQUIPMENT:
       -----------------------------

       Major classes of property, plant and equipment at December 31, 1999 and
       January 1, 1999 were as follows (in thousands):

                                                       1999             1998
                                                       ----             ----

           Land.....................................$     484         $     484
           Buildings and improvements...............    6,186             5,997
           Machinery and equipment..................   10,513             9,777
           Capitalized leases.......................    1,666             1,586
           Leasehold improvements...................      418               275
                                                    ---------         ---------
                                                       19,267            18,119
           Less accumulated depreciation
           and amortization.........................   10,988             9,996
                                                    ---------         ---------

           Total....................................$   8,279         $   8,123
                                                    =========         =========

       Accumulated  amortization  of the leased  property was $1,133 and $790 at
       December 31, 1999 and January 1, 1999, respectively.


5.     ACCRUED EXPENSES:

       Accrued expenses at December 31, 1999 and January 1, 1999 consisted of
       the following (in thousands):
                                                     1999                1998
                                                     ----                ----

         Payroll and bonuses......................$  2,734           $   1,249
         Income taxes.............................      --                 869
         Sales commissions........................     282                 237
         Selling and advertising..................     567                 186
         Other....................................   3,620               2,163
                                                  --------           ---------
         Total....................................$  7,203           $   4,704
                                                  ========           =========

       Included in prepaid  expenses at December 31, 1999, were prepaid income
       taxes of $287.


6.     LONG-TERM DEBT:

       The Company  has two notes with  monthly  installments  of $0.6 and $0.7,
       respectively.  Payments are due through June 2002,  with  interest  rates
       ranging from 3.9% to 10.0%.  As of December 31, 1999 and January 1, 1999,
       the  outstanding  balance  was $31 and  $47,  respectively.  The  current
       portion of the  long-term  debt was $11 for the year ending  December 31,
       1999 and January 1, 1999.

       Long-term debt maturities payable for the three years or after subsequent
       to  December  31,  1999  are as  follows  (in thousands):

                       2000...........................    11
                       2001...........................    14
                       2002...........................     6
                                                      ------

                       Total..........................$   31
                                                      ======




7.     CAPITAL LEASE OBLIGATIONS:

       The  following is a schedule by years of future  minimum  lease  payments
       under capital  leases  together with the present value of the net minimum
       lease payments as of December 31, 1999 (in thousands):

            2000...................................................$     388
            2001...................................................      248
            2002...................................................       28
            2003...................................................        5
                                                                   ---------
            Total minimum lease payments...........................      669
            Less amounts representing interest.....................       33
                                                                   ---------
            Present value of minimum lease payments................      636
            Less current portion...................................      364
                                                                   ---------
            Long-term portion......................................$     272
                                                                   =========


8.     EMPLOYEE RETIREMENT PLANS:

       The Company has maintained a qualified  retirement  savings plan ("401(k)
       Plan") since 1991. As amended, 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.  Such
       contributions  amounted  to $121,  $72 and $83 for  1999,  1998 and 1997,
       respectively.

       In 1995, the Company established a deferred  compensation program ("DCP")
       to  provide  key  executives  and  highly   compensated   employees  with
       supplemental  retirement  benefits.  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  equal  to  a  certain   percentage  of  the
       participants'  contributions.  Such expenses amounted to $31, $14 and $10
       for 1999, 1998 and 1997, respectively.



9.     COMMITMENTS AND CONTINGENCIES:
       -----------------------------

       LEASE COMMITMENTS

       The Company is obligated under various operating leases for equipment and
       rental space through 2005.  Total equipment and rental expenses for 1999,
       1998 and 1997 were  $903,  $959 and $910,  respectively.  Future  minimum
       equipment and rental payments are as follows:  2000,  $745;  2001,  $599;
       2002, $480; 2003, $149; 2004 and thereafter, $81.

       SHORT-TERM BORROWING ARRANGEMENTS

       On August 31, 1998, the Company entered into a revolving credit agreement
       under  the  terms of which a bank  committed  a  maximum  credit  line of
       $15,000 to the Company  for cash  borrowings  and letters of credit.  The
       credit  facility,  which was amended and  increased  on March 15, 1999 to
       $20,000,  terminates on July 31, 2001. Borrowings under the facility bear
       interest at either the bank's  prime rate of interest,  less 0.5%,  or at
       the LIBO rate,  plus 1.5%.  In  addition,  the  Company  pays a quarterly
       commitment  fee of 0.375% on the average  daily unused  credit line.  The
       credit facility contains  restrictions and financial covenants including:
       restrictions on additional indebtedness,  restrictions on the declaration
       or payment of  dividends,  a minimum  tangible  net  worth,  as  defined,
       restrictions on annual capital expenditures,  a minimum current ratio, as
       defined,  a minimum  leverage  ratio,  a minimum  interest  coverage,  as
       defined.  The credit facility is subject to the bank's periodic review of
       the Company's operations.

       The Company was in compliance  with such  covenants at December 31, 1999.
       At December  31, 1999,  there were no  borrowings  outstanding  under the
       facility and there were letters of credit outstanding of $2,845.

       On March 25,  1998,  the  Company's  primary  lender  and  several of the
       Company's foreign subsidiaries entered into demand lines of credit letter
       agreements to provide working capital  resources.  Demand lines of credit
       were made  available  as  follows:  Saucony  Sports  BV,  Dutch  Guilders
       3,500,000  and Saucony UK, Inc.,  British  Pounds  800,000.  The lines of
       credit  are not  committed  facilities  and as such the  availability  of
       advances  under  the lines of credit  are at the sole  discretion  of the
       bank. At December 31, 1999,  aggregate  borrowings under the demand lines
       of credit amounted to $1,928.

       Saucony Canada,  Inc. maintains a credit facility with a Canadian lender.
       The  agreement  provides  Saucony  Canada  with a credit line of Canadian
       Dollars  1,000,000 for cash borrowings and letters of credit. At December
       31,  1999,  there were no  borrowings  or letters of credits  outstanding
       under this credit facility.

       At December 31, 1999,  the Company was committed  under foreign  exchange
       contracts to purchase  U.S.  dollars in the  notional  amount of $750 and
       $735 at December 31, 1999 and January 1, 1999,  respectively.  Unrealized
       gains or losses relating to these contracts at December 31, 1999 were not
       material.

       LITIGATION

       The  Company is involved in various  routine  litigation  incident to its
       business.  Many of these  proceedings  are covered in whole or in part by
       insurance. In management's opinion, none of these proceedings will have a
       material adverse effect on the Company's financial  position,  operations
       or cash flows (irrespective of any potential insurance recovery).


10.    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 premium  equal to 110% of the cash  dividend,
       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.

       As of December 31, 1999,  January 1, 1999 and January 2, 1998, the number
       of shares of Class A Common  Stock and Class B Common  Stock  outstanding
       were as follows:

<TABLE>
<CAPTION>
                                                                       Class A                   Class B
                                                                       Common                    Common
                                                                        Stock                     Stock
                                                                        -----                     -----
<S>                                                                    <C>                       <C>
           Shares outstanding at January 3, 1997.....................  2,703,227                 3,533,659
           Shares issued.............................................         --                    14,428
                                                                     -----------               -----------
           Shares outstanding at January 2, 1998.....................  2,703,227                 3,548,087
           Shares issued.............................................        800                    83,318
           Shares repurchased........................................    (25,000)                  (82,000)
                                                                     ------------              ------------
           Shares outstanding at January 1, 1999.....................  2,679,027                 3,549,405
           Shares issued.............................................      4,100                   128,504
           Shares repurchased........................................    (15,000)                  (26,500)
                                                                     ------------              ------------
           Shares outstanding at December 31, 1999...................  2,668,127                 3,651,409
                                                                     ===========               ===========

</TABLE>


11.    STOCK OPTIONS:
       -------------

       Under the Company's  1993 Equity  Incentive  Plan (the "Equity  Incentive
       Plan") the Company may grant incentive stock options and restricted stock
       awards to officers,  key employees and Directors of the Company.  Outside
       consultants   and  advisors  to  the  Company  are  eligible  to  receive
       non-statutory stock options and awards of restricted stock.

       The Equity Incentive Plan is administered by the  Compensation  Committee
       of the Board of Directors which, at its sole  discretion,  grants options
       to purchase  shares of Common Stock and make awards of restricted  stock.
       The purchase  price per share of Common Stock shall be  determined by the
       Board of Directors,  provided,  however,  in the case of Incentive  Stock
       Options,  the  purchase  price  shall  not be less  than 100% of the fair
       market value of such stock 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,  wherein the term cannot exceed ten
       years.  The vesting schedule is subject to the discretion of the Board of
       Directors.

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

       At December 31, 1999, a total of 1,150,000 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  Director  Stock  Option Plan  provides  for the  automatic  grant to
       non-employee  directors of  non-statutory  stock  options upon  specified
       occasions.  A total of 100,000  shares of Class B Common  Stock have been
       reserved for issuance under the plan. The option purchase price per share
       shall equal the fair market  value of Class B Common Stock on the date of
       the grant.  The options are exercisable at any time, in whole or in part,
       prior to the  fifth  anniversary  of the date of the  grant.  No  further
       options may be granted under the Director Stock Option Plan which expired
       in 1998.  The  remaining  62,000  shares  reserved  under the Plan are no
       longer available for grant.

       The following table  summarizes the awards  available for grant under the
       Company's  1993 Equity  Incentive Plan and the Director Stock Option Plan
       for the three-year reporting period ended December 31, 1999:

                                                                       Shares
                                                                       ------

           Shares available at January 3, 1997.....................    457,726
           Additional shares reserved..............................    350,000
           Awards granted..........................................   (149,150)
           Options expired.........................................     25,278
                                                                   -----------
           Shares available at January 2, 1998.....................    683,854
           Awards granted..........................................    (18,750)
           Options expired.........................................     26,666
           Director stock option plan expiration...................    (62,000)
                                                                   ------------
           Shares available at January 1, 1999.....................    629,770
           Awards granted..........................................   (345,575)
           Options expired or cancelled............................     50,465
                                                                   -----------
           Shares available at December 31, 1999...................    334,660
                                                                   ===========


       Statement of Financial  Accounting  Standards  No. 123,  "Accounting  for
       Stock-Based  Compensation"  (SFAS 123)  encourages,  but does not require
       companies  to  record   compensation   cost  for   stock-based   employee
       compensation  plans at fair value. 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."  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.

       Stock-based  compensation  arising from the issuance of restricted  stock
       warrants and below market options, is being amortized to expense over the
       vesting period of the stock grant or option term and amounted to $38, $24
       and $62 for 1999, 1998 and 1997, respectively.

       The following table  summarizes the Company's stock option activity as of
       January 2, 1998, January 1, 1999 and December 31, 1999:
<TABLE>
<CAPTION>

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

<S>                                                              <C>             <C>           <C>         <C>
           Outstanding at January 3, 1997.....................   333,174         $  4.36       $  2.00   - $  12.25

                Granted.......................................   147,350         $  4.50       $  4.44   - $   5.00
                Exercised.....................................   (12,628)        $  3.11       $  2.50   - $   3.69
                Forfeited.....................................   (38,278)        $  5.87       $  2.50   - $   8.50
                Expired.......................................    (3,000)        $  3.35       $  2.88   - $   3.63
                                                              -----------

           Outstanding at January 2, 1998.....................   426,618         $  4.32       $  2.00   - $  12.25

                Granted.......................................    18,750         $  5.05       $  4.44   - $   6.50
                Exercised.....................................   (84,118)        $  3.52       $  2.25   - $   5.00
                Forfeited.....................................    (3,266)        $  3.27       $  2.50   - $   5.00
                Expired.......................................   (23,400)        $  8.46       $  3.69   - $  12.25
                                                              -----------

           Outstanding at January 1, 1999.....................   334,584         $  4.28       $  2.00   - $   6.50

                Granted.......................................   345,575         $  9.84       $  4.13   - $  22.63
                Exercised.....................................  (132,404)        $  3.78       $  2.00   - $   6.50
                Forfeited.....................................   (41,465)        $  8.03       $  4.44   - $  23.63
                Expired.......................................    (4,000)        $  5.75       $  5.75
                Cancelled.....................................   (14,000)        $  5.13       $  4.75   - $   5.63
                                                              -----------

           Outstanding at December 31, 1999...................   488,290         $  7.99       $  4.00   - $  23.63
                                                                 =======


</TABLE>


       Options  exercisable  for  shares  of the  Company's  Class A and Class B
       Common Stock as of January 2, 1998, January 1, 1999 and December 31, 1999
       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, 1998              4,900         228,586         233,486      $  2.27       $   4.71

              January 1, 1999              4,100         224,054         228,154      $  2.27       $   4.22

              December 31, 1999               --         203,220         203,220        --          $   5.88

</TABLE>

       The  following   table   summarizes   information   about  stock  options
       outstanding at December 31, 1999:

<TABLE>
<CAPTION>

                                                   Options Outstanding                       Options Exercisable
                                        -----------------------------------------         -------------------------
                                                          Weighted
                                          Shares           Average       Weighted           Shares         Weighted
                                        Outstanding       Remaining       Average         Exercisable       Average
                     Range of               at           Contractual     Exercise             at           Exercise
                  Exercise Prices        12/31/99           Life           Price           12/31/99          Price
                  ---------------        --------           ----           -----           --------          -----

              <S>                          <C>              <C>          <C>                <C>            <C>
              $  4.00   - $  4.88          199,090          2.02         $  4.52            131,820        $  4.56
              $  5.00   - $  5.75          130,400          4.02         $  5.12             47,000        $  5.12
              $  6.00   - $  7.00            4,900          3.90         $  6.49                400        $  6.09
              $      11.375                 33,400          4.35         $ 11.38                 --        $     --
              $ 12.50   - $ 13.44            8,500          4.90         $ 12.60                 --        $     --
              $ 14.63   - $ 14.69           44,750          4.80         $ 14.69             24,000        $ 14.69
              $ 16.16   - $ 17.75           60,250          4.81         $ 16.53                 --        $     --
              $ 19.88   - $ 23.63            7,000          4.50         $ 23.09                 --        $     --
                                        ----------                                        ---------
                                           488,290                                          203,220
                                        ==========                                        =========
</TABLE>

12.    EARNINGS PER SHARE

       The  following  table sets forth the  computation  of basic  earnings per
       common share and diluted earnings per common share (dollars in thousands,
       except per share amounts):

<TABLE>
<CAPTION>
                                                    1999                       1998                      1997
                                            ---------------------     ----------------------    ----------------------
                                             Earnings    Earnings     Earnings     Earnings     Earnings      Earnings
                                                per         per          per          per          per           per
                                              Common      Common       Common       Common       Common        Common
                                              Share -    Share -       Share -      Share -      Share -       Share -
                                               Basic      Diluted       Basic       Diluted       Basic        Diluted
                                               -----      -------       -----       -------       -----        -------

<S>                                        <C>          <C>           <C>          <C>          <C>          <C>
       Net income (loss)

         Income (loss) from
          continuing operations            $ 10,319     $ 10,319      $ 3,579      $ 3,579      $ (4,032)    $ (4,032)
         Loss from discontinued
          operations                             --           --           --           --          (298)        (298)
                                           --------     --------      -------      -------      ---------    ---------
         Net income (loss) available
          for common shares and
          assumed conversions              $ 10,319     $ 10,319      $ 3,579      $ 3,579      $ (4,330)    $ (4,330)
                                           ========     ========      =======      =======      =========    =========

       Weighted-average common shares
        and equivalents outstanding:

         Weighted-average shares
          outstanding                         6,292        6,292        6,242        6,242         6,240        6,240

         Effect of dilutive securities:
          Stock options                          --          276           --          131            --           --
                                           --------     --------      -------      -------      --------     --------
                                              6,292        6,568        6,242        6,373         6,240        6,240
                                           ========     ========      =======      =======      ========     ========
       Earnings per share:
         Income (loss) from
          continuing operations            $   1.64     $   1.57      $  0.57      $  0.56      $ (0.65)     $  (0.65)
         Loss from discontinued
          operations                           0.00         0.00         0.00         0.00        (0.05)        (0.05)
                                           --------     --------      -------      -------      --------     ---------

         Net income (loss)                 $   1.64     $   1.57      $  0.57      $  0.56      $ (0.70)     $  (0.70)
                                           ========     ========      =======      =======      ========     =========

</TABLE>

       Options to purchase  112,000  shares of common stock were  outstanding at
       December 31, 1999, but were not included in the computations of EPS since
       the  options  were  anti-dilutive.  There were no  anti-dilutive  options
       outstanding at January 1, 1999 and January 2, 1998.

       The weighted  average fair value at date of grant for options  granted in
       1999, 1998 and 1997 was $4.91, $2.30 and $2.03 per 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  1999,  1998 and  1997,  respectively:
       risk-free interest rates of 5.5%, 5.6%, and 6.3%;  dividend yields of 0%,
       0% and  0%;  volatility  factors  of the  expected  market  price  of the
       Company's common stock of 62.3%,  42.9% and 40.7%; and a weighted-average
       expected life of the options of 3.5, 5.0 and 5.0 years.

       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  in  1999,  1998  and  1997,  consistent  with  the
       provisions  of SFAS 123, the  Company's  net income (loss) and net income
       (loss)  per share  would  have  been  reduced  to the pro  forma  amounts
       indicated below (dollars in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                                   1999                     1998                       1997
                                          ----------------------     ---------------------     ------------

                                           Earnings     Earnings     Earnings     Earnings     Earnings     Earnings
                                              per          per          per          per          per          per
                                            Common       Common       Common       Common       Common       Common
                                            Share -     Share -       Share -      Share -      Share -      Share -
                                             Basic       Diluted       Basic       Diluted       Basic       Diluted
<S>                                      <C>          <C>            <C>          <C>          <C>          <C>
       Net income (loss):
         As reported                     $  10,319    $  10,319      $ 3,579      $ 3,579      $ (4,330)    $ (4,330)
         Compensation expense for
          stock, net of tax                    304          304          (81)         (81)          (63)         (63)
                                         ---------    ---------      --------     --------     ---------    ---------

       Pro forma net income (loss)       $  10,015    $  10,015        3,498        3,498        (4,393)      (4,393)
                                         =========    =========      =======      =======      =========    =========

       Pro forma earnings per share:
         As reported                     $    1.64    $    1.57      $  0.57      $  0.56      $ (0.70)     $ (0.70)
         Compensation expense for
          stock, net of tax                  (0.05)       (0.05)       (0.01)       (0.01)       (0.01)       (0.01)
                                         ----------   ----------     --------     --------     --------     --------

       Pro forma net income (loss)
         per share                       $    1.59    $    1.52      $  0.56      $  0.55      $ (0.71)     $ (0.71)
                                         =========    =========      =======      =======      ========     ========

</TABLE>

       The pro forma net income for 1999, 1998 and 1997 is not representative of
       the pro forma effect on net income in future years  because SFAS 123 does
       not take into  consideration  pro forma  compensation  expense related to
       option grants made prior to 1995.

       The  Black-Scholes  option  valuation  model  was  developed  for  use in
       estimating  the fair  value  of  traded  options  which  have no  vesting
       restrictions and are fully  transferable.  In addition,  option valuation
       models require the input of highly subjective  assumptions  including the
       expected stock price volatility.

       Because  the  Company's  employee  stock  options  have   characteristics
       significantly  different from those of traded options and because changes
       in the  subjective  assumptions  can  materially  affect  the fair  value
       estimate,  management  believes  the existing  models do not  necessarily
       provide a reliable single measure of the fair value of its employee stock
       options.



13.    INCOME TAXES:

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

                                          1999             1998           1997
                                          ----             ----           ----

         Pre-tax income (loss):

            United States...............$ 15,864        $  3,870       $    369
            Foreign.....................   1,725           1,368         (4,169)
                                         --------        --------       --------

            Total.......................$ 17,589        $  5,238       $ (3,800)
                                         ========       ========       ========


       The  provision  (credit) for income taxes  consists of the  following (in
       thousands):

                                               1999         1998         1997
                                               ----         ----         ----
         Current:
           Federal...........................$ 5,349      $   830       $ 1,058
           State.............................  1,511          234           309
           Foreign...........................    421          104           223
                                             -------      -------       -------
                                               7,281        1,168         1,590
                                             -------      -------       -------
         Deferred:
           Federal...........................   (139)         239          (971)
           State.............................    (47)          90          (298)
           Foreign...........................    466          (36)       (1,365)
                                             -------      --------      --------
                                                 280          293        (2,634)
                                             -------      --------      --------

         Change in valuation allowance.......   (367)         168         1,399
                                             --------     --------     --------

           Total.............................$ 7,194      $ 1,629      $    355
                                             =======      =======      ========


       The net  deferred  tax asset or  liability  reported on the  consolidated
       balance sheet consist of the following  items as of December 31, 1999 and
       January 1, 1999 (in thousands):
<TABLE>
<CAPTION>

                                                                                          1999           1998
                                                                                          ----           ----
<S>                                                                                   <C>            <C>
         Net current deferred tax assets:
           Allowance for doubtful accounts and discounts..............................$   1,207      $     581
           Inventory allowances and tax costing adjustments...........................      338            336
           Deferred compensation......................................................      330            468
           Other accrued expenses.....................................................      103            172
           Unrealized gain on marketable securities...................................      (70)           (18)
           Foreign loss carryforwards.................................................      232             66
                                                                                      ---------      ---------
              Total...................................................................$   2,140      $   1,605
                                                                                      ---------      ---------

         Net long-term deferred tax assets:
           Foreign loss carryforwards.................................................$     197      $     921
           Valuation allowance........................................................      (98)          (568)
                                                                                      ----------     ----------
              Total...................................................................$      99      $     353
                                                                                      ---------      ---------

         Net long-term deferred tax liabilities:
           Property, plant and equipment..............................................$     868      $     697
           Investment in limited partnership..........................................    1,177          1,154
                                                                                      ---------      ---------
              Total...................................................................$   2,045      $   1,851
                                                                                      ---------      ---------

         Net deferred tax asset.......................................................$     194      $     107
                                                                                      =========      =========
</TABLE>

       The  foreign   loss   carryforwards   relate  to   operating   losses  of
       approximately  $1,156  which  may be  carried  forward  indefinitely.  At
       December 31, 1999, the Company has determined that it is more likely than
       not that $98 of the deferred tax assets resulting from foreign  operating
       losses will not be realized.

       A reconciliation  from the U.S.  statutory federal income tax rate to the
       effective  income tax rate on pre-tax income from  continuing  operations
       before minority interest follows:

<TABLE>
<CAPTION>
                                                                                    1999         1998        1997
                                                                                    ----         ----        ----

<S>                                                                                <C>          <C>        <C>
         U.S. federal income tax rate...............................................34.3%       34.0%      (34.0%)
         State income tax, net of federal benefit....................................5.5         4.8         0.2
         Non-deductible expenses and tax-exempt income...............................1.7         0.4         0.7
         International tax rate differences..........................................1.6        (7.6)        7.0
         Detriment (benefit) of valuation allowance relating
           to foreign losses........................................................(2.1)        3.2        36.8
         Low-income housing tax credits.............................................(0.1)       (0.7)       (1.4)
         Adjustment of prior years' estimated tax liabilities......................  0.0        (3.0)        0.0
                                                                                   -----       ------      -----

         Effective income tax rate................................................. 40.9%       31.1%        9.3%
                                                                                   ======      ======      ======
</TABLE>

       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  $2,002 at
       December 31, 1999.


14.    DISCONTINUED OPERATIONS:

       On July 4, 1997,  the  Brookfield  Athletic Co., Inc.  ("Brookfield"),  a
       wholly owned domestic  subsidiary of the Company,  sold substantially all
       of the net  assets  used in its  business  of  distributing  recreational
       products for $6,841.  The Company  recorded a pre-tax gain on the sale of
       $417, net of transaction costs of $278.

       The  operating  results of  Brookfield  for the 1997 fiscal year has been
       segregated  from  continuing  operations and is reported as  discontinued
       operations in the Company's Consolidated Financial Statements.  A summary
       of such results follows (in thousands):

                                                                      1997
                                                                      ----

             Revenues..............................................$  2,381
             Costs and expenses....................................   3,037
                                                                   --------
             Loss before income taxes..............................    (656)
             Income tax benefit....................................    (262)
                                                                   ---------
             Loss from discontinued operations.....................$   (394)
                                                                   =========
             Gain on sale of net assets............................$    417
             Post measurement date operating losses................    (243)
                                                                   ---------
             Gain on disposal before income taxes..................     174
             Income tax expense....................................      78
                                                                   --------
             Gain on disposal of Brookfield business...............$     96
                                                                   ========
             Total loss from discontinued operations...............$   (298)
                                                                   =========



15.    ASSET WRITEDOWNS:
       ----------------

       During  1997,  the  Company's  Australian  subsidiary  recorded  a $1,426
       non-recurring  charge to write-down  accounts  receivables  (by $858) and
       other assets (by $568) to their net  realizable  values.  In addition,  a
       write-down  of inventory of $1,340 was included in cost of sales in 1997.
       The Company recorded a deferred tax valuation  allowance of $999 relating
       to net operating loss  carryforwards  of the Australian  subsidiary which
       are not expected to be realized.

       During  the  second  quarter  of fiscal  1997,  the  Company  recorded  a
       non-recurring charge of $850 ($508 after tax, $0.08 per diluted share) to
       reduce the carrying value of the Company's inactive distribution facility
       in East Brookfield, Massachusetts to estimated fair value. The fair value
       of the  facility  was based on a present  value  calculation  of  assumed
       market rental income using a discount rate of 12.0%.

       This facility consisted of approximately 109,000 square feet of warehouse
       and  distribution  space,  as well as a retail factory outlet situated on
       approximately  5.4 acres of land. The facility  encompassed nine separate
       buildings adjoined together.  The dates of construction for the buildings
       range from 1925 to 1972.

       The facility had functioned as an overflow warehouse for the Company.  On
       July 4, 1997, the Company's wholly-owned subsidiary,  Brookfield Athletic
       Co., Inc.,  ("Brookfield"),  sold substantially all of the assets used in
       Brookfield's business. At that time,  approximately 15% of the facilities
       aggregate  square footage was either  utilized by the Company or let out.
       The  Company  had  no  current  or   anticipated   future  need  for  the
       under-utilized  space, nor were there any definitive or prospective plans
       to  lease  additional   space.   Attempts  to  lease  the  facility  were
       unsuccessful  due  to the  inefficient  configuration  of  the  facility.
       Accordingly, the Company determined that the East Brookfield distribution
       facility was  impaired.  Management is assessing the use of this facility
       and is considering various options. Management believes that the carrying
       value at December 31, 1999 represents the fair value of the facility.

       The non-recurring charge affected the United States business segment.


16.    GEOGRAPHIC SEGMENT DATA:
       -----------------------

       The following  table  summarizes the Company's  continuing  operations by
       geographic  area for the years ended  December 31, 1999,  January 2, 1998
       and  January 3, 1997 and  identifiable  assets as of December  31,  1999,
       January 1, 1999 and January 2, 1998.  Operating  income (loss) for fiscal
       1997 has been  reclassified on a basis consistent with operating  segment
       information presented in Note 17.
<TABLE>
<CAPTION>

                                                                                         (in thousands)

                                                                              1999           1998          1997
                                                                              ----           ----          ----
<S>                                                                      <C>            <C>             <C>
       REVENUES:

         United States...................................................$   135,410    $    83,617     $    65,711
         International...................................................     19,281         22,193          28,251
                                                                         -----------    -----------     -----------
                                                                         $   154,691    $   105,810     $    93,962
                                                                         ===========    ===========     ===========

       INTERNATIONAL REVENUES:

         United States - based divisions.................................      3,560    $     4,086     $     5,602
         Foreign subsidiaries............................................     15,721         18,107          22,649
                                                                         -----------    -----------     -----------
                                                                         $    19,281    $    22,193     $    28,251
                                                                         ===========    ===========     ===========

       INTER-AREA REVENUES:

         United States...................................................$       828    $       629     $       786
         International...................................................      8,442          9,286           7,430
                                                                         -----------    -----------     -----------
                                                                         $     9,270    $     9,915     $     8,216
                                                                         ===========    ===========     ===========

       TOTAL REVENUES:

         United States...................................................$   136,238    $    84,246     $    66,497
         International...................................................     27,723         31,479          35,681
         Less:  Inter-area eliminations..................................     (9,270)        (9,915)         (8,216)
                                                                         ------------   ------------    ------------
                                                                         $   154,691    $   105,810     $    93,962
                                                                         ===========    ===========     ===========

       OPERATING INCOME (LOSS):

         United States...................................................$    16,815    $     6,902     $     2,934
         International...................................................      1,469         (1,117)         (4,572)
         Less:  Inter-area eliminations..................................        (88)           (44)           (297)
                                                                         ------------   ------------    ------------
                                                                         $    18,196    $     5,741     $    (1,935)
                                                                         ===========    ===========     ============

       IDENTIFIABLE ASSETS:

         United States...................................................$    79,288    $    72,677     $    59,521
         International...................................................     13,078         14,171          13,142
         Less:  Inter-area eliminations..................................    (15,185)       (16,969)        (11,347)
                                                                         ------------   ------------    ------------
                                                                         $    77,181    $    69,879     $    61,316
                                                                         ===========    ===========     ===========

</TABLE>

       Revenues  are  classified  based  on  customer  location.  Other  revenue
       consists  primarily of royalty income and freight and handling  income on
       product  shipments.  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.  Operating income consists of revenue, less cost of sales, selling
       expenses and general and  administrative  expenses and for 1997  includes
       non-recurring charges of $850 and $2,766 relating to the reduction in the
       carrying value of the Company's East Brookfield,  Massachusetts  facility
       to  market  and the  Australian  subsidiaries  write-down  of  assets  to
       estimated realizable values, respectively.


17.    OPERATING SEGMENT DATA:
       ----------------------

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

       SAUCONY SEGMENT

       Performance running,  walking,  cross training and outdoor trail footwear
       and  multi-sport  and triathlon  athletic  apparel sold under the Saucony
       brand name.

       OTHER PRODUCTS SEGMENT

       Other Product segment  aggregates  several  product lines,  none of which
       meet  the  criteria  as  defined  in SFAS  131 as a  reportable  segment.
       Included  in other  products  are:  Hind  multi-sport  athletic  apparel;
       Quintana Roo triathlon,  road and mountain  bicycles,  bicycle components
       parts and wetsuits; Merlin titanium bicycle frames; Spot-bilt coaches and
       official  footwear;  Real bicycle  components,  and the Company's  retail
       factory outlet stores.

       The following table summarizes the Company's  operating  segments for the
       years ended  December 31,  1999,  January 1, 1999 and January 2, 1998 and
       identifiable  assets as of December 31, 1999, January 1, 1999 and January
       2, 1998:
<TABLE>
<CAPTION>

                                                                               (in thousands)
                                                                     1999           1998           1997
                                                                     ----           ----           ----
<S>                                                              <C>             <C>            <C>
           REVENUES:
              Saucony............................................$  132,275      $  86,651      $   78,771
              Other..............................................    22,416         19,159          15,191
                                                                 ----------      ---------      ----------
                                                                 $  154,691      $ 105,810      $   93,962
                                                                 ==========      =========      ==========
           PRE-TAX INCOME (LOSS):
              Saucony............................................$   18,965      $   5,497      $   (2,946)
              Other Products.....................................    (1,376)          (259)           (854)
                                                                 -----------     ----------     -----------
              Total segment pre-tax income (loss)................    17,589          5,238          (3,800)
              Provision for income taxes.........................     7,194          1,629             355
              Minority interest..................................        76             30            (123)
                                                                 ----------      ---------      -----------

           Net income (loss) from continuing operations..........$   10,319      $   3,579      $   (4,032)
                                                                 ==========      =========      ===========

           ASSETS:
              Saucony............................................$   61,584      $  53,906      $   51,974
              Other Products.....................................    15,597         15,973           9,342
                                                                 ----------      ---------      ----------
                                                                 $   77,181      $  69,879      $   61,316
                                                                 ==========      =========      ==========
           DEPRECIATION AND AMORTIZATION:
              Saucony............................................$    1,516      $   1,606      $    1,493
              Other Products.....................................       346            230             101
                                                                 ----------      ---------      ----------
                                                                 $    1,862      $   1,836      $    1,594
                                                                 ==========      =========      ==========
           INTEREST, NET:
              Saucony............................................$      228      $     252      $      568
              Other Products.....................................       455            455             249
                                                                 ----------      ---------      ----------
                                                                 $      683      $     707      $      817
                                                                 ==========      =========      ==========
           COMPONENTS OF INTEREST, NET
              Interest expense...................................$      729      $     733      $      888
              Interest income....................................        46             26              71
                                                                 ----------      ---------      ----------
                Interest, net....................................$      683      $     707      $      817
                                                                 ==========      =========      ==========
</TABLE>


18.    MAJOR CUSTOMER:
       --------------

       During 1999 and 1998,  the Company had one customer  that  accounted  for
       approximately  15% and 13% of  gross  sales,  respectively.  For 1997 the
       Company did not have a customer account for more than 10% of gross sales.

19.    ACQUISITIONS:
       ------------

       SAUCONY S.P. PTY. LTD.

       On  April  2, 1998,   Hyde   International   Services,   Limited   ("Hyde
       International"),  a wholly-owned subsidiary of the Company,  acquired all
       of  the  outstanding shares of  Saucony S.P.  Pty. Ltd.'s  capital  stock
       (other than  those  shares  already  owned by Hyde  International)  for a
       nominal amount.  Saucony S.P.  Pty.  Ltd. is currently in  the process of
       liquidation.

       MERLIN

       On February  17,  1998,  the Company  acquired  substantially  all of the
       assets of Merlin Materials,  Inc. ("Merlin"),  a manufacturer of high-end
       titanium  road  and  mountain  bicycle  frames,  for  $644 in  cash.  The
       acquisition   was  accounted  for  as  a  purchase.   Goodwill  of  $120,
       representing  the  excess of the  acquisition  cost  over the net  assets
       acquired, is being amortized on a straight-line basis over 15 years.

       The Merlin purchase agreement included provisions for additional purchase
       price  consideration  in the form of  deferred  contingent  amounts.  The
       earnout payouts are subject to annual maximum earnout amounts for each of
       the three  fiscal  years,  covered  by the  Agreement,  and a  cumulative
       aggregate  earnout amount not to exceed  $1,200.  As of December 31, 1999
       and  January  1,  1999,  the  Company  had not  incurred  any  additional
       obligations under the deferred contingent payout clause.

       REAL DESIGN

       On August 11, 1998, Quintana Roo, Inc., a wholly-owned  subsidiary of the
       Company, acquired substantially all of the assets of Real Product Design,
       Inc. ("Real"), a manufacturer of bicycle components for $240 in cash. The
       acquisition was accounted for as a purchase.

       The Real purchase agreement included  provisions for additional  purchase
       price  consideration  in the  form of  contingent  earnout  amounts.  The
       cumulative  earnout  amount  cannot  exceed  approximately  $380.  As  of
       December  31, 1999 and January 1, 1999,  the Company had not incurred any
       additional obligations under the deferred contingent payout clause.

20.    CONCENTRATION OF CREDIT RISK:
       ----------------------------

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

       The  Company  maintains  cash and cash  equivalents  with  various  major
       financial   institutions.   Cash  equivalents   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 F.D.I.C. 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 41% of
       the  Company's  gross trade  receivables  balance was  represented  by 17
       customers  at  December  31,  1999,   which  exposes  the  Company  to  a
       concentration of credit risk.


21.    FAIR VALUE OF FINANCIAL INSTRUMENTS:
       -----------------------------------

       The carrying value of cash, cash equivalents, receivables, long-term debt
       and other notes payable  approximates  fair value.  The Company  believes
       similar terms for current long-term debt and other notes payable would be
       attainable.  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 other than the functional currency.  The fair value of the
       Company's  foreign  currency  exchange  contracts is  estimated  based on
       current foreign exchange rates. At December 31, 1999 and January 1, 1999,
       the notational value of the Company's foreign currency exchange contracts
       to  purchase  U.S.  dollars  was $750 and $735,  respectively.  Gains and
       losses on forward  exchange  contracts  are deferred  and offset  against
       foreign currency exchange gains and losses on the underlying hedged item.
       At December  31, 1999 and  January 1, 1999,  estimated  fair value of the
       Company's financial instruments approximated the carrying value.


22.    COMPREHENSIVE INCOME:
       --------------------

       As  defined  in  Financial   Accounting   Standard  No.  130,  "Reporting
       Comprehensive  Income," (SFAS 130)  comprehensive  income encompasses net
       income and other  components  of  comprehensive  income that are excluded
       from  net  income  under  Generally   Accepted   Accounting   Principles,
       comprising items previously  reported  directly in stockholders'  equity.
       SFAS  130  limits  the  excluded  components  to the  following:  foreign
       currency translation  adjustments,  minimum pension liability adjustments
       and unrealized gains and losses on certain investments in debt and equity
       investments classified as available-for-sales securities.

       The following table sets forth  comprehensive  income for the years ended
       December 31, 1999, January 1, 1999 and January 2, 1998 (in thousands):
<TABLE>
<CAPTION>


                                                                          1999             1998          1997
                                                                          ----             ----          ----

<S>                                                                    <C>            <C>            <C>
              Net income (loss)........................................$  10,319      $   3,579      $  (4,330)
                                                                       ---------      ---------      ----------

              Other comprehensive income (loss):
                Foreign currency translation adjustment................$     (36)     $    (111)     $    (183)
                Income tax expense (benefit) related to
                  other comprehensive income (loss)....................      (30)           (32)             5
                Reclassification adjustment, net of tax................       57             27             --
                                                                       ---------      ---------      ---------
              Other comprehensive income (loss), net
                of tax.................................................$      51      $     (52)     $    (188)
                                                                       ---------      ----------     ----------

              Comprehensive income (loss)..............................$  10,370      $   3,527      $  (4,518)
                                                                       =========      =========      ==========
</TABLE>


23.    QUARTERLY INFORMATION:
       ---------------------
<TABLE>
<CAPTION>

                                                                                   (Unaudited)
                                                                     (in thousands, except per share amounts)


              1999                                                Quarter 1    Quarter 2    Quarter 3    Quarter 4
              ----                                                ---------    ---------    ---------    ---------

<S>                                                             <C>          <C>          <C>           <C>
              Net sales.........................................$   42,406   $   37,706   $   43,454    $   30,492
              Gross profit......................................    15,421       14,137       17,371        11,895
              Net income........................................     3,333        2,257        3,094         1,635
              Earnings per share:
                Basic...........................................      0.54         0.36         0.49         0.26
                Diluted.........................................      0.52         0.34         0.47         0.25
</TABLE>
<TABLE>
<CAPTION>


              1998 (1)                                            Quarter 1    Quarter 2    Quarter 3    Quarter 4
              ----                                                ---------    ---------    ---------    ---------

<S>                                                             <C>          <C>          <C>           <C>
              Net sales.........................................$   29,624   $   26,562   $   26,056    $   22,832
              Gross profit......................................     9,973       10,082        9,250         8,146
              Net income........................................       989          689          818         1,083
              Earnings per share:
                Basic...........................................      0.16         0.11         0.13         0.17
                Diluted.........................................      0.16         0.11         0.13         0.17


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

       (1)Quarterly net income for each of the four quarters of fiscal 1998 have
       been  restated.  The earnings  restatement  had no impact on earnings per
       share.
</TABLE>

       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 1999 and fiscal 1998.


<TABLE>


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

              For the Years Ended December 31, 1999, January 1, 1999 and January 2, 1998

                                            (dollars in thousands)

<CAPTION>


                                                                                 Additions
                                                                     Balance     charged to    Deductions     Balance
                                                                    beginning    costs and        from          end
                                                                     of year      expenses      reserve       of year
                                                                     -------      --------      -------       -------

<S>                                                               <C>            <C>           <C>           <C>
Year ended December 31, 1999:

  Allowance for doubtful accounts and discounts...................$   1,880      $  7,151      $   5,497     $   3,534

Year ended January 1, 1999:
  Allowance for doubtful accounts and discounts...................$   2,032      $  4,908      $   5,060     $   1,880

Year ended January 2, 1998:
  Allowance for doubtful accounts and discounts...................$   1,234      $  5,475      $   4,677     $   2,032

</TABLE>


                              EXHIBIT INDEX

Exhibit
Number                          Description


3.1       Restated Articles of Organization, as amended, of the Registrant
          are incorporated herein by reference to the Registrant's current
          report on Form 8-K dated May 21, 1998.                              *

3.2       By-Laws, as amended, of the Registrant are incorporated
          herein by reference to Exhibit 3.3 to the Registrant's
          Registration Statement on Form S-2, as amended
          (File No. 33-61040) (the "Form S-2").                               *

10.1      Credit Agreement between the Registrant and State Street
          Bank and Trust Company dated August 31, 1998 incorporated
          herein by reference to Exhibit 10.2 to the Registrant's Quarterly
          Report on Form 10-Q for the fiscal quarter ended October 2, 1998.   *

10.2      Amendment dated March 15, 1999 to the Credit Agreement
          between the Registrant and State Street Bank and Trust
          Company, dated August 31, 1998, incorporated herein by
          reference to Exhibit 10.2 to the Registrant's Annual Report
          on Form 10-K for the year ended January 1, 1999.                    *

10.3**    1982 Employee Stock Option Plan, as amended, is
          incorporated herein by reference to Exhibit 10.7 to the Form S-2    *

10.4**    1993 Equity Incentive Plan, as amended, is incorporated herein
          by reference to Exhibit 10.8 to the Registrant's Annual Report
          on Form 10-K for the fiscal year ended January 2, 1998.             *

10.5**    Amendment No. 3 to 1993 Equity Incentive Plan

10.6**    VP Bonus Plan is incorporated herein by reference to
          Exhibit 10.19 to the Form S-2                                       *

10.7**    1993 Director Option Plan is  incorporated  herein by reference to
          Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
          the quarter ended April 2, 1993, as amended (the "1993
          Form 10-Q")                                                         *

21        Subsidiaries of the Registrant

23.1      Consent of PricewaterhouseCoopers LLP

23.2      Consent of Grant Thornton

27        Financial Data Schedule for the fiscal year ended December 31, 1999.


*         Incorporated herein by reference.

**        Management  contract or  compensatory  plan or  arrangement  filed
          herewith in response to Item 14(a)(3) of the  instructions to Form
          10-K.