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 January 1, 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. [ ]

The aggregate market value of voting and non-voting stock held by non-affiliates
of the registrant, as of March 26, 1999, was approximately $39,848,000 (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 26,
1999 was 2,679,027 and 3,549,905, 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                          Part III
Stockholders of the Registrant to
be  held  on May  20,  1999,  to be  
filed  with  the  Securities  and  Exchange
Commission.


<PAGE>


PART I


ITEM 1 - BUSINESS

OVERVIEW

Saucony,  Inc.  and its  subsidiaries  (together,  "Saucony"  or the  "Company")
design, develop, manufacture and market (i) a broad line of performance-oriented
athletic shoes for adults under the  Saucony(R)  brand name,  (ii)  high-quality
bicycles,  bicycle  frames  and  component  parts  under  the  Quintana  Roo(R),
Merlin(R) and Real Design(R)  names,  (iii)  athletic  apparel under the Hind(R)
brand name and (iv) shoes for coaches and officials under the Spot-Bilt(R) name.
The Company's  Saucony  athletic  footwear  products  include  running,  women's
walking,  cross training and outdoor trail shoes. The following table sets forth
the approximate contribution to net sales (in dollars and as a percentage of net
sales)  attributable  to the  Company's  Saucony  product line and other product
lines for the periods and geographic  areas  indicated.  "Other" consists of the
Quintana Roo, Real Design, Merlin, Hind and Spot-Bilt businesses,  together with
sales of the Company's  products at six retail factory  outlets  operated by the
Company,  and sales of other  branded  products at the  Company's  subsidiary in
Australia,  which  ceased  operations  in July  1998  and is in the  process  of
liquidation.
<TABLE>
                                                                           Net Sales
<CAPTION>

                                                                     (dollars in thousands)

                                        Fiscal 1998                         Fiscal 1997                            Fiscal 1996     
                             -----------------------------       -------------------------------       -----------------------------
                                 Sales     Sales     Co.            Sales      Sales       Co.            Sales       Sales     Co.
                                   $         %        %               $          %          %               $           %         %

   Saucony
<S>                          <C>              <C>                <C>              <C>                  <C>               <C>
       Domestic              $   67,774       79%                $   56,050       71%                  $    54,445       69%
       International             18,558       21%                    22,580       29%                       24,366       31%
                             ----------    ------                ----------    ------                  -----------   -------
       Total                 $   86,332      100%      82%       $   78,630      100%        84%       $    78,811      100%     86%
                             ----------    ------                ----------    ------                  -----------   -------

   Other
       Domestic              $   15,590       83%                $    9,552       64%                  $     5,791       46%
       International              3,152       17%                     5,429       36%                        6,739       54%
                             ----------    ------                ----------    ------                  -----------   -------
       Total                 $   18,742      100%      18%       $   14,981      100%        16%       $    12,530      100%     14%
                             ----------    ------   ------       ----------    ------    -------       -----------   -------  ------

   Grand Total               $  105,074               100%       $   93,611                 100%       $    91,341              100%
                             ==========             ======       ==========              =======       ===========            ======
</TABLE>



Saucony Brand

The Company sells  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. The Company assembles a large portion of
its Saucony footwear sold in the United States at its manufacturing  facility in
Bangor,  Maine,  largely with components sourced from independent  manufacturers
located  overseas.  The Company  believes that  assembly at its Bangor  facility
assists in timely and flexible product delivery in the domestic market.

Saucony products are designed, developed,  manufactured,  distributed,  marketed
and ultimately sold to athletes who who have a high  participation rate in their
sport of choice.  The  Company  calls that  "Loyal to the  Sport".  The  Company
believes  that that  these  consumers  are more  brand  loyal than those who buy
athletic  footwear for casual use. The Company has several  different  offerings
within each Saucony brand category.  These offerings have different  designs and
features, resulting in different cushioning,  stability, support characteristics
and prices.

The Company builds a variety of technical  features into its shoes.  The Company
has been focused for many years on the applications of biomechanical  technology
to the design  process.  This helps  drive the  distinctive  "fit and feel" that
Saucony  products  are known for.  Research  and  Development  is  charged  with
constantly  finding  new ways to apply the  equity in  Saucony's  "famous  ride"
throughout the product line.

Most of the Company's technical running and other athletic shoes incorporate the
Company's  GRID System,  a  multi-patented  and  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 and thereby simultaneously to maximize shock absorption and minimize
rear foot motion.  First  introduced  in 1991,  the GRID system has evolved into
many  different  applications.  The latest,  4D GRID,  will be  available in the
United States marketplace  beginning in mid-April of 1999. This state-of-the-art
product  will  retail  for $140 and is  anticipated  to add high  visability  to
Saucony's technical running line.

The Company  designs and markets  separate  lines for men and women  within most
Saucony product  categories.  The Company currently sells approximately the same
percentage of Saucony  shoes to men and women.  The  suggested  domestic  retail
prices for most  Saucony  footwear  products  are in the range of $40 to $85 per
pair, with the Company's top-of-the-line running shoes having suggested domestic
retail prices of up to $140 per pair.

The Company  designs its Saucony  cross  training,  women's  walking and outdoor
trail  shoes  with  many of the same  performance  features  and "fit and  feel"
characteristics as are found in Saucony running shoes. Currently,  the Company's
most popular non-running athletic shoe is a women's performance walking shoe.

In 1998, the Company  reintroduced  a popular model of the Saucony  running line
from 1981 called the Jazz. Renamed the Jazz Original, this product gained a wave
of  popularity  due to the style trend toward  "retro"  products in footwear and
apparel.  The Jazz  Original  program has  assisted  Saucony in gaining  greater
market  share among the  under-25  year old athletic  footwear  buyer.  This has
traditionally  been a challenge  for the Company,  but this popular  product may
serve to be a "door  opener"  to  greater  visibility  and sales of the  broader
Saucony brand offering with this very large and influential consumer segment.

The Company believes that a line of athletic apparel bearing the Saucony name is
supportive of its athletic  footwear products and enhances the visibility of the
Saucony  brand.  Saucony  markets  apparel under both the Dave Scott and Saucony
labels.  These products carry the same  commitment to quality and performance as
the Company's  footwear line. The Dave Scott line is an upscale  multi-sport and
triathlon  collection,  while  the  Saucony  apparel  line  is  targeted  at the
mainstream running consumer.


Other Products

Hind.  In  December  1996,  the Company  purchased  the  trademarks  and related
intellectual property of Hind, Inc., a performance athletic apparel company. The
Company distributes a full line of technical fiber garments for use in a variety
of sports.

Quintana Roo. The Company  manufactures and distributes the Quintana Roo line of
triathlon  bicycles,  road  bicycles,  and  wet  suits,  together  with  bicycle
component  parts,  through  high-end  bicycle  retail stores and sporting  goods
stores geared to tri-athletes.

Factory Outlet Stores. The Company operates six retail factory outlet stores. To
avoid competing  against its customers'  retail outlets,  the Company  generally
limits the items  offered at these  stores to products  with  cosmetic  defects,
discontinued  merchandise and certain  slow-moving  products.  The Company sells
Saucony,  Hind, Spot-Bilt and Quintana Roo products at these outlets, as well as
athletic accessory goods of third parties.

Merlin.  In February 1998, the Company acquired  substantially all of the assets
of  Merlin  Materials,  Inc.  The  Company  manufactures  and  distributes  high
performance titanium bicycles and frames under the Merlin trademark.

Spot-Bilt.  The Company offers  Spot-Bilt  shoes for coaches and  officials.  In
addition,  the Company has licensed the Spot-Bilt name and logo to a third party
that distributes youth shoes for field sports.

Real  Design.  Acquired in August  1998,  "Real"  designs  and  markets  bicycle
components for the mid to high end price range. Real sells through  distributors
worldwide under the Real Design brand name.


Product Development

The Company believes that the technical performance (i.e., comfort,  support and
stability  experienced  by the athlete) of its Saucony  footwear is important to
purchasers  of its  products.  The  Company  uses  consulting  services  of such
professionals as podiatrists,  orthopedists,  athletes,  trainers and coaches as
part of its Saucony product development  program.  The Company maintains a staff
of 17 persons located in Peabody,  Massachusetts to undertake continuing product
development and design.  During the years ended January 1, 1999, January 2, 1998
and January 3, 1997, the Company expended $1,681,000, $1,438,000 and $1,417,000,
respectively, in connection with its product development programs, most of which
related to Saucony products.


SALES AND MARKETING

Saucony Brand. The Company's Saucony athletic footwear products are sold at more
than  5,000  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,  Athlete's Foot, The Sports  Authority,  Road Runner's
Sports,  Foot Action and Just For Feet. The Company  maintains a corporate sales
team that is  directly  responsible  for the sales  activity  in its  largest 48
accounts.  The Company also sells its footwear and apparel in the United  States
through  13  independent   manufacturer   agents  whose   organizations   employ
approximately 44 sales representatives. The Company's Websites (saucony.com) and
(sock-a-knee.com)  receive thousands of "hits" weekly from consumers looking for
new  product  profiles,  race  and  event  data,  as  well  as  general  Saucony
information.

The Company sells its Saucony products outside the United States in 26 countries
through 16  distributors  located  throughout  the world,  including  a Canadian
subsidiary  in  which  the  Company  holds  an 85%  ownership  interest  and the
Company's wholly-owned subsidiaries based in the United Kingdom, Germany and the
Netherlands.

To accommodate its customers'  requirements  and plan for its own product needs,
the  Company  employs a futures  orders  program  for its  Saucony  and  bicycle
products  under  which the Company  takes  orders well in advance of the selling
season for a particular  product and commits to ship the product to the customer
in time for the selling season.  The Company  affords  customers price discounts
and extended payment terms in respect of such advance orders.

Saucony engages in various advertising and promotional programs.  The main media
vehicles  used are  magazines and  television.  The Company  employs many sports
marketing  initiatives to drive brand awareness and image 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,  the Company uses  account-specific  and in-store promotions,
such as athlete  appearances,  special events,  gift with purchase  programs and
discounts for store employee purchases of Company products.

Although  most of the Company's  advertising  and  promotional  programs for its
Saucony brand are directed  towards  ultimate  consumers,  the Company  promotes
these  products  to the trade  through  attendance  at trade  shows and  similar
events.  The Company  employs an  advertising  program under which it reimburses
participating retailers for a portion of the costs incurred by such retailers in
advertising the Company's Saucony products.

The Company's  advertising of non-Saucony  products  includes  advertisements in
magazines and product  promotion  through  attendance at trade shows and similar
events.

Backlog; Seasonality; Distribution. The Company's backlog of unfilled orders was
approximately  $55.1  million at January 1, 1999 and $42.0 million at January 2,
1998.  The  Company  expects  that all of its backlog at January 1, 1999 will be
shipped in fiscal 1999. While the Company has 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.

The  Company is subject  to  seasonality  in its  product  sales  because of the
different  selling seasons for various products and variability of weather.  The
Company  distributes  its Saucony and Hind products from its owned  warehouse in
Massachusetts  and a leased warehouse in Canada,  as well as through third party
operated  warehouse  facilities  located in California,  the Netherlands and the
United  Kingdom.  The  Company  distributes  its  Quintana  Roo and Real  Design
products  through its leased warehouse in California and Merlin products through
its leased warehouse in Massachusetts.


MANUFACTURING

The Company assembles most of its domestically  sold Saucony technical  footwear
at its  manufacturing  facility in Maine,  largely with components  sourced from
independent  manufacturers located overseas.  Independent overseas manufacturers
produce the balance of the Company's  Saucony  products and all of the Company's
Spot-Bilt  products.  Quintana Roo and Merlin  products are  manufactured by the
Company in California and Massachusetts,  respectively. Bicycle components under
the Real  Design  brand  name are  principally  manufactured  in Taiwan by third
parties.  The Company  outsources the production of most of its Hind products to
manufacturers in the United States.

The overseas  manufacturers  that supply  products and components to the Company
are  located  in the Far  East,  primarily  in  China,  but also in  Taiwan  and
Thailand. The Company seeks to develop additional overseas manufacturing sources
from  time to  time,  both to  increase  its  sourcing  capacity  and to  obtain
alternative  sources of supply. All products and components  produced by foreign
suppliers are manufactured in accordance with product  specifications  furnished
by the Company. The Company carefully monitors foreign manufacturing  operations
and imported  products and  components to assure  compliance  with the Company's
design, production and quality requirements.

Raw materials required for the manufacture of the Company's products,  including
leather,  rubber,  nylon,  titanium,  aluminum and other fabrics,  are generally
available in the country in which the products are manufactured. The Company and
its suppliers  have not  experienced  any  difficulty  in  satisfying  their raw
material needs to date.

The  number of foreign  suppliers  and the  percentage  of the  Company's  total
foreign production requirements produced by each such supplier vary from time to
time.  During  fiscal 1998,  the Company  purchased  footwear  products  from 24
overseas  suppliers.  One  such  supplier,   located  in  China,  accounted  for
approximately 49% of the Company's total overseas  footwear  purchases by dollar
volume.

The Company is subject to the potential  risks of a business  involving  foreign
suppliers,  such as government  regulation of fund transfers,  export and import
duties and political and labor instability.  The Company has not been materially
affected  by any of these  factors to date.  Substantially  all  purchases  from
foreign  suppliers to date have been  denominated  in United  States  dollars in
order to reduce the Company's risk from currency fluctuations.

Although the Company has no long-term manufacturing agreements with its overseas
suppliers and competes with other  athletic shoe  (including  companies that are
much larger than the Company) for access to  production  facilities,  management
believes that the Company's  relationships with its footwear and other suppliers
are  strong  and that it has the  ability to  develop,  over  time,  alternative
sources  in  various  countries  for  footwear,  footwear  components  and other
products obtained from its current suppliers.  However, in the event of a supply
interruption,  the  Company's  operations  could  be  materially  and  adversely
affected if a substantial  delay occurred in locating and obtaining  alternative
sources of supply.


TRADE POLICY

The  Company's  practice of sourcing  products  and  components  overseas,  with
subsequent  importation  into the United States,  exposes it 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, the Company imports significant amounts of product and components
from China.  The United States provides China with  most-favored  nation ("MFN")
status,  allowing  China to receive  the same tariff  treatment  that the United
States  extends to its "most favored"  trading  partners.  Notwithstanding  this
current  policy,  Congress  could seek to revoke MFN for China or condition  its
renewal on factors such as China's human rights accord.  Any cancellation of MFN
status with China would  significantly add to the Company's cost of goods and/or
restrict the supply of product from that country.

The Company is unable to predict whether additional U.S. customs duties,  quotas
or other  restrictions  may be imposed in the future upon the importation of its
products and/or components as a result of any of the matters discussed above, or
because  of similar  foreign  government  actions.  Any such  occurrences  might
adversely affect the sales or profitability of the Company, possibly materially.


COMPETITION

Competition  is intense in the markets in which the Company  sells its products.
The Company competes 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
those of the  Company.  The  principal  competitors  for the  Company's  Saucony
products are Nike,  New Balance and ASICS.  The  principal  competitors  for the
Company's Hind products are Nike, Pearl Izumi and TYR. The principal competitors
for the Company's  Quintana Roo and Merlin products are Cannondale and Trek. The
Company believes that the key competitive  factors as to for all of its products
are styling, durability,  technical performance,  product identification through
promotion,  brand  awareness  and price.  Customer  support  services and E.D.I.
(Electronic  Data  Interchange)  are also  important  competitive  factors.  The
Company believes that it is competitive in all of these areas.


TRADEMARKS

The Company utilizes  trademarks on nearly all of its products and believes that
having  distinctive  marks is an important  factor in marketing  its goods.  The
Company has  registered  its  Saucony(R),  Spot-Bilt(R),  G.R.I.D.(R),  Quintana
Roo(R),  Merlin(R) and Hind(R) marks,  among others,  in the United States.  The
Company  has  also  registered  some of  these  marks  in a  number  of  foreign
countries. Although the Company has a foreign trademark registration program for
selected  marks,  no assurance  can be given that it will be able to register or
use such marks in each foreign country in which registration is sought.



EMPLOYEES

At January 1, 1999, the Company employed approximately 471 people worldwide: 409
in the United States and 62 at foreign locations.  The Company believes that its
employee relations are excellent.  The Company has never experienced a strike or
other work  stoppage.  There were  approximately  25 employees in the  Company's
Massachusetts warehouse who were represented by a union at January 1, 1999. None
of the  Company's  other  employees are  represented  by a union or subject to a
collective bargaining agreement.


ITEM 2 - PROPERTIES

The Company's general and executive  offices and its main distribution  facility
are  located  in  Peabody,  Massachusetts,  and are owned by the  Company.  This
facility consists of approximately  175,000 square feet, of which 145,000 square
feet is warehouse space.

The Company owns a facility in Bangor,  Maine,  containing  approximately 82,000
square feet of space, substantially all of which is used for the assembly of the
Company's Saucony running shoes,  mostly with imported  components.  The Company
also owns an inactive  warehouse in East Brookfield,  Massachusetts,  containing
approximately 100,000 square feet.

The Company also leases  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 is leased in Boulder, Colorado.


ITEM 3 - LEGAL PROCEEDINGS

The Company is  involved in routine  litigation  incident  to its  business.  In
management's  opinion,  none of these  proceedings  will have a material adverse
effect on the Company's financial position, operations or cash flows.



<PAGE>


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

Not applicable.


Executive Officers of the Registrant


The executive officers of the Company are as follows:

     Name                     Age                      Position


John H. Fisher                   51          President, Chief  Executive Officer
                                             and Director


Charles A. Gottesman             48          Executive Vice President,
                                             Chief Operating Officer, Treasurer
                                             and Director

Terence P. Chin                  43          Senior Vice President,
                                             Chief Financial Officer


Arthur E. Rogers, Jr.            36          President, Saucony North America


Wolfgang Schweim                 46          President, Saucony International


Kenneth W. Graham                45          Senior Vice President,
                                             Research & Development/Textiles


Roger P. Deschenes               40          Vice President, Controller and
                                             Chief Accounting Officer


Daniel J. Horgan                 43          Vice President, Operations


Andrew M. James                  42          Vice President, MIS


John H. Fisher has served as Chief Executive  Officer of the Company 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 Executive Vice President and Chief  Operating
Officer of the  Company  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.

Terence P. Chin joined the Company in March 1999 as Senior  Vice  President  and
Chief  Financial  Officer.  Prior  to  joining  the  Company,  Mr.  Chin  was an
independent   consultant  and  from  1996  to  1998  was  Treasurer  of  Lexmark
International,  Inc., a manufacturer of computer printers and supplies. Mr. Chin
was also Assistant  Treasurer of Joseph E. Seagram & Sons,  Inc., a manufacturer
of  distilled  spirits  and  beverages,   and  Merck,   Inc.,  a  pharmaceutical
manufacturer, from 1993 to 1995 and 1989 to 1992, respectively.

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

Wolfgang  Schweim became the President of Saucony  International in January 1998
after serving as President of the Company's 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 shoe manufacturers including Nike International,  Le Coq Sportif and Adidas
AG.

Kenneth   W.   Graham   became   Senior   Vice   President   of   Research   and
Development/Textiles  in January 1998 after serving as Senior Vice  President of
Research  and  Development/Manufacturing  since 1996.  Prior to that Mr.  Graham
served as Vice President of Research and  Development/Manufacturing.  Mr. Graham
joined  the  Company in 1984 and has served as  Manager  and Vice  President  of
Research and  Development.  Prior to joining the Company,  Mr. Graham worked for
seven years with New Balance Athletic Shoe, Inc.

Roger P. Deschenes has served as Vice President,  Controller  since August 1997,
after having served as Controller and Chief Accounting Officer from October 1995
to August 1997. Mr. Deschenes joined the Company 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  the  Company  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 for the Company from 1992 to 1994.

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



<PAGE>




PART II


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

The Company's  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 January 1, 1999
<S>                                                                       <C>             <C>             <C>           <C>     
      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



      Fiscal Year ended January 2, 1998

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

</TABLE>


There were 310 and 301  stockholders  of record of the Class A Common  Stock and
Class B Common Stock, respectively, on March 26, 1999.

The Company does not  anticipate  paying any cash  dividends in the  foreseeable
future  on the  shares  of Class A Common  Stock  or Class B Common  Stock.  The
Company  currently intends to retain future earnings to fund the development and
growth of its business.  The Company's 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.


<PAGE>

<TABLE>

ITEM 6 - SELECTED FINANCIAL DATA
Selected Income Statement Data (3)
<CAPTION>
                                                                                     (in thousands; except share amounts)

                                                                Year            Year           Year           Year            Year
                                                               Ended           Ended          Ended          Ended           Ended
                                                              Jan. 1,         Jan. 2,        Jan. 3,        Jan. 5,        Dec. 30,
                                                                1999            1998           1997           1996            1994

<S>                                                         <C>             <C>             <C>            <C>             <C>      
Revenues                                                    $  105,810      $  93,962       $  91,879      $  78,840       $  83,541

Operating income (loss)                                          5,741         (1,935)          2,345            491           3,881

Income (loss) from continuing operations                         3,579         (4,032)          1,349            522           2,086

Discontinued operations: (1)
   Income (loss) from discontinued operations                       --           (394)           (243)           863             851
   Gain on disposal of Brookfield business                          --             96              --             --              --

Net income (loss)                                                3,579         (4,330)          1,106          1,385           2,937

Earnings per common share  - basic (2)
   Income (loss) from continuing operations                  $    0.57      $    (0.65)     $   0.22       $   0.08        $    0.32
   Income (loss) from discontinued operations                     0.00           (0.05)        (0.04)          0.14             0.14
                                                             ---------      -----------     ---------      --------        ---------
Net income (loss) per common share - basic                   $    0.57      $    (0.70)     $   0.18       $   0.22        $    0.46
                                                             =========      ===========     ========       ========        =========

Earnings per common share - diluted (2)
   Income (loss) from continuing operations                  $    0.56      $    (0.65)     $   0.22       $   0.08        $    0.32
   Income (loss) from discontinued operations                     0.00           (0.05)        (0.04)          0.14             0.14
                                                             ---------      -----------     ---------      --------        ---------
Net income (loss) per common share - diluted                 $    0.56      $    (0.70)     $   0.18       $   0.22        $    0.46
                                                             =========      ===========     ========       ========        =========

Weighted average common shares and
   equivalents outstanding (2)                                   6,373          6,240           6,268          6,244           6,446

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


Selected Balance Sheet Data(3)
                                                               Jan. 1,         Jan. 2,        Jan. 3,        Jan. 5,        Dec. 30,
                                                                1999            1998           1997           1996            1994

Current assets                                               $  59,142      $  50,239       $  58,132      $  58,984       $  61,621

Current liabilities                                             18,840         13,315          13,963         14,728          15,657

Working capital                                                 40,302         36,924          44,169         44,256          45,964

Total assets                                                    69,879         61,316          70,752         69,265          77,082

Long-term debt and capitalized lease
   obligations, net of current portion                             559            771           4,893          4,205          11,922

Stockholders' equity                                            48,250         45,072          49,484         48,160          46,754

---------------------------
(1) See Note 14 regarding discontinued operations.

     (2) See Notes 1 and 12  regarding  the  adoption of  Statement of Financial
Accounting  Standards  No. 128 (SFAS 128) in fiscal 1997.  SFAS 128 requires the
restatement of all previously reported per share amounts.

(3) See Note 24 for details of restatement.

</TABLE>








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

This Annual Report on Form 10-K contains "forward-looking statements" within the
meaning  of the  Private  Securities  Litigation  Reform  Act of 1995.  For this
purpose,  any statements  contained herein that are not statements of historical
fact may be  deemed  to be  forward-looking  statements.  Without  limiting  the
foregoing, the words "believes,"  "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements.

<TABLE>
<CAPTION>

          Highlights

                                                                               Percent Change Increase (Decrease)
                                                                             1998 vs. 1997            1997 vs. 1996

<S>                                                                              <C>                       <C> 
           Net sales                                                             12.2%                     2.5%
           Gross profit                                                          24.4                      1.5
           Selling, general and administrative                                    7.8                      8.1

</TABLE>
<TABLE>

<CAPTION>

                                                                                          $ Change
                                                                                       (in thousands)


<S>                                                                         <C>                       <C>        
           Operating income                                                 $     7,676               $   (4,280)
           Income before income taxes                                             9,038                   (5,782)
           Net income                                                             7,909                   (5,436)


</TABLE>
<TABLE>
<CAPTION>

                                                                                      Percent of Net Sales
                                                                              1998            1997           1996


<S>                                                                           <C>             <C>            <C>  
           Gross profit                                                       35.6%           32.2%          32.5%
           Selling, general and administrative expenses                       30.9            32.2           30.5
           Operating income (loss)                                             5.5            (2.1)           2.6
           Income (loss) before income taxes                                   5.0            (4.3)           2.2
           Net income                                                          3.4            (4.6)           1.2

</TABLE>

Consolidated Net Sales

Net sales  increased  12% to  $105,074,000  in fiscal 1998 from  $93,611,000  in
fiscal 1997. Sales increased 15% adjusting for the unfavorable impact of foreign
exchange rate changes in 1998.  Sales in 1997 of $93,611,000 were 2% higher than
in 1996.  Sales  increased  1%  adjusting  for the  favorable  impact of foreign
exchange rate changes in 1997.

On a geographic basis, U.S. sales increased $17,762,000 or 27% to $83,364,000 in
fiscal 1998. International sales decreased $6,299,000 or 22% to $21,710,000.  At
constant exchange rates,  international  sales decreased 14% in 1998. U.S. sales
in fiscal 1997 increased 9% to $65,602,000. International sales decreased 10% to
$28,009,000 in fiscal 1997 from $31,105,000 the prior year. At constant exchange
rates, international sales decreased 14% in 1997.




Saucony Brand Segment (dollars in thousands)

                        1998               1997                      1996
                        ----               ----                      ----

   Net Sales       $86,332 (+10%)      $78,630 (-0%)               $78,811

Worldwide  net sales of branded  Saucony  footwear and apparel  increased 10% to
$86,332,000  in 1998  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 the Company's domestic product mix resulted
in an 8% decline in overall selling prices compared to 1997.

Domestic net sales increased 21% to  $67,774,000.  Domestic sales benefited from
the introduction of Jazz Originals in the second quarter of 1998 which accounted
for 21% of domestic footwear unit volumes for the year.

International  net sales  decreased 18% to  $18,558,000 in fiscal 1998 primarily
due to lower sales in Australia and reduced  distributor unit volumes  partially
offset by higher direct Company sales in Canada and Western Europe.

Worldwide net sales of the Company's  Saucony  products were marginally lower in
fiscal 1997  compared to the  previous  year due to  decreased  unit volumes and
unfavorable  foreign currency exchange rates.  Branded Saucony sales in the U.S.
increased 3% in fiscal 1997 to $56,050,000  reflecting  higher  selling  prices,
and,  to a  lesser  extent,  increased  unit  volume.  International  net  sales
decreased 7% to  $22,580,000  compared to prior year due  primarily to decreased
footwear unit volume and currency  impacts,  offset in part by increased apparel
sales.

Other Products Segment (dollars in thousands)

                            1998                1997                     1996
                            ----                ----                     ----

    Net Sales          $18,742 (+25%)       $14,981 (+20%)             $12,530

The Other  Products  segment  consists of the Company's  Quintana Roo and Merlin
bicycles,  frames,  and Real Design bicycle  components;  Hind athletic apparel;
Spot-Bilt coaches shoes; and six Company-operated factory outlet stores. Each of
these  businesses  represent less than 10% of Company  revenues,  (which did not
meet the criteria for separate  disclosure in accordance  with SFAS 131) and, in
the aggregate, totaled 18% of Company revenues in fiscal 1998.

Other  Products  segment  sales  in the U.S.  increased  63% in  fiscal  1998 to
$15,590,000  reflecting  significantly  higher  revenues  in both  bicycles  and
related  products as well as higher sales of the Company's  Hind apparel  brand.
Year on year  growth  in  bicycles  and  related  products  revenues  were  also
favorably  impacted by the  acquisition of the Merlin  business in February 1998
and the subsequent acquisition of Real Design in August 1998.

Net sales of Other  Products  increased 20% to  $14,981,000  in fiscal 1997 from
$12,530,000 in fiscal 1996. Revenue increases that were recorded at Quintana Roo
and Hind were partially offset by decreased sales of non-Saucony  brand products
by the Company's Australian subsidiary.

Costs and Expenses

The  Company's  gross  margin  in  fiscal  1998 and 1997 was  35.6%  and  32.2%,
respectively.  The gross margin  improvement  in 1998 was favorably  impacted by
reduced levels of close-out goods and other product markdowns.  Gross margins in
1997 were  negatively  impacted  by  declines  in gross  margin  realized by the
Company's Australian  subsidiary on close-out sales during the fourth quarter of
1997 in addition to the inventory  write-down of $1,340,000  taken in the fourth
quarter of fiscal 1997.

For the 1998 fiscal  year,  the SG&A ratio  improved  1.3% to 30.9% of net sales
versus 32.2% in 1997. The improvement in the ratio resulted from cost management
on selling and administrative  expenses below the rate of sales growth, and by a
reduced  spending rate on advertising and  promotions.  In fiscal 1997, the SG&A
ratio  increased 1.7% over the 30.5% rate for 1996 due  principally to increased
information systems costs,  higher professional fees and payroll,  and increased
administrative  costs  attributable  to the  introduction  of Hind  apparel  and
continued investment at Quintana Roo.

No  non-recurring  charges  were  recorded in fiscal 1998.  In fiscal 1997,  the
Company  recorded a non-recurring  charge of $850,000  ($508,000  after-tax,  or
$0.08 per diluted share) to recognize the impairment of an inactive distribution
facility.

Also in fiscal  1997,  the  Company  wrote  down the  assets  of its  Australian
subsidiary  to  their  net  realizable  values.  This  resulted  in the  Company
recording  total  non-recurring  pre-tax  charges  of  $2,766,000  (or $0.44 per
share).  Inventory,  accounts  receivable  and other assets were written down by
$1,340,000,  $858,000 and $568,000,  respectively.  The inventory write-down was
included in cost of sales. In addition, the Company also recorded a deferred tax
valuation  allowance of $999,000  ($0.16 per diluted share) relating to the loss
carryforwards  of  the  Australian  subsidiary  which  are  not  expected  to be
realized.

Net  interest  expense  totaled  $707,000  and $817,000 in fiscal years 1998 and
1997,  respectively.  Interest expense decreased 13% in fiscal 1998 due to lower
average debt levels and, to a lesser  extent,  lower  interest rates compared to
fiscal 1997. In fiscal 1997, higher average  borrowings  compared to fiscal 1996
resulted in a net interest expense increase of 12%, or $87,000.

Income Before Taxes

     Segment                             1998      1997         1996
     ------                              ----      ----         ----

     Saucony Brand                    $ 5,497    $ (2,946)     $  947
     Other Products                      (259)       (854)      1,035
                                      --------    -------      -------
     Consolidated                     $ 5,238    $ (3,800)     $ 1,982
                                      =======     ========     =======

The Company evaluates  business  performance and the performance of key managers
based on profit or loss before  income taxes.  Consolidated  income before taxes
was $9,038,000  higher in fiscal 1998 compared to 1997. This  improvement can be
attributed  to  higher  income  in  the  domestic   Saucony  Brand  Segment  and
significantly reduced losses compared to fiscal 1997 related to the wind-down of
the Company's Australian subsidiary.  The Other Products Segment recorded a loss
before taxes of $259,000 in 1998 versus a loss of $854,000 in 1997. Underpinning
these  improved  results have been lower  Australian  and Hind related losses in
fiscal 1998 compared to fiscal 1997.


Income Taxes

The  provision  for income  taxes  increased to  $1,629,000  in fiscal 1998 from
$355,000 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.

The  provision  for income  taxes  increased  to  $355,000  in fiscal  1997 from
$325,000 in fiscal 1996 due to the deferred tax valuation  allowance recorded in
fiscal 1997 relating to foreign net operating loss  carryforwards  that were not
expected to be realized.  The  effective  tax rate  decreased by 7.1% to 9.3% in
fiscal 1997 from 16.4% the prior year due  principally to recording the deferred
tax valuation  allowance in fiscal 1997 and shifts in the composition of foreign
and domestic pre-tax income and losses.




Net Income

In 1998 net income was $3,579,000 compared to a net loss of $4,330,000 in fiscal
1997.  Diluted  earnings  per share was  $0.56  compared  to a loss of $0.70 per
diluted  share in fiscal 1997.  In fiscal 1996,  net income was  $1,106,000,  or
$0.18 per diluted share.


LIQUIDITY AND CAPITAL RESOURCES

As of  January  1,  1999,  the  Company's  cash  and  cash  equivalents  totaled
$5,495,000, an increase of $1,063,000 from January 2, 1998. The increase was due
primarily to net cash from  operating  activities  of  $2,446,000  and increased
borrowings against the Company's domestic credit facility,  offset by $1,257,000
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.
of $863,000,  the repurchase of shares of the Company's Common Stock of $611,000
and the  repayment of  $2,364,000  of long-term  debt.  The increase in accounts
receivable of $804,000, net of the provision for bad debt and discounts, was due
primarily  to increased  net sales of the  Company's  Saucony,  Hind and bicycle
products  in the  fourth  quarter  of fiscal  1998.  The  Company's  days  sales
outstanding for its accounts receivable decreased to 68 days in fiscal 1998 from
73 days in fiscal  1997.  Inventories  increased  $7,002,000  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 significant  increase in the Company's
backlog of unfilled  orders,  which is up 31% at January 1, 1999, as compared to
the backlog at January 2, 1998.  As a  consequence  of the fiscal 1998  year-end
inventory  increase,  the Company's inventory turns ratio decreased to 2.5 turns
in fiscal 1998 from 2.6 turns in fiscal 1997.

Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory)  affecting the operating cash flows in fiscal
1998,  included a decrease of $176,000 in prepaid expenses (due to a decrease in
advance payments for inventory and certain administrative expenses), an increase
of  $1,589,000  in  accrued  letters  of  credit  (due to  increased  in-transit
inventory),  an  increase of $714,000  in  accounts  payable  (due to  increased
inventory  purchases),  an increase of  $1,921,000  in accrued  expenses (due to
increased  performance-based  compensation  accruals  and  increased  income tax
accruals resulting from higher pre-tax earnings in fiscal 1998).

As of  January  2,  1998,  the  Company's  cash  and  cash  equivalents  totaled
$4,432,000,  an increase of  $1,629,000  from January 3, 1997.  The increase was
primarily the result of the receipt of $6,841,000 from the sale of substantially
all of the net  assets of the  Company's  wholly  owned  subsidiary,  Brookfield
Athletic  Co.,  Inc.  The increase was offset in part by an increase in accounts
receivable of $1,824,000,  net of the provision for bad debts and discounts, and
an increase in inventories of  $1,301,000.  The increase in accounts  receivable
was due to  increased  net  sales of the  Company's  Saucony  products  and Hind
products  in the  fourth  quarter  of fiscal  1997.  The  Company's  days  sales
outstanding for its accounts  receivable  remained constant at 73 days in fiscal
1997.  Inventories  increased  in fiscal 1997 due in part to the buildup of Hind
apparel inventory.  The Company's  inventory turn ratio remained constant at 2.6
turns in fiscal 1997.

During  fiscal  1997,  the  Company  used  $1,422,000  of net cash in  operating
activities,  expended  $1,331,000  to acquire  capital  assets  and  information
technology,  decreased short-term borrowings by $1,063,000,  expended $2,711,000
to reduce  long-term  debt,  received  $511,000 from the sale of capital assets,
principally  the sale of the  Company's  facility  in  Australia,  and  expended
$140,000 to acquire the remaining shares held by the minority shareholder in the
Company's  Dutch  subsidiary.  Current  maturities of long-term  debt  increased
$1,190,000  in  fiscal  1997 due  primarily  to the  reclassification  of a note
payable due on January 30, 1998 from long-term debt.

Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory)  affecting the operating cash flows in fiscal
1997 included the non-recurring charge of $2,766,000 to write-down assets of the
Company's Australian subsidiary to estimated realizable value, net cash provided
by  discontinued  operations of $2,227,000,  an increase in prepaid  expenses of
$539,000 (due to advance payments for advertising and inventory),  a decrease in
accrued  expenses  of  $137,000  (due to a change in sales  commissions  payment
terms) and an  increase in  accounts  payable  and letters of credit  payable of
$307,000 (due to the timing of inventory purchases).

The Company maintains a revolving credit line of $20,000,000 for cash borrowings
and  letters of credit.  As of March 25,  1999,  $8,254,000  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 $4,204,000. At February 28, 1999, an
aggregate of  approximately  $1,000,000  was available  for borrowing  under the
facilities of the foreign subsidiaries. See Note 9 to the Consolidated Financial
Statements.

At  January  1,  1999,   the  Company  had  various   commitments   for  capital
expenditures. The Company believes that these commitments are insignificant.

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


INFLATION AND CURRENCY RISK

The effect of inflation on the  Company's  results of  operations  over the past
three years has been minimal. The impact of currency fluctuation on the purchase
of  inventory  by the Company  from  foreign  suppliers  has been minimal as the
transactions were denominated in U.S. dollars. The Company,  however, is subject
to  currency  fluctuation  risk with  respect  to the  operating  results of the
Company's  foreign   subsidiaries  and  certain  foreign  currency   denominated
payables.  The Company has entered into forward  foreign  exchange  contracts to
minimize the transaction currency risk.


YEAR 2000

The Company  views its  exposure to the Year 2000  problem in three  areas:  (i)
internal  computer  systems  used  to  manage  the  Company's   business,   (ii)
microprocessors and other electronic devices included as components of equipment
used by the  Company  ("embedded  chips")  and (iii)  computer  systems  used by
suppliers  and  customers  of  the  Company.   The  Company's  plan,  under  the
coordination  of the Vice  President -  Management  Information  Systems,  is to
resolve its  internal  Year 2000  problems in these areas  following  sequential
phases of evaluation, updating and testing. In the evaluation phase, the Company
reviews the applicable  system to identify Year 2000 problems and determines any
necessary   remediation.   The   updating   and  testing   phases   involve  the
implementation and testing, respectively, of Year 2000 remediation measures.

Based on its current  evaluation of its exposure to the Year 2000  problem,  the
Company has  determined  that it will have to modify or replace  portions of its
software,  computer and other equipment  systems.  The Company incurred costs of
approximately  $20,000 in fiscal 1998 and expects to incur  additional  costs of
between $100,000 to $150,000 in fiscal 1999 related to Year 2000  modifications.
To date,  the Company  has  completed  evaluation  of  substantially  all of its
internal  computer  systems and embedded chips and has completed the majority of
necessary  upgrades.  It is expected that full evaluation,  updating and testing
will be completed during the third quarter of 1999.

The Company has  interviewed  key  suppliers to determine  their  capability  to
continue providing goods and services. Based on responses from over 80% of those
surveyed,  the  Company  believes  that these  suppliers  are  either  Year 2000
compliant or will be made Year 2000  compliant on a timely basis.  Nevertheless,
the Company  continues to expand its  understanding of the Year 2000 problems to
its  significant  business  partners based on ongoing surveys and interviews and
this  process  will  continue  throughout  1999.  Contingency  plans for  supply
disruptions  are in the  process  of being  formulated  and are  expected  to be
completed by third quarter 1999.

The  Company  has also  interviewed  key  customers  and all those  who  utilize
Electronic Data Interface  (EDI) as the principal  means of placing orders.  The
responses received indicate that most customers are in the process of developing
or  executing  remediation  plans to address  Year 2000  problems.  The  Company
believes that  customers  present a potential Year 2000 business risk because of
the Company's limited ability to influence their actions or internal processes.

The  foregoing   discussion  of  the  Company's  Year  2000  readiness  contains
forward-looking statements, and were derived using numerous assumptions. Despite
the Company's  belief that its Year 2000 program reduces the risk of an internal
compliance  failure and is taking an active  approach to assess the readiness of
its business partners,  there can be no assurances that all parties will achieve
timely Year 2000 compliance or that such  noncompliance will not have a material
adverse impact to the Company.


ACCOUNTING PRONOUNCEMENTS

SFAS 131

In  June  1997,  the  Financial  Accounting  Standards  Board  issued  Financial
Accounting  Standards No. 131,  "Disclosures about Segments of an Enterprise and
Related  Information"  (SFAS 131). SFAS 131 establishes the reporting  standards
for operating  segments in annual  financial  statements  and requires  selected
information on operating  statements in interim financial  statements.  SFAS 131
revised the  disclosure  requirements  for  segment  reporting  by defining  the
characteristics  and  quantitative  thresholds for which segment  information is
required to be disclosed.  The Company adopted SFAS in 1998 and all prior period
amounts have been restated.


SFAS 133

In  June  1998,  the  Financial  Accounting  Standards  Board  issued  Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities,"  (SFAS 133), which is effective for fiscal quarters of fiscal years
commencing after June 15, 1999, 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.



SOP 98-5

In April 1998, the American  Institute of Certified  Public  Accountants  issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5).  SOP 98-5  requires  that all  costs of  start-up  activities,  including
organization  costs,  be expensed as incurred.  SOP 98-5 is effective for fiscal
years  beginning after December 15, 1998. The Company will adopt SOP 98-5 in the
first quarter of fiscal 1999,  the initial  application of which will not have a
material effect on earnings or on the Company's financial position.


CERTAIN OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS

Risks and  uncertainties  could  cause the  Company's  actual  results to differ
materially  from those  reflected  by forward  looking  statements  or otherwise
implied by management from time to time.

Competition

Competition  is intense in the markets in which the Company  sells its products.
The Company competes  against a large number of other  companies,  both domestic
and  foreign,  with  substantially  greater  resources  than  the  Company.  The
principal  competitors for the Company's  Saucony products are Nike, New Balance
and ASICS.  The principal  competitors  for the Company's  bicycle  products are
Cannondale and Trek. The principal  competitors  for Hind are Nike,  Pearl Izumi
and TYR.

Foreign Currency Exchange Rates

The Company's financial results have, from time to time, been adversely affected
by the fluctuations in currency  exchange rates.  There can be no assurance that
the Company's  efforts to reduce currency  exchange losses will be successful or
that currency  exchange  rates will not have an adverse  impact on the Company's
future operating results and financial condition.

Potential Fluctuations in Quarterly Results

The Company's quarterly operating results may vary significantly  depending on a
number of factors,  including,  but not  limited to, the timing and  shipment of
individual  orders,  market  acceptance of new products  offered by the Company,
changes in the Company's operating expenses,  personnel changes, mix of products
sold, changes in product pricing and general economic conditions. It is possible
that in some future quarter the Company's  revenue or operating  results will be
below  expectations of stock investors.  If that were to occur, the market price
of the Common Stock could be materially and adversely affected.

Dependence on Consumer Preferences

The Company is susceptible to  fluctuations  in its business based upon footwear
fashion  trends,  particularly  on its  Jazz  Original  product  offerings,  and
frequently  changing  consumer  preferences  and  product  demands.  The Company
believes  that  its  success  depends  in  substantial  part on its  ability  to
anticipate, gauge and respond to changing consumer demands and fashion trends in
a timely  manner.  Moreover,  the  Company  could be  materially  and  adversely
affected  by   conditions   in  the  retail   industry  in  general,   including
consolidation  and the  resulting  decline in the number of retailers  and other
cyclical economic factors.

Dependence on Major Customers

One key  customer  accounted  for more  than 13% of the  Company's  consolidated
revenue during 1998. Other major accounts also provide  significant  portions of
the Company's overall revenues which could be adversely  impacted by the loss of
any key account.


ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates and foreign
exchange rates. Almost all borrowings of the Company are based on floating rates
which would  increase  interest  expense in an  environment  of rising  interest
rates.  The Company has 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.


ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Index to the Company's  Consolidated Financial Statements in Item 14 and
the accompanying  Consolidated  Financial Statements,  notes and schedules which
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 20, 1999 (the "1999 Proxy  Statement")  under the
captions  "ELECTION  OF  DIRECTORS"  and  "SECTION  16(A)  BENEFICIAL  OWNERSHIP
REPORTING COMPLIANCE" and is incorporated herein by this reference.  The Company
expects to file the 1999 Proxy Statement  within 120 days after the close of the
fiscal year ended January 1, 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,"  "Employment
and Consulting  Agreements and Other  Arrangements" and "Compensation  Committee
Interlocks  and  Insider  Participation"  in the  1999  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 1999 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

The information required by this item is contained under the caption "Employment
and Consulting  Agreements and Other  Arrangements"  appearing in the 1999 Proxy
Statement and is incorporated herein by this reference.


<PAGE>



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:

     Reports of Independent  Accountants  Consolidated balance sheets at January
1, 1999 and January 2, 1998

                                                                      
     Consolidated  statements  of income  for the years  ended  January 1, 1999,
January 2, 1998 and January 3, 1997

     Consolidated statements of stockholders' equity for the years ended January
1, 1999, January 2, 1998 and January 3, 1997

                                                                    
     Consolidated  statements of cash flows for the years ended January 1, 1999,
January 2, 1998 and January 3, 1997

       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
1998.



<PAGE>




                                   SIGNATURES


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


                                         SAUCONY, INC. (registrant)


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

Date:      April 1, 1999

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

  NAME                         CAPACITY                            DATE


/s/ John H. Fisher             President                        April 1, 1999
John H. Fisher                 Chief Executive Officer
                               Director

/ s/ Charles A. Gottesman      Executive Vice President         April 1, 1999
Charles A. Gottesman           Chief Operating Officer
                               Director

/s/ Terence P. Chin            Senior Vice President            April 1, 1999
Terence P. Chin                Chief Financial Officer

/s/ Roger P. Deschenes         Vice President, Controller       April 1, 1999
Roger P. Deschenes             Chief Accounting Officer

/s/ John J. Neuhauser          Director                         April 1, 1999
John J. Neuhauser

/s/ Robert J. LeFort, Jr.      Director                         April 1, 1999
Robert J. LeFort, Jr.

/s/ John M. Connors, Jr.       Director                         April 1, 1999

John M. Connors, Jr.

/s/ Phyllis H. Fisher          Director                         April 1, 1999
Phyllis H. Fisher



<PAGE>


Report of Independent Accountants

To The Board of Directors 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 January 1, 1999 and
January 2, 1998,  and the results of their  operations  and their cash flows for
each of the three years in the period ended January 1, 1999, in conformity  with
generally  accepted  accounting  principles.  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
generally accepted auditing standards 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., a fifty  percent
owned consolidated joint venture, as of January 2, 1998 and for the two years in
the period ended January 2, 1998, which  statements  reflect total assets of six
percent of consolidated  assets at January 2, 1998, and total revenues of eleven
percent and twelve percent of consolidated  revenues for the years ended January
2, 1998 and January 3, 1997,  respectively.  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 as of January 2, 1998 and for the two years in the period  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.

As  discussed in footnote 24, the  financial  statements  for 1996 and 1997 have
been restated.




                           PricewaterhouseCoopers LLP
Boston, Massachusetts
March 15, 1999





<PAGE>



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 3 January 1997,  and the results of
their  operations and their cash flows for each of the three years in the period
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


<PAGE>
<TABLE>


                                                       SAUCONY, INC. AND SUBSIDIARIES
<CAPTION>
                                                         CONSOLIDATED BALANCE SHEETS

                                                                   ASSETS
                                                    (in thousands, except share amounts)
                                                                                                       January 1,        January 2,
                                                                                                          1999              1998
Current assets:
<S>                                                                                                   <C>               <C>         
      Cash and cash equivalents                                                                       $      5,495      $      4,432
      Marketable securities                                                                                    179               148
      Accounts receivable, net of allowance for doubtful accounts
        and discounts (1998, $1,880; 1997, $2,032)                                                          19,473            18,636
      Inventories                                                                                           31,072            23,471
      Deferred income taxes                                                                                  1,605             2,034
      Prepaid expenses and other current assets                                                              1,318             1,518
                                                                                                      ------------      ------------
        Total current assets                                                                                59,142            50,239
                                                                                                      ------------      ------------

Property, plant and equipment, net of accumulated depreciation and amortization                              8,123             8,135
                                                                                                      ------------      ------------

Other assets:
      Goodwill, net of accumulated amortization (1998, $132; 1997, $42;)                                     1,267             1,238
      Deferred charges, net of accumulated amortization (1998, $1,544; 1997, $1,843)                           430               491
      Long-term accounts and notes receivable                                                                   82               114
      Deferred income taxes                                                                                    353               353
      Other                                                                                                    482               746
                                                                                                      ------------      ------------
        Total other assets                                                                                   2,614             2,942
                                                                                                      ------------      ------------

Total assets                                                                                          $     69,879      $     61,316
                                                                                                      ============      ============

                                                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Letters of credit payable                                                                          $      2,790       $     1,201
   Notes payable                                                                                             7,568             2,885
   Current portion of long-term debt and capital lease obligations                                             324             3,639
   Accounts payable                                                                                          3,454             2,680
   Accrued expenses                                                                                          4,704             2,910
                                                                                                      ------------      ------------
      Total current liabilities                                                                             18,840            13,315
                                                                                                      ------------      ------------

Long-term obligations:
      Long-term debt, net of current portion                                                                    36                25
   Capital lease obligations, net of current portion                                                           523               746
   Deferred income taxes                                                                                     1,851             1,819
   Other long-term obligations                                                                                 157               144
                                                                                                      ------------      ------------
      Total long-term obligations                                                                            2,567             2,734
                                                                                                      ------------      ------------
Commitments and contingencies                                                                                   --                --

Minority interest in consolidated subsidiaries                                                                 222               195
                                                                                                      ------------      ------------

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 1998, 2,707,027; 1997, 2,706,227)                                                                902               902
      Class B, $.333 par; authorized 20,000,000 shares
      (issued 1998, 3,826,805; 1997, 3,743,487)                                                              1,276             1,248

   Additional paid-in capital                                                                               15,921            15,652
   Retained earnings                                                                                        32,360            28,781
   Accumulated translation                                                                                    (528)            (417)
                                                                                                      -------------    -------------
                                                                                                            49,931            46,166
                                                                                                      ------------      ------------
  Less:
   Common stock held in treasury, at cost (1998, 305,400; 1997, 198,400)                                    (1,665)          (1,054)
      Unearned compensation                                                                                    (16)             (40)
                                                                                                      -------------     ------------
                                                                                                            48,250            45,072
                                                                                                      ------------      ------------
Total liabilities and stockholders' equity                                                            $     69,879      $     61,316
                                                                                                      ============      ============

                 See notes to Consolidated Financial Statements

</TABLE>

<PAGE>
<TABLE>


                                                      SAUCONY, INC. AND SUBSIDIARIES
                                                    CONSOLIDATED STATEMENTS OF INCOME
                                   FOR THE YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998, AND JANUARY 3, 1997

<CAPTION>
                                                               (Note 24)
                                                (in thousands, except share amounts)

                                                                                          1998            1997             1996
                                                                                          ----            ----             ----

<S>                                                                                  <C>              <C>              <C>        
Net sales                                                                            $    105,074     $     93,611     $    91,341
Other revenue                                                                                 736              351             538
                                                                                     ------------     ------------     -----------

Total revenue                                                                             105,810           93,962          91,879
                                                                                     ------------     ------------     -----------

Costs and expenses:
   Cost of sales                                                                           67,623           63,511          61,692
   Selling expenses                                                                        17,507           16,698          16,065
   General and administrative expenses                                                     14,939           13,412          11,777
   Writedown of Australian assets                                                              --            1,426              --
   Writedown of impaired real estate                                                           --              850              --
                                                                                     ------------     ------------     -----------
      Total costs and expenses                                                            100,069           95,897          89,534
                                                                                     ------------     ------------     -----------

Operating income (loss)                                                                     5,741           (1,935)          2,345

Non-operating income (expense):
   Interest, net                                                                             (707)            (817)           (730)
   Foreign currency                                                                           124           (1,127)            171
   Other                                                                                       80               79             196
                                                                                     ------------     ------------     -----------

Income (loss) before income taxes and minority interest                                     5,238           (3,800)          1,982

Provision for income taxes                                                                  1,629              355             325

Minority interest in income (loss) of consolidated subsidiaries                                30             (123)            308
                                                                                     ------------     -------------    -----------

Income (loss) from continuing operations                                                    3,579           (4,032)          1,349

Discontinued operations (net of tax):
   Loss from discontinued operations                                                           --             (394)           (243)
   Gain on disposal of Brookfield business                                                     --               96              --
                                                                                     ------------     ------------     -----------

Net income (loss)                                                                    $      3,579     $     (4,330)    $     1,106
                                                                                     ============     =============    ===========

Per share amounts:

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

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

                 See notes to Consolidated Financial Statements

</TABLE>

<PAGE>
<TABLE>



                                                         SAUCONY, INC. AND SUBSIDIARIES
                                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 FOR THE YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997

<CAPTION>
                                                     (in thousands, except share amounts)

                                                                             Common Stock                Paid-In         Retained
                                                                        Class A        Class B           Capital         Earnings

<S>                                                                    <C>             <C>             <C>              <C>      
Balance, January 5, 1996 (as restated, see Note 24)                    $    902        $ 1,237         $  15,521        $  32,005

Issuance of common stock, stock option exercise                              --              6                63               --

Cancellation of below market options                                         --             --                (3)              --

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

Net income                                                                   --             --                --            1,106

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

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 option exercise                              --             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
                                                                       ========        =======         =========        =========


</TABLE>

<PAGE>

<TABLE>



                                                                   SAUCONY, INC. AND SUBSIDIARIES
                                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
                                        FOR THE YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997

                                                               (in thousands, except share amounts)
<CAPTION>

                                                                                                                           Total
                                                                    Treasury Stock         Unearned       Accumulated  Stockholders'
                                                                Shares        Amount     Compensation     Translation     Equity

<S>                                                             <C>         <C>            <C>           <C>            <C>       
Balance, January 5, 1996 (as restated, see Note 24)             198,400     $  (1,054)     $  (194)      $   (257)      $   48,160

Issuance of common stock, stock option exercise                      --            --           --             --               69

Cancellation of below market options                                 --            --            3             --               --

Amortization of unearned compensation                                --            --          126             --              126

Net income                                                           --            --           --             --            1,106

Foreign currency translation adjustments                             --            --           --             23               23
                                                              ---------     ---------      -------       --------       ----------

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 option exercise                      --            --           --             --              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
                                                              =========     ==========     ========      =========      ==========


                                                       See notes to Consolidated Financial Statements



</TABLE>

<PAGE>

<TABLE>


                                         SAUCONY, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                   FOR THE YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
<CAPTION>
                                                (in thousands)

                                                                                        1998              1997              1996
                                                                                        ----              ----              ----
Cash flows from operating activities:
<S>                                                                                  <C>               <C>               <C>      
   Net income (loss)                                                                 $    3,579        $   (4,330)       $   1,106
Adjustments to reconcile net income (loss) to net cash
   provided (used) by operating activities:
      Writedown of Australian assets                                                         --             2,766               --
      Discontinued operations                                                                --               298              243
      Depreciation and amortization                                                       1,836             1,594            1,452
      Provision for bad debt and discounts                                                4,908             4,887            5,269
      Deferred income tax provision (benefit)                                               461            (1,269)            (217)
      Writedown of impaired real estate                                                      --               850               --
      Minority interest in income (loss) of consolidated subsidiaries                        30              (123)             308
      Other                                                                                 (17)              (29)             148
Changes in operating  assets and  liabilities,  net of effects of  acquisitions,
   dispositions and foreign currency adjustments:
Decrease (increase) in assets:
   Marketable securities                                                                    (31)               88               71
   Accounts and notes receivable                                                         (5,718)           (6,711)          (9,938)
   Inventories                                                                           (7,002)           (1,301)          (1,158)
   Prepaid expenses and other current assets                                                176              (539)             281
Increase (decrease) in liabilities:
   Letters of credit payable                                                              1,589              (612)            (613)
   Accounts payable                                                                         714               919             (525)
   Accrued expenses                                                                         977              (296)             733
   Accrued income taxes                                                                     944               159               (5)
                                                                                     ----------        ----------        ----------
Total adjustments                                                                        (1,133)              681           (3,951)
                                                                                     -----------       ----------        ----------

Net cash provided (used) by continuing operations                                         2,446            (3,649)          (2,845)
                                                                                                                            
Net cash provided (used) by discontinued operations                                          --             2,227           (2,379)
                                                                                     ----------        ----------        ----------
Net cash provided (used) by operating activities                                          2,446            (1,422)          (5,224)
                                                                                     ----------        -----------       ----------

Cash flows from investing activities:
   Proceeds from the sale of Brookfield business                                             --             6,841               --
   Purchases of property, plant and equipment                                            (1,257)           (1,305)            (791)
   Proceeds from the sale of equipment                                                       72               511               78
   Change in deferred charges, deposits and other                                            92               (26)          (1,066)
   Payments for business acquisitions                                                      (863)             (140)          (1,250)
                                                                                     -----------       -----------       ----------
Net cash provided (used) by investing activities                                         (1,956)            5,881           (3,029)
                                                                                     -----------       ----------        ----------

Cash flows from financing activities:
   Net short-term borrowings                                                              3,426            (1,063)            1,313
   Repayment of long-term debt and capital lease obligations                             (2,364)           (2,711)           (2,364)
   Proceeds from long-term borrowings                                                        --                --               420
   Common stock repurchased                                                                (611)               --                --
   Issuances of common stock, including options                                             297                39                69
                                                                                     ----------        ----------        ----------

Net cash provided (used) by financing activities                                            748            (3,735)             (562)
Effect of exchange rate changes on cash and cash equivalents                               (175)              905               (50)
                                                                                     -----------       ----------        -----------
Net increase (decrease) in cash and cash equivalents                                      1,063             1,629            (8,865)
Cash and cash equivalents at beginning of period                                          4,432             2,803            11,668
                                                                                     ----------        ----------        ----------
Cash and cash equivalents at end of period                                           $    5,495        $    4,432        $    2,803
                                                                                     ==========        ==========        ==========

Supplemental  disclosure of cash flow  information:  
  Cash paid during the period for:
      Income taxes, net of refunds                                                   $      257        $      663        $      736
                                                                                     ==========        ==========        ==========

      Interest                                                                       $      657        $      887        $      959
                                                                                     ==========        ==========        ==========

Non-cash Investing and Financing Activities:
   Property purchased under capital leases                                           $      141        $       86        $    1,234
                                                                                     ==========        ==========        ==========

                 See notes to Consolidated Financial Statements

</TABLE>



                         SAUCONY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   For the Years Ended January 1, 1999, January 2, 1998 and January 3, 1997


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  adopted a 52-53 week fiscal year in 1991. The  Consolidated
        Financial  Statements  and notes for 1998,  1997 and 1996  represent the
        fiscal years ended January 1, 1999, January 2, 1998 and January 3, 1997,
        respectively.   In  management's  opinion,  the  Consolidated  Financial
        Statements for 1998, 1997 and 1996 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.

        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.

        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.

        Deferred Charges and Goodwill 

        Deferred   charges   consist   primarily  of  trademarks   and  business
        acquisition  costs.   Business  acquisition  costs  and  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 the precepts
        of  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
        January 1, 1999 and  January 2, 1998  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 the precepts
        of Financial  Accounting  Standards  No. 128  "Earnings Per Share" (SFAS
        128),  which was issued in 1997 by the  Financial  Accounting  Standards
        Board.  SFAS 128 replaced the  calculation  of primary and fully diluted
        earnings  per share with basic and diluted  earnings  per share.  Unlike
        primary  earnings  per share,  basic  earnings  per share  excludes  the
        dilutive effect of options, warrants and convertible securities. Diluted
        earnings per share is very similar to fully diluted  earnings per share.
        As required  under SFAS 128, all  previously  reported per share amounts
        have been restated.

        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,  except those granted to selected  consultants
        and advisors of the Company,  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.  The  Company  accounts  for stock  option
        grants to consultants  and advisors in accordance  with SFAS 123 and has
        not incurred any material charges to date. 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.

        Statements of Cash Flows

        For  purposes  of  these  statements,   cash  equivalents   include  all
        short-term deposits with an original maturity of three months or less.

        Foreign Currency Translation

        The  financial  statements  of the Company's  foreign  subsidiaries  are
        measured using the local currency as the functional currency. Assets and
        liabilities of these subsidiaries are translated at exchange rates as of
        the balance sheet date.  Revenues and expenses are translated at average
        rates of exchange in effect during the year.  The  resulting  cumulative
        translation  adjustments  have been recorded as a separate  component of
        stockholders' equity.  Foreign currency transaction gains and losses are
        included in consolidated net income.

        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 1998  presentation.  The results of
        operations for Brookfield  Athletic Co., Inc. have been  segregated from
        continuing  operations  and  are  reported  separately  as  discontinued
        operations.

        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 $7,912,000,  $8,543,000  and  $8,743,000 for 1998,  1997 and
        1996, respectively.

        Research and Development Expenses

        Expenditures  for research and  development  of products are expensed as
        incurred.  Research and development  expenses  amounted to approximately
        $1,681,000,   $1,438,000  and  $1,417,000  for  1998,   1997  and  1996,
        respectively.

        New Accounting Pronouncements

        In June 1997, the Financial  Accounting Standards Board issued Financial
        Accounting   Standards  No.  131  "Disclosures   about  Segments  of  an
        Enterprise and Related Information" (SFAS 131). SFAS 131 establishes the
        reporting   standards  for  operating   segments  in  annual   financial
        statements and requires  selected  information on operating  segments in
        interim   financial   statements.   SFAS  131  revised  the   disclosure
        requirements for segment reporting by defining the  characteristics  and
        quantitative  thresholds for which segment information is required to be
        disclosed.  SFAS 131 is  effective  for fiscal  years  commencing  after
        December 15, 1997.  The Company  adopted SFAS 131 in fiscal 1998 and all
        prior  periods  have  been  restated.  See  Note  17  of  the  Notes  to
        Consolidated Financial Statements.

        In June 1998, the Financial  Accounting Standards Board issued Financial
        Accounting Standards No. 133, "Accounting for Derivative Instruments and
        Hedging  Activities," (SFAS 133), which is effective for fiscal quarters
        of fiscal  years  commencing  after June 15, 1999,  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 earning 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 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.

        In April 1998, the American  Institute of Certified  Public  Accountants
        issued  Statement of Position 98-5,  "Reporting on the Costs of Start-Up
        Activities"  (SOP 98-5).  SOP 98-5  requires  that all costs of start-up
        activities,  including  organization costs, be expensed as occurred. SOP
        98-5 is effective for fiscal years  beginning  after  December 15, 1998.
        The Company will adopt SOP 98-5 in the first quarter of fiscal 1999, the
        initial application of which will not have a material effect on earnings
        or on the Company's financial position.


2.      Marketable Securities:

        As of January 1, 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 January 1, 1999 and January 2, 1998
        was  $134,000  and  $138,000,  respectively.  As of  January 1, 1999 and
        January 2, 1998,  the market value of such  securities  was $179,000 and
        $148,000, respectively.

        Included in the  determination of net income for the years ended January
        1, 1999,  January 2, 1998 and January 3, 1997 were:  1998,  net realized
        losses of $3,000 and net unrealized gains of $35,000; 1997, net realized
        gains of  $22,000  and net  unrealized  gains of $2,000;  and 1996,  net
        realized gains of $10,000.


3.      Inventories:

        Inventories  at January 1, 1999 and  January  2, 1998  consisted  of the
        following (in thousands):


                                            1998                     1997
                                            ----                     ----

            Finished goods             $     24,194              $    17,534

            Work-in-process                     834                      514

            Raw materials and supplies        6,044                    5,423
                                       ------------              -----------

            Total                      $     31,072              $    23,471
                                       ============              ===========



<PAGE>



4.   Property, Plant and Equipment:

     Major  classes  of  property,  plant and  equipment  at January 1, 1999 and
     January 2, 1998 were as follows (in thousands): 1998 1997

        Land                               $        484            $       484
        Buildings and improvements                5,997                  5,997
        Machinery and equipment                   9,777                  8,328
        Capitalized leases                        1,586                  1,708
        Leasehold improvements                      275                    236
                                           ------------              -----------
                                                 18,119                 16,753
        Less accumulated depreciation
         and amortization                         9,996                  8,618
                                           ------------              -----------

           Total                           $      8,123              $   8,135
                                           ============              ===========


        Accumulated  amortization  of the leased  property  was $790 and $344 at
        January 1, 1999 and January 2, 1998, respectively.


5.      Accrued Expenses:

        Accrued expenses at January 1, 1999 and January 2, 1998 consisted of the
following (in thousands):

                                             1998                   1997
                                             ----                   ----

     Payroll and bonuses               $    1,249             $       570
     Income taxes                             869                      --
     Sales commissions                        237                     251
     Selling and advertising                  186                     265
     Other                                  2,163                   1,824
                                       ----------             -----------

     Total                             $    4,704             $     2,910
                                        ==========             ===========




<PAGE>

<TABLE>

<CAPTION>

6.      Long-Term Debt:
                                                                                                              (in thousands)
                                                                                                         1998                1997
<S>                                                                                                  <C>                <C> 
       Senior notes payable due in semiannual installments of interest (9.70%                                          
        per annum) on the unpaid  principal  amount  through  maturity  and six
         annual principal payments of $2,000,000 commencing April 29, 1993                           $       --           $    2,000

        Note payable to a bank under a revolving line of credit  agreement,  due
         on January 30, 1998, with interest of 8.15%.                                                         --               1,302

        Notes payable to bank due in monthly  installments  ranging from $580 to
         $744 through June 2002, with interest ranging from 4.9% to 10.0%.                                    47                  31
                                                                                                     -----------          ----------
                                                                                                              47               3,333

        Less current portion                                                                                  11               3,308
                                                                                                     -----------          ----------


        Long-term debt, net                                                                          $        36          $       25
                                                                                                     ===========          ==========
</TABLE>


        Long-term  debt  maturities  payable  for the four years and  thereafter
subsequent to January 1, 1999 are as follows (in thousands):

                 1999                       $    11
                 2000                            14
                 2001                            14
                 2002                             8
                                            -------
    
                Total                       $    47
                                            =======




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 January 1, 1999 (in thousands):

              1999                                               $      359
              2000                                                      331
              2001                                                      195
              2002                                                       22
              2003                                                        5
                                                                 ----------
              Total minimum lease payments                              912
              Less amounts representing interest                         76
                                                                 ----------
              Present value of minimum lease payments                   836
              Less current portion                                      313
                                                                 ----------
              Long-term portion                                  $      523
                                                                 ==========

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 $72,000,  $83,000 and $71,000 for 1998,  1997
        and 1996, respectively.

        In 1995,  the  Company  established  an unfunded  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 contributions amounted to $14,000,
        $10,000 and $5,000 for 1998, 1997 and 1996, 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
        1998, 1997 and 1996 were $959,000, $910,000 and $831,000,  respectively.
        Future  minimum  equipment  and rental  payments  are as follows:  1999,
        $577,000;  2000,  $448,000;  2001,  $299,000;  2002,  $50,000;  2003 and
        thereafter, $78,000.

        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  $15,000,000  to the Company for cash  borrowings and letters of
        credit.  The credit  facility,  which was amended and increased on March
        15, 1999 to  $20,000,000,  terminates  on July 31,  2001 and  replaces a
        prior credit facility that expired on August 31, 1998.  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% (the  borrowing  mark-up at
        January 1, 1999 was 2.0%).  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 January 1, 1999. At
        January 1, 1999, there were borrowings of $5,838,000  outstanding  under
        the facility and letters of credit outstanding of $6,604,000.

        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;  Saucony UK,  Inc.,  British  Pounds  800,000;  and,  Saucony
        Deutschland  Vertriebs GmbH,  German Marks 900,000.  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 January  1,  1999,  aggregate  borrowings  under the demand  lines of
        credit amounted to $1,730,000.

        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 January
        1,  1999,  there  were  no  borrowings  outstanding  under  this  credit
        facility.

        At January 1, 1999,  the Company was committed  under  foreign  exchange
        contracts to purchase U.S. dollars in the amount of $735,000.

        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:

        As of January 1, 1999, January 2, 1998 and January 3, 1997, 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 5, 1996                                  2,701,727                      3,515,415
             Shares issued                                                              1,500                         18,244
                                                                                    ---------                      ---------
             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
                                                                                    =========                      =========
</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 January 1, 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 exerciseable 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 January 1, 1999:

                                                                      Shares

         Shares available at January 5, 1996                         421,240
         Awards granted                                               (8,000)
         Options expired                                              44,486
                                                                   ---------
         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
                                                                   ==========

        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
        and below market options, is being amortized to expense over the vesting
        period  of the stock  grant or  option  term and  amounted  to  $24,000,
        $62,000 and $126,000 for 1998, 1997 and 1996, respectively.



<PAGE>


        The following table summarizes the Company's stock option activity as of
January 3, 1997, January 2, 1998 and January 1, 1999:

<TABLE>
<CAPTION>
                                                                                                 Weighted
                                                                                                  Average
                                                                                                 Exercise                Option
                                                                            Shares               Price                 Price Range

             <S>                                                             <C>              <C>              <C>           <C>    
             Outstanding at January 5, 1996                                  390,304          $   4.37         $   2.00    - $ 12.25

                  Granted                                                      8,000          $   4.00         $   4.00    - $  4.00
                  Exercised                                                  (19,744)         $   3.52         $   2.25    - $  3.69
                  Forfeited                                                  (10,386)         $   5.00         $   2.25    - $ 10.75
                  Expired                                                    (35,000)         $   4.68         $   4.68    - $  4.68
                                                                             --------

             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
                                                                          ==========


</TABLE>


     Options  exercisable for shares of the Company's Class A and Class B Common
Stock as of  January  3, 1997,  January  2, 1998 and  January  1,  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 3, 1997                   11,400            181,953           193,353        $   5.60        $    4.81

                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


</TABLE>


<PAGE>



        The  following  table   summarizes   information   about  stock  options
outstanding at January 1, 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         Jan. 1, 1999            Life              Price         Jan. 1, 1999           Price
                      ---------------         ------------            ----              -----         ------------           -----

               <S>           <C>               <C>                   <C>             <C>               <C>                <C>     
                $   2.00   -  $   2.625             51,334            0.59           $   2.46              51,334         $   2.46

                $   4.00   -  $   4.875            257,350            2.84           $   4.52             155,620         $   4.57

                $   5.00   -  $   5.75              24,400            3.88           $   5.40              20,400         $   5.48

                $   6.00   -  $   6.50               1,500            2.27           $   6.17                 800         $   6.00
                                               -----------                                             ----------

                                                   334,584                                                228,154
                                               ===========                                             ==========
</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>

                                                       1998                           1997                           1996           
                                              ------------------------     --------------------------     --------------------------
                                               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            $   3,579      $   3,579      $  (4,032)      $  (4,032)     $   1,349       $   1,349
           Loss from discontinued
            operations                              --             --           (298)           (298)          (243)           (243)
                                             ---------      ---------      ----------      ----------     ----------      ----------
           Net income (loss) available
            for common shares and
            assumed conversions              $   3,579      $   3,579      $  (4,330)      $  (4,330)     $   1,106       $   1,106
                                             =========      =========      ==========      ==========     =========       =========

        Weighted-average common
           shares and equivalents
           outstanding:

           Weighted-average shares
            outstanding                          6,242          6,242          6,240           6,240          6,224           6,224

           Effect of dilutive securities:
            Stock options                           --            131             --              --             --              44
                                             ---------      ---------      ---------       ---------      ---------       ---------
                                                 6,242          6,373          6,240           6,240          6,224           6,268
                                             =========      =========      =========       =========      =========       =========
        Earnings per share:
           Income (loss) from
            continuing operations             $   0.57       $   0.56       $   (0.65)      $  (0.65)      $   0.22        $   0.22
           Loss from discontinued
            operations                            0.00           0.00           (0.05)         (0.05)         (0.04)          (0.04)
                                              --------       --------       ----------      ---------      ---------       ---------

           Net income (loss)                  $   0.57       $   0.56       $   (0.70)      $  (0.70)      $   0.18        $   0.18
                                              ========       ========       ==========      =========      ========        ========

</TABLE>

        The weighted  average fair value at date of grant for options granted in
        1998, 1997 and 1996 was $2.75, $2.47 and $1.93 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  1998,  1997  and  1996,
        respectively:  risk-free interest rates of 5.5%, 6.3% and 6.3%; dividend
        yields of 0%, 0% and 0%; volatility factors of the expected market price
        of  the  Company's  common  stock  of  43.0%,  41.0%  and  47.0%;  and a
        weighted-average expected life of the options of 5.0, 5.0 and 5.5 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  1998,  1997  and  1996,  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>


                                                      1998                          1997                           1996            
                                           --------------------------     --------------------------     --------------------------
                                            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                     $   3,579       $   3,579      $  (4,330)      $  (4,330)     $   1,106      $   1,106
           Compensation expense for
            stock, net of tax                    (81)            (81)           (63)            (63)           (87)           (87)
                                           ----------      ----------     ----------      ----------     ----------     ----------

        Pro forma net income (loss)            3,498           3,498         (4,393)         (4,393)         1,019          1,019
                                           =========       =========      ==========      ==========     =========      =========

        Pro forma earnings per share
           As reported                     $   0.57        $   0.56       $  (0.70)       $  (0.70)      $   0.18       $    0.18
           Compensation expense for
            stock, net of tax                 (0.01)          (0.01)         (0.01)          (0.01)         (0.02)          (0.02)
                                           ---------       ---------      ---------       ---------      ---------      ----------

        Pro forma net income (loss)
           per share                       $   0.56        $   0.55       $  (0.71)       $  (0.71)      $   0.16       $    0.16
                                           ========        ========       =========       =========      ========       =========
</TABLE>


        The pro forma net income for 1998,  1997 and 1996 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):

<TABLE>
<CAPTION>
                                                                                 1998                1997                 1996
                                                                                 ----                ----                 ----
             Pre-tax income (loss):

             <S>                                                              <C>                <C>                   <C>       
                 United States                                                $    3,870         $       369           $    1,149
                 Foreign                                                           1,368              (4,169)                 833
                                                                              ----------         ------------          ----------

                 Total                                                        $    5,238         $    (3,800)          $    1,982
                                                                              ==========         ============          ==========

</TABLE>

        The  provision  (credit) for income taxes  consists of the following (in
thousands):
<TABLE>
<CAPTION>

                                                                                  1998               1997                 1996
                                                                                  ----               ----                 ----
             Current:
            <S>                                                               <C>                <C>                   <C>       
                 Federal                                                      $      830         $     1,058           $      265
                 State                                                               234                 309                  142
                 Foreign                                                             104                 223                  135
                                                                              ----------         -----------           ----------
                                                                                   1,168               1,590                  542
                                                                              ----------         -----------           ----------
             Deferred:
                 Federal                                                             239                (971)                (102)
                 State                                                                90                (298)                 (34)
                 Foreign                                                             (36)             (1,365)                 137
                                                                              -----------        ------------          ----------
                                                                                     293              (2,634)                   1
                                                                              ----------         ------------          ----------

             Change in valuation allowance                                           168               1,399                 (218)
                                                                              ----------         -----------           -----------

                 Total                                                        $    1,629         $       355           $      325
                                                                              ==========         ===========           ==========
</TABLE>


        The net  deferred tax asset or  liability  reported on the  consolidated
        balance sheet  consist of the following  items as of January 1, 1999 and
        January 2, 1998 (in thousands):
<TABLE>
<CAPTION>

                                                                                                         1998              1997
                                                                                                         ----              ----
           <S>                                                                                       <C>               <C>       
           Net current deferred tax assets:

             Allowance for doubtful accounts and discounts                                           $      581        $    1,111
             Inventory allowances and tax costing adjustments                                               336               236
             Deferred compensation                                                                          315               279
             Other accrued expenses                                                                         307               283
             Foreign loss carryforwards                                                                      66               125
                                                                                                     ----------        ----------
                Total                                                                                $    1,605        $    2,034
                                                                                                     ----------        ----------

           Net long-term deferred tax assets:
             Foreign loss carryforwards                                                              $      921        $    1,752
             Valuation allowance                                                                           (568)           (1,399)
                                                                                                     -----------       -----------
                Total                                                                                $      353        $      353
                                                                                                     ----------        ----------

           Net long-term deferred tax liabilities:
             Property, plant and equipment                                                           $      697        $      621
             Investment in limited partnership                                                            1,154             1,198
                                                                                                     ----------        ----------
                Total                                                                                $    1,851        $    1,819
                                                                                                     ----------        ----------

           Net deferred tax asset                                                                    $      107        $      568
                                                                                                     ==========        ==========
</TABLE>

        The  foreign  loss   carryforwards   relate  to   operating   losses  of
        approximately  $2,394,000 which may be carried forward indefinitely.  At
        January 1, 1999, the Company has determined  that it is more likely than
        not that  $568,000 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>

                                                                                                   1998           1997          1996
                                                                                                   ----           ----          ----

           <S>                                                                                    <C>          <C>            <C>  
           U.S. federal income tax rate                                                            34.0%        (34.0%)        34.0%
           State income tax, net of federal benefit                                                 4.8           0.2           3.6
           Detriment (benefit) of valuation allowance relating
             to foreign losses                                                                      3.2          36.8         (11.0)
           Non-deductible expenses and tax-exempt income                                            0.4           0.7           1.5
           International tax rate differences                                                      (7.6)          7.0          (0.6)
           Low-income housing tax credits                                                          (0.7)         (1.4)         (9.0)
           Adjustment of prior years' estimated tax liabilities                                    (3.0)          0.0          (2.1)
                                                                                                 -------       ------        -------

           Effective income tax rate                                                               31.1%          9.3%         16.4%
                                                                                                 =======       =======       =======
</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 $1,573,000
        at January 1, 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 $6,841,000. The Company recorded a pre-tax gain on the sale
        of $417,000, net of transaction costs of $278,000.

        The  operating  results of the  Brookfield  for the 1997 and 1996 fiscal
        years have been segregated  from continuing  operations and are reported
        as  discontinued  operations  in the  Company's  Consolidated  Financial
        Statements.  A summary of such results follows (in thousands) (also, see
        Note 24):

<TABLE>
<CAPTION>
                                                                                                     1997                1996
                                                                                                     ----                ----

                <S>                                                                               <C>               <C>       
                Revenues                                                                          $    2,381        $   19,567
                Costs and expenses                                                                     3,037            19,969
                                                                                                  ----------        ----------
                Loss before income taxes                                                                (656)             (402)
                Income tax benefit                                                                      (262)             (159)
                                                                                                  -----------       -----------
                Loss from discontinued operations                                                 $     (394)       $     (243)
                                                                                                  ===========       ===========
                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)       $     (243)
                                                                                                  ===========       ===========

</TABLE>



15.     Asset Writedowns:

        During 1997, the Company's  Australian  subsidiary recorded a $1,426,000
        non-recurring  charge to write-down  accounts  receivables (by $858,000)
        and other  assets  (by  $568,000)  to their net  realizable  values.  In
        addition,  a write-down of inventory of $1,340,000  was included in cost
        of sales  in  1997.  The  Company  recorded  a  deferred  tax  valuation
        allowance of $999,000  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 $850,000 ($508,000 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.

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



<PAGE>



16.     Geographic Segment Data:

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

                                                                                      1998              1997             1996
        <S>                                                                     <C>               <C>               <C>          
        Revenues:


           United States                                                        $      83,617     $      65,711     $      60,388
           International                                                               22,193            28,251            31,491
                                                                                 ------------     -------------     -------------
                                                                                $     105,810     $      93,962     $      91,879
                                                                                 ============     =============     =============

        International revenues:

           United States - based divisions                                              4,086     $       5,602     $       7,405
           Foreign subsidiaries                                                        18,107            22,649            24,086
                                                                                 ------------     -------------     -------------
                                                                                $      22,193     $      28,251     $      31,491
                                                                                =============     =============     =============

        Inter-area revenues:

           United States                                                        $         629     $         786     $         743
           International                                                                9,286             7,430             8,148
                                                                                -------------     -------------     -------------
                                                                                $       9,915     $       8,216     $       8,891
                                                                                =============     =============     =============

        Total revenues:

           United States                                                        $      84,246     $      66,497     $      61,131
           International                                                               31,479            35,681            39,639
           Less:  Inter-area eliminations                                              (9,915)           (8,216)           (8,891)
                                                                                --------------    --------------    --------------
                                                                                $     105,810     $      93,962     $      91,879
                                                                                =============     =============     =============

        Operating income (loss):

           United States                                                        $       6,902     $       2,934     $       1,595
           International                                                               (1,117)           (4,572)              978
           Less:  Inter-area eliminations                                                 (44)             (297)             (228)
                                                                                --------------    --------------    --------------
                                                                                $       5,741     $      (1,935)    $       2,345
                                                                                =============     ==============    =============

        Identifiable assets:

           United States                                                        $      72,677     $      59,521     $      65,854
           International                                                               14,171            13,142            17,742
           Less:  Inter-area eliminations                                             (16,969)          (11,347)          (12,844)
                                                                                --------------    --------------    --------------
                                                                                $      69,879     $      61,316     $      70,752
                                                                                =============     =============     =============
</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 primarily  represent  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  $850,000  and  $2,766,000  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:

        At year end 1998, the Company adopted Financial Accounting Standards No.
        131,   "Disclosure   about   Segments  of  an  Enterprise   and  Related
        Information"  (SFAS 131).  Prior period  amounts  have been  restated in
        accordance with the requirements of the new standard.

        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  January 1, 1999,  January 2, 1998 and January 3, 1997
        and  identifiable  assets as of January  1, 1999,  January 2, 1998 and
        January 3, 1997:
<TABLE>
<CAPTION>


                                                                                              (in thousands)
                                                                                1998                1997            1996
             <S>                                                            <C>               <C>               <C>           

                Saucony                                                     $     86,651      $     78,771      $     79,253
                Other                                                             19,159            15,191            12,626
                                                                            ------------      ------------      ------------
                                                                            $    105,810      $     93,962      $     91,879
                                                                            ============      ============      ============
             Pre-tax income (loss):
                Saucony                                                     $      5,497      $     (2,946)     $        947
                Other Products                                                      (259)             (854)            1,035
                                                                            -------------     -------------     ------------
                Total segment pre-tax income (loss)                                5,238            (3,800)            1,982
                Provision for income taxes                                         1,629               355               325
                Minority interest                                                     30              (123)              308
                                                                            ------------      -------------     ------------

             Net income (loss) from continuing operations                   $      3,579      $     (4,032)     $      1,349
                                                                            ============      =============     ============

             Assets:
                Saucony                                                     $     53,906      $     51,974      $     66,311
                Other Products                                                    15,973             9,342             4,441
                                                                            ------------      ------------      ------------
                                                                            $     69,879      $     61,316      $     70,752
                                                                            ============      ============      ============
             Depreciation and amortization:

                Saucony                                                     $      1,606      $      1,493      $      1,434
                Other Products                                                       230               101                17
                                                                            ------------      ------------      ------------
                                                                            $      1,836      $      1,594      $      1,451
                                                                            ============      ============      ============
             Interest, net:
                Saucony                                                     $        252      $        568      $        585
                Other Products                                                       455               249               145
                                                                            ------------      ------------      ------------
                                                                            $        707      $        817      $        730
                                                                            ============      ============      ============
             Components of interest, net
                Interest expense                                            $        733      $        888      $        803
                Interest income                                                       26                71                73
                                                                            ------------      ------------      ------------
                  Interest, net                                             $        707      $        817      $        730
                                                                            ============      ============      ============
</TABLE>


18.     Major Customer:

        During  1998,   the  Company  had  one  customer  that  accounted  for
        approximately  13% of gross sales.  For 1997 and 1996, the Company did
        not have a customer account for more than 10% of gross sales.


19.     Acquisitions:

        Hind Apparel

        On December 20, 1996, the Company purchased the trade name,  trademarks,
        patents  and  service  marks of an  athletic  apparel  manufacturer  for
        $1,250,000 in cash. The acquisition was accounted for as a purchase. The
        entire purchase amount has been recorded as goodwill.

        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 $644,000 in cash.  The
        acquisition  was  accounted  for as a purchase.  Goodwill  of  $120,000,
        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 $1,200,000.

        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 $240,000
        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 $380,000.


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 39% of the Company's gross trade  receivables  balance was
        represented  by 11  customers  at  January 1, 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
        January 1, 1999, the value of the Company's  foreign  currency  exchange
        contracts to purchase  U.S.  dollars was  $735,000.  Gains and losses on
        forward  exchange  contracts  are  deferred and offset  against  foreign
        currency  exchange  gains and losses on the  underlying  hedged item. At
        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  January  1,  1999,  January  2,  1998 and  January  3, 1997 (in
        thousands):

<TABLE>
<CAPTION>

                                                                                       1998               1997             1996
                                                                                       ----               ----             ----

               <S>                                                                 <C>               <C>               <C>       
                Net income (loss)                                                  $    3,579        $   (4,330)       $    1,106
                                                                                   ----------        -----------       ----------

                Other comprehensive income (loss):
                  Foreign currency translation adjustment                          $     (111)       $     (183)       $       24
                  Income tax expense (benefit) related to
                     other comprehensive income (loss)                                    (32)                5                10
                  Reclassification adjustment, net of tax                                  27                --                --
                                                                                   ----------        ----------        ----------
                Other comprehensive income (loss), net
                  of tax                                                           $      (52)       $     (188)       $       14
                                                                                   -----------       -----------       ----------

                Comprehensive income (loss)                                        $    3,527        $   (4,518)       $    1,120
                                                                                   ==========        ===========       ==========

</TABLE>


<PAGE>



23.     Quarterly Information:
<TABLE>
<CAPTION>

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

                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

               <CAPTION>

                1997 (2)                                                  Quarter 1       Quarter 2      Quarter 3       Quarter 4
                ----                                                      ---------       ---------      ---------       ---------

                <S>                                                     <C>            <C>             <C>            <C>         
                Net sales                                               $     25,217   $     24,398    $    24,635    $     19,361
                Gross profit                                                   8,585          8,550          8,422           5,883
                Income (loss) from continuing operations                         570           (120)           375          (4,857)
                Loss from discontinued operations                               (287)           246           (172)            (85)
                Net income (loss)                                                283            126            203          (4,942)
                Earnings per share:
                  Basic                                                         0.05          (0.02)           0.03          (0.79)
                  Diluted                                                       0.05          (0.02)           0.03          (0.79)
        --------------
</TABLE>

       (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.

       (2) See Note 24

        During the second quarter of 1997, the Company  recorded a non-recurring
        impairment  charge of  $850,000  ($508,000  after  tax,  $0.08 per share
        diluted)  to reduce the  carrying  value of the  Company's  distribution
        facility in East Brookfield, Massachusetts to market.

        During the fourth quarter of 1997, the Company's  Australian  subsidiary
        recorded a $1,426,000  non-recurring  charge to  write-down  to accounts
        receivables  of  $858,000  and  prepaid  expenses  and  other  assets of
        $568,000 to their net realizable  values.  In addition,  a write-down of
        inventory  of  $1,340,000  is  included  in cost of sales  in 1997.  The
        Company recorded a deferred tax valuation allowance of $999,000 relating
        to net operating loss  carryforwards of the Australian  subsidiary which
        are not expected to be realized.

        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 1998 and fiscal 1997.


24.     Accounting Restatements:

        On  March  1,  1999,  the  Company  announced  that  it was  engaged  in
        discussions  with  the  Securities  and  Exchange   Commission   ("SEC")
        regarding the accounting for two specific  transactions recorded in 1995
        and 1997. As a result of those discussions, the Company has restated its
        previously reported financial results for 1995, 1996 and 1997.

        November  1995 - Barter  Transaction.  In November  1995,  the Company's
        Brookfield subsidiary  ("Brookfield") entered into a barter of inventory
        with an  approximate  book value of  $1,055,000  in exchange for cash of
        $100,000 and media and trade receivables  barter credits of $950,000 and
        $350,000,  respectively.  As of January 3,  1997,  $1,297,714  of barter
        credits were  outstanding.  In addition,  in 1995, the Company  recorded
        $345,000 of pre-tax  gross margin which was  reflected in  "discontinued
        operations" in the 1997 Form 10-K for the fiscal year 1995.

        In connection  with the  restatement  discussed with the SEC, the fiscal
        1995 gross margin was reduced by $345,000  ($206,000  after-tax or $0.04
        per diluted  share),  leaving a net carrying value of all barter credits
        of $955,000 at year end fiscal 1995. In addition,  a pre-tax  impairment
        charge of $650,000 ($388,000 after-tax,  or $0.06 per diluted share) was
        recorded for fiscal 1996 to reflect the uncertain value of the remaining
        barter credits at that time.

        Substantially  all the assets of  Brookfield,  including  the  remaining
        barter  credits,  were  sold to a third  party  in 1997.  As  such,  the
        adjustments  in 1995 and 1996 were reversed in 1997 and are reflected in
        the "Gain on disposal  of the  Brookfield  business"  in 1997 and had no
        impact on cumulative  retained  earnings at January 2, 1998.  Reflecting
        this restatement for fiscal 1997, the previously reported after-tax loss
        of $498,000 on the disposal of Brookfield  becomes an after-tax  gain on
        disposal of $96,000.

        August 1997 - License  Agreement.  In August 1997, the Company granted a
        three-year  license  to an  independent  third  party for the use of the
        "Spot-Bilt" and the "single spot" logo trademarks.  The agreement called
        for minimum  guaranteed  total royalties of $447,000 over the three-year
        life of the license.  In 1997,  the  Company,  based on the fact that it
        believed  that it had no  further  contractual  requirements  under  the
        agreement, recorded a receivable based on the minimum guaranteed present
        value of future cash flows,  utilizing  a discount  rate of 8.5%,  which
        equates to $378,000.  This amount was recorded as revenue in fiscal 1997
        resulting in $225,000 of net income, or $0.04 per diluted share. The SEC
        disagreed with the Company's original accounting.

        As a result of the  restatement,  the licensing  revenue and  associated
        profit  will be  recognized  ratably  over  the  three-year  life of the
        agreement,  rather than up front as  originally  reported.  Accordingly,
        fiscal 1997 revenue has been reduced by $346,000 ($206,000 after-tax, or
        $0.03 per diluted share).

        The following table  summarizes the net income and diluted  earnings per
        share impact of the two financial restatements (in thousands):

<TABLE>
<CAPTION>

                                                                            1997                 1996                1995
            <S>                                                         <C>                  <C>                  <C>             
             Net income effect
                Barter transaction                                      $       594          $     (388)          $     (206)
                License agreement                                             ( 206)                  -                    -
                                                                        ------------         ----------           ----------
                                                                        $       388          $     (388)          $     (206)
                                                                        ===========          ===========          ===========

             Earnings per diluted share
                As previously reported
                  Continuing operations                                 $    (0.62)          $    0.22            $    0.08
                  Discontinued operations                                    (0.14)               0.02                 0.18
                                                                        -----------          ---------            ---------
                                                                        $    (0.76)          $    0.24            $    0.26
                                                                        ===========          =========            =========

                Restatement impact
                  Continuing operations                                 $    (0.03)          $    0.00            $    0.00
                  Discontinued operations                                     0.09               (0.06)               (0.04)
                                                                        ----------           ----------           ----------
                                                                        $     0.06           $   (0.06)           $   (0.04)
                                                                        ==========           ==========           ==========

             Adjusted earnings per diluted share
                Continuing operations                                   $    (0.65)          $    0.22            $    0.08
                Discontinued operations                                      (0.05)              (0.04)                0.14
                                                                        -----------          ----------           ---------
                                                                        $    (0.70)          $    0.18            $    0.22
                                                                        ===========          =========            =========


</TABLE>



<PAGE>



<TABLE>




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

                               For the Years Ended  January 1, 1999, January 2, 1998 and January 3, 1997
                               -------------------------------------------------------------------------

                                                       (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 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

Year ended January 3, 1997:
  Allowance for doubtful accounts and discounts                         $      940      $     5,269      $    4,975       $    1,234

</TABLE>


<PAGE>


                                  Exhibit Index

Exhibit
Number                                    Description


3.1    Restated Articles of Organization as amended.

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 39 weeks 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

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*** Trademark License Agreement, dated as of February 1, 1994,
        between the Registrant and Leif J. Ostberg, Inc. is incorporated
        herein by reference to Exhibit 10.21 of the 1993 10-K Report       *

10.5** 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.             *

10.6** 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 thirteen weeks ended April 2, 1993, as amended
       (the "1993 Form 10-Q")                                              *

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

21     Subsidiaries of the Registrant

23.1   Consent of PricewaterhouseCoopers LLP

27     Financial Data Schedule for the fiscal year ended 
       January 1, 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.

***    Confidential treatment previously granted as to certain portions
       of such document.