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

                                    Form 10-K

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

 For the fiscal year ended January 2, 2004     Commission file number: 000-05083

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

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

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

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

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

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

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

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

The  aggregate  market  value of voting and  non-voting  common  equity  held by
non-affiliates  of the  registrant,  as of  July 3,  2003,  which  was the  last
business  day  of  the   registrant's   second   quarter  of  fiscal  2003,  was
approximately  $55,121,000  (based  on the  closing  sale  prices of the Class A
Common  Stock and Class B Common  Stock on such date as  reported  on the Nasdaq
National Market). For purposes of the immediately  preceding sentence,  the term
"affiliate" consists of each director and executive officer of the registrant.

The number of shares of the  registrant's  Class A Common  Stock,  $.33-1/3  par
value,  and Class B Common Stock,  $.33-1/3 par value,  outstanding  on March 3,
2004 was 2,520,647 and 3,976,911, respectively.

Portions of the  registrant's  Definitive  Proxy  Statement  for its 2004 Annual
Meeting of  Stockholders  scheduled  to be held on May 19, 2004 (the "2004 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after January 2, 2004,  are  incorporated  by reference into
Part III of this Annual Report on Form 10-K.  With the exception of the portions
of the 2004 Proxy Statement  expressly  incorporated  into this Annual Report on
Form 10-K by reference,  such document shall not be deemed filed as part of this
Annual Report on Form 10-K.
<PAGE>

                                  SAUCONY, INC.
                       INDEX TO ANNUAL REPORT ON FORM 10-K
                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2004



            Caption                                                        Page

PART I

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

PART II
Item 5.     Market for Registrant's Common Equity, Related Stockholder
             Matters and Issuer Purchases of Equity Securities                14
Item 6.     Selected Financial Data                                           16
Item 7.     Management's Discussion and Analysis of Financial
             Condition and Results of Operations                              17
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk        35
Item 8.     Financial Statements and Supplementary Data                       36
Item 9.     Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure                              36
Item 9A.    Controls and Procedures                                           36

PART III
Item 10.    Directors and Executive Officers of the Registrant                37
Item 11.    Executive Compensation                                            37
Item 12.    Security Ownership of Certain Beneficial Owners and Management
             and Related Stockholder Matters                                  37
Item 13.    Certain Relationships and Related Transactions                    38
Item 14.    Principal Accountant Fees and Services                            38

PART IV
Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K   39
            Signatures                                                        40

<PAGE>

PART I


ITEM 1 - BUSINESS

Overview

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

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

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

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

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


Our products are sold in the United  States at more than 5,500 retail  locations
and at our 17 factory outlet stores.  Outside the United States our products are
sold in 53 countries  through 22 distributors  located  throughout the world and
through  our  subsidiary  located  in  Canada,  the  Netherlands  and the United
Kingdom.

For the fiscal year ended  January 2, 2004,  we generated  total sales of $136.1
million.  During fiscal 2003 we increased  our  ownership  percentage in Saucony
Canada,  Inc.,  our  Canadian  subsidiary,  to 95% from 85% and sold our  former
Saucony footwear manufacturing facility located in Bangor, Maine.

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

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

Segments

Our business is organized into two operating  segments,  the Saucony segment and
the Other Products  segment.  The Saucony segment consists of Saucony  technical
and Originals footwear and Saucony apparel.  The Other Products segment consists
of Hind athletic apparel and Spot-bilt shoes for coaches and officials, football
and soccer cleats and casual leather  walking and workplace  footwear,  together
with sales of our products at our 17 factory outlet stores.
<PAGE>

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

                                                          Net Sales
                                                    (dollars in thousands)
                                                    ----------------------

                                  Fiscal 2003                    Fiscal 2002                 Fiscal 2001
                            ---------------------          ---------------------        --------------------
                                 $            %                 $             %              $           %
                            ----------      -----          ----------       ----        ----------      ----
<S>                         <C>               <C>          <C>               <C>        <C>              <C>
   Saucony
      Domestic..............$   81,720        60%          $   83,182        62%        $   86,414       65%
      International.........    30,991        23%              27,647        21%            23,878       18%
                            ----------       ----          ----------       ----        ----------      ----
      Total.................$  112,711        83%          $  110,829        83%        $  110,292       83%
                            ----------       ----          ----------       ----        ----------      ----

   Other Products
      Domestic..............$   21,901        16%          $   20,171        15%        $   20,070       15%
      International.........     1,454         1%               2,196         2%             1,899        2%
                            ----------       ----          ----------       ----        ----------      ----
      Total.................$   23,355        17%          $   22,367        17%        $   21,969       17%
                            ----------       ----          ----------       ----        ----------      ----

   Total....................$  136,066       100%          $  133,196       100%        $  132,261      100%
                            ==========       ====          ==========       ====        ==========      ====

_________________
</TABLE>


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


Products

Footwear

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

We design and market  separate  lines for men and women  within  most  technical
footwear categories. In keeping with our emphasis on performance,  we market and
sell our technical  footwear to athletes who have a high  participation  rate in
their sport of choice.  We address this market  through our "Loyal to the Sport"
advertising  campaign.  We believe that  consumers in this market are more brand
loyal  than  those who buy  athletic  footwear  for casual  use.  The  suggested
domestic  retail prices for most of our technical  footwear  products are in the
range of $50 to $90 per pair,  with our  top-of-the-line  running  shoes  having
suggested  domestic retail prices of up to $130 per pair. During fiscal 2003, we
introduced several new shoes targeted at the mid-priced footwear segment,  which
is the largest  segment of the running shoe market,  with retail prices  ranging
from $60 to $80 per pair.

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

We build a variety of technical  features into our shoes.  Most of our technical
running and other athletic shoes incorporate our Ground Reaction Inertia Device,
or GRID  system,  an  innovative  midsole  system that  employs  molded  strings
engineered  to create a feeling  similar to that of the "sweet spot" of a tennis
racquet. In contrast with conventional  athletic shoe midsoles,  the GRID system
is designed to react to various stress forces  differently,  thereby  maximizing
shock absorption and minimizing rear foot motion.  We have continually  improved
the GRID system since it was first introduced in 1991.
<PAGE>

We have incorporated our newest  proprietary  footwear  technology,  Custom Ride
Management,  into our core technical footwear  products.  Custom Ride Management
technology  allows us to tailor  shoes to the  individual  characteristics  of a
runner,  including  height,  weight,  foot size and gait cycles. By doing so, it
allows athletes to select a level of cushioning or stability based on their need
or preference.  During fiscal 2003, we incorporated  Custom Ride Management into
one running model and one walking model and commenced  shipment of an additional
running model with Custom Ride Management in the first quarter of fiscal 2004.

We design our Saucony  technical  cross  training,  women's  walking and outdoor
technical  trail shoes with many of the same  performance  features and "fit and
feel"  characteristics  as are found in Saucony technical running shoes.  During
fiscal 2003, our most popular non-running  technical athletic shoe was a woman's
performance walking shoe.

Technical  footwear,  inclusive of full margin and closeout technical  footwear,
accounted for  approximately  71% of our fiscal 2003 consolidated net sales, 70%
of  our  fiscal  2002  consolidated  net  sales  and  61%  of  our  fiscal  2001
consolidated net sales.

Originals  Footwear.  In 1998, we reintroduced a number of our technical running
shoe models from the early  1980's under the name  "Originals."  These shoes are
designed  to appeal to  younger  consumers  who do not  generally  wear them for
athletic purposes.  We believe our Originals shoes have benefited from the trend
toward  "retro"  products in  footwear  and  apparel.  We offer these shoes in a
variety  of styles  with over 100  combinations  of colors  and  materials.  The
suggested  retail  prices for our  Originals  are in the range of $40 to $60 per
pair.

Our initial Originals offering consisted of two models, the "Jazz Originals" and
the  "Shadow  Originals."  In light of the  success of these  products,  we then
expanded the Originals product line to include color and material  variations on
our initial Originals and also introduced children's models. During fiscal 2003,
we  introduced  additional  Originals  products,  including  contemporary-styled
reintroductions  of our technical  running shoe models from the early 1980's and
other casual footwear designed for the 12 to 25 year old footwear consumer.

Originals  footwear,  inclusive of full margin and closeout originals  footwear,
accounted for  approximately  11% of our fiscal 2003 consolidated net sales, 12%
of  our  fiscal  2002  consolidated  net  sales  and  21%  of  our  fiscal  2001
consolidated net sales. We attribute the decrease in sales of Originals footwear
primarily  to a shift  in  consumer  preference  to  other  product  categories,
primarily basketball footwear, which we do not sell.

Spot-bilt

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

Athletic Apparel

Hind

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

Saucony

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

Product Design and Development

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

In fiscal 2003, we spent  approximately $1.67 million on our product development
programs,  compared  to  approximately  $1.61  million in fiscal  2002 and $1.14
million in fiscal 2001. Most of our research and development expenditures relate
to Saucony brand footwear products.

Sales and Marketing

Saucony

We sell our Saucony  footwear  products at more than 5,500 retail outlets in the
United  States,   primarily  higher-end,   full-margin  sporting  goods  chains,
independent  sporting  goods  stores,  athletic  footwear  specialty  stores and
department  stores.  One  of  our  domestic  Saucony  customers   accounted  for
approximately 9% of our domestic Saucony segment net sales in fiscal 2003, 9% of
our  domestic  Saucony  segment net sales in fiscal 2002 and 11% of our domestic
Saucony  segment  net sales  fiscal  2001.  We did not derive 10% or more of our
consolidated  revenue from sales to one  customer in any of fiscal 2003,  fiscal
2002 or fiscal 2001.

We maintain a corporate  sales group that is directly  responsible for the sales
activity in our largest 38  accounts.  We also sell our  footwear and apparel to
retail  outlets  in the United  States  through  15  independent  manufacturers'
agents, whose organizations employ  approximately 48 sales  representatives.  We
coordinate  the  efforts  of  these  representatives  through  our  field  sales
management group. Our web site, saucony.com, receives thousands of "hits" weekly
from consumers  looking for new product  information and race and event data, as
well as general Saucony information.

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

We strive to enhance our  reputation and image in the  marketplace  and increase
recognition of the Saucony brand name by advertising our products  through print
media and  television  advertising.  For our  technical  footwear,  we advertise
primarily in magazines such as "Runner's World",  "Self", "Shape" and "Fitness",
as well as several regional running periodicals. We also sponsor sporting events
and  telecasts  to  increase  brand  awareness  and the  image of our  technical
footwear to athletes. Examples include "Saucony Running and Racing" seen monthly
on ESPN and sponsorship of the Los Angeles Marathon. To build in-store presence,
we use account-specific  and in-store  promotions,  such as athlete appearances,
special events and discounts for store employee  purchases of our products.  For
our Originals line, we generally advertise in "lifestyle"  magazines that target
12 to 25 year olds, such as "Seventeen" and "Maxim".

Most of our  advertising  and  promotional  programs  for our Saucony  brand are
directed toward the ultimate consumer.  We also promote the Saucony brand to the
retail trade through attendance at trade shows and similar events.

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


Hind

We sell our Hind products  domestically at independent sporting goods stores and
athletic footwear specialty stores through 16 independent manufacturers' agents,
whose organizations employ approximately 34 sales  representatives.  We sell our
Hind  products  outside  the  United  States  in three  countries,  through  two
distributors and our subsidiary in Canada and the United Kingdom.

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

Factory Stores

We  currently  operate 17 factory  outlet  stores at which we sell our  Saucony,
Hind,  Spot-bilt products and the products of third parties.  To avoid competing
against full margin retail outlets for these  products,  we generally  limit the
items offered at these stores to products with  cosmetic  defects,  discontinued
merchandise, slow moving products and special make-up footwear products. As part
of our growth  strategy,  we plan to open factory  stores in  selected,  factory
outlet  malls in areas in which we believe the Saucony  brand is  underdeveloped
and there is a  significant  potential for sales and profit  growth.  We believe
that this approach will strengthen Saucony brand name recognition. During fiscal
2003,  we opened five new factory  outlet  stores.  In  addition,  we opened two
factory outlet stores in the first quarter of fiscal 2004.

Suppliers

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

We perform  an array of  quality  control  procedures  at various  stages of the
production process, from testing of product prototypes prior to manufacture,  to
inspection of finished goods prior to shipment.  Our quality  control program is
designed   to  ensure  that   finished   goods  meet  our   established   design
specifications  and high quality standards.  We employ  approximately 22 Saucony
footwear  quality control  personnel in China.  Our personnel in China regularly
visit our footwear manufacturers throughout Asia to monitor, oversee and improve
the quality control and production processes.

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

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

The number of our foreign suppliers and the percentage of products sourced by us
from particular  foreign suppliers varies from time to time. During fiscal 2003,
we purchased footwear products from four overseas suppliers.  One such supplier,
located in China, accounted for approximately 32% of our total overseas footwear
purchases by dollar volume.
<PAGE>

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

Our operations are subject to compliance with the laws and regulations  enforced
by the United States  Customs  Service and to the customary  risks of conducting
business abroad,  including currency  fluctuations,  increases in customs duties
and related fees,  import  controls and trade barriers such as the imposition of
import  quotas,  restrictions  on the transfer of funds,  work stoppages and, in
certain parts of the world,  political  instability causing disruption of trade.
To date, these factors have not had a material adverse affect on our operations.

Distribution and Inventory

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

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

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

Backlog

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

Our backlog of unfilled  orders was  approximately  $59.9  million at January 2,
2004 and $52.4  million at January 3, 2003. We expect that all of our backlog at
January 2, 2004 will be shipped in fiscal 2004,  provided  that our customers do
not cancel their orders.  However,  our backlog does not  necessarily  represent
actual future shipments because orders may be cancelled by our customers without
financial penalty.  The rate of customer order cancellations can vary quarter to
quarter and year to year. Customers may also reject nonconforming products.

We did not  derive  10% or more of our  consolidated  revenue  from sales to one
customer in any of fiscal 2003, fiscal 2002 or fiscal 2001. Approximately 44% of
our gross trade  receivables  balance was represented by 15 customers at January
2, 2004. We  anticipate  that our results of operations in any given period will
depend to a significant  extent upon sales to major customers.  The loss of or a
reduction in the level of sales to one or more major customers or the failure of
a major  customer to proceed  with a large order or to timely pay us for a large
order could materially reduce our sales.

<PAGE>

Trade Policy

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

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

Competition

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

Trademarks

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

Employees

As of January 2, 2004, we employed approximately 311 people worldwide.  Of these
employees, approximately 237 were in the United States and approximately 74 were
in foreign locations.  We believe that our employee relations are excellent.  We
have  never  experienced  a strike  or other  work  stoppage.  Approximately  24
employees in our Peabody, Massachusetts warehouse were represented by a union as
of January 2, 2004.  The  collective  bargaining  agreement with the union which
represents our warehouse  employees expires on April 30, 2008. None of our other
employees are  represented by a union or are subject to a collective  bargaining
agreement.
<PAGE>

Available Information

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

EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers, as of March 5, 2004 are as follows:

            Name                  Age                        Position

John H. Fisher                  56        Chairman of the Board, President and
                                          Chief Executive Officer

Charles A. Gottesman            53        Vice Chairman of the Board and
                                          Executive Vice President,
                                          Business Development

Michael Umana                   41        Executive Vice President, Finance,
                                          Chief Operating and Financial Officer,
                                          Treasurer and Assistant Clerk

Michael Jeppesen                44        Senior Vice President, Manufacturing
                                          and Design

Samuel S. Ward                  41        Senior Vice President, Operations
                                          and Technology

Roger P. Deschenes              45        Vice President, Controller,
                                          Chief Accounting Officer and
                                          Assistant Treasurer



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

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

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


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

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

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

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

ITEM 2 - PROPERTIES

Our general and executive offices and our main distribution facility are located
in  Peabody,  Massachusetts  and are  owned by us.  This  facility  consists  of
approximately  126,000  square feet, of which  107,000  square feet is warehouse
space and 1,000  square  feet is used for a factory  outlet  store.  During  the
second and third  quarters of 2004,  we plan to expand and renovate our Peabody,
Massachusetts  facility,  increasing  our office space by  approximately  15,000
square feet, at a cost of approximately $2,500,000 to $3,000,000.

We also own a facility in  Brookfield,  Massachusetts  containing  approximately
109,000 square feet, which we use for warehousing and distribution.

We lease  space  for our  retail  stores  at  factory  outlet  malls  and  other
locations. These stores have an aggregate of approximately 38,000 square feet of
retail space at 17 locations in several states.  The terms of these leases range
from five to ten  years.  The  aggregate  effective  annual  commitment  for our
factory outlet store leases is approximately  $1,353,000.  We also own a factory
outlet  store  containing  approximately  3,000  square feet of retail  space in
Bangor, Maine.

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


ITEM 3 - LEGAL PROCEEDINGS

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


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

During the fiscal quarter ended January 2, 2004, there were no matters submitted
to a vote of security holders of Saucony, through the solicitation of proxies or
otherwise.


<PAGE>

PART II

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

Our Class A Common Stock 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
                                                              ----          ---             ----             ---


<S>                                                        <C>           <C>            <C>              <C>
     Fiscal Year ended January 2, 2004

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


     Fiscal Year ended January 3, 2003

     First quarter.........................................$    7.000    $   5.400      $    6.950       $   5.375
     Second quarter........................................     8.400        6.710           8.590           6.600
     Third quarter.........................................     7.900        5.850           7.850           5.650
     Fourth quarter........................................    10.040        6.000          10.000           5.700

</TABLE>

On March 3, 2004,  there were 228  stockholders  of record of the Class A Common
Stock and 253  stockholders  of record of the Class B Common Stock.  In general,
only the Class A Common Stock has voting rights.

Dividend Policy

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

On February 17, 2004 our Board of  Directors  adopted an increase in our regular
quarterly  dividend  to an annual rate of $0.200 per share on our Class A Common
Stock and  $0.220  per share on our Class B Common  Stock.  Commencing  with the
quarterly  dividend  declared  on  February  17,  2004,  the Board of  Directors
increased the regular  quarterly  dividend on our Class A Common Stock to $0.050
per share and the  regular  quarterly  dividend  on our Class B Common  Stock to
$0.055 per share.

Also,  on February  17,  2004,  our Board of  Directors  declared a special cash
dividend  of $4.00  per  share on each of our  Class A Common  Stock and Class B
Common Stock.  The special  dividend which  amounted to $26,000,000  was paid on
March 17,  2004 to  stockholders  of record at the close of business on March 3,
2004.
<PAGE>

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

Our  declaration of future cash dividends will be at the discretion of our Board
of  Directors  and is  dependent  upon,  among other  things,  future  earnings,
operations,  capital  requirements,  our general financial  position and general
business  conditions.  The terms of our credit facility  generally  restrict our
ability to pay cash  dividends,  together with other  repurchases or redemptions
of, or other  specified  distributions  with respect to, our capital  stock,  in
excess of  $5,000,000  in any fiscal  year.  Our  special  dividend  declared in
February 2004 was excepted from this restriction.
<PAGE>

ITEM 6 - SELECTED FINANCIAL DATA

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

The selected  consolidated  financial data set forth below as of January 2, 2004
and January 3, 2003 and for the years ended January 2, 2004, January 3, 2003 and
January 4, 2002 are derived from the audited  consolidated  financial statements
of Saucony  included  in this  Annual  Report on Form 10-K.  All other  selected
consolidated  financial  data set forth below is derived from audited  financial
statements  of Saucony  not  included in this  Annual  Report on Form 10-K.  Our
historical  results are not necessarily  indicative of its results of operations
to be expected in the future.
<TABLE>
<CAPTION>

                                                          Year         Year        Year        Year        Year
                                                          Ended        Ended       Ended       Ended       Ended
                                                         Jan. 2,      Jan. 3,     Jan. 4,     Jan. 5,    Dec. 31,
                                                          2004         2003        2002       2001(1)      1999
                                                         -------      ------      ------      -------    --------
                                                                     (in thousands except per share amounts)
<S>                                                    <C>          <C>         <C>         <C>          <C>
Selected Income Statement Data

Revenues ..............................................$ 136,445    $ 133,499   $ 132,364   $ 167,920    $ 155,887

Operating income (loss) (2), (3).......................   12,997        8,943        (269)     16,123       18,196

Net income (loss)......................................    8,488        5,243        (940)      8,963       10,319

Earnings (loss) per common share - basic
   Class A common stock................................$    1.31    $    0.81   $   (0.15)  $    1.37    $    1.55
                                                       =========    =========   =========   =========    =========

   Class B common stock................................$    1.44    $    0.89   $   (0.16)  $    1.51    $    1.71
                                                       =========    =========   =========   =========    =========

Earnings (loss) per common share - diluted
   Class A common stock................................$    1.26    $    0.80   $   (0.15)  $    1.34    $    1.48
                                                       =========    =========   =========   =========    =========
   Class B common stock................................$    1.38    $    0.88   $   (0.16)  $    1.47    $    1.63
                                                       =========    =========   =========   =========    =========

Weighted average common shares and
   equivalents outstanding
   Basic:
     Class A common stock .............................    2,521        2,563       2,567       2,606        2,679
     Class B common stock .............................    3,583        3,544       3,513       3,586        3,613
                                                           -----        -----       -----       -----        -----
                                                           6,107        6,080       6,192       6,292        6,104
                                                           =====        =====       =====       =====        =====
   Diluted: (4)
     Class A common stock .............................    2,521        2,563       2,567       2,606        2,684
     Class B common stock .............................    3,850        3,623       3,513       3,735        3,884
                                                           -----        -----       -----       -----        -----
                                                           6,186        6,080       6,341       6,568        6,371
                                                           =====        =====       =====       =====        =====
Cash dividends per share of common stock:
     Class A common stock..............................$   0.120           --          --          --           --
     Class B common stock..............................$   0.132           --          --          --           --


Selected Balance Sheet Data
                                                          Jan. 2,      Jan. 3,     Jan. 4,     Jan. 5,    Dec. 31,
                                                           2004         2003        2002        2001        1999
                                                       ----------    ---------   ---------   --------    ---------
                                                                               (in thousands)

Current assets.........................................$  92,826     $ 80,670    $ 69,538    $ 73,531    $  66,480
Current liabilities....................................   18,803       16,343      12,325      15,919       15,403
Working capital........................................   74,023       64,327      57,213      57,612       51,077
Total assets...........................................  100,193       87,540      78,100      83,285       77,181
Long-term debt and capitalized lease
   obligations, net of current portion.................       --           --          --          34          292
Stockholders' equity...................................   79,054       68,696      63,162      64,620       58,962

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

(1)      See Note 1 to our Consolidated Financial Statements regarding reporting period.
(2)      See Note 15 to our Consolidated Financial Statements regarding our Bangor, Maine plant closing and other
          charges incurred in fiscal 2001.
(3)      In fiscal 2000 we sold substantially all of the assets and business of our former cycling division.  In
          connection with the sale we recorded a pre-tax loss of $2,661 which is included in the operating income
          for fiscal 2000.
(4)      Includes common stock and dilutive options and stock warrants, with the exception of fiscal 2001, since
          the common stock equivalents were ant-dilutive.
</TABLE>
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Introduction

In the following management's discussion and analysis of financial condition and
results of  operations:  (1) when we refer to the 2003 fiscal year,  we mean the
fiscal year ended January 2, 2004, (2) when we refer to the 2002 fiscal year, we
mean the fiscal year ended January 3, 2003, (3) when we refer to the 2001 fiscal
year,  we mean the fiscal year ended  January 4, 2002 and (4) all amounts are in
thousands, except share and per share amounts.

Business Overview

Our core business  focus is to design,  develop and market  performance-oriented
athletic  footwear and athletic  apparel,  which we sell under the Saucony brand
name, and athletic  apparel,  which we sell under the Hind brand name.  Sales of
Saucony brand products  accounted for  approximately 83% of our consolidated net
sales for fiscal 2003, fiscal 2002 and fiscal 2001, the significant  majority of
which are  sales of  Saucony  footwear  products.  Our  results  of  operations,
financial  position  and cash  flows  are  heavily  dependent  upon our  Saucony
footwear  business.  Our ability to increase Saucony footwear sales is dependent
in  significant  part upon  increasing  our  share of the  market  for  athletic
footwear sales.

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

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

Our Saucony  technical  footwear and  Originals  footwear,  along with  athletic
apparel we sell under the Saucony brand name,  constitute one operating segment.
We have another  operating  segment which  consists of athletic  apparel we sell
under the Hind brand name, shoes for coaches and officials,  football and soccer
cleats and casual  leather  walking  and  workplace  footwear  we sell under the
Spot-bilt brand name and sales of all of our and third parties'  products at our
17  factory  outlet  stores.  We refer to this  segment  as our  Other  Products
segment.  Sales from our Other Products segment  accounted for approximately 17%
our  consolidated  net sales for fiscal 2003,  fiscal  2002,  and fiscal 2001. A
majority of these sales are sales of our Hind athletic apparel.

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

Critical Accounting Policies and Estimates

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

-    Revenue Recognition

     We  recognize  revenue  from  product  sales when title  passes and all the
     rewards and risk of loss have been  transferred  and all the  criteria  for
     revenue  recognition  described in SEC Staff  Accounting  Bulletin No. 101,
     Revenue  Recognition  in Financial  Statements,  as amended by SAB 101A and
     101B are met. Title  generally  passes upon shipment or upon receipt by the
     customer. We record retail store revenues at the time of sale.

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

-    Accounts Receivable - Allowances for Doubtful Accounts

     We maintain  allowances  for doubtful  accounts and therefore must estimate
     losses  resulting  from the  inability of our  customers  to make  required
     payments.  We analyze our accounts receivable,  historical bad debt trends,
     customer  creditworthiness,  economic  trends and  changes in our  customer
     payment  terms when  evaluating  the adequacy of the allowance for doubtful
     accounts.  As noted  in Note 19 of our  consolidated  financial  statements
     included  in Item 8 of this  Annual  Report on Form 10-K,  we have a credit
     risk  concentration  due  to the  concentration  of  our  domestic  Saucony
     footwear sales among a relatively  small customer base. If the liquidity or
     financial  condition of any of our larger  customers  were to  deteriorate,
     resulting in an  impairment of their ability to make payments due us, or if
     payment  schedules of our customers are otherwise  delayed from  historical
     trends,  we  would be  required  to  record  additional  allowances  to our
     provision  for  doubtful  accounts.  This would  increase  our  general and
     administrative  expenses  and could have a material  adverse  effect on our
     results of operations and cash flows.

-    Inventories

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

-    Property, Plant and Equipment

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

-    Impairment of Long-Lived Assets

     We review the recoverability of our long-lived assets (property,  plant and
     equipment and  trademarks)  when events or changes in  circumstances  occur
     that indicate that the carrying value of the assets may not be recoverable.
     We recognize an impairment of a long-lived  asset if the carrying  value of
     the  long-lived  asset is not  recoverable  from its estimated  future cash
     flows. We measure an impairment loss as the difference between the carrying
     amount of the asset and its  estimated  fair value.  During fiscal 2003 and
     fiscal 2002, we recorded  impairment charges of $15 and $44,  respectively,
     to reduce  the  carrying  amount of  long-lived  assets  used in our retail
     operations,  which carrying value we deemed to be not recoverable  from its
     future  cash flows.  The charge is  included in general and  administrative
     expenses.   Should  future  events  and  circumstances   cause  cash  flows
     associated with any of our long-lived assets to decline  significantly from
     our  estimates,  we may need to record charges for impairment of long-lived
     assets,  which would increase our general and  administrative  expenses and
     could have a material  adverse  effect on our  results  of  operations  and
     financial position.

     We no  longer  amortize  goodwill  and  other  indefinite-lived  intangible
     assets.  Rather,  we  review  them  for  impairment.  We  would  record  an
     impairment  if the carrying  value of the asset exceeds our estimate of its
     fair market value. We record  impairment  charges as a component of general
     and  administrative  expenses.  We  test  the  impairment  of our  goodwill
     annually. We completed an annual test for impairment at January 2, 2004 and
     determined that goodwill was not impaired. At January 2, 2004, the carrying
     value of goodwill was $912.  Our  estimates of future cash flows may differ
     materially from actual cash flows due to, technological  changes,  economic
     conditions or changes to our business  operations.  A charge for impairment
     of goodwill may be necessary if we experience a significant  decline in our
     future cash flows. Such a charge would affect our results of operations and
     financial position.

-    Income Taxes

     We estimate our income taxes in each of the jurisdictions  that we operate.
     This  process  requires us to estimate our current tax  exposure,  together
     with assessing temporary  differences,  which result in deferred tax assets
     and liabilities.  We recognize deferred tax assets and liabilities based on
     the difference between the financial statement carrying amounts and the tax
     bases of assets and  liabilities.  We  regularly  review our  deferred  tax
     assets  for  recoverability  and  establish  valuation  allowances  when we
     determine  that it is more  likely  than not that the  deferred  tax assets
     resulting  from  operating  losses  will not be  realized.  Realization  of
     deferred tax assets (such as net operating loss carryforwards) is dependent
     upon future  taxable  earnings and is therefore  uncertain.  During  fiscal
     2003,  we  reversed  $613 of  deferred  tax  valuation  allowances  on loss
     carryforwards that we expect to realize,  decreasing our tax expense in the
     period  we made  that  reversal.  At  January  2,  2004,  we have  provided
     valuation  allowances  in an amount  equal to our  long-term  deferred  tax
     assets which have resulted from net operating losses in certain foreign and
     state tax jurisdictions.
<PAGE>

     U.S. generally accepted accounting  principles allow companies to defer the
     recognition  of  tax  liability  on   undistributed   earnings  of  foreign
     subsidiaries that are indefinitely  reinvested in the foreign operation. At
     January 2, 2004, we had approximately  $6,604 of undistributed  earnings of
     foreign subsidiaries that are indefinitely reinvested in foreign operations
     for which we have not recorded deferred income taxes. Were we to repatriate
     foreign  earnings which have been  designated as  indefinitely  invested in
     foreign  operations,  we would record additional tax expense at the time of
     repatriation.

-    Stock-Based Compensation

     We have  elected to continue to measure  stock-based  compensation  expense
     using the intrinsic value method. Accordingly, we measure compensation cost
     for stock options and restricted stock awards as the excess, if any, of the
     quoted market price of our stock at the date of the grant over the exercise
     price an employee must pay to acquire the stock. We calculate  compensation
     cost for common stock  purchase  warrants  based upon the fair value at the
     grant date. We amortize stock-based  compensation arising from the issuance
     of  restricted  stock  warrants,   below  market  options  and  stock-based
     compensation resulting from common stock purchase warrants over the vesting
     period of the stock grant, option term or the warrant term. Amortization of
     stock-based compensation amounted to $37 for 2003, $43 for 2002 and $38 for
     2001,  respectively.  In fiscal  2003,  we  accelerated  the vesting of the
     common  stock  purchase  warrants  which  required  us to  record  $416  of
     stock-based   compensation  expense.  Had  we  determined  the  stock-based
     compensation expense for our stock options based upon the fair value at the
     grant date for stock option  awards our reported net income would have been
     reduced by $1,138 in fiscal  2003,  $684 in fiscal  2002 and $746 in fiscal
     2001.

-    Hedge Accounting for Derivatives

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

     We estimate the fair value of our foreign currency exchange contracts based
     on foreign  exchange  rates as of January 2, 2004. At January 2, 2004,  the
     notional  value our foreign  currency  exchange  contracts to purchase U.S.
     dollars  was  $7,448.  The fair  value  of our  foreign  currency  exchange
     contracts  at  January  2, 2004 was  $7,028.  We  recorded a charge of $420
     against  earnings  to adjust our  derivatives  to their fair  value.  Since
     January 2, 2004,  the value of the U.S.  dollar has  decreased  against the
     Pound  Sterling and has  strengthened  against the Canadian  dollar and the
     Euro.  If the  U.S.  dollar  were to  weaken  in  comparison  to the  Pound
     Sterling,  the  Canadian  dollar or the Euro,  we would  record  additional
     charges in fiscal 2004 to adjust our  derivatives to their fair value.  The
     amount of the  potential  charge is  dependent  upon the  change in foreign
     exchange  rates from the January 2, 2004 rates to the time that the forward
     exchange contract matures or to the foreign exchange rates as of the period
     end reporting date.  These charges could have a material  adverse effect on
     our future results of operations, financial position and cash flows.
<PAGE>


Highlights
<TABLE>
<CAPTION>

                                                                          Increase (Decrease)
                                                                          -------------------

                                                                 2003 vs. 2002           2002 vs. 2001
                                                                 -------------           -------------

<S>                                                            <C>          <C>       <C>             <C>
     Net sales.................................................$  2,870     2.2%      $    935        0.7%
     Gross profit..............................................   6,607    14.4          3,703        8.8
     Selling, general and administrative expenses..............   2,921     7.8         (3,129)      (7.7)

</TABLE>
<TABLE>
<CAPTION>

                                                                               $ Change
                                                                               --------

                                                                 2003 vs. 2002           2002 vs. 2001
                                                                 -------------           -------------

<S>                                                                <C>                      <C>
     Operating income...........................................   $  4,054                 $ 9,212
     Income before income taxes and minority interest...........      4,293                   9,645
     Net income.................................................      3,245                   6,183

</TABLE>
<TABLE>
<CAPTION>

                                                                       Percent of Net Sales
                                                                       --------------------

                                                                 2003          2002           2001
                                                                 ----          ----           ----

<S>                                                              <C>           <C>            <C>
     Gross profit.............................................   38.5%         34.4%          31.9%
     Selling, general and administrative expenses.............   29.5          28.0           30.6
     Operating income (loss) .................................    9.6           6.7           (0.2)
     Income (loss) before income taxes and minority interest..   10.0           7.0           (0.3)
     Net income (loss)........................................    6.2           3.9           (0.7)

</TABLE>

Consolidated Net Sales

Net sales increased  $2,870,  or 2%, to $136,066 in fiscal 2003 from $133,196 in
fiscal 2002.  Net sales  increased  $935, or 1%, to $133,196 in fiscal 2002 from
$132,261 in fiscal 2001.

On a geographic basis, domestic sales increased $268, to $103,621 in fiscal 2003
from $103,353 in fiscal 2002.  International  sales increased  $2,602, or 9%, to
$32,445 in fiscal 2003 from $29,843 in fiscal 2002.  $2,925 of our international
sales increase in fiscal 2003 is  attributable  to favorable  changes in foreign
exchange rates, as compared to fiscal 2002.  Domestic sales decreased $3,131, or
3%, to $103,353 in fiscal 2002 from $106,484 in fiscal 2001. International sales
increased $4,066, or 16%, to $29,843 in fiscal 2002 from $25,777 in fiscal 2001.
Favorable   changes  in  foreign  exchange  rates  accounted  for  $214  of  the
international sales increase in fiscal 2002.


   Saucony Segment

                            2003                  2002
                       Total / Change        Total / Change           2001
                       from Prior Year      from Prior Year          Total
                       ---------------      ---------------          -----

     Net Sales          $112,711 / 2%        $110,829 / 1%         $110,292



<PAGE>

Net Sales:  2003 Compared to 2002

Worldwide  net sales of Saucony  branded  footwear and Saucony  branded  apparel
increased  $1,882,  or 2%, to $112,711  in fiscal  2003 from  $110,829 in fiscal
2002, due primarily to favorable  currency exchange resulting from a weaker U.S.
dollar  against  European  and  Canadian  currencies  and,  to a  lesser  extent
increased sales of Saucony  apparel and a 2% increase in domestic  footwear unit
volumes,  partially offset by decreased  international footwear unit volumes and
lower average domestic and international  wholesale per pair selling prices. The
volume of  footwear  sold in fiscal 2003  increased  1% to 3,761 pair from 3,707
pair in fiscal 2002, primarily due to increased domestic technical footwear unit
volumes,  increased  domestic  Originals  footwear  unit  volumes and  increased
special makeup footwear unit volumes,  partially  offset by lower  international
technical and lower international Originals footwear unit volumes.

Domestic  net sales  decreased  $1,462,  or 2%, to $81,720  in fiscal  2003 from
$83,182 in fiscal 2002,  due  primarily  to a 61% decrease in closeout  footwear
unit  volumes  and a 7%  decrease  in  the  overall  domestic  average  domestic
wholesale  per  pair  selling  price,  offset  partially  by a 12%  increase  in
technical  footwear  unit  volumes,  an 8% increase in Originals  footwear  unit
volumes and a 2% increase in special makeup footwear unit volumes. The volume of
domestic footwear sold in fiscal 2003 increased 2% to 2,833 pair from 2,775 pair
in fiscal 2002. The lower average  wholesale selling price per pair was due to a
change  in the  product  mix of our  technical,  Originals  and  special  makeup
footwear sold to lower priced  products and increased  special  makeup  footwear
unit volumes and increased  Originals footwear unit volumes,  both of which sell
at prices below our first quality technical footwear.

Sales of closeout  footwear  accounted for  approximately 2% of domestic Saucony
net sales in fiscal 2003 compared to 5% in fiscal 2002. The decrease in closeout
footwear  sales was due to lower  inventory  quantities of past season  footwear
available  for sale in fiscal  2003 due to  improvements  in our  supply  chain.
Originals  footwear  accounted  for 20% of fiscal 2003  domestic  footwear  unit
volume versus 19% in fiscal 2002. The unit volume increase in Originals footwear
was primarily due to increased  unit volume of Jazz Originals sold into the mall
channel.  Our domestic  order  cancellation  rate for fiscal 2003 was comparable
with our historical averages.

International net sales increased $3,344, or 12%, to $30,991 in fiscal 2003 from
$27,647 in fiscal 2002, due primarily to favorable  currency exchange  resulting
from a weaker U.S.  dollar against  European and Canadian  currencies  and, to a
lesser extent,  increased sales of Saucony  apparel,  partially  offset by lower
average  per pair  wholesale  selling  prices and a decrease  in  footwear  unit
volumes.  The volume of international  footwear sold in fiscal 2003 decreased to
928 pair from 932 pair in fiscal 2002. Footwear unit volumes decreased 3% at our
international  distributor  business,  partially  offset  by  a 1%  increase  in
footwear unit volume sold at our  subsidiaries in fiscal 2003 compared to fiscal
2002. The footwear unit volume increase at our subsidiaries was due primarily to
increased  special makeup  footwear unit volume sold by our British  subsidiary,
partially  offset by decreased  sales of our technical  footwear at our Canadian
subsidiary and, to a lesser extent,  decreased sales of technical  footwear unit
volume  sold at our Dutch  subsidiary.  Sales at our  international  distributor
business decreased in fiscal 2003 due primarily to decreased  Originals footwear
unit volume sold in the Japanese  footwear  market.  Distributor  sales into the
Japanese footwear market accounted for 4% of international sales in fiscal 2003,
compared to 9% in fiscal 2002.  International  distributor footwear unit volumes
decreased 3%, due primarily to a 51% decrease in Originals footwear unit volumes
sold in  Japan,  offset  by a 29%  increase  in  footwear  unit  volumes  due to
increased  footwear  unit  volumes  sold in  Australia,  Israel and Sweden.  The
international footwear average wholesale per pair selling price decreased due to
a change in product mix to lower priced  technical  footwear and increased  unit
volumes of special  makeup  footwear  sold at our  British  subsidiary  and by a
change in the international  distributors  product mix for technical footwear to
lower priced product.
<PAGE>

Net Sales:  2002 Compared to 2001

Worldwide  net sales of Saucony  branded  footwear and Saucony  branded  apparel
increased  $537, or 1%, to $110,829 in fiscal 2002 from $110,292 in fiscal 2001,
due  primarily  to a 10%  increase in  international  footwear  unit volumes and
higher  domestic  wholesale  per pair average  sell prices,  offset by decreased
overall  domestic  footwear unit volumes.  The volume of footwear sold in fiscal
2002 decreased 9% to 3,707 pair from 4,075 pair in fiscal 2001, primarily due to
lower Originals and closeout footwear unit volumes. The overall average domestic
wholesale  selling price per pair of domestic  footwear  increased 12% in fiscal
2002 versus fiscal 2001,  due to an increase in technical  footwear unit volumes
and  decreased  closeout  footwear  unit  volumes and  Originals  footwear  unit
volumes,  both of  which  sell at  prices  below  our  first  quality  technical
footwear.

Domestic  net sales  decreased  $3,232,  or 4%, to $83,182  in fiscal  2002 from
$86,414 in fiscal 2001,  due  primarily to a 42% decrease in Originals  footwear
unit  volumes and a 52%  decrease  in closeout  footwear  unit  volumes,  offset
partially by a 16% increase in technical footwear unit volumes, a 5% increase in
special make-up  footwear unit volumes and a 12% increase in the overall average
domestic  wholesale per pair selling price. The volume of domestic footwear sold
in fiscal 2002  decreased 14% to 2,775 pair from 3,224 pair in fiscal 2001.  The
higher average wholesale selling price per pair was due to increased unit volume
of first quality technical  footwear and lower unit volumes of closeout footwear
and  Originals  footwear,  both of which sell at prices below our first  quality
technical footwear. Sales of closeout footwear accounted for approximately 5% of
domestic  Saucony net sales in fiscal 2002  compared to 12% in fiscal 2001.  The
decrease in closeout  footwear  sales was due to lower  inventory  quantities of
past season  footwear  available  for sale in fiscal  2002.  Originals  footwear
accounted  for 19% of fiscal 2002  domestic  footwear  unit volume versus 29% in
fiscal 2001. The unit volume decrease in Originals footwear was primarily due to
a shift in consumer preference to other product categories, primarily basketball
footwear,  which we do not sell. Our domestic order cancellation rate for fiscal
2002 was comparable with our historical averages.

International net sales increased $3,769, or 16%, to $27,647 in fiscal 2002 from
$23,878 in fiscal 2001, due primarily to a 10% increase in footwear unit volumes
and, to a lesser extent the  favorable  impact on a weaker U.S.  dollar  against
European  currencies,  partially  offset  by lower  average  per pair  wholesale
selling  price.  The  volume  of  international  footwear  sold in  fiscal  2002
increased  10% to 932 pair from 852 pair in fiscal 2001.  Footwear  unit volumes
increased  36% at our European and Canadian  subsidiaries,  which was  partially
offset by a 16% unit volume decrease at our international  distributor  business
in fiscal 2002 compared to fiscal 2001. The footwear unit volume increase at our
European and Canadian  subsidiaries  was due to increased sales of our technical
footwear.  Sales at our international  distributor  business decreased in fiscal
2002 due  primarily  to  decreased  Originals  footwear  unit volume sold in the
Japanese  footwear market.  Distributor  sales into the Japanese footwear market
accounted  for 9% of  international  sales in fiscal  2002,  compared  to 14% in
fiscal 2001.


  Other Products Segment

                               2003                   2002
                          Total / Change         Total / Change           2001
                          from Prior Year        from Prior Year          Total
                          ---------------        ---------------          -----

    Net Sales              $23,355 / 4%           $22,367 / 2%           $21,969



The Other  Products  segment  consists of our Hind athletic  apparel,  seventeen
factory outlet stores,  Spot-bilt  coaches' and officials'  shoes,  football and
soccer cleats and casual  walking and  workplace  footwear and sales of our Hyde
Authentic casual  footwear,  the distribution of which we discontinued in fiscal
2002. Each of these businesses  represented less than 10% of total revenues and,
in the aggregate, represented 17% of consolidated net sales in fiscal 2003.
<PAGE>

Net Sales:  2003 Compared to 2002

Worldwide  sales of Other Products  increased  $988, or 4%, to $23,355 in fiscal
2003 from $22,367 in fiscal 2002 due primarily to increased sales at our factory
outlet  division  and  increased  domestic  sales  of our  Hind  brand  apparel,
partially offset by lower  international sales of our Hind brand apparel and the
discontinuance of our Hyde Authentics footwear line.

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

International  net sales of Other Products  decreased $742, or 34%, to $1,454 in
fiscal 2003 from $2,196 in fiscal 2002,  due primarily to decreased Hind apparel
sales at our European and Canadian subsidiaries.

Net Sales:  2002 Compared to 2001

Worldwide  sales of Other Products  increased  $398, or 2%, to $22,367 in fiscal
2002 from  $21,969  in fiscal  2001 due  primarily  to  increased  domestic  and
international  sales of our Hind brand apparel,  partially offset by lower sales
of our Hyde Authentics footwear and lower sales at our factory outlet division.

Domestic net sales of Other Products increased $101, or 1%, to $20,171 in fiscal
2002 from  $20,070 in fiscal 2001 due  primarily to a 5% increase in unit volume
of our Hind  apparel  and,  to a lesser  extent,  a 4%  increase  in the average
wholesale unit selling price of our Hind apparel,  partially offset by decreased
sales of Hyde  Authentics  footwear due to lower unit volume and a lower average
per pair  wholesale  selling  price and a 2%  decrease  in sales at our  factory
outlet  division  due to reduced  closeout  sales.  The  increase in the average
wholesale  unit selling  price for our Hind apparel brand was due to new product
introductions, which generally carry higher selling prices. Sales at our factory
outlet  division  decreased  due to lower  closeout  sales volume in fiscal 2002
compared to fiscal  2001.  Close out sales  accounted  for  approximately  3% of
fiscal 2002 sales compared to approximately 9% in fiscal 2001.

International  net sales of Other Products  increased $297, or 16%, to $2,196 in
fiscal 2002 from $1,899 in fiscal 2001,  due primarily to increased Hind apparel
sales at our European and Canadian subsidiaries.

Costs and Expenses

Our gross margin  increased  4.1% to 38.5%,  in fiscal 2003 from 34.4% in fiscal
2002 due primarily to lower Saucony footwear product costs,  improved margins on
Hind brand apparel,  due to increased  sales of first quality  product at higher
margins, as well as lower inventory reserve provisions taken in 2003,  favorable
currency exchange due to the impact of a weaker U.S. dollar against European and
Canadian  currencies,  lower sales of closeout  footwear and improved margins at
our factory  outlet  stores.  Offsetting  these  margin  increases in 2003 are a
pre-tax  charge of $416 recorded in cost of goods sold due to  accelerating  the
vesting on common  stock  purchase  warrants  held by five  footwear  suppliers,
increased  rebates provided to certain Saucony domestic  customers and increased
inventory  reserve  provisions  taken on certain  slow  moving  Spot-bilt  brand
inventory.

Our gross  margin in fiscal  2002  increased  2.5% to 34.4% from 31.9% in fiscal
2001 due primarily to increased Saucony domestic sales of first quality footwear
products at full margin.  Other factors  contributing  to the fiscal 2002 margin
increase were proportionately lower sales of closeout footwear products, reduced
cost resulting from the closing of our Bangor,  Maine manufacturing  operations,
improved  margins on several  domestic  footwear  products and higher  levels of
domestic at once shipments,  which shipments  carry lower  discounts,  partially
offset by increased inventory  provisions for obsolete Hind raw material and for
some slow moving Hind apparel finished goods.
<PAGE>

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

The ratio of selling, general and administrative expenses as a percentage of net
sales decreased 2.6% to 28.0% in fiscal 2002 from 30.6% in 2001. The decrease in
the ratio  resulted  from  decreased  advertising,  selling  and  administrative
expenses in fiscal 2002. Selling,  general and administrative expenses decreased
to $37,278 in 2002,  or 8%, from $40,407 in fiscal 2001.  Decreased  spending in
fiscal  2002 was due  primarily  to  decreased  print media  advertising,  lower
provisions  for  bad  debts  and,  to a  lesser  extent,  decreased  promotional
spending,   decreased  account  specific  advertising,   decreased  depreciation
expense, decreased professional fees and lower selling payroll, partially offset
by increased incentive compensation, due to improved operating profit, increased
administrative payroll and increased insurance costs.

Plant Closing and Other Charges

On November 9, 2001 we announced the cessation of manufacturing  and the closing
of our Bangor,  Maine  facility.  During the fourth  quarter of fiscal 2001,  we
relocated our Asian sourcing and quality  control office to China,  resulting in
the closure of our Taiwan office,  and negotiated an early  termination and exit
of a retail  store  lease.  As a result of these  actions,  we recorded  pre-tax
charges of $2,108 in fiscal 2001.  The closing of our Bangor,  Maine facility in
January 2002  resulted in the  termination  of 104  employees,  of which 61 were
terminated  subsequent  to January 4, 2002.  Assets  used by our  Bangor,  Maine
manufacturing facility, the Taiwan office and our retail store were written down
to fair market value.

Expenses associated with the plant closing and other charges were as follows:
<TABLE>
<CAPTION>

                                                                        Bangor      Taiwan      Retail
                                                                         Plant      Office       Store       Total
                                                                         -----      ------       -----       -----

<S>                                                                    <C>          <C>         <C>        <C>
     Employee severance and termination benefits.......................$ 1,121      $  150      $     4    $ 1,275
     Facility and equipment lease exit costs and
      other non-cancelable contractual commitments.....................    228          --          200        428
     Writedown of machinery and equipment
      to fair market value.............................................    248          25           77        350
     Professional fees and other transaction costs.....................     47          --            8         55
                                                                       -------      ------      -------    -------
      Total............................................................$ 1,644      $  175      $   289    $ 2,108
                                                                       =======      ======      =======    =======

</TABLE>

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

Included in accrued expenses at January 3, 2003 are $36 of costs associated with
the plant closing and other  charges.  A pre-tax  benefit of $35 was recorded in
fiscal 2003 to terminate the plant-closing  accrual. The charge recorded for the
Bangor,  Maine plant  closing and the Taiwan  office  closing  were  included in
income before tax for the Saucony  segment,  and the retail store closing charge
was included in income before tax for the Other Products segment.
<PAGE>

Gain on Sale of Former Manufacturing Facility

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

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

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

Non-Operating Income (Expense)

Non-operating income (expense),  excluding interest, increased to $337 in fiscal
2003 from $11 in fiscal 2002. The increase was due primarily to foreign currency
gains of $288 in fiscal  2003,  compared  to  foreign  currency  gains of $20 in
fiscal 2002.  Non-operating income (expense),  excluding interest,  increased to
$11 in fiscal 2002 from a loss of $18 in fiscal 2001, due primarily to losses on
foreign currency in fiscal 2001.

Interest Income

Interest  income  decreased to $245 in fiscal 2003 from $332 in fiscal 2002, due
to lower interest  rates on invested cash balances and  short-term  investments.
Interest  income  increased to $332 in fiscal 2002 from $136 in fiscal 2001, due
primarily to higher average cash balances invested in money market funds.

Interest Expense

Interest  expense  remained  constant  at $5 in  fiscal  2003 and  fiscal  2002.
Interest  expense  decreased  to $5 in fiscal  2002 from $213 in fiscal 2001 due
primarily to the absence of  borrowings  under our  domestic and foreign  credit
facilities.

Income (Loss) Before Taxes and Minority Interest

              Segment                  2003          2002             2001
              -------                  ----          ----             ----

          Saucony...................$  11,910      $  10,288        $  (296)
          Other Products............    1,664         (1,007)           (68)
                                    ---------      ---------        -------
          Consolidated..............$  13,574      $   9,281        $  (364)
                                    =========      =========        =======

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

Income  before tax and minority  interest  increased  $9,645 in fiscal 2002 to a
profit of $9,281 compared to a loss of $364 in fiscal 2001, due primarily to the
significant  improvement  in the  domestic  Saucony  segment due to higher gross
margins,  reduced selling,  general and administrative  expenses, the charges of
$1,819  incurred  in fiscal 2001 in  connection  with the closure of our Bangor,
Maine  manufacturing  facility and the closure of our Taiwan office and improved
profitability at our Saucony  international  business due to increased sales and
improved margins at our Canadian and European subsidiaries.  The decrease in our
Other  Products  segment income before tax in 2002, as compared to 2001, was due
primarily to lower gross  margins  realized by our Hind apparel  brand due to an
increase in provisions  for obsolete raw material and some slow moving  finished
goods  inventory,  partially  offset by increased  profitability  at our factory
outlet division due to higher gross margins, lower operating expenses due to the
closing of  underperforming  retail stores in fiscal 2002 and the charge of $289
incurred in fiscal 2001 due to the early  termination and exit of a retail store
outlet.

Income Taxes

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

The provision  for income taxes  increased to $3,865 in fiscal 2002 from $475 in
fiscal 2001 due  primarily  to  increased  domestic  and  international  pre-tax
income.  The effective tax rate  decreased to 41.6% in fiscal 2002,  compared to
130.5% in fiscal 2001,  due primarily to an increase in fiscal 2001 in valuation
allowances on foreign loss carryforwards  that we did not expect to realize.  We
credited  income tax benefit of options  exercised of $21 during fiscal 2002 and
$8 during fiscal 2001 to additional paid-in capital.  Therefore that benefit did
not impact our  provision  for income taxes or the  effective tax rate in either
period.

Minority Interest in Income of Consolidated Subsidiary

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

Minority  interest expense  decreased to $146 in fiscal 2003 from $173 in fiscal
2002 due primarily to increasing our ownership in Saucony Canada,  Inc. Minority
interest  expense  increased to $173 in fiscal 2002 from $101 in fiscal 2001 due
primarily to increased  sales and, to a lesser extent  improved gross margins at
Saucony Canada, Inc.

Net Income (Loss)

Net income for fiscal 2003 was $8,488,  or $1.26 per Class A share and $1.38 per
Class B share on a diluted basis, compared to $5,243, or $0.80 per Class A share
and  $0.88 per Class B share on a  diluted  basis  for  2002.  We used  weighted
average common shares and common stock  equivalents of 6,371,000 for fiscal 2003
and 6,186,000 for fiscal 2002 to calculate diluted earnings per share.

Net income for fiscal 2002 was $5,243,  or $0.80 per Class A share and $0.88 per
Class B share on a diluted basis, compared to a net loss of $940, or ($0.15) per
Class A share and ($0.16) per Class B share on a diluted basis,  in fiscal 2001.
We used weighted average common shares and common stock equivalents of 6,186,000
to  calculate  diluted  earnings  per share for fiscal  2002.  We used  weighted
average common shares of 6,080,000 to calculate  diluted  earnings per share for
fiscal 2001.  Common stock equivalents were not used in fiscal 2001 to calculate
diluted earnings per share because they were anti-dilutive.
<PAGE>

Liquidity and Capital Resources

Fiscal 2003

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

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

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

Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory,  affecting our operating cash flows in fiscal
2003,  included an increase of $638 in accounts  payable due to extended payment
terms  provided by our footwear  suppliers,  a $121  decrease in accrued  income
taxes payable due to the timing of tax payments and a $1,378 increase in accrued
expenses due primarily to increased accruals for incentive compensation.

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

On February 17, 2004 our Board of  Directors  adopted an increase in our regular
dividend to an annual  rate of $0.200 per share on our Class A Common  Stock and
$0.220  per share on our Class B Common  Stock.  Commencing  with the  quarterly
dividend  declared on February 17, 2004,  the Board of Directors  increased  the
regular  quarterly  dividend on our Class A Common Stock to $0.050 per share and
the regular quarterly dividend on our Class B Common Stock to $0.055 per share.

Also on  February  17,  2004,  our Board of  Directors  declared a special  cash
dividend  of $4.00  per  share on each of our  Class A Common  Stock and Class B
Common Stock. The special dividend was paid on March 17, 2004 to stockholders of
record at the close of business on March 3, 2004. The aggregate  dividend payout
for the special dividend amounted to approximately $26,000.
<PAGE>

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

In January 2004, we amended our credit  facility to reduce the  restrictions  in
the facility on our ability to pay cash dividends,  make other  distributions on
our common stock and  repurchase or redeem our capital  stock.  As amended,  the
credit  facility  permits  us to pay cash  dividends,  and make  repurchases  or
redemptions  of, or other specified  distributions  with respect to, our capital
stock,  in a total  amount of up to  $5,000  in any  fiscal  year.  Our  special
dividend declared in February 2004 was excepted from this $5,000 restriction.

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

During fiscal 2003, we repurchased 12,000 shares of our common stock for a total
expenditure  of $126.  Since the  approval of the stock  buyback  program by our
Board of Directors in May 1998, we have repurchased a total of 574,000 shares of
our common stock for a total  expenditure  of $5,370.  As of January 2, 2004, we
remained  authorized to repurchase up to 176,000 shares under the May 1998 stock
buyback program.

Fiscal 2002

As of  January  3,  2003,  our cash and cash  equivalents  totaled  $34,483,  an
increase of $12,256 from January 4, 2002.  The increase was due primarily to the
generation  of $13,230 of cash from  operations  and,  to a lesser  extent,  the
receipt of payment on notes  receivable  of $312,  the  receipt of $329 from the
issuance of shares of our common  stock,  the  conversion  of $197 in marketable
securities  to cash and the  receipt  of $90 from  the sale of  capital  assets,
partially  offset by cash  outlays  for the  repurchase  of shares of our common
stock of $880,  purchases of capital  assets of $777, the repayment of long-term
debt of $88 and debt financing costs of $87.

Our  accounts  receivable  at  January  3, 2003  increased  to $622,  net of the
provision  for bad debts and  discounts,  as  compared to at January 4, 2002 due
primarily to increased net sales of our Saucony  products in the fourth  quarter
of fiscal 2002 and an increase in our days' sales  outstanding  for our accounts
receivable. Our days' sales outstanding for our accounts receivable increased to
42 days in fiscal 2002 from 41 days in fiscal 2001.  The provision for bad debts
and doubtful  accounts  decreased to $4,752 in fiscal 2002 from $5,767 in fiscal
2001 due to a decrease in the provision for doubtful accounts in fiscal 2002 and
a change in pricing programs for several of our larger customers to net pricing,
which reduced discounts in fiscal 2002.

Inventories  decreased  $1,848 at January 3, 2003,  as compared to at January 4,
2002,  due  primarily to  improvements  in our supply chain which we intended to
reduce on-hand  inventory and our decision to reduce inventory of our Hind brand
apparel and Spot-bilt footwear products.  Our inventory turns ratio increased to
3.1 turns in fiscal  2002 from 2.7  turns in fiscal  2001.  The  number of days'
sales in inventory  decreased to 113 days in fiscal 2002 from 115 days in fiscal
2001.

Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory,  affecting our operating cash flows in fiscal
2002, included an increase of $1,862 in accounts payable due to extended payment
terms provided by our footwear  suppliers,  a $1,754  increase in accrued income
taxes payable due to higher pre-tax profits and the timing of tax payments and a
$1,295  increase in accrued  expenses due  primarily  to increased  accruals for
incentive compensation.

During fiscal 2002,  we  repurchased  approximately  95,000 shares of our common
stock for a total expenditure of $880.
<PAGE>

Credit Facility

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

We were in compliance  with all  covenants of the credit  facility at January 2,
2004. As of January 2, 2004 we had open  commitments  under letters of credit of
$747 and as of March 12, 2004 we had open commitments under letters of credit of
$150. As of January 2, 2004,  $14,253,  and as of March 12, 2004,  $14,850,  was
available for borrowing under the credit facility.

One of our foreign subsidiaries  maintains a credit facility for cash borrowings
and letters of credit in the amount of $1,123.  At January 2, 2004 and March 12,
2004,  $1,123 was available for borrowing under the facility.  See Note 8 to the
consolidated financial statements included in Item 8 to this Form 10-K.

Capital Expenditures

We anticipate  capital  expenditures to range between $4,000 to $4,500 in fiscal
2004.  Of this  amount,  we expect to expend  approximately  $2,500 to $3,000 to
expand and  renovate our Peabody,  Massachusetts  facility,  $1,000 to $1,300 on
computer  hardware  and  software  and $150 to $200 to open two  factory  outlet
stores.

Contractual Obligations

Below is a table which presents our  contractual  obligations and commitments at
January 2, 2004.
<TABLE>
<CAPTION>


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

<S>                                             <C>          <C>         <C>        <C>        <C>
Operating leases................................$  5,782     $  1,881    $ 2,351    $ 1,298    $ 252
Other long-term obligations (1).................   1,820        1,519        281         20       --
Purchase obligations (2)........................  23,555       23,555         --         --       --
                                                --------     --------    -------    -------    -----
Total contractual obligations...................$ 31,157     $ 26,955    $ 2,632    $ 1,318    $ 252
                                                ========     ========    =======    =======    =====
_______________

(1) Other  long-term  obligations  include  athlete and event  sponsorship  and  employment  contracts with two key
executives.  The amounts  included for athlete  sponsorship  represent base  compensation  consist of $200 for less
than one year and $141 for one to three years.  Actual  payments  may be higher than the amounts  included as these
contracts  provide for bonus payments to the athletes based upon athletic  achievements in future periods.  Maximum
aggregate bonus payments to athletes are as follows: less than one year, $233 and one to three years, $120.

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

Off-Balance Sheet Arrangements

We had  letters  of credit  outstanding  of $747 at  January 2, 2004 and $348 at
January 3, 2003.  All of the letters of credit  were issued for the  purchase of
inventory.  We had forward  foreign  exchange  contracts of $7,448 at January 2,
2004 and $5,685 at January  3, 2003,  all of which are due to settle  within the
next 12 months (see Note 19 to the consolidated financial statements included in
Item 8 to this Annual Report Form 10-K).

                                                             Amounts
                                                            Committed
                                                         January 2, 2004
                                                         ---------------

           Letters of credit...............................$     747
           Forward foreign exchange contracts..............    7,448
                                                           ---------
           Total...........................................$   8,195
                                                           =========


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

Overall Liquidity

Our liquidity is  contingent  upon a number of factors,  principally  our future
operating results.  Our liquidity fluctuates during the course of a fiscal year.
For instance, we generally use cash from operations in the first quarter, due to
working capital requirements,  but generate cash from operations for the balance
of the fiscal  year.  We believe  that our  current  cash and cash  equivalents,
credit  facilities and internally  generated  funds will be adequate to meet our
working  capital  requirements  and  other  operating  expenses  and to fund our
capital  investment needs and dividend  payments for at least the next 12 months
in the near term. During fiscal 2003 we generated $15,045 in cash from operating
cash  flows due to our  operating  profit,  a  decrease  in  inventories  and an
increase  in  accounts  payable.  In 2002,  we  generated  $13,230  in cash from
operating cash flows, due primarily to our operating  profit, an increase in our
accrued liabilities and accounts payable.

As of January 2, 2004, we had $41,781 in cash, $5,788 in short-term investments,
$19,167 in accounts  receivable and $22,421 in  inventories.  As approved by our
Board of Directors on February 17,  2004,  we paid a special,  cash  dividend of
$4.00 per share on each of our Class A Common  Stock and Class B Common Stock on
March 17, 2004. The aggregate  dividend payout for the special dividend amounted
to  approximately  $26,000.  We paid the dividend from  available  cash and cash
equivalents and short-term investments.

At January 2, 2004, we had no borrowings outstanding and $15,376 available under
our credit  facilities.  As of March 12, 2004, we had no borrowings  outstanding
and $15,973  available  under our credit  facilities.  Our short-term  liquidity
could  potentially be adversely  impacted should demand for our products decline
significantly,  which could result in extended  payment  terms for our customers
and the increased use of price  concessions to induce  customers to purchase our
products.
<PAGE>

Inflation and Currency Risk

The effect of inflation on our results of  operations  over the past three years
has been  minimal.  The  impact of  currency  fluctuations  on our  purchase  of
inventory  from  foreign  suppliers  has been minimal as the  transactions  were
denominated in U.S. dollars.  We are, however,  subject to currency  fluctuation
risk with  respect to the  operating  results of our  foreign  subsidiaries  and
foreign currency denominated  payables.  During fiscal 2003 the gross margins of
our European and Canadian subsidiaries increased due to currency fluctuation. We
have  entered  into  forward  foreign  exchange  contracts  to minimize  various
transaction  currency  risks.  We  believe  that our  forward  foreign  currency
contracts  function  as  economic  hedges of our cash flows and that our foreign
exchange management program effectively  minimizes various transaction  currency
risks.

Accounting Pronouncements

SFAS 150

In  May  2003,  the  Financial   Accounting  Standards  Board  issued  Financial
Accounting Standards No. 150. "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 establishes  standards
for how an issuer classifies and measures in its statement of financial position
certain  financial  instruments  with  characteristics  of both  liabilities and
equity. SFAS 150 requires that an issuer classify a financial instrument that is
within its scope as a liability, or an asset in some circumstances, because that
financial instrument embodies an obligation of the issuer. SFAS 150 is effective
for financial  instruments entered into or modified after May 31, 2003, and with
one  exception,  is  effective  at the  beginning  of the first  interim  period
beginning  after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on our financial position, results of operations or cash flows.

FIN 46 and FIN 46-R

In January 2003 and December  2003,  the Financial  Accounting  Standards  Board
issued   Financial   Accounting   Standards   Board   Interpretation   No.   46,
"Consolidation  of  Variable  Interest  Entities"  and its  revision,  FIN 46-R,
respectively.  FIN 46 and FIN 46-R address the  consolidation  of entities whose
equity holders have either not provided  sufficient  equity at risk to allow the
entity to finance its own activities or do not possess  certain  characteristics
of  a  controlling  financial  interest.   FIN  46  and  FIN  46-R  require  the
consolidation of these entities,  know as variable interest entities  ("VIE's"),
by the primary beneficiary of the entity. The primary beneficiary is the entity,
if any,  that is  subject  to a  majority  of the risk of loss  from  the  VIE's
activities,  entitled to receive a majority of the VIE's  residual  returns,  or
both.  FIN 46 and FIN 46-R are  applicable  for  financial  statements of public
entities that have interests in VIE's or potential VIE's, referred to as special
purpose  entities,  for periods  ending after December 15, 2003, of which we had
none. Application by public entities for all other types of entities is required
in financial statements for periods ending after March 15, 2004. The adoption of
FIN 46-R is not expected to have a material  impact on our  financial  position,
results of operations or cash flows.

Special Note Regarding Forward-Looking Statements

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

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

Certain Factors That May Affect Future Results

We face intense competition

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

We depend on foreign suppliers

A number of manufacturers  located in Asia,  primarily in China, supply products
to us. During fiscal 2003, one of our suppliers, located in China, accounted for
approximately  32% of our total  footwear  purchases  by dollar  volume.  We are
subject to the usual risks of a business  involving foreign  suppliers,  such as
currency  fluctuations,  government  regulation  of fund  transfers,  export and
import duties,  import quotas,  administrative  trade cases,  trade  limitations
imposed by the United  States or foreign  governments  and  political  and labor
instability,  as  well as  potential  disruptions  in our  supply  chain  due to
transportation,   geographic   and  other   factors.   There  are  a  number  of
trade-related  and  other  issues  creating  significant  friction  between  the
governments  of the United  States and China,  and the  imposition  of  punitive
import duties on certain  categories of Chinese  products has been threatened in
the past and may be implemented in the future. In addition, we have no long-term
manufacturing  agreements  with our foreign  suppliers  and  compete  with other
athletic shoe and apparel  companies,  including  companies that are much larger
than us, for access to production facilities.

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

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

Our quarterly results may fluctuate

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

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

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

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


Our revenues are subject to foreign currency exchange fluctuations

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


Our business is affected by seasonal consumer buying patterns

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


Our operating results may be affected by order cancellations

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


We are susceptible to financial difficulties of retailers

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


We need effective marketing and advertising programs

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


We depend on key customers

Approximately 44% of our gross trade  receivables  balance was represented by 15
customers at January 2, 2004.  We  anticipate  that our results of operations in
any  given  period  will  depend to a  significant  extent  upon  sales to major
customers. The loss of or a reduction in the level of sales to one or more major
customers or the failure of a major customer to proceed with a large order or to
timely pay us for a large order could materially reduce our sales.

<PAGE>

Declines in revenue in our retail stores could adversely affect profitability

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


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

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


Changes in general economic conditions may adversely affect our business

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


ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are  exposed  to market  risk from  changes  in  interest  rates and  foreign
exchange  rates,  which  could  affect our  future  results  of  operations  and
financial position. Our objective in managing our exposure to interest rates and
foreign  currency  rate changes is to limit the impact of these  changes on cash
flows and earnings and to lower our overall borrowing costs. In order to achieve
these  objectives  we identify the risks and manage them by adjusting  fixed and
variable rate debt positions and  selectively  hedging  foreign  currency risks.
Borrowings under our credit facilities are based on floating rates,  which would
increase  interest  expense in an  environment  of rising  interest  rates.  Our
primary market risk is the risk of exposure to unfavorable movements in exchange
rates  between  the U.S.  dollar and the  Canadian  dollar,  the  British  Pound
Sterling and the Euro.  We enter into forward  exchange  contracts to hedge firm
and anticipated  purchase and sale  commitments  denominated in currencies other
than our  subsidiaries'  local  currencies.  The purpose of our currency hedging
activities  is to protect our local  subsidiaries'  cash flows  related to these
commitments from  fluctuations in currency  exchange rates. Our forward exchange
contracts  principally  hedge U.S.  denominated  transactions with our Canadian,
Dutch and British  subsidiaries.  While we have a policy of selectively  hedging
foreign  currency  risks,  this  program  may  not  fully  insulate  us  against
short-term fluctuations in financial results.


Currency Risk

The fair value of our forward  exchange  contracts  is  sensitive  to changes in
currency  exchange rates.  The fair value of forward  exchange  contracts is the
estimated  amount that we would pay or receive upon termination of the contract,
taking into account the change in the currency  exchange rates. As of January 2,
2004,  the fair value of our forward  exchange  contracts  was  $7,028.  We have
calculated the effect of a 10%  depreciation in the year-end  currency  exchange
rates related to the forward exchange contracts.  This depreciation would result
in an increase in the  unrealized  loss on forward  exchange  contracts of $684,
which would affect our fiscal 2004 results of operations and financial position.
The unrealized losses on our forward exchange  contracts  resulting from changes
in currency  exchange  rates will be partially  offset by gains on the exposures
being  hedged.  We have also  calculated  the  effect of a 10%  depreciation  in
year-end  interest  rates and have  determined  the  effects  to our  results of
operations and financial position to be immaterial. We do not expect to make any
significant  changes in our  management  of foreign  currency or  interest  rate
exposures  or in the  strategies  we  employ  to manage  such  exposures  in the
foreseeable future.
<PAGE>


ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


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

The information  required to be reported in this Item was previously reported in
Saucony's  Current Reports on Form 8-K (1) dated July 9, 2002 and filed with the
Securities  and Exchange  Commission on July 10, 2002 and (2) dated July 1, 2002
and filed with the Securities and Exchange Commission on July 1, 2002.

Our  consolidated  financial  statements  as of and for the  fiscal  year  ended
January 4, 2002 were audited by Arthur Andersen LLP, independent accountants. On
August 31, 2002, Arthur Andersen ceased  practicing  before the SEC.  Therefore,
Arthur  Andersen did not participate in the preparation of this Annual Report on
Form 10-K,  did not  reissue  its audit  report  with  respect to the  financial
statements  included in this  Annual  Report on Form 10-K and did not consent to
the  inclusion  of its audit  report in this  Annual  Report on Form 10-K.  As a
result,  holders  of  our  securities,   and  investors  evaluating  offers  and
purchasing  securities pursuant to a prospectus  incorporating by reference this
Annual Report on Form 10-K, may have no effective remedy against Arthur Andersen
in  connection  with a  material  misstatement  or  omission  in  the  financial
statements to which its audit report relates. In addition,  even if such holders
or investors were able to assert such a claim, because it has ceased operations,
Arthur Andersen may fail or otherwise have insufficient assets to satisfy claims
made by such persons that might arise under federal securities laws or otherwise
with respect to Arthur Andersen's audit report.


ITEM 9A - CONTROLS AND PROCEDURES

Our management,  with the participation of our chief executive officer and chief
financial  officer,  evaluated the effectiveness of our disclosure  controls and
procedures (as defined in Rules  13a-15(e) and 15d-15(e) under the Exchange Act)
as of January 2, 2004. Based on this evaluation, our chief executive officer and
chief  financial  officer  concluded that, as of January 2, 2004, our disclosure
controls and  procedures  were (1) designed to ensure that material  information
relating to Saucony, including its consolidated  subsidiaries,  is made known to
our chief executive  officer and chief financial  officer by others within those
entities, particularly during the period in which this report was being prepared
and (2) effective,  in that they provide  reasonable  assurance that information
required  to be  disclosed  by Saucony in the  reports  that it files or submits
under the Exchange Act is recorded,  processed,  summarized and reported  within
the time periods specified in the SEC's rules and forms.

No change in our internal control over financial  reporting (as defined in Rules
13a-15(f)  and  15d-15(f)  under the Exchange  Act)  occurred  during the fiscal
quarter ended  January 2, 2004 that has  materially  affected,  or is reasonably
likely to materially affect, our internal control over financial reporting.
<PAGE>


PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required to be disclosed by this Item  pursuant to Item 401 of
Regulation S-K with respect to our executive  officers is contained in Part I of
this Annual  Report on Form 10-K under the caption,  "Executive  Officers of the
Registrant."  The  remaining  information  required to be disclosed by this Item
pursuant to Item 401 of Regulation S-K will be contained in our proxy  statement
for our 2004 Annual  Meeting of  Stockholders  under the  caption,  "Election of
Directors," and is incorporated in this Annual Report on Form 10-K by reference.

The  information  required to be disclosed by this Item  pursuant to Item 405 of
Regulation  S-K will be  contained  in our proxy  statement  for our 2004 Annual
Meeting of Stockholders under the caption,  "Section 16(a) Beneficial  Ownership
Reporting Compliance," and is incorporated in this Annual Report on Form 10-K by
reference.

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


ITEM 11 - EXECUTIVE COMPENSATION

The  information  required to be disclosed by this Item  pursuant to Item 402 of
Regulation  S-K will be  contained  in our proxy  statement  for our 2004 Annual
Meeting of Stockholders under the captions, "Compensation of Executive Officers"
and "Election of  Directors-Director  Compensation," and is incorporated in this
Annual Report on Form 10-K by reference.


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

The  information  required to be disclosed by this Item  pursuant to Item 403 of
Regulation  S-K will be  contained  in our proxy  statement  for our 2004 Annual
Meeting  of  Stockholders  under  the  caption,   "Stock  Ownership  of  Certain
Beneficial  Owners and Management," and is incorporated in this Annual Report on
Form 10-K by reference.

The information required to be disclosed by this Item pursuant to Item 201(d) of
Regulation  S-K will be  contained  in our proxy  statement  for our 2004 Annual
Meeting  of  Stockholders   under  the  caption,   "Compensation   of  Executive
Officers--Equity  Compensation  Plan  Information,"  and is incorporated in this
Annual Report on Form 10-K by reference.

<PAGE>

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required to be disclosed by this Item  pursuant to Item 404 of
Regulation  S-K will be  contained  in our proxy  statement  for our 2004 Annual
Meeting  of  Stockholders   under  the  captions,   "Compensation  of  Executive
Officers--Other Executive Compensation,"  "--Employment Contract" and "--Related
Party  Transactions,"  and is incorporated in this Annual Report on Form 10-K by
reference.


ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

The  information  required to be disclosed by this Item pursuant to Item 9(e) of
Schedule  14A will be  contained  in our  proxy  statement  for our 2004  Annual
Meeting of  Stockholders  under the caption,  "Ratification  of  Appointment  of
Independent  Auditors--Independent  Auditor's Fees," and "--Pre-Approval  Policy
and  Procedures,"  and is  incorporated  in this  Annual  Report on Form 10-K by
reference.

<PAGE>


PART IV

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   1.   Index to Consolidated Financial Statements

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

           - Independent Auditors' Report - Deloitte & Touche LLP

           - Report of Independent Public Accountants - Arthur Andersen LLP

           - Consolidated balance sheets at January 2, 2004 and January 3, 2003

           - Consolidated statements of income for the years ended January 2,
             2004, January 3, 2003 and January 4, 2002

           - Consolidated statements of stockholders' equity for the years ended
             January 2, 2004, January 3, 2003 and January 4, 2002

           - Consolidated statements of cash flows for the years ended
             January 2, 2004, January 3, 2003, and January 4, 2002

           - Notes to the Consolidated Financial Statements

          Separate financial statements of our subsidiaries are omitted since we
          are primarily an operating  company and our  subsidiaries  included in
          the  consolidated  financial  statements do not have a minority equity
          interest or indebtedness to any person other than Saucony in an amount
          which  exceeds  5% of the total  assets  as shown by the  consolidated
          financial statements as included in this Annual Report on Form 10-K.

      2.   Index to Consolidated Financial Statement Schedules

           Schedule II -- Valuation and Qualifying Accounts

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

      3.   Index to Exhibits

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

(b)      Reports on Form 8-K

          On October 28, 2003,  we furnished a Current  Report on Form 8-K dated
          the  same  date.  The  report  contains  a copy of our  press  release
          announcing  our  earnings  for the period  ended  October 3, 2003.  We
          furnished the report  pursuant to Item 12 (Results of  Operations  and
          Financial Condition).
<PAGE>


                                   SIGNATURES


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


                                        SAUCONY, INC.
                                        (Registrant)


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

Date:    March 30,  2004

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

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



<S>                                   <C>                                         <C>
/s/ John H. Fisher                    Chairman of the Board,                      March 30, 2004
John H. Fisher                        President and
                                      Chief Executive Officer
                                      (Principal Executive Officer)

/s/ Charles A. Gottesman              Vice Chairman of the Board,                 March 30, 2004
Charles A. Gottesman                  and Executive Vice President,
                                      Business Development

/s/ Michael Umana                     Executive Vice President,                   March 30, 2004
Michael Umana                         Chief Operating and Financial Officer
                                      (Principal Financial Officer)

/s/ Roger P. Deschenes                Vice President, Controller and              March 30, 2004
Roger P. Deschenes                    Chief Accounting Officer
                                      (Principal Accounting Officer)

/s/ Jonathan O.  Lee                  Director                                    March 30, 2004
Jonathan O. Lee

/s/ Robert J. LeFort, Jr.             Director                                    March 30, 2004
Robert J. LeFort, Jr.

/s/ John J. Neuhauser                 Director                                    March 30, 2004
John J. Neuhauser

</TABLE>
<PAGE>

Independent Auditors' Report

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

We have audited the accompanying  consolidated  balance sheets of Saucony,  Inc.
and  subsidiaries  as of January 2, 2004 and  January 3, 2003,  and the  related
consolidated statements of income,  stockholders' equity, and cash flows for the
years then ended.  Our audits also  included  the January 2, 2004 and January 3,
2003 financial  statement  schedules  listed in the Index at Item 15(a)2.  These
financial statements and financial statement schedules 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. The
consolidated financial statements and financial statement schedule as of January
4,  2002 and for the year then  ended,  before  the  inclusion  of the  goodwill
disclosures  in  Note 1 to the  financial  statements,  were  audited  by  other
auditors who have ceased  operations.  Those  auditors  expressed an unqualified
opinion  on those  financial  statements  and stated  that such  January 4, 2002
financial statement schedule, when considered in relation to the January 4, 2002
basic financial  statements taken as a whole,  presented fairly, in all material
respects, the information set forth therein, in their reports dated February 14,
2002.

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

In our opinion,  the consolidated  financial  statements  present fairly, in all
material respects,  the financial position of Saucony,  Inc. and subsidiaries as
of January 2, 2004 and January 3, 2003, and the results of their  operations and
their  cash  flows for the years  then  ended,  in  conformity  with  accounting
principles  generally  accepted in the United  States of America.  Also,  in our
opinion,  the  January  2,  2004 and  January  3,  2003  consolidated  financial
statement  schedules,  when  considered  in  relation to the January 2, 2004 and
January  3,  2003  basic  consolidated  financial  statements  taken as a whole,
presents fairly in all material respects, the information set forth therein.

As discussed above, the consolidated  financial statements of Saucony,  Inc. and
subsidiaries as of January 4, 2002 and for the year then ended,  were audited by
other  auditors  who have  ceased  operations.  As  described  in Note 1,  these
consolidated  financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets", which was adopted by the Company as
of January 5, 2002. Our audit procedures with respect to the disclosures in Note
1 with  respect to the year ended  January 4, 2002  included (1)  comparing  the
previously reported net income to the previously issued financial statements and
the  adjustments  to  reported  net  income  representing  amortization  expense
(including any related tax effects) recognized in the period related to goodwill
to the Company's  underlying analysis obtained from management,  and (2) testing
the  mathematical  accuracy  of the  reconciliation  of  adjusted  net income to
reported net income and the related earnings-per-share  amounts. In our opinion,
the  disclosures  for the year ended January 4, 2002 in Note 1 are  appropriate.
However,  we were not engaged to audit,  review,  or apply any procedures to the
January 4, 2002  financial  statements of the Company other than with respect to
such  disclosures  and,  accordingly,  we do not express an opinion or any other
form of assurance on the January 4, 2002 financial statements taken as a whole.

As  discussed in Note 1, in the year ended  January 3, 2003 the Company  changed
its method of accounting for goodwill and intangible  assets to conform with the
provisions of SFAS No. 142.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 30, 2004

<PAGE>


THE FOLLOWING REPORT IS A COPY OF A REPORT  PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

Report of Independent Public Accountants


To the Board of Directors of Saucony, Inc.:

We have audited the accompanying  consolidated balance sheet of Saucony, Inc. (a
Massachusetts  corporation)  and  subsidiaries  as of January  4, 2002,  and the
related consolidated statement of income, stockholders' equity and cash flow for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of Saucony,  Inc. and
subsidiaries  as of January 4, 2002,  and the  results of their  operations  and
their  cash  flows  for the year  then  ended,  in  conformity  with  accounting
principles generally accepted in the United States.



                                                   Arthur Andersen LLP


Boston, Massachusetts
February 14, 2002
<PAGE>

<TABLE>


                                          SAUCONY, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                     AS OF JANUARY 2, 2004 AND JANUARY 3, 2003
<CAPTION>

                                (in thousands, except share and per share amounts)

                                                      ASSETS

                                                                                        January 2,     January 3,
                                                                                           2004           2003
                                                                                           ----           ----
Current assets:
<S>                                                                                    <C>             <C>
   Cash and cash equivalents...........................................................$   41,781      $  34,483
   Short-term investments .............................................................     5,788             --
   Accounts receivable, net of allowance for doubtful accounts
     and discounts (2003, $1,108: 2002, $2,406)........................................    19,167         15,496
   Inventories ........................................................................    22,421         27,201
   Deferred income taxes...............................................................     2,340          1,916
   Prepaid expenses and other current assets...........................................     1,329          1,217
   Assets held for sale................................................................        --            357
                                                                                       ----------      ---------
     Total current assets..............................................................    92,826         80,670
                                                                                       ----------      ---------

Property, plant and equipment, net ....................................................     6,201          5,714
                                                                                       ----------      ---------

Other assets:
   Goodwill, net of accumulated amortization (2003, $551; 2002, $551)..................       912            912
   Deferred charges, net...............................................................       124            208
   Other ..............................................................................       130             36
                                                                                       ----------      ---------
     Total other assets................................................................$    1,166      $   1,156
                                                                                       ----------      ---------

Total assets...........................................................................$  100,193      $  87,540
                                                                                       ==========      =========


                                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable....................................................................$    9,259      $   8,543
   Accrued expenses....................................................................     9,544          7,800
                                                                                       ----------      ---------
       Total current liabilities.......................................................    18,803         16,343
                                                                                       ----------      ---------

Long-term obligations:
   Deferred income taxes...............................................................     2,016          1,859
                                                                                       ----------      ---------

Commitments and contingencies:

Minority interest in consolidated subsidiary...........................................       320            642
                                                                                       ----------      ---------

Stockholders' equity:
   Preferred stock, $1.00 par value per share; authorized 500,000 shares; none issued..        --             --
   Common stock:
     Class A, $.333 par value per share; authorized 20,000,000 shares
       (issued 2003, 2,711,127 and 2002, 2,711,127)....................................       904            904
     Class B, $.333 par value per share; authorized 20,000,000 shares
       (issued 2003, 4,210,560 and 2002, 4,106,343)....................................     1,403          1,369
   Additional paid-in capital..........................................................    19,010         17,769
   Retained earnings...................................................................    63,655         55,945
   Accumulated other comprehensive income (loss).......................................       505           (870)
   Common stock held in treasury, at cost (2003, 772,806; 2002, 760,806)...............    (6,423)        (6,297)
   Unearned compensation...............................................................        --           (124)
                                                                                       ----------      ---------
     Total stockholders' equity........................................................    79,054         68,696
                                                                                       ----------      ---------
Total liabilities and stockholders' equity.............................................$  100,193      $  87,540
                                                                                       ==========      =========

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

<TABLE>

                                          SAUCONY, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF INCOME
                  FOR THE FISCAL YEARS ENDED JANUARY 2, 2004, JANUARY 3, 2003 AND JANUARY 4, 2002

                                     (in thousands, except per share amounts)
<CAPTION>


                                                                            2003           2002          2001
                                                                            ----           ----          ----


<S>                                                                      <C>           <C>           <C>
Net sales................................................................$  136,066    $  133,196    $  132,261
Other revenue............................................................       379           303           103
                                                                         ----------    ----------    ----------
Total revenue............................................................   136,445       133,499       132,364
                                                                         ----------    ----------    ----------

Costs and expenses:
   Cost of sales.........................................................    83,613        87,350        90,118
   Selling expenses......................................................    18,574        17,790        21,910
   General and administrative expenses...................................    21,625        19,488        18,497
   Plant closing and other charges (credits).............................       (35)          (72)        2,108
   Gain on sale of former manufacturing facility.........................      (329)           --            --
                                                                         ----------    ----------    ----------
   Total costs and expenses..............................................   123,448       124,556       132,633
                                                                         ----------    ----------    ----------
Operating income (loss)..................................................    12,997         8,943          (269)
Non-operating income (expense):
   Interest income.......................................................       245           332           136
   Interest expense......................................................        (5)           (5)         (213)
   Foreign currency gains (losses).......................................       288            20           (46)
   Other.................................................................        49            (9)           28
                                                                         ----------    ----------    ----------
Income (loss) before income taxes and minority interest..................    13,574         9,281          (364)
Provision for income taxes...............................................     4,940         3,865           475
Minority interest in income of consolidated subsidiary...................       146           173           101
                                                                         ----------    ----------    ----------
Net income (loss)........................................................$    8,488    $    5,243    $     (940)
                                                                         ==========    ==========    ==========

Earnings per share:
   Basic:
     Class A common stock................................................$     1.31    $     0.81    $    (0.15)
                                                                         ==========    ==========    ==========
     Class B common stock................................................$     1.44    $     0.89    $    (0.16)
                                                                         ==========    ==========    ==========
   Diluted:
     Class A common stock................................................$     1.26    $     0.80    $    (0.15)
                                                                         ==========    ==========    ==========
     Class B common stock................................................$     1.38    $     0.88    $    (0.16)
                                                                         ==========    ==========    ==========

Weighted-average shares outstanding:
   Basic:
     Class A common stock................................................     2,521         2,563         2,567
     Class B common stock................................................     3,583         3,544         3,513
                                                                         ----------    ----------    ----------
     Total...............................................................     6,104         6,107         6,080
                                                                         ==========    ==========    ==========
   Diluted:
     Class A common stock................................................     2,521         2,563         2,567
     Class B common stock................................................     3,850         3,623         3,513
                                                                         ----------    ----------    ----------
     Total...............................................................     6,371         6,186         6,080
                                                                         ==========    ==========    ==========

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


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

<TABLE>


                                                 SAUCONY, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                         FOR THE FISCAL YEARS ENDED JANUARY 2, 2004, JANUARY 3, 2003 AND JANUARY 4, 2002
<CAPTION>

                                              (in thousands, except share amounts)

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


<S>                                                  <C>      <C>       <C>        <C>         <C>       <C>
Balance, January 5, 2001.............................$  904   $ 1,340   $ 17,112   $51,642     646,500   $(5,285)

Issuance of 17,930 shares of common stock upon
   exercise of stock options.........................    --         6         78        --         --         --
Amortization of unearned compensation................    --        --         --        --         --         --
Issuance of non-qualified stock options..............    --        --          3        --         --         --
Issuance of stock warrants...........................    --        --        197        --         --         --
Tax benefit related to stock options.................    --        --          8        --         --         --
Repurchase of 19,476 shares of common stock, at cost.    --        --         --        --     19,476       (132)
Interest income on notes receivable..................    --        --         --        --         --         --
Payment of interest income on notes receivable.......    --        --         --        --         --         --
Net loss.............................................    --        --         --      (940)        --         --
Foreign currency translation adjustments.............    --        --         --        --         --         --
                                                     ------   -------   --------   -------    -------    -------

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

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

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

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

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



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

</TABLE>
<PAGE>

<TABLE>

                                              SAUCONY, INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
                      FOR THE FISCAL YEARS ENDED JANUARY 2, 2004, JANUARY 3, 2003 AND JANUARY 4, 2002

<CAPTION>
                                           (in thousands, except share amounts)

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


<S>                                                <C>          <C>           <C>            <C>
Balance, January 5, 2001...........................$  (296)     $    (5)      $  (792)       $64,620             --

Issuance of 17,930 shares of common stock upon
   exercise of stock options.......................     --           --            --             84             --
Amortization of unearned compensation..............     --           38            --             38             --
Issuance of non-qualified stock options............     --           (3)           --             --             --
Issuance of stock warrants.........................     --         (197)           --             --             --
Tax benefit related to stock options...............     --           --            --              8             --
Repurchase of 19,476 shares of common stock, at cost    --           --            --           (132)            --
Interest income on notes receivable................    (18)          --            --            (18)            --
Payment of interest income on notes receivable.....     11           --            --             11             --
Net loss...........................................     --           --            --           (940)          (940)
Foreign currency translation adjustments ..........     --           --          (509)          (509)          (509)
                                                   -------      -------       -------        -------       ---------

Balance, January 4, 2002...........................$  (303)     $  (167)      $(1,301)       $63,162       $ (1,449)
                                                                                                           =========

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

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

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

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



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

</TABLE>
<PAGE>

<TABLE>

                                              SAUCONY, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE FISCAL YEARS ENDED JANUARY 2, 2004, JANUARY 3, 2003 AND JANUARY 4, 2002

<CAPTION>
                                                  (in thousands)


                                                                              2003           2002           2001
                                                                              ----           ----           ----

<S>                                                                        <C>            <C>             <C>
Cash flows from operating activities:
   Net income (loss).......................................................$   8,488      $   5,243       $   (940)
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
     Plant closing and other (credits) charges ............................      (35)          (123)         1,725
     Depreciation and amortization.........................................    1,337          1,597          1,969
     Provision for bad debt and discounts..................................    5,019          4,752          5,767
     Deferred income tax provision (benefit)...............................     (267)            91           (656)
     Compensation from stock grants and options............................      593             87             38
     Litigation settlement benefit.........................................     (566)            --             --
     Minority interest in income of consolidated subsidiaries..............      146            173            101
     Short-term investments - net unrealized gains.........................      (19)            --             --
     Marketable securities - unrealized (gains) losses.....................       --             --             32
     Gain on sale of former manufacturing facility.........................     (329)            --             --
     Other.................................................................      184            (20)            12
Changes in operating assets and liabilities, net of effects
   of dispositions and foreign currency adjustments:
Decrease (increase) in assets:
   Accounts receivable.....................................................   (7,528)        (5,374)         6,060
   Inventories.............................................................    6,163          1,848          9,418
   Prepaid expenses and other current assets...............................      (36)            45             (8)
Increase (decrease) in liabilities:
   Letters of credit payable...............................................       --             --         (3,472)
   Accounts payable........................................................      638          1,862          3,484
   Accrued expenses........................................................    1,378          1,295         (2,286)
   Income taxes............................................................     (121)         1,754            344
                                                                             -------        -------         ------
Total adjustments..........................................................    6,557          7,987         22,528
                                                                             -------        -------         ------
Net cash provided by operating activities..................................   15,045         13,230         21,588
                                                                             -------        -------         ------

Cash flows from investing activities:
   Purchases of property, plant and equipment..............................   (1,667)          (777)        (1,326)
   Change in deposits and other............................................     (159)            94             62
   Purchases of short-term investments.....................................   (5,769)            --             --
   Proceeds from the sale of manufacturing facility, net of cost to sell...      686             --             --
   Share purchase - Saucony Canada, Inc....................................     (547)            --             --
   Marketable securities - realized (gain) loss............................       --             99             15
   Proceeds from the sale of marketable securities.........................       --            197             --
   Proceeds from the sale of equipment.....................................       --             90              1
                                                                             -------         ------         -------
Net cash used by investing activities......................................   (7,456)          (297)        (1,248)
                                                                             -------         ------         -------

Cash flows from financing activities:
   Net short-term borrowings (payments)....................................       --             --         (2,474)
   Repayment of long-term debt and capital lease obligations...............       --            (88)          (226)
   Common stock repurchased................................................     (126)          (880)          (132)
   Issuances of common stock, stock option exercises.......................      644            329             84
   Dividends on common stock...............................................     (518)            --             --
   Debt financing costs....................................................       --            (87)            --
   Receipt of payment on notes receivable..................................       --            312             --
                                                                             -------        -------        -------
Net cash used by financing activities......................................       --           (414)        (2,748)
Effect of exchange rate changes on cash and cash equivalents...............     (291)          (263)          (103)
                                                                             -------        -------        -------
Net increase in cash and cash equivalents..................................    7,298         12,256         17,489
Cash and cash equivalents at beginning of period...........................   34,483         22,227          4,738
                                                                           ---------      ---------       --------
Cash and cash equivalents at end of period.................................$  41,781      $  34,483       $ 22,227
                                                                           =========      =========       ========


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


                         SAUCONY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    For the Years Ended January 2, 2004, January 3, 2003 and January 4, 2002

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


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

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

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


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

     The  Company's  fiscal  year ends on the first  Friday  falling on or after
     December 31,  resulting in fiscal years of 52 or 53 weeks. The consolidated
     financial statements and notes for 2003, 2002 and 2001 represent the fiscal
     years  ended  January  2,  2004,  January  3,  2003 and  January  4,  2002,
     respectively.  There were 52 weeks in each of fiscal 2003,  fiscal 2002 and
     fiscal 2001.


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

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

     All  intercompany   accounts  and  transactions  have  been  eliminated  in
     consolidation.


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

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


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

     Sales, net of discounts and estimated  returns and allowances,  and related
     costs of sales are recognized  upon shipment when title and all the rewards
     and  risks  of loss  have  been  transferred  to the  buyer,  there  are no
     uncertainties regarding acceptance,  there exists persuasive evidence of an
     arrangement, the sales price is fixed or determinable and collection of the
     related accounts receivable is reasonably  assured.  Provisions for returns
     and  allowances  are  determined  on the basis of past  experience  and the
     receipt of notification of pending  returns.  Royalty revenue is recognized
     based on licensee's sales that incorporate our trademarks.


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

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

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

     Short-term  investments  which consist  primarily of  obligations of United
     States governmental  agencies and commercial paper with original maturities
     of  91  days  to  one  year.  The  securities  are  classified  as  trading
     securities,  which are carried at fair value  based upon the quoted  market
     prices of those investments at January 2, 2004. Net realized and unrealized
     gains and losses on trading securities are included in the determination of
     net income and are reported in non-operating income.
<PAGE>

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

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


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

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


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

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

     Intangible  assets are amortized  over their  estimated  useful lives which
     range from two to five years. The Company has recorded no intangible assets
     with indefinite lives other than goodwill.  The Company reviews  intangible
     assets  when  indications  of  potential   impairment  exists,  such  as  a
     significant reduction in cash flows associated with the assets.  Intangible
     assets as of January 2, 2004 and January 3, 2003 are as follows:
<TABLE>
<CAPTION>

                                                          2003                                   2002
                                                       Accumulated                             Accumulated
                                             Cost     Amortization     Net            Cost    Amortization     Net
                                             ----     ------------     ---            ----    ------------     ---


          <S>                              <C>         <C>           <C>            <C>         <C>          <C>
          Software licenses................$  1,060    $    (992)    $   68         $  1,060    $   (928)    $   132
          Capitalized debt
             financing costs...............      87          (76)        11               87         (14)         73
          Other............................     444         (399)        45              381        (378)          3
                                           --------    ----------    ------         --------    ---------    -------
          Total............................$  1,591    $  (1,467)    $  124         $  1,528    $ (1,320)    $   208
                                           ========    =========     ======         ========    ========     =======

</TABLE>

     Amortization of intangible assets was $149, $117 and $91, respectively,  in
     fiscal 2003, fiscal 2002 and fiscal 2001.

     The  estimated  future  amortization  expense  of  intangible  assets is as
     follows:

                2004................................$   77
                2005................................    41
                2006................................     5
                2007................................     1
                2008 and thereafter.................    --
                                                    ------
                Total...............................$  124
                                                    ======

<PAGE>

     Goodwill
     --------

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

     In June 2001, the Financial  Accounting Standards Board issued Statement of
     Financial  Accounting  Standards No. 142,  "Goodwill  and Other  Intangible
     Assets",  "SFAS 142". SFAS 142 addresses financial accounting and reporting
     for acquired goodwill and other intangible assets acquired  individually or
     with a group  of other  assets  (excluding  those  acquired  in a  business
     combination)  at  acquisition.   The  statement  also  addresses  financial
     accounting and reporting for goodwill and other  intangibles  subsequent to
     their acquisition.  SFAS 142 supersedes Accounting Principles Board Opinion
     No. 17,  "Intangible  Assets" "APB 17". Under SFAS 142, the amortization of
     goodwill ceased and the Company  assesses the  realizability  of this asset
     annually and whenever events or changes in  circumstances  indicate that it
     may be  impaired.  The  Company  adopted  SFAS 142 on  January  5, 2002 and
     discontinued  amortizing goodwill.  The Company estimates the fair value of
     its  reporting  units by using  forecasts  of  discounted  cash  flows.  In
     applying SFAS 142 the Company  performed the  transitional  assessment  and
     impairment  test required as of January 5, 2002 and  determined  that there
     was no  impairment  of  goodwill.  The Company  completed  annual tests for
     impairment  at January  3, 2003 and  January  2, 2004 and  determined  that
     goodwill  was not  impaired.  At January 2, 2004 and  January 3, 2003,  the
     carrying value of goodwill was $912.

     The transitional disclosure of reported earnings for the fiscal years ended
     January 2, 2004,  January 3, 2003 and  January  4, 2002,  as  adjusted,  is
     presented in the table below:

<TABLE>
<CAPTION>
                                                                       2003           2002         2001
                                                                       ----           ----         ----

         <S>                                                         <C>            <C>          <C>
         Net income (loss), as reported..............................$ 8,488        $ 5,243      $  (940)
         Addback amortization of goodwill, net of tax................     --             --           79
                                                                     -------        -------      -------
         Adjusted net income (loss)..................................$ 8,488        $ 5,243      $  (861)
                                                                     =======        =======      =======

         Earnings per share:
           Basic
           Class A
              Net income (loss), as reported.........................$  1.31        $  0.81      $ (0.15)
              Addback amortization of goodwill, net of tax...........     --             --         0.02
                                                                     -------        -------      -------
              Adjusted net income (loss).............................$  1.31        $  0.81      $ (0.13)
                                                                     =======        =======      =======

           Class B
              Net income (loss), as reported.........................$  1.44        $  0.89      $ (0.16)
              Addback amortization of goodwill, net of tax...........     --             --         0.01
                                                                     -------        -------      -------
              Adjusted net income (loss).............................$  1.44        $  0.89      $ (0.15)
                                                                     =======        =======      =======

           Diluted
           Class A
              Net income (loss), as reported.........................$  1.26        $  0.80      $ (0.15)
              Addback amortization of goodwill, net of tax...........     --             --         0.02
                                                                     -------        -------      -------
              Adjusted net income (loss).............................$  1.26        $  0.80      $ (0.13)
                                                                     =======        =======      =======

           Class B
              Net income (loss), as reported.........................$  1.38        $  0.88      $ (0.16)
              Addback amortization of goodwill, net of tax...........     --             --         0.01
                                                                     -------        -------      -------
              Adjusted net income (loss).............................$  1.38        $  0.88      $ (0.15)
                                                                     =======        =======      =======


</TABLE>

<PAGE>
     Income Taxes
     ------------

     Income taxes are provided for the amount of taxes  payable or refundable in
     the current year and for the  expected  future tax  consequences  of events
     that have been recognized in the financial  statements or tax returns. As a
     result of  recognition  and  measurement  differences  between tax laws and
     financial  accounting  standards,  temporary  differences arise between the
     amount of taxable income and pretax financial income for a year and the tax
     bases of assets or liabilities  and their reported  amount in the financial
     statements.  The deferred tax assets and liabilities reported as of January
     2,  2004 and  January 3 2003  reflect  the  estimated  future  tax  effects
     attributable  to  temporary  differences  and  carryforwards  based  on the
     provisions of enacted tax law. See note 13 for further discussion on income
     taxes.


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

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

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

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


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

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

     The financial statements of the Company's foreign subsidiaries are measured
     using the current  rate method.  Under the current rate method,  assets and
     liabilities  of these  subsidiaries  are translated at exchange rates as of
     the balance  sheet date.  Revenues and expenses are  translated  at average
     rates of  exchange  in effect  during the year.  The  resulting  cumulative
     foreign currency translation  adjustments have been recorded in Accumulated
     Other  Comprehensive  Income (Loss), a component of  stockholders'  equity.
     Foreign  currency  translation  adjustments  amounted  to $1,375  and $431,
     respectively,   for  2003  and  2002.  Net  losses  from  foreign  currency
     translation  adjustments  amounted  to  $509  in 2001  and is  recorded  in
     Accumulated Other Comprehensive Income (Loss).


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

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

     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 2003, 2002 and 2001,  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. Pro
     forma  net  income  available  to  the  Company's  common  stockholders  is
     allocated  among our two classes of common stock,  Class A common stock and
     Class B common stock.  The  allocation  among each class was based upon the
     two-class method.  Under the two-class method, pro forma earnings per share
     for each  class  of  common  stock is  determined  according  to  dividends
     declared. Pro forma net income allocated to Class A common stockholders and
     Class B common  stockholders  and the  calculation  of pro forma  basic and
     diluted earnings per share are as follows:
<TABLE>
<CAPTION>


                                                       2003                      2002                     2001
                                               --------------------      --------------------     --------------------
                                                Basic      Diluted        Basic      Diluted       Basic      Diluted
                                                -----      -------        -----      -------       -----      -------

       <S>                                     <C>        <C>            <C>         <C>          <C>        <C>
       Net income (loss):
       As reported.........................    $ 8,488    $ 8,488        $ 5,243     $ 5,243      $  (940)   $  (940)
       Add:   Stock-based compensation
        expense included in reported net
        income (loss), net of related tax
        benefit............................         23         23             26          26           22         22
       Less:  Total stock-based compensation
        expense determined under the fair
        value based method for all awards,
        net of related tax benefit.........     (1,161)    (1,161)          (710)       (710)        (768)      (768)
                                               -------    -------        -------     -------      -------    -------
       Pro forma net income (loss).........    $ 7,350    $ 7,350        $ 4,559     $ 4,559      $(1,686)   $(1,686)
                                               =======    =======        =======     =======      =======    =======


       Pro forma net income  (loss) allocated:
         Class A common stock..............    $ 2,868    $ 2,743        $ 1,808     $ 1,784      $  (673)   $  (673)
         Class B common stock..............      4,482      4,607          2,751       2,775       (1,013)    (1,013)
                                               -------    -------        -------     -------      -------    -------
                                               $ 7,350    $ 7,350        $ 4,559     $ 4,559      $(1,686)   $(1,686)
                                               =======    =======        =======     =======      =======    =======

       Pro forma earnings per share:
       Class A common stock
       As reported.........................    $  1.31    $  1.26       $   0.81     $  0.80      $ (0.15)   $ (0.15)
       Add:   Stock-based compensation
        expense included in reported net
        income (loss), net of related tax..       0.00       0.00           0.00        0.00         0.00       0.00
       Less:  Total stock-based compensation
        expense determined under the fair
        value based method for all awards,
        net of related tax benefit.........      (0.17)     (0.17)         (0.10)      (0.10)       (0.11)     (0.11)
                                               -------    -------        -------     -------      -------    -------
       Pro forma net income (loss)
        per share..........................    $  1.14    $  1.09        $  0.71     $  0.70      $ (0.26)   $ (0.26)
                                               =======    =======        =======     =======      =======    =======

       Class B common stock
       As reported.........................    $  1.44    $  1.38        $  0.89     $  0.88      $ (0.16)   $ (0.16)
       Add:   Stock-based compensation
        expense included in reported net
        income (loss), net of related tax..       0.00       0.00           0.00        0.00         0.00       0.00
       Less:  Total stock-based compensation
        expense determined under the fair
        value based method for all awards,
        net of related tax benefit.........      (0.19)     (0.18)         (0.11)      (0.11)       (0.13)     (0.13)
                                               -------    -------        -------     -------      -------    -------
       Pro forma net income (loss)
        per share..........................    $  1.25    $  1.20        $  0.78     $  0.77      $ (0.29)   $ (0.29)
                                               =======    =======        =======     =======      =======    =======
</TABLE>

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

<PAGE>

     Derivative Instruments and Hedging Activities
     ---------------------------------------------

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

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

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


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

     Advertising and promotion costs,  including print media  production  costs,
     are expensed as incurred.  Advertising  and promotion  expense  amounted to
     $7,308, $7,313 and $10,885 for 2003, 2002 and 2001, respectively.


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

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


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

     Expenditures  for  research  and  development  of products  are expensed as
     incurred.  Research  and  development  expenses  amounted to  approximately
     $1,673, $1,611 and $1,135 for 2003, 2002 and 2001, respectively.


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

     At January 4, 2002, the Company held notes of $179 and $124,  respectively,
     from two  officers  of the  Company who are also  directors  and  principal
     shareholders of the Company's Class A Common Stock.  The notes,  which were
     included as a component of stockholders'  equity,  were due and were repaid
     on March 17, 2002,  were full recourse  notes and accrued  interest at 9.0%
     per annum.  Interest  income from the two notes  amounted to $9 and $18 for
     2002 and 2001, respectively.

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

<PAGE>

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

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


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

     SFAS 150
     --------

     In May 2003,  the Financial  Accounting  Standards  Board issued  Financial
     Accounting Standards No. 150. "Accounting for Certain Financial Instruments
     with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150
     establishes  standards  for how an issuer  classifies  and  measures in its
     statement  of  financial   position  certain  financial   instruments  with
     characteristics  of both liabilities and equity.  SFAS 150 requires that an
     issuer  classify  a  financial  instrument  that is  within  its scope as a
     liability,  or an  asset  in some  circumstances,  because  that  financial
     instrument  embodies an obligation of the issuer. SFAS 150 is effective for
     financial instruments entered into or modified after May 31, 2003, and with
     one  exception,  is effective at the beginning of the first interim  period
     beginning  after June 15,  2003.  The  adoption  of SFAS 150 did not have a
     material impact on the Company's financial position,  results of operations
     or cash flows.


     SFAS 149
     --------

     In April 2003, the Financial Accounting Standards Board issued Statement of
     Financial  Accounting  Standards  No. 149,  "Amendment  of Statement 133 on
     Derivative  Instruments  and Hedging  Activities"  ("SFAS  149").  SFAS 149
     amends and clarifies  financial  accounting  and  reporting for  derivative
     instruments,  including certain  derivative  instruments  embedded in other
     contracts  (collectively  referred  to  as  derivatives)  and  for  hedging
     activities  under  Statement of  Financial  Accounting  Standards  No. 133,
     "Accounting  for  Derivative  Instruments  and Hedging  Activities"  ("SFAS
     133"). SFAS 149 requires that contracts with comparable  characteristics be
     accounted for similarly.  In particular,  SFAS 149 (1) clarifies under what
     circumstances  a  contract  with  an  initial  net  investment   meets  the
     characteristic of a derivative discussed in paragraph 6(b) of SFAS 133, (2)
     clarifies when a derivative contains a financing component,  (3) amends the
     definition  of an  underlying  to conform it to language  used in Financial
     Accounting  Standards  Interpretation No. 45, "Guarantors of Accounting and
     Disclosure  Requirements for Guarantees,  Including Indirect  Guarantees of
     Indebtedness of Others",  and (4) amends certain other existing  accounting
     pronouncements.  SFAS  149 is  effective  for  contracts  entered  into  or
     modified  after  June 30,  2003,  except as stated in  paragraph  40.  This
     statement is also effective for hedging relationships designated after June
     30, 2003,  except as stated in  paragraph  40. The adoption of SFAS 149 did
     not have a material impact on the Company's financial position,  results of
     operations or cash flows.


     FIN 46 and FIN 46-R
     -------------------

     In January 2003 and December 2003, the Financial Accounting Standards Board
     issued  Financial   Accounting   Standards  Board  Interpretation  No.  46,
     "Consolidation of Variable Interest  Entities" and its revision,  FIN 46-R,
     respectively.  FIN 46 and FIN 46-R  address the  consolidation  of entities
     whose equity holders have either not provided  sufficient equity at risk to
     allow the entity to finance its own  activities  or do not possess  certain
     characteristics of a controlling  financial interest.  FIN 46 and FIN 46- R
     require the  consolidation  of these  entities,  know as variable  interest
     entities  ("VIE's"),  by the primary beneficiary of the entity. The primary
     beneficiary  is the  entity,  if any,  that is subject to a majority of the
     risk of loss from the VIE's  activities,  entitled to receive a majority of
     the VIE's residual returns, or both. FIN 46 and FIN 46-R are applicable for
     financial  statements of public  entities  that have  interests in VIE's or
     potential  VIE's,  referred  to as special  purpose  entities,  for periods
     ending after December 15, 2003, of which we had none. Application by public
     entities  for  all  other  types  of  entities  is  required  in  financial
     statements  for periods  ending after March 15,  2004.  The adoption of FIN
     46-R is not expected to have a material  impact on the Company's  financial
     position, results of operations or cash flows.
<PAGE>


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

     As of January 4, 2002,  the Company's  holdings in  short-term  investments
     consisted primarily of obligations of United States  governmental  agencies
     and commercial paper with original maturities of 91 days to one year, which
     are classified as trading securities.

     The cost of the  securities  held at  January  2,  2004 was  $5,769.  As of
     January 2, 2004, the market value of such securities was $5,788.

     Included in the  determination of net income for the years ended January 2,
     2004 were realized gains of $74 and net unrealized gains of $19.


3.   Inventories:
     -----------

     Inventories  at  January  2,  2004 and  January  3, 2003  consisted  of the
     following:

                                               2003                 2002
                                               ----                 ----

         Finished goods.....................$  22,322            $  26,528
         Raw materials and supplies.........       34                  480
         Work-in-process....................       65                  193
                                            ---------            ---------
         Total..............................$  22,421            $  27,201
                                            =========            =========


4.   Assets Held for Sale:
     --------------------

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


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

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

     The Bangor,  Maine real  property  was  included  in Current  Assets on the
     balance sheet at January 3, 2003 as Assets "Assets Held for Sale".

<PAGE>

5.   Property, Plant and Equipment:
     -----------------------------

     Major  classes  of  property,  plant and  equipment  at January 2, 2004 and
     January 3, 2003 were as follows:

                                                    2003          2002
                                                    ----          ----

         Land and improvements....................$    494      $    494
         Buildings and improvements...............   6,068         5,920
         Machinery and equipment..................  12,272        12,280
         Leasehold improvements...................     719           556
                                                  --------      --------
                                                  $ 19,553      $ 19,250
         Less accumulated depreciation
         and amortization.........................  13,352        13,536
                                                  --------      --------
         Total....................................$  6,201      $  5,714
                                                  ========      ========


6.   Accrued Expenses:

     Accrued  expenses at January 2, 2004 and January 3, 2003  consisted  of the
     following:

                                                              2003          2002

        Payroll and incentive compensation.................$ 3,244       $ 2,350
        Income taxes.......................................    856           936
        Inventory freight and duty.........................    891           818
        Professional fees..................................    316           307
        Sales commissions..................................    370           301
        Selling and advertising............................    356           300
        Dividends..........................................    260            --
        Forward contracts - fair value adjustment..........    420           181
        Plant closing and other charges....................     --            36
        Other..............................................  2,831         2,571
                                                           -------       -------
        Total..............................................$ 9,544       $ 7,800
                                                           =======       =======


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

     The Company has  maintained  a qualified  retirement  savings  plan (401(k)
     Plan) since 1991.  All United States  employees of the Company who meet the
     minimum age and service  requirements  are eligible to  participate  in the
     401(k) Plan. The Company may make discretionary contributions to the 401(k)
     Plan  equal  to  a  certain  percentage  of  the  participating  employees'
     contributions,  subject to the  limitations  imposed by the 401(k) Plan and
     the Internal  Revenue Code. The Company's  contributions  amounted to $197,
     $155 and $175 for 2003, 2002 and 2001, respectively.

     The  Company  has a deferred  compensation  program  (DCP) to  provide  key
     executives and highly  compensated  employees with supplemental  retirement
     benefits.  Eligibility  is determined by the Company's  Board of Directors.
     The DCP is not qualified  under  Section 401 of the Internal  Revenue Code.
     The  Company  may make  discretionary  contributions  to the DCP equal to a
     certain  percentage  of  the  participants'  contributions.  The  Company's
     contributions  amounted  to  $16,  $17 and $19 for  2003,  2002  and  2001,
     respectively.

     At the 2001  Annual  Meeting  of  Stockholders  held on May 24,  2001,  the
     stockholders  approved the  Company's  2001  Employee  Stock  Purchase Plan
     (Employee Stock Purchase Plan), adopted by the Company's Board of Directors
     on April 6, 2001.  An aggregate of 250,000  shares of Class B Common Stock,
     $0.33-1/3 par value per share,  of Saucony,  Inc. have been reserved by the
     Company and may be issued under the Employee  Stock Purchase Plan, of which
     a total of 214,000 shares remained  available for issuance as of January 2,
     2004.  The  plan  provides  employees  of the  Company  and its  designated
     subsidiaries  with an opportunity  to purchase  common stock of the Company
     through accumulated  payroll deductions,  at a price per share equal to 85%
     of the fair market value of a share of common stock on the enrollment  date
     or on the  purchase  date,  whichever  is lower.  The plan  qualifies as an
     "Employee  Stock Purchase  Plan" under Section 423 of the Internal  Revenue
     Code  and  its   provisions  are  construed  so  as  to  extend  and  limit
     participation in a manner  consistent with the requirements of that section
     of the code.
<PAGE>

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

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

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

     The Company is obligated under various  operating  leases for equipment and
     rental space through 2010.  Total  equipment and rental  expenses for 2003,
     2002 and 2001 were $1,715, $1,602 and $1,720, respectively.

     Future minimum equipment and rental payments:

                  2004 ..............................$ 1,881
                  2005 ..............................$ 1,381
                  2006 ..............................$   970
                  2007...............................$   830
                  2008 and thereafter................$   720


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

     In August 2002, the Company entered into a revolving credit  agreement,  as
     amended,  under the  terms of which a bank  committed  up to a  maximum  of
     $15,000 to the  Company  for cash  borrowings  and  letters of credit.  The
     credit facility terminates on August 31, 2004. Maximum borrowings under the
     credit  facility  are limited to the lesser of $15,000 or the sum of 65% of
     eligible  receivables  plus  20%  of  eligible  finished  goods  inventory.
     Borrowings under the credit facility are made at our election at the bank's
     prime  rate of  interest  less 1.0% or at the  LIBOR  rate  plus  1.5%.  In
     addition,  the  Company  pays a  quarterly  commitment  fee of 0.25% on the
     average daily unused credit line. The credit facility contains restrictions
     and financial covenants including:  restrictions on additional indebtedness
     and  restrictions  on the annual amount of equipment  financing and capital
     lease indebtedness. As amended in January 2004, the credit facility permits
     the Company to pay cash dividends,  and make repurchases or redemptions of,
     or other specified  distributions  with respect to, its capital stock, in a
     total  amount  of up to $5,000  in any  fiscal  year.  The  Company  was in
     compliance with all covenants of the credit facility at January 2, 2004. At
     January 2, 2004, there were no borrowings  outstanding  under the facility.
     We had open  commitments  under  letters of credit in the amount of $747 at
     January 2, 2004.

     Saucony Canada,  Inc.  maintains a credit facility with a Canadian  lender.
     The agreement  provides Saucony Canada with a credit line of 1,500 Canadian
     Dollars  for cash  borrowings  and  letters of credit.  At January 2, 2004,
     there were no borrowings or letters of credit outstanding under this credit
     facility.
<PAGE>

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

     The Company has entered into employment agreements with two key executives.
     The  employment  agreements  provide  for  minimum  aggregate  annual  base
     salaries of $934, annual consumer price index  adjustments,  life insurance
     coverage,  cash  bonuses  calculated  as  a  percentage  of  the  Company's
     consolidated  pre-tax income.  The employment  agreements were scheduled to
     expire  in  August  2003,  but were  extend  automatically  for  additional
     one-year  terms  beginning  upon such  scheduled  expiration.  unless prior
     notice is given by the Company or the employee. The Company has included an
     aggregate bonus expense to these executives of $681, $511 and $0 in general
     and administrative expenses for 2003, 2002 and 2001, respectively. Included
     in accrued  expenses  at January 2, 2004 and  January 3, 2003,  are accrued
     bonus expense of $681 and $511, respectively.


     Litigation
     ----------

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


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

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

     The following  table  summarizes  the activity for the Class A Common Stock
     and Class B Common Stock, for the periods ended January 4, 2002, January 3,
     2003 and January 2, 2004:
<TABLE>
<CAPTION>

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

           <S>                                                          <C>                       <C>
           Shares outstanding at January 5, 2001.....................   2,570,127                 3,513,969
           Shares issued.............................................          --                    17,930
           Shares repurchased........................................      (3,380)                  (16,096)
                                                                        ---------                 ---------
           Shares outstanding at January 4, 2002.....................   2,566,747                 3,515,803
           Shares issued.............................................          --                    68,944
           Shares repurchased........................................     (41,700)                  (53,130)
                                                                        ---------                 ---------
           Shares outstanding at January 3, 2003.....................   2,525,047                 3,531,617
           Shares issued.............................................          --                   104,217
           Shares repurchased........................................      (4,400)                   (7,600)
                                                                        ---------                 ---------
           Shares outstanding at January 2, 2004.....................   2,520,647                 3,628,234
                                                                        =========                 =========
</TABLE>
<PAGE>

     As of January 2, 2004,  January 3, 2003 and January 4, 2002,  the number of
     shares of Class A Common  Stock and Class B Common  Stock held in  Treasury
     were as follows:

                                                                       Total
                                      Class A        Class B        Class A and
                                      Common         Common       Class B Common
                                       Stock          Stock            Stock
                                       -----          -----            -----

         January 2, 2004..............190,480        582,326          772,806
         January 3, 2003..............186,080        574,726          760,806
         January 4, 2002..............144,380        521,596          665,976


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

     On July 16,  2003,  the  Company  paid its  first  regular  quarterly  cash
     dividends,  in the amount of $0.040  per share on the Class A Common  Stock
     and $0.044 per share on the Class B Common Stock,  to all  stockholders  of
     record at the close of business  on June 18,  2003.  The Company  also paid
     quarterly  dividends in the same amount on October 16, 2003.  The aggregate
     of all dividends  paid in 2003 was $518. On November 6, 2003, the Company's
     Board of Directors declared regular quarterly cash dividends, in the amount
     of $0.040 per share on the Class A Common Stock and $0.044 per share on the
     Class B Common Stock.  The  dividends  were paid on January 15, 2004 to all
     stockholders of record at the close of business on December 18, 2003. As of
     January 2, 2004, $260,  representing the aggregate  dividend  liability for
     the January 15, 2004  dividend was recorded in current  liabilities,  under
     accrued  expenses.  The Company's  corporate  charter provides that regular
     cash dividends paid on Class B Common Stock are to be in an amount equal to
     110% of the amount paid on Class A Common Stock.

     In January  2004,  the Company  amended  its credit  facility to reduce the
     restrictions  in  the  facility  on  the  Company's  ability  to  pay  cash
     dividends,  make other  distributions on its common stock and repurchase or
     redeem its capital  stock.  As  amended,  the credit  facility  permits the
     Company to pay cash dividends,  and make  repurchases or redemptions of, or
     other  specified  distributions  with respect to, its capital  stock,  in a
     total amount of up to $5,000 in any fiscal year.

     See Note 23 for the discussion of the Company's special dividend.


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

     1993 Equity Incentive Plan
     --------------------------

     Under the Company's  1993 Equity  Incentive Plan (Equity  Incentive  Plan),
     approved by the  Company's  stockholders  on May 25, 1993,  the Company may
     grant 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 Board of Directors, which,
     at its sole  discretion,  grants options to purchase shares of Common Stock
     and makes  awards of  restricted  stock.  The  purchase  price per share of
     Common  Stock  shall be  determined  by the Board of  Directors,  provided,
     however,  that in the case of incentive  stock options,  the purchase price
     may not be less than  100% of the fair  market  value of such  stock at the
     time of grant of the option. The terms of option agreements are established
     by the Board of Directors,  except in the case of incentive  stock options,
     the term of which may not  exceed  ten  years,  or five  years for  certain
     principal  stockholders.  The vesting schedule is subject to the discretion
     of the Board of Directors.
<PAGE>

     Restricted  stock awards  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
     determines the purchase price, which may be less than the fair market value
     of the Common Stock, and the vesting schedule for such awards.

     The Board of Directors has delegated its powers under the Equity  Incentive
     Plan to the Compensation Committee of the Board of Directors. At January 2,
     2004,  a total of 1,900,000  shares,  in the  aggregate,  of Class A Common
     Stock and Class B Common Stock have been reserved by the Company and may be
     issued under the Plan. The Equity  Incentive Plan expires on April 7, 2003,
     at which time no further options or stock awards may be granted.

     The following  table  summarizes  the awards  available for grant under the
     Company's 1993 Equity  Incentive Plan for the three-year  reporting  period
     ended January 2, 2004:

                                                                     Shares
                                                                     ------

          Shares available at January 5, 2001....................    870,913
          Awards granted.........................................   (284,801)
          Options expired or cancelled...........................     72,465
                                                                    --------
          Shares available at January 4, 2002....................    658,577
          Awards granted.........................................   (160,000)
          Options expired or cancelled...........................    128,621
                                                                    --------
          Share available at January 3, 2003.....................    627,198
          Awards granted.........................................   (157,750)
          Options expired or cancelled...........................     39,112
                                                                    --------
          Shares available at January 2, 2004....................    508,560
                                                                    ========

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


     2003 Equity Plan
     ----------------

     On May  21,  2003  the  Company's  stockholders  approved  the  2003  Stock
     Incentive Plan (Stock Incentive Plan),  which had been adopted by the Board
     of Directors on February 20, 2003.  Under the Stock  Incentive Plan 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 Stock Incentive Plan is administered by the Board of Directors,  which,
     at its sole  discretion,  grants options to purchase shares of Common Stock
     and makes  awards of  restricted  stock.  The  purchase  price per share of
     Common  Stock  shall be  determined  by the Board of  Directors,  provided,
     however,  that in the case of incentive  stock options,  the purchase price
     may not be less than  100% of the fair  market  value of such  stock at the
     time of grant of the option. The terms of option agreements are established
     by the Board of Directors,  except in the case of incentive  stock options,
     the term of which may not  exceed  ten  years,  or five  years for  certain
     principal  stockholders.  The vesting schedule is subject to the discretion
     of the Board of Directors.

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

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

     The following  table  summarizes  the awards  available for grant under the
     Company's 2003 Equity  Incentive Plan for the period ended January 2, 2004:

                                                                Shares
                                                                ------

          Shares reserved....................................  1,750,000
          Awards granted.....................................   (602,785)
          Options expired or cancelled.......................         --
                                                               ---------
          Shares available at January 2, 2004................  1,147,215
                                                               =========

     The following table  summarizes the Company's stock option activity for the
     periods ended January 4, 2002, January 3, 2003 and January 2, 2004:
<TABLE>
<CAPTION>

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

           <S>                                                 <C>               <C>           <C>
           Outstanding at January 5, 2001.....................   638,677         $  9.59       $  4.00   -  $ 19.88
                Granted.......................................   284,801         $  6.64       $  4.50   -  $ 10.50
                Exercised.....................................   (17,930)        $  4.67       $  4.00   -  $  5.13
                Forfeited.....................................   (65,465)        $  7.63       $  4.13   -  $ 14.63
                Expired.......................................    (7,000)        $  4.19       $  4.00   -  $  4.44
                                                               ---------
           Outstanding at January 4, 2002.....................   833,083         $  8.89       $  4.00   -  $ 19.88
                Granted.......................................   160,000         $  6.67       $  5.90   -  $  9.30
                Exercised.....................................   (57,650)        $  4.78       $  4.00   -  $  7.06
                Forfeited.....................................   (96,771)        $  9.45       $  4.00   -  $ 14.69
                Expired.......................................   (35,850)        $  4.84       $  4.44   -  $  5.36
                                                               ---------
           Outstanding at January 3, 2003.....................   802,812         $  8.85       $  4.00   -  $ 19.88
                Granted.......................................   760,535         $ 14.67       $  5.50   -  $ 17.88
                Exercised.....................................   (79,268)        $  6.52       $  4.13   -  $ 12.50
                Forfeited.....................................   (37,212)        $ 11.39       $  4.13   -  $ 19.88
                Expired.......................................    (1,900)        $  4.71       $  4.44   -  $  6.50
                                                               ---------
           Outstanding at January 2, 2004..................... 1,444,967         $ 11.98       $  4.00   -  $ 17.88
                                                               =========

</TABLE>


     Options  exercisable for shares of the Company's Class A and Class B Common
     Stock as of  January 4,  2002,  January 3, 2003 and  January 2, 2004 are as
     follows:
<TABLE>
<CAPTION>

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

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

          <S>                               <C>          <C>            <C>              <C>          <C>
          January 4, 2002..............     --           396,209        396,209          --           $ 8.81
          January 3, 2003..............     --           435,736        435,736          --           $ 9.30
          January 2, 2004..............     --           513,123        513,123          --           $ 9.60
</TABLE>
<PAGE>


     The following table summarizes  information about stock options outstanding
     at January 2, 2004:
<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. 2, 2004     Life (Years)       Price         Jan. 2, 2004        Price
          -------------------      ------------     ------------     --------        ------------      --------

          <S>                          <C>              <C>          <C>                <C>            <C>
          $  4.00   - $  4.75              850          1.48         $  4.44                850        $  4.44
          $  5.13   - $  5.90          128,940          3.48         $  5.51             83,460        $  5.41
          $  6.00   - $  6.95          129,200          6.99         $  6.30             71,933        $  6.27
          $  7.01   - $  7.77          150,034          6.85         $  7.15            100,283        $  7.13
          $  8.06   - $  8.59            4,100          7.59         $  8.31              1,050        $  8.31
          $  9.30   - $  9.88            7,550          8.72         $  9.39              1,300        $  9.34
          $ 10.00   - $ 10.55          145,139          7.77         $ 10.26                300        $ 10.19
          $ 11.25   - $ 11.80          181,150          6.33         $ 11.38            139,900        $ 11.38
          $ 12.13   - $ 12.50           38,191          1.10         $ 12.13             22,881        $ 12.31
          $ 13.34   - $ 13.89           37,278          4.12         $ 13.52             14,566        $ 13.34
          $ 14.00   - $ 14.68           35,750          3.51         $ 14.60             24,600        $ 14.68
          $ 16.16   - $ 16.60          559,009          9.16         $ 16.24             40,000        $ 16.16
          $ 17.13  -  $ 17.88           27,776          2.73         $ 17.47             12,000        $ 17.13
                                     ---------                                          -------
                                     1,444,967                                          513,123
                                     =========                                          =======

</TABLE>

     On March 12, 2001,  the Company  issued common stock  purchase  warrants to
     purchase,  in the aggregate,  50,250 shares of the Company's Class B Common
     Stock at a per share price of $7.00 to five footwear  suppliers.  The stock
     purchase  warrants  vest in five equal annual  installments,  commencing on
     March 12, 2002 and expire on March 12,  2006.  The stock  purchase  warrant
     grant was  approved by the  Company's  Board of  Directors  on February 27,
     2001. The warrants were issued for no cash consideration;  but rather as an
     incentive to the recipients of the warrants to satisfy specific performance
     criteria  which support the Company's  financial  and operating  goals.  On
     December  31, 2003,  the Board of Directors  amended the terms of the stock
     purchase  warrants  to  provide  that  the  warrants  vested  in full as of
     December  31,  2003.  The right to exercise  the warrants is subject to the
     satisfaction  of specific  performance  criteria by each of the recipients.
     See Note 13 for  further  discussion  of the stock  warrant  fair value and
     annual stock-based compensation expense.
<PAGE>



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

     The following table sets forth the computation of basic earnings per common
     share and diluted  earnings per common share for the years ended January 2,
     2004, January 3, 2003 and January 4, 2002:
<TABLE>
<CAPTION>

                                                    2003                    2002                     2001
                                           -------------------      -------------------      -------------------
                                             Basic     Diluted       Basic      Diluted       Basic      Diluted
                                             -----     -------       -----      -------       -----      -------

<S>                                        <C>         <C>          <C>         <C>          <C>         <C>
       Net income (loss) available for
         common shares and
         assumed conversions...............$ 8,488     $ 8,488      $ 5,243     $ 5,243      $  (940)    $  (940)
                                           =======     =======      =======     =======      =======     =======

       Weighted-average common shares
         and equivalents outstanding:

       Weighted-average shares
          outstanding......................  6,104       6,104        6,107       6,107        6,080       6,080

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

       Net income (loss) allocated:
         Class A common stock..............$ 3,312     $ 3,168      $ 2,080     $ 2,052      $  (375)    $  (375)
         Class B common stock..............  5,176       5,320        3,163       3,191         (565)       (565)
                                           -------     -------      -------     -------      -------     -------
                                           $ 8,488     $ 8,488      $ 5,243     $ 5,243      $  (940)    $  (940)
                                           =======     =======      =======     =======      =======     =======

       Weighted-average common shares
         and equivalents outstanding:
          Class A common stock.............  2,521       2,521        2,563       2,563        2,567        2,567
          Class B common stock ............  3,583       3,850        3,544       3,623        3,513        3,513
                                           -------     -------      -------     -------      -------      -------
                                             6,104       6,371        6,107       6,186        6,080        6,080
                                           =======     =======      =======     =======      =======      =======

       Earnings per share:
         Class A common stock..............$  1.31     $  1.26      $  0.81     $  0.80      $ (0.15)     $ (0.15)
                                           =======     =======      =======     =======      =======      =======

         Class B common stock..............$  1.44     $  1.38      $  0.89     $  0.88      $ (0.16)     $ (0.16)
                                           =======     =======      =======     =======      =======      =======

</TABLE>

     Options  to  purchase  336,000  and  312,000  shares of common  stock  were
     outstanding at January 2, 2004 and January 3, 2003, respectively,  were not
     included in the  computations  of earnings per share since the options were
     anti-dilutive.  Stock  warrants to purchase  47,000  shares of common stock
     outstanding  at January 3, 2003,  were not included in the  computation  of
     earnings per share since the warrants were anti-dilutive.


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

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

     The Company recognizes  stock-based  compensation arising from the issuance
     of  restricted  stock  warrants and below  market  options over the vesting
     period of the stock grant or option term. Stock-based compensation amounted
     to $0, $1 and $7 for 2003, 2002 and 2001, respectively.

     The Company  issued  common stock  purchase  warrants to  purchase,  in the
     aggregate,  50,250  shares of the  Company's  Class B Common Stock at a per
     share  price of $7.00 to five  footwear  suppliers.  Fair  value at date of
     grant for the warrants was $3.93 per share  issuable  upon exercise of each
     warrant.  Amortization of stock-based compensation resulting from the stock
     purchase  warrants  amounted to $37,  $42 and $31 for 2003,  2002 and 2001,
     respectively,  and is  recorded as a  component  of cost of goods sold.  In
     addition, the Company recorded stock-based compensation expense of $566 and
     $44,  respectively,  in 2003 and  2002,  to record  additional  stock-based
     compensation  expense to reflect changes in the market value of our Class B
     Common Stock and is recorded as a component of cost of goods sold. The 2003
     stock-based  compensation expense includes $416 of stock-based compensation
     expense  recorded  as a result of  accelerating  the  vesting on the common
     stock purchase warrants.

     The  weighted  average  fair value at date of grant for options  granted in
     2003,  2002 and 2001 was  $7.53,  $3.18 and $3.57 per share  issuable  upon
     exercise of each option,  respectively.  The weighted-average fair value of
     these  options at the date of grant was estimated  using the  Black-Scholes
     option-pricing  model with the following  weighted-average  assumptions for
     2003, 2002 and 2001, respectively:

                                                    2003       2002         2001
                                                    ----       ----         ----

        Weighted-average expected life (years)..    5.0        3.3          3.5
        Risk free interest rate.................    3.0%       3.7%         5.0%
        Expected volatility.....................   62.8%      67.3%        71.9%
        Expected dividend yield.................    1.0%       0.0%         0.0%


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

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

                                           2003          2002            2001
                                           ----          ----            ----
      Pre-tax income (loss):
          United States..................$ 10,316       $ 7,502        $ (1,261)
          Foreign........................   3,258         1,779             897
                                         --------       -------        --------
          Total..........................$ 13,574       $ 9,281        $   (364)
                                         ========       =======        ========


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

                                                 2003        2002         2001
                                                 ----        ----         ----
       Current:
          Federal..............................$ 3,442     $ 2,293      $   426
          State................................    770         686          165
          Foreign..............................    999         795          540
                                               -------     -------      -------
                                                 5,211       3,774        1,131
                                               -------     -------      -------
       Deferred:
          Federal..............................    101         144         (828)
          State................................     36         (81)        (176)
          Foreign..............................    205         (66)         (39)
                                               -------     -------      -------
                                                   342          (3)      (1,043)
                                               -------     -------      -------

       Change in valuation allowance...........   (613)         94          387
                                               -------     -------      -------
          Total................................$ 4,940     $ 3,865      $   475
                                               =======     =======      =======




<PAGE>


     The net  deferred  tax  asset or  liability  reported  on the  consolidated
     balance  sheet  consists of the  following  items as of January 2, 2004 and
     January 3, 2003:
<TABLE>
<CAPTION>

                                                                                        2003        2002
                                                                                        ----        ----
         Net current deferred tax assets:
         <S>                                                                          <C>          <C>
           Allowance for doubtful accounts and discounts..............................$   373      $   753
           Deferred compensation......................................................    885          568
           Inventory allowances and tax costing adjustments...........................    516          392
           Other accrued expenses.....................................................    242          203
           Foreign loss carryforwards.................................................    324           --
                                                                                      -------      -------
              Total...................................................................$ 2,340      $ 1,916
                                                                                      -------      -------

         Net long-term deferred tax assets:
           Foreign loss carryforwards.................................................$   166      $   612
           State loss carryforward....................................................     49           52
           Valuation allowance........................................................   (215)        (664)
                                                                                      -------      -------
              Total...................................................................$     0      $     0
                                                                                      -------      -------

         Net long-term deferred tax liabilities:
           Investment in limited partnership..........................................$ 1,246      $ 1,195
           Property, plant and equipment..............................................    770          664
                                                                                      -------      -------
              Total...................................................................$ 2,016      $ 1,859
                                                                                      -------      -------

         Net deferred tax asset ......................................................$   324      $    57
                                                                                      =======      =======
</TABLE>

     The foreign loss carryforwards  relate to operating losses of approximately
     $1,334, which may be carried forward  indefinitely.  At January 2, 2004 the
     Company  has  determined  that it is more  likely than not that some of the
     deferred tax assets  resulting from foreign and state operating losses will
     not be realized.

     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  $6,604 at
     January 2, 2004

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

                                                                               2003       2002       2001
                                                                               ----       ----       ----

         <S>                                                                 <C>        <C>         <C>
         Expected tax at 34%.................................................$ 4,615    $ 3,155     $ (124)
         State income tax, net of federal benefit............................    532        399         (7)
         Non-deductible expenses and tax-exempt income.......................     78        121         40
         International tax rate differences..................................     81        100        124
         Valuation allowance relating to foreign and state
           operating losses..................................................   (613)        94        387
         Low-income housing tax credits......................................     (3)        (4)        (5)
         Adjustment of tax reserves..........................................    250         --         60
                                                                             -------    -------     ------
         Provision for income taxes..........................................$ 4,940    $ 3,865     $  475
                                                                             =======    =======     ======
</TABLE>

<PAGE>

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

     On May 6, 2003,  the United  States  Bankruptcy  Court for the  District of
     Delaware,  upon  consideration  of the Trustee's  Motion for Entry of Order
     Approving  Settlement  with  Saucony,   Inc.,  ordered  that  the  proposed
     settlement entered into on March 11, 2003,  between the trustee,  appointed
     to oversee the  liquidation  of assets of a former  customer of the Company
     which filed for bankruptcy  protection on November 4, 1999, and the Company
     was  approved.  On May 16,  2003,  the  Company  paid  $530 to  settle  all
     preferential  claims.  As a  consequence  of the  court's  approval  of the
     settlement,  the  Company  recorded  a pre-tax  benefit  of $566 in 2003 to
     reduce the amount  accrued as of January 3, 2003.  The benefit was recorded
     in general and administrative expenses.


16.  Plant Closing and Other Charges:
     -------------------------------

     On November 9, 2001, the Company  announced the cessation of  manufacturing
     at and the closing of its Bangor, Maine facility. During the fourth quarter
     of fiscal  2001,  the  Company  relocated  its Asian  sourcing  and quality
     control office to China,  resulting in the closure of its Taiwan office. In
     addition,  in the fourth quarter of 2001,  the Company  negotiated an early
     termination and exit of a retail store lease. As a result of these actions,
     the Company  recorded pre-tax charges of $2,108 in fiscal 2001. The closing
     of the Bangor,  Maine facility in January 2002 resulted in the  termination
     of 101  employees,  of which 61 were  terminated  subsequent  to January 4,
     2002. Assets used extensively by the Bangor, Maine manufacturing  facility,
     the Taiwan  office and the retail  store were  written  down to fair market
     value.  Expenses associated with the plant closing and other charges are as
     follows:

<TABLE>
<CAPTION>
                                                                         Bangor     Taiwan      Retail
                                                                         Plant      Office       Store     Total
                                                                         -----      ------       -----     -----

       <S>                                                             <C>          <C>         <C>       <C>
       Employee severance and termination benefits.....................$ 1,121      $  150      $    4    $ 1,275
       Facility and equipment lease exit costs and
         other non-cancelable contractual commitments..................    228          --         200        428
       Writedown of machinery and equipment
         to fair market value..........................................    248          25          77        350
       Professional fees and other transaction costs...................     47          --           8         55
                                                                       -------      ------      ------    -------
         Total.........................................................$ 1,644      $  175      $  289    $ 2,108
                                                                       =======      ======      ======    =======
</TABLE>


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

     Included in accrued expenses at January 4, 2002 are $36 of costs associated
     with the plant  closing  and other  charges.  The charge  recorded  for the
     Bangor,  Maine plant closing and the Taiwan office  closing are included in
     income before tax for the Saucony  segment,  while the retail store closing
     is included in income before tax for the Other Products segment.

     The following table  summarizes the activity in the plant closing and other
     charge accruals for the fiscal years ended January 4, 2002, January 3, 2003
     and January 2, 2004:
<TABLE>
<CAPTION>

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

     <S>                               <C>               <C>              <C>               <C>             <C>
     Company Total
         Charge........................$ 1,275           $  428           $   350           $   55          $ 2,108
         Payments / utilization........   (382)              --              (260)              (5)            (647)
                                       -------           ------           -------           ------          -------
       Balance, January 4, 2002........    893              428                90               50            1,461
         Payments / utilization........   (787)            (320)              (89)             (15)          (1,211)
         Expense reversal..............    (79)             (99)               (1)             (35)            (214)
                                       -------           ------           -------           ------          -------
       Balance, January 3, 2003........$    27           $    9           $     0           $    0          $    36
         Payments / utilization........     (1)              --                --               --               (1)
         Expense reversal..............    (26)              (9)               --               --              (35)
                                       -------           ------           -------           ------          -------
       Balance, January 2, 2004........$    --           $   --           $    --           $   --          $    --
                                       =======           ======           =======           ======          =======

</TABLE>
<PAGE>

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

     The following table summarizes the Company's  operations by geographic area
     for the years  ended  January 2, 2004,  January 3, 2003 and January 4, 2002
     and assets as of January 2, 2004, January 3, 2003 and January 4, 2002:
<TABLE>
<CAPTION>

                                                                  2003         2002          2001
                                                                  ----         ----          ----
       <S>                                                      <C>          <C>           <C>
       Revenues:

         United States.........................................$ 103,718    $ 103,444     $ 106,450
         Canada................................................   12,745       11,700         8,464
         Other international...................................   19,982       18,355        17,450
                                                               ---------    ---------     ---------
                                                               $ 136,445    $ 133,499     $ 132,364
                                                               =========    =========     =========
       International revenues:

         United States - sales to foreign distributors.........$   6,813    $   7,048     $   8,164
         Canada................................................   12,745       11,700         8,464
         Other international...................................   13,169       11,307         9,286
                                                               ---------    ---------     ---------
                                                               $  32,727    $  30,055     $  25,914
                                                               =========    =========     =========
       Inter-area revenues:

         United States.........................................$     253    $     247     $   1,228
         Canada................................................    5,419        6,386         5,363
         Other international...................................    5,399        5,191         4,211
                                                               ---------    ---------     ---------
                                                               $  11,071    $  11,824     $  10,802
                                                               =========    =========     =========
       Total revenues:

         United States.........................................$ 103,971    $ 103,691     $ 107,678
         Canada................................................   18,164       18,086        13,827
         Other international...................................   25,381       23,546        21,661
         Less:  Inter-area eliminations........................  (11,071)     (11,824)      (10,802)
                                                               ---------    ---------     ---------
                                                               $ 136,445    $ 133,499     $ 132,364
                                                               =========    =========     =========
       Operating income (loss):

         United States.........................................$   8,303    $   5,531     $  (2,565)
         Canada................................................    2,323        1,931         1,304
         Other international...................................    2,473        1,659         1,151
         Less:  Inter-area eliminations........................     (102)        (178)         (159)
                                                               ---------    ---------     ---------
                                                               $  12,997    $   8,943     $    (269)
                                                               =========    =========     =========
       Assets:

         United States.........................................$  92,148    $  81,538     $  78,942
         Canada................................................    9,117        6,906         5,222
         Other international...................................    9,668        9,396         7,403
         Less:  Inter-area eliminations........................  (10,740)     (10,300)      (13,467)
                                                               ---------    ---------     ---------
                                                               $ 100,193    $  87,540     $  78,100
                                                               =========    =========     =========
</TABLE>

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

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

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


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

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


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

     The Other Products segment  aggregates several product lines, none of which
     individually  meets the  criteria  as defined in SFAS 131 for a  reportable
     segment. Included in Other Products are: Hind multi-sport athletic apparel;
     Spot-bilt coaches,  official,  football and soccer cleats,  leather walking
     and workplace  footwear;  the Company's  retail factory outlet stores;  and
     Hyde Authentics casual footwear.

     The  following  table  summarizes  the results of the  Company's  operating
     segments for the years ended  January 2, 2004,  January 3, 2003 and January
     4, 2002 and identifiable  assets as of January 2, 2004, January 3, 2003 and
     January 4, 2002:
<TABLE>
<CAPTION>


                                                                 2003           2002          2001
                                                                 ----           ----          ----
         <S>                                                   <C>            <C>           <C>
         Revenues:
            Saucony...........................................$ 112,993      $ 111,035     $ 110,393
            Other Products....................................   23,452         22,464        21,971
                                                              ---------      ---------     ---------
            Total.............................................$ 136,445      $ 133,499     $ 132,364
                                                              =========      =========     =========
         Pre-tax income (loss):
            Saucony...........................................$  11,910      $  10,288     $    (296)
            Other Products....................................    1,664         (1,007)          (68)
                                                              ---------      ---------     ---------
            Total segment pre-tax income (loss)...............   13,574          9,281          (364)
            Provision for income taxes........................    4,940          3,865           475
            Minority interest.................................      146            173           101
                                                              ---------      ---------     ---------
         Net income (loss)....................................$   8,488      $   5,243     $    (940)
                                                              =========      =========     =========
         Assets:
            Saucony...........................................$  91,512      $  75,918     $  62,488
            Other Products....................................    8,681         11,622        15,612
                                                              ---------      ---------     ---------
            Total.............................................$ 100,193      $  87,540     $  78,100
                                                              =========      =========     =========
         Depreciation and amortization:
            Saucony...........................................$   1,064      $   1,332     $   1,668
            Other Products....................................      273            265           301
                                                              ---------      ---------     ---------
            Total.............................................$   1,337      $   1,597     $   1,969
                                                              =========      =========     =========
         Goodwill, net:
            Saucony...........................................$      19      $      19     $      19
            Other Products....................................      893            893           893
                                                              ---------      ---------     ---------
            Total.............................................$     912      $     912     $     912
                                                              =========      =========     =========
         Interest, net income (expense):
            Saucony...........................................$     240      $     327     $     (28)
            Other Products....................................       --             --           (49)
                                                              ---------      ---------     ---------
            Total.............................................$     240      $     327     $     (77)
                                                              =========      =========     =========
         Components of interest, net
            Interest expense..................................$      (5)     $      (5)    $    (213)
            Interest income...................................      245            332           136
                                                              ---------      ---------     ---------
              Interest, net...................................$     240      $     327     $     (77)
                                                              =========      =========     =========
</TABLE>
<PAGE>

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

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

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

     Trade receivables subject the Company to the potential for credit risk with
     customers in the retail and distributor sectors. To reduce credit risk, the
     Company performs ongoing evaluations of its customers'  financial condition
     but does not generally require collateral. Approximately 44% and 42% of the
     Company's gross trade  receivables  balance was represented by 15 customers
     and 18  customers,  respectively,  at January 2, 2004 and  January 3, 2003,
     respectively,  which exposes the Company to a concentration of credit risk.
     The Company did not derive more that 10% of its  consolidated  revenue from
     one customer in 2003, 2002 or 2001.


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

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

     The Company  enters  into  forward  currency  exchange  contracts  to hedge
     intercompany   liabilities   denominated  in  currencies   other  than  the
     functional  currency.  The fair  value of the  Company's  foreign  currency
     exchange  contracts  is  estimated  based on foreign  exchange  rates as of
     January 2, 2004. At January 2, 2004 and January 3, 2003, the notional value
     of the  Company's  foreign  currency  exchange  contracts to purchase  U.S.
     dollars was $7,448 and $5,685, respectively. Consistent with the provisions
     of SFAS 133, all  derivatives  must be  recognized  on the balance sheet at
     their then fair value and adjustments to the fair value of derivatives that
     are not hedges must be recognized currently in earnings when they occur.

     The  Company  believes  that  these  contracts   economically  function  as
     effective  hedges of the  underlying  exposures  but, the foreign  currency
     contracts  do not meet the  specific  criteria  as defined in SFAS 133 thus
     requiring  the  Company to record all changes in the fair value in earnings
     in the period of the change. The Company recorded charges of $420 and $181,
     at January 2, 2004 and January 3, 2003,  respectively,  against fiscal 2003
     and fiscal 2002 earnings,  to record the unrealized loss on certain foreign
     currency contracts  outstanding as of those dates. The charges are recorded
     in non-operating expenses. At January 2, 2004 and January 3, 2003, the fair
     value of derivatives in a loss position are recorded in accrued expenses.
<PAGE>

21.  Quarterly Information:
     ---------------------
<TABLE>
<CAPTION>

                                                                                      (Unaudited)

              2003                                              Quarter 1    Quarter 2    Quarter 3    Quarter 4
              ----                                              ---------    ---------    ---------    ---------

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

                Diluted:
                Class A.........................................    0.39         0.33         0.32         0.21
                Class B.........................................    0.43         0.37         0.35         0.24


              2002                                              Quarter 1    Quarter 2    Quarter 3    Quarter 4
              ----                                              ---------    ---------    ---------    ---------

              Net sales.........................................$ 34,787     $ 36,453     $ 33,745      $ 28,211
              Gross profit......................................  11,899       12,407       12,062         9,478
              Net income........................................   1,301        1,549        1,587           806

              Earnings per share:
                Basic:
                Class A.........................................    0.20         0.24         0.25          0.12
                Class B.........................................    0.22         0.26         0.27          0.14

                Diluted:
                Class A.........................................    0.20         0.24         0.24          0.12
                Class B.........................................    0.22         0.26         0.27          0.13

</TABLE>

     Earnings  per share  amounts for each  quarter are  required to be computed
     independently and, as a result,  their sum may not equal the total earnings
     per share amounts for fiscal 2003 and 2002.


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

     The  following  table  summarizes   additional   disclosure  of  cash  flow
     information  for the years  ended  January  2,  2004,  January  3, 2003 and
     January 4, 2002:
<TABLE>
<CAPTION>

                                                                             2003         2002          2001
                                                                             ----         ----          ----

          <S>                                                              <C>          <C>           <C>
          Supplemental disclosure of cash flow information:
              Cash paid during the period for:
              Income taxes, net of refunds.................................$ 5,243      $ 2,036       $   857
                                                                           =======      =======       =======
              Interest.....................................................$     5      $     4       $   205
                                                                           =======      =======       =======
          Non-cash Investing and Financing Activities:
              Property purchased under capital leases......................$    --      $    --       $   102
                                                                           =======      =======       =======

          Plant closing and other related charges (credits)................$   (35)     $   (72)        2,108
              Cash received................................................     --           --             3
              Severance and other payments.................................     --          (51)         (386)
                                                                           -------      -------       -------
                                                                           $   (35)     $  (123)      $ 1,725
                                                                           =======      =======       =======

          Non-cash portion:
              Accrued expenses.............................................$   (35)     $  (214)      $ 1,461
              Property, plant and equipment................................     --           91           264
                                                                           -------      -------       -------
                                                                           $   (35)     $  (123)      $ 1,725
                                                                           =======      =======       =======

</TABLE>

<PAGE>

23.  Subsequent Event
     ----------------

     On February 17, 2004, the Company's  Board of Directors  declared a special
     cash dividend of $4.00 per share on each of the Company's Class A and Class
     B  common  stock.  The  special  dividend  was paid on  March  17,  2004 to
     stockholders  of record  at the close of  business  on March 3,  2004.  The
     aggregate   dividend   payout  for  the   special   dividend   amounted  to
     approximately $26,000.

     In addition on February 17, 2004, the Board declared regular quarterly cash
     dividends,  of  $0.050  per  share on the  Company's  Class A common  stock
     (representing an increase from the previous amount of the Company's regular
     quarterly  dividend  of  $0.040  per  share)  and  $0.055  per share on the
     Company's Class B common stock  (representing an increase from the previous
     amount of the Company's  regular  quarterly  dividend of $0.044 per share).
     The regular  dividends  are payable on April 15,  2004 to  stockholders  of
     record at the close of business on March 18, 2004.

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

     In January  2004,  the Company  amended  its credit  facility to reduce the
     restrictions  in  the  facility  on  the  Company's  ability  to  pay  cash
     dividends,  make other  distributions on its common stock and repurchase or
     redeem its capital  stock.  As  amended,  the credit  facility  permits the
     Company to pay cash dividends,  and make  repurchases or redemptions of, or
     other  specified  distributions  with respect to, its capital  stock,  in a
     total  amount of up to $5,000 in any  fiscal  year.  The  special  dividend
     declared in February 2004 was excepted from this $5,000 restriction.

<PAGE>

THE FOLLOWING REPORT IS A COPY OF A REPORT  PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHER ANDERSEN LLP.


Report of Independent Public Accountants
On Schedules


To Saucony, Inc.:

We have audited in accordance with auditing standards  generally accepted in the
United States, the accompanying  consolidated  financial  statements of Saucony,
Inc.  for the year  ended  January 4, 2002  included  in this Form 10-K and have
issued our report thereon dated February 14, 2002.

Our  audit  was  made  for the  purpose  of  forming  an  opinion  on the  basic
consolidated  financial  statements  taken  as  a  whole.  Schedule  II  is  the
responsibility  of the  Company's  management  and is presented  for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements.  The schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements  and, in our  opinion,  fairly  states in all  material  respects the
financial  data  required  to be set  forth  therein  in  relation  to the basic
consolidated financial statements taken as a whole.


                                                  Arthur Andersen LLP



Boston, Massachusetts
February 14, 2002
<PAGE>


<TABLE>


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

                      For the Years Ended January 2, 2004, January 3, 2003 and January 4, 2002
<CAPTION>

                                                  (in thousands)



                                                                                  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 2, 2004:
  Allowance for doubtful accounts and discounts...................$   2,406      $  4,453      $   5,751     $   1,108

Year ended January 3, 2003:
  Allowance for doubtful accounts and discounts...................$   2,457      $  4,752      $   4,803     $   2,406

Year ended January 4, 2002:
  Allowance for doubtful accounts and discounts...................$   2,047      $  5,767      $   5,357     $   2,457

</TABLE>
<PAGE>






                                  Exhibit Index

Exhibit
Number                              Description

3.1    Restated Articles of Organization, as amended, of the Registrant.

3.2    By-Laws, as amended, of the Registrant are incorporated herein by
       Reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K
       for the fiscal year ended January 3, 2003, as filed with the Securities
       and Exchange Commission on April 3, 2003.

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

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

10.3   Amendment to Amended and Restated Credit Agreement, dated August 30,
       2002, between Saucony, Inc. and HSBC Bank USA, dated January 26, 2004.

10.4*  1993 Equity Incentive Plan, as amended.

10.5*  VP Bonus Plan is incorporated herein by reference to Exhibit 10.19 to the
       Registrant's Registration Statement on Form S-2 (File No.  33-61040),  as
       filed with the Securities and Exchange Commission on May 13, 1993.

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

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

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

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

<PAGE>



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

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

10.12* Severance  Agreement as of January 2, 2004 by and between the  Registrant
       and Wolfgang Schweim.

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

10.14* Amendment  to  Employment  Agreement  dated as of July 31,  2003,  by and
       between the Registrant and John H. Fisher.

10.15* Amendment to  Employment  Agreement  dated  as  of  July 31, 2003, by and
       between the Registrant and Charles A. Gottesman.

21     Subsidiaries of Registrant.

23.1   Consent of Deloitte & Touche LLP.

23.2   Limitation of Remedies Against Arthur Andersen LLP.  Please see Item 9
       of this Annual Report on Form 10-K.

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

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

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

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


____________________


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