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 3, 2003    Commission file number: 000-05083

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

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

                     13 Centennial Drive, Peabody, MA 01960
                     --------------------------------------
                    (Address of principal executive offices)

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

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

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

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

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

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 stock held by
non-affiliates  of  the  registrant,  as of  July  5,  2002,  was  approximately
$32,071,000  (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).

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 7,
2003 was 2,525,047 and 3,554,340, respectively.

Portions of the  registrant's  Definitive  Proxy  Statement  for its 2003 Annual
Meeting of  Stockholders  scheduled  to be held on May 21, 2003 (the "2003 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after January 3, 2003,  are  incorporated  by reference into
Part III of this Annual Report on Form 10-K.  With the exception of the portions
of the 2003 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.




                                  SAUCONY, INC.
                       INDEX TO ANNUAL REPORT ON FORM 10-K
                    FOR THE FISCAL YEAR ENDED JANUARY 3, 2003



           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 and Related
            Stockholder Matters                                            14
Item 6.    Selected Financial Data                                         15
Item 7.    Management's Discussion and Analysis of Financial Condition
             and Results of Operations                                     16
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk      33
Item 8.    Financial Statements and Supplementary Data                     33
Item 9.    Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure                                      33

PART III
Item 10.   Directors and Executive Officers of the Registrant              35
Item 11.   Executive Compensation                                          35
Item 12.   Security Ownership of Certain Beneficial Owners and Management
              And Related Stockholder Matters                              35
Item 13.   Certain Relationships and Related Transactions                  35
Item 14.   Controls and Procedures                                         35

PART IV
Item 15.   Exhibits, Financial Statement Schedules and Reports on
             Form 8-K                                                      36
           Signatures                                                      37
           Certifications                                                  38


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;

     o    shoes for  coaches  and  officials  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 12  factory  outlet  stores  and  outside  the  United  States  in 35
countries through 21 distributors  located  throughout the world. For the fiscal
year ended January 3, 2003, we generated total sales of $133.2  million.  During
2002 we relocated our Hind apparel design and development function from Boulder,
Colorado to our facility in Peabody,  Massachusetts.  Furthermore,  we completed
the conversion of our Hind sourcing to a finished goods solution,  which we feel
should reduce our inventory requirements.

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
consists of Saucony  technical and Originals  footwear and Saucony apparel.  The
Other  Products  segment  consists of Hind  athletic  apparel,  Hyde  Authentics
footwear, which footwear brand we no longer distribute,  and Spot-bilt shoes for
coaches  and  officials  and casual  leather  walking  and  workplace  footwear,
together with sales of our products at our 12 factory outlet stores.

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 2002                   Fiscal 2001                Fiscal 2000
                                   -----------                   -----------                -----------
                                 $           %                  $           %                $           %
                                 -           -                  -           -                -           -
   <S>                       <C>            <C>            <C>              <C>         <C>              <C>
   Saucony
      Domestic..............$   83,182        62%          $   86,414        65%        $  126,758       75%
      International.........    27,647        21%              23,878        18%            19,710       12%
                            ----------        --           ----------        --         ----------       --
      Total.................$  110,829        83%          $  110,292        83%        $  146,468       87%
                            ----------        --           ----------        --         ----------       --


   Other Products
      Domestic..............$   20,171        15%          $   20,070        15%        $   19,035       12%
      International.........     2,196         2%               1,899         2%             2,294        1%
                            ----------        --           ----------        --         ----------       --
      Total.................$   22,367        17%          $   21,969        17%        $   21,329       13%
                            ----------        --           ----------        --         ----------       --


   Total....................$  133,196       100%          $  132,261       100%        $  167,797      100%
                            ==========       ===           ==========       ===         ==========      ===

_________________


For further financial information  concerning geographic areas and our operating
segments, please see Notes 16 and 17 to our Consolidated Financial Statements in
this Annual Report on Form 10-K.

</TABLE>

Products
--------

Footwear
--------

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

We design and market  separate  lines for men and women  within  most  technical
footwear categories. In keeping with our emphasis on performance,  we market and
sell our technical  footwear to athletes who have a high  participation  rate in
their sport of choice.  We address this market  through our "Loyal to the Sport"
advertising  campaign. We believe that these consumers are more brand loyal than
those who buy athletic  footwear for casual use. The suggested  domestic  retail
prices for most of our  technical  footwear  products are in the range of $50 to
$90 per pair, with our  top-of-the-line  running shoes having suggested domestic
retail prices of up to $130 per pair. During fiscal 2002, 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.

During fiscal 2002, we 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 2002, we incorporated
Custom Ride  Management  into two running  models and in December 2002 commenced
shipment of a walking model.

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 2002, 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 70%, 61% and 51% of our fiscal 2002, fiscal 2001 and
fiscal 2000 consolidated net sales, respectively.

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 expanded
the  Originals  product  line to include  color and material  variations  on our
initial Originals and have introduced  children's models. During fiscal 2002, 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 12%, 21% and 35% of our fiscal 2002, fiscal 2001 and
fiscal 2000 consolidated net sales,  respectively.  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 and casual leather walking and workplace
footwear under the Spot-bilt brand name through similar distribution channels as
our Saucony brand shoes.

Hyde Authentics
---------------

We formerly sold shoes under the Hyde Authentics brand name.

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 in an
effort to incorporate the latest 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.

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 13 design and development
specialists  in  Peabody,   Massachusetts   to  undertake   continuing   product
development.

In fiscal 2002, we spent  approximately $1.61 million on our product development
programs,  compared  to  approximately  $1.14  million in fiscal  2001 and $1.08
million in fiscal 2000. 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.  These retail outlets include Foot Locker,  Lady Foot Locker,
Road Runner Sports, The Athletes Foot Group,  United  Merchandising and DSW Shoe
Warehouse.

We maintain a corporate  sales group that is directly  responsible for the sales
activity in our largest 42  accounts.  We also sell our  footwear and apparel to
retail  outlets  in the United  States  through  14  independent  manufacturers'
agents, whose organizations employ  approximately 64 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. See "Available Information".

We sell our Saucony products  outside the United States in 35 countries  through
19 distributors  located throughout the world,  through our Canadian subsidiary,
in which  we hold an 85%  ownership  interest,  and  through  our  wholly  owned
subsidiaries located in the Netherlands and the United Kingdom.

We strive to enhance our  reputation and image in the  marketplace  and increase
recognition of the Saucony brand name by advertising our products  through print
media and  television  advertising.  For our  technical  footwear,  we advertise
primarily in magazines  such as "Runner's  World",  "Shape" and "Self".  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".

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.  We employ a
cooperative  advertising  program,  which is intended  to  maximize  advertising
resources by having our  retailers  share in the cost of  promoting  our Saucony
brand in print  advertising,  while  affording our retailers the  opportunity to
promote their stores.

Advertising  and  promotion  efforts in foreign  markets  are  directed by local
distributors,  the nature and content of which is subject to our approval.

Other Products
--------------

We sell our Hind products  domestically at independent sporting goods stores and
specialty  sporting  equipment  stores  through  18  independent  manufacturers'
agents, whose organizations employ  approximately 48 sales  representatives.  We
sell our Hind  products  outside the United  States in 3 countries,  through two
distributors  and our  subsidiaries 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. See "Available Information".

Factory Stores
--------------

We currently operate 12 factory outlet stores at which we sell our Saucony, Hind
and Spot-bilt  products.  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 2002, we opened two new factory
outlet  stores  and  closed  one  underperforming  store.  We  plan  to  open an
additional factory outlet store in the first quarter of fiscal 2003 and two more
factory outlet stores in the second quarter of fiscal 2003.

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,  most of
which is manufactured in the United States of domestically sourced fabrics.

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 2002,
we purchased footwear products from four overseas suppliers.  One such supplier,
located in China, accounted for approximately 35% of our total overseas footwear
purchases by dollar volume.

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  (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  limited inventory for several styles 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 and 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  $52.4  million at January 3,
2003 and $42.5  million at January 4, 2002. We expect that all of our backlog at
January 3, 2003 will be shipped in fiscal 2003,  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.

During  fiscal  2002,  2001  and  2000 we did not  derive  more  that 10% of our
consolidated revenue from sales to one customer.

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   adversely   affect  our  sales  or
profitability, possibly materially.

For example,  we import significant amounts of our footwear products from China.
On December 11, 2001, China acceded to the World Trade Organization  ("WTO") and
thus now  enjoys  Permanent  Normal  Trade  Relations  with the  United  States.
Therefore,  China receives the same favorable  tariff  treatment that the United
States extends to its other "normal" trading partners.  However,  even though it
has  joined the WTO,  scrutiny  of China's  trading  practices  is not likely to
subside.   There  will  be  continuing  pressure  on  China  to  honor  its  WTO
commitments, 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 our cost of goods 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,  there can be no assurance that we will 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 3, 2003, we employed approximately 291 people worldwide.  Of these
employees, approximately 224 were in the United States and approximately 67 were
in foreign locations.  We believe that our employee relations are excellent.  We
have  never  experienced  a strike  or other  work  stoppage.  Approximately  22
employees in our Peabody, Massachusetts warehouse were represented by a union as
of January 3, 2003.  The  collective  bargaining  agreement with the union which
represents our warehouse  employees  expires on April 30, 2003. While we believe
that we will be able to negotiate a new collective bargaining agreement prior to
that date, we may not be successful  in doing so. If we are not  successful,  we
might  experience a strike or other work  stoppage,  which could have a material
adverse affect on our operations. None of our other employees are represented by
a union or are subject to a collective bargaining agreement.

Available Information
---------------------

We maintain a website at www.sauconyinc.com. We make available free of charge on
or through that  website our recent  Annual  Reports on Form 10-K and  Quarterly
Reports on Form 10-Q as soon as  reasonably  practicable  after such reports are
electronically  filed  with,  or  furnished  to,  the  Securities  and  Exchange
Commission. Beginning in April 2003, we expect to make available, free of charge
on our website, our recent Current Reports on Form 8-K and filings under Section
16 of the  Securities  Exchange Act of 1934, as soon as  reasonably  practicable
after  such  reports  are  electronically  filed  with,  or  furnished  to,  the
Securities  and  Exchange  Commission.  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.

EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------

Our executive officers, as of March 15, 2003 are as follows:

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

John H. Fisher                 55        Chairman of the Board, President and
                                         Chief Executive Officer

Charles A. Gottesman           52        Vice Chairman of the Board and
                                         Executive Vice President,
                                         Business Development

Michael Umana                  40        Senior Vice President, Finance,
                                         Chief Operating and Financial Officer
                                         and Treasurer

Wolfgang Schweim               50        President, Saucony International

Michael Jeppesen               43        Senior Vice President, Manufacturing
                                         and Design

Samuel S. Ward                 40        Senior Vice President, Operations
                                         and Technology

Roger P. Deschenes             44        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 son of Phyllis H. Fisher, one
of our  directors,  and 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 son-in-law of Phyllis H. Fisher, one of our directors,  and
the brother-in-law of John H. Fisher, our President and Chief Executive Officer.

Michael Umana has served as our Senior Vice President,  Finance, Chief Operating
Officer,  Chief  Financial  Officer and Treasurer,  since July 2001 after having
served as 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.

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

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 and 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
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.

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.

We also own a facility in Bangor,  Maine containing  approximately 73,000 square
feet of space,  which we  previously  had used for the  assembly of our domestic
Saucony  running  shoes.  We  commenced  seeking  a buyer for this  facility  in
February  2002. We also own a facility in Brookfield,  Massachusetts  containing
approximately   109,000  square  feet,   which  we  use  for   warehousing   and
distribution.

We lease factory outlet stores with an aggregate of approximately  23,000 square
feet of retail space at 10 locations in  Massachusetts,  Maine and Florida.  The
terms of these  leases  range from 3 to 10 years.  We also own a factory  outlet
store  containing  approximately  3,000  square feet of retail  space in Bangor,
Maine.


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 3, 2003, there were no matters submitted
to a vote of security holders of Saucony, through the solicitation of proxies or
otherwise.



PART II


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

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

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

                                                              High          Low             High             Low
                                                              ----          ---             ----             ---

     <S>                                                   <C>           <C>            <C>              <C>
     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



     Fiscal Year ended January 4, 2002

     First quarter.........................................$   10.500    $   6.313      $   10.125       $   5.969
     Second quarter........................................     8.570        5.570           8.590           5.800
     Third quarter.........................................     6.620        5.190           6.400           5.030
     Fourth quarter........................................     5.450        4.530           5.600           4.260


</TABLE>

There were 243 and 251  stockholders  of record of the Class A Common  Stock and
Class B Common Stock,  respectively,  on March 27, 2003. Only the Class A Common
Stock has voting rights.

We have never paid any cash  dividends  on shares of our Class A Common Stock or
Class B Common Stock.  Our credit  facility  agreement  restricts the payment or
declaration  of any  dividend  without the consent of our lender.  Each share of
Class B Common Stock is entitled to a regular cash dividend equal to 110% of the
regular cash dividend, if any, payable on a share of Class A Common Stock.

ITEM 6 - SELECTED FINANCIAL DATA
--------------------------------

The  selected   consolidated   financial  data  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 3, 2003
and January 4, 2002 and for the years ended January 3, 2003, January 4, 2002 and
January 5, 2001 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. Saucony's
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. 3,      Jan. 4,     Jan. 5,    Dec. 31,     Jan. 1,
                                                          2003         2002      2001 (1)      1999        1999
                                                          ----         ----      --------      ----        ----

                                                                     (in thousands except per share amounts)

Selected Income Statement Data

<S>                                                    <C>           <C>         <C>         <C>         <C>
Revenues ..............................................$ 133,499     $132,364    $167,920    $155,887    $ 105,810

Operating income (loss) (2), (3).......................    8,943         (269)     16,123      18,196        5,741

Net income (loss)......................................    5,243         (940)      8,963      10,319        3,579

Earnings per common share - basic......................$    0.86     $  (0.15)   $   1.45    $   1.64    $   0.57
                                                       =========     ========    ========    ========    ========

Earnings per common share - diluted....................$    0.85     $  (0.15)   $   1.41    $   1.57    $   0.56
                                                       =========     ========    ========    ========    ========

Weighted average common shares and
   equivalents outstanding

   Basic EPS ..........................................    6,107        6,080       6,192       6,292        6,242

   Diluted EPS ........................................    6,186        6,080       6,341       6,568        6,373

Cash dividends per share of common stock...............       --           --          --          --           --
</TABLE>
<TABLE>
<CAPTION>


Selected Balance Sheet Data
                                                          Jan. 3,      Jan. 4,     Jan. 5,    Dec. 31,     Jan. 1,
                                                           2003         2002        2001        1999        1999
                                                           ----         ----        ----        ----        ----

                                                                               (in thousands)

<S>                                                    <C>           <C>         <C>         <C>         <C>
Current assets.........................................$  80,670     $ 69,538    $ 73,531    $ 66,480    $  58,963
Current liabilities....................................   16,343       12,325      15,919      15,403       18,840
Working capital........................................   64,327       57,213      57,612      51,077       40,123
Total assets...........................................   87,540       78,100      83,285      77,181       69,879
Long-term debt and capitalized lease
   obligations, net of current portion.................       --           --          34         292          559

Stockholders' equity...................................   68,696       63,162      64,620      58,962       48,250

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

(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)      See Note 14 to our Consolidated Financial Statements regarding the sale of our cycling division in
          fiscal 2000.
</TABLE>

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 2002 fiscal year,  we mean the
fiscal year ended January 3, 2003, (2) when we refer to the 2001 fiscal year, we
mean the fiscal year ended January 4, 2002, (3) when we refer to the 2000 fiscal
year, we mean the fiscal year ended  January 5, 2001 and (4) all dollar  amounts
are in thousands, except 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%, 83% and 87% of our
consolidated  net sales for 2002, 2001 and 2000,  respectively,  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 upon increasing our share of the market for footwear sales.

We pursue different  strategies for our two Saucony footwear product categories.
For our  technical  footwear  category,  we combine  high  quality  material and
components and 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 the 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 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  and casual  leather
walking and workplace  footwear we sell under the Spot-bilt brand name and sales
of all of our products at our 12 factory outlet stores. We refer to this segment
as our Other Products  segment.  Sales from our Other Products segment accounted
for approximately 17%, 17% and 13% of our consolidated net sales for 2002, 2001,
and 2000, respectively. 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,  but not limited to, 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  increases  in national  unemployment  levels and  decreased  consumer
confidence may restrict  consumer  spending,  thereby  negatively  affecting our
sales and results of operations.

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 (SAB 101), as amended
          by SAB 101A and 101B are met. Title generally  passes upon shipment or
          upon receipt by the  customer.  Retail store  revenues are recorded 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  and  resulting
          reduction in our net sales 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 credit worthiness,  economic trends and changes
          in our  customer  payment  terms when  evaluating  the adequacy of the
          allowance  for  doubtful  accounts.   As  noted  in  Note  18  of  the
          consolidated   financial   statements,   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,   additional  allowances  might  be
          required,  which could materially  increase our allowance for doubtful
          accounts and effect 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. The provision is recorded as a charge to cost of sales. If
          actual  future demand or market  conditions  are less  favorable  than
          those we project, additional provisions to write-down inventory may be
          required,  which could materially  reduce our amount of current assets
          and affect our results of operations and cash flows.

-        Property, Plant and Equipment

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

-        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  undiscounted  cash flows.  We measure an impairment
          loss as the  difference  between the carrying  amount of the asset and
          its  estimated  fair  value.   During  fiscal  2002,  we  recorded  an
          impairment  charge of $44 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  undiscounted  future cash flows.  The
          charge is  included  in general and  administrative  expenses.  Should
          future events and circumstance 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 affect our results of operations and financial position.

          We no longer amortize goodwill and other  indefinite-lived  intangible
          assets.  Rather,  we  review  them  for  impairment.  When  events  or
          circumstances  indicate that the carrying value of a long-lived  asset
          may be impaired,  we estimate the future undiscounted cash flows to be
          derived  from  the  asset  to  determine  whether  or not a  potential
          impairment  exists.  If the  carrying  value  exceeds our  estimate of
          future  undiscounted  cash flows,  we then calculate the impairment as
          the excess of the carrying value of the asset over 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 3, 2003 and  determined  that  goodwill was not  impaired.  At
          January  3,  2003,  the  carrying  value of  goodwill  was  $912.  Our
          estimates of undiscounted 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  undiscounted  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
          2002,  we recorded  deferred tax  valuation  allowances of $94 on loss
          carryforwards that are not expected to be realized, increasing our tax
          expense in the period such determination was made. At January 3, 2003,
          we have  provided  valuation  allowances  in an  amount  equal  to our
          deferred tax assets which have resulted from net operating losses.

          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  3,  2003,  we  had  approximately  $4,055  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 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 stock
          purchase  warrants over the vesting period of the stock grant,  option
          term or the warrant term.  Amortization  of  stock-based  compensation
          amounted to $43, $38 and $6 for 2002, 2001 and 2000, respectively. 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 in fiscal  2002,  2001 and 2000,  our reported net income would
          have been reduced by $684, $746 and $535, respectively.

-        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 3, 2003. At January 3,
          2003, the notional value our foreign  currency  exchange  contracts to
          purchase  U.S.  dollars  was  $5,685.  The fair  value of our  foreign
          currency exchange contracts at January 3, 2003 was $5,504. We recorded
          a charge of $181 against  earnings to adjust our  derivatives to their
          fair value.  Since January 3, 2003,  the value of the U.S.  dollar has
          decreased against the Canadian dollar and the Euro. Continued weakness
          of the U.S. dollar will require that we record  additional  charges in
          fiscal 2003 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  3, 2003 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
          effect on our  results  of  operations,  financial  position  and cash
          flows.

-        Contingencies

          We  are  involved  in  legal   proceedings   involving   employee  and
          contractual relationships,  product liability claims, trademark rights
          and other matters. We record contingent liabilities for claims against
          us when it is probable  that a  liability  has been  incurred  and the
          amount of the loss is  reasonably  estimable.  We disclose  contingent
          liabilities when there is a reasonable possibility that the claim will
          exceed the recorded  liability.  Estimating  probable  losses requires
          analysis of several  factors  and may  include our  judgment as to the
          potential actions of third party claimants and courts.  Currently,  we
          do not believe  that any of our pending  legal  proceedings  or claims
          will  have a  material  impact  on our  earnings  or on our  financial
          position.  If actual or estimated  probable  future  claims exceed our
          recorded  liability for the claims, we would record additional charges
          during  the  period in which  the  actual  loss or change in  estimate
          occurred.

<TABLE>
<CAPTION>

Highlights
                                                                               Increase (Decrease)
                                                                     2002 vs. 2001            2001 vs. 2000
                                                                     -------------            -------------

<S>                                                            <C>             <C>       <C>              <C>
     Net sales.................................................$       935     0.7%      $   (35,536)     (21.2)%
     Gross profit..............................................      3,703     8.8           (20,059)      (32.3)
     Selling, general and administrative expenses..............     (3,129)   (7.7)           (3,134)      (7.2)

<CAPTION>

                                                                                   $ Change
                                                                     2002 vs. 2001            2001 vs. 2000
                                                                     -------------            -------------

<S>                                                                   <C>                     <C>
     Operating income.................................................$  9,212                $   (16,392)
     Income before income taxes.......................................   9,645                    (15,877)
     Net income.......................................................   6,183                     (9,903)
<CAPTION>


                                                                               Percent of Net Sales
                                                                        2002          2001            2000
                                                                        ----          ----            ----

<S>                                                                     <C>            <C>            <C>
     Gross profit.................................................      34.4%          31.9%          37.1%
     Selling, general and administrative expenses.................      28.0           30.6           25.9
     Operating income (loss) .....................................       6.7           (0.2)           9.6
     Income (loss) before income taxes............................       7.0           (0.3)           9.2
     Net income (loss)............................................       3.9           (0.7)           5.3

</TABLE>

Consolidated Net Sales
----------------------

Fiscal  2002,  fiscal  2001 and fiscal  2000  consisted  of 52, 52 and 53 weeks,
respectively.  Our net sales and results of operations  for each of fiscal 2002,
fiscal 2001 and fiscal 2000 are comparable.  Net sales increased $935, or 1%, to
$133,196  in fiscal  2002 from  $132,261  in fiscal  2001.  Net sales  decreased
$35,536,  or 21%, to $132,261 in fiscal 2001 from  $167,797 in fiscal 2000.  Net
sales for 2000 included $3,188 in net sales from our cycling division,  which we
divested in June 2000.

On a geographic  basis,  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.  Domestic sales decreased $39,309, or 27%, to $106,484 in fiscal
2001 from $145,793 in fiscal 2000. International sales increased $3,773, or 17%,
to $25,777 in fiscal 2001 from  $22,004 in fiscal 2000.  Unfavorable  changes in
foreign exchange rates reduced the  international  sales increase in fiscal 2001
by $940.


   Saucony Segment
                               2002                   2001
                          Total / Change         Total / Change           2000
                          from Prior Year        from Prior Year          Total
                          ---------------        ---------------          -----

         Net Sales         $110,829 / 1%         $110,292 / -25%        $146,468



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 is 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 is 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 versus  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.

Net Sales:  2001 Compared to 2000
---------------------------------

Worldwide  net sales of Saucony  branded  footwear and Saucony  branded  apparel
decreased  $36,176,  or 25%, to $110,292 in fiscal 2001 from  $146,468 in fiscal
2000,  due  primarily  to a 22%  decrease  in  footwear  unit  volumes and lower
domestic and  international  wholesale  per pair  average  selling  prices.  The
overall average domestic  wholesale  selling price per pair of domestic footwear
decreased 2% in fiscal 2001 versus fiscal 2000,  due primarily to a 33% increase
in special make-up footwear unit volumes and a 34% increase in closeout footwear
unit  volumes,  both of which sell at prices below our first  quality  technical
footwear and, a change in the product mix for technical footwear to lower priced
products.

Domestic  net sales  decreased  $40,344,  or 32%, to $86,414 in fiscal 2001 from
$126,758 in fiscal 2000,  due primarily to a 62% decrease in Originals  footwear
unit  volumes,  a 13%  decrease in technical  footwear  unit volumes and a lower
average wholesale per pair selling price,  partially offset by a 34% increase in
closeout  footwear unit volumes and a 33% increase in special  make-up  footwear
unit  volumes.  The lower  average  wholesale  selling  price per pair is due to
higher unit volumes of closeout footwear and special make-up  footwear,  both of
which  sell at prices  below  our first  quality  technical  footwear.  Sales of
closeout footwear  accounted for approximately 12% of domestic Saucony net sales
in fiscal 2001 compared to 5% in fiscal 2000. The Originals  footwear  accounted
for 29% of fiscal 2001 domestic  footwear unit volume versus 53% in fiscal 2000.
The unit volume  decrease in Originals  footwear is primarily  due to a shift in
consumer preference to other product categories,  primarily basketball footwear,
which we do not sell.  During the second half of fiscal 2001, the domestic order
cancellation rate for our Saucony footwear decreased from the order cancellation
rate in the first half of fiscal  2001 and was  comparable  with our  historical
average.

International net sales increased $4,168, or 21%, to $23,878 in fiscal 2001 from
$19,710 in fiscal  2000,  due  primarily  to a 40%  increase  in  footwear  unit
volumes,  partially  offset by a lower average per pair wholesale  selling price
and the negative impact of the stronger U.S. dollar against European currencies.
Footwear unit volumes  increased 73% at our international  distributor  business
and 17% at our European and Canadian subsidiaries,  respectively, in fiscal 2001
versus  fiscal 2000.  The  footwear  unit volume  increase in our  international
distributor  business was due primarily to the success of our Originals footwear
product  in  the  Japanese   footwear  market  in  2001,   which  accounted  for
approximately  91% of the  international  distributor unit volume increase,  and
increased  market  penetration  in the Pacific Rim.  Distributor  sales into the
Japanese  market  accounted  for 14% of  international  sales  in  fiscal  2001,
compared to 4% in fiscal 2000.

  Other Products Segment

                                2002                   2001
                           Total / Change         Total / Change          2000
                           from Prior Year        from Prior Year         Total

         Net Sales          $22,367 / 2%           $21,969 / 3%          $21,329


The Other Products segment consists of our Hind athletic apparel, twelve factory
outlet  stores,  Spot-bilt  coaches' and official  shoes and casual  walking and
workplace footwear, sales of our Hyde Authentics casual footwear, which brand we
no longer distribute,  and sales from our former cycling division. Each of these
businesses  represented  less than 10% of total  revenues and, in the aggregate,
represented 17% of total net sales in fiscal 2002.


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 per
pair wholesale 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 is due to new product
introductions,  which 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.


Net Sales:   2001 Compared to 2000
----------------------------------

Worldwide  sales of Other Products  increased  $640, or 3%, to $21,969 in fiscal
2001 from $21,329 in fiscal 2000 due primarily to increased sales at our factory
outlet stores,  increased Hyde Authentic unit volume and increased  sales of our
Hind brand apparel,  partially offset by the elimination of sales resulting from
the cycling division divestiture in fiscal 2000.

Domestic  net sales of Other  Products  increased  $1,035,  or 5%, to $20,070 in
fiscal 2001 from $19,035 in fiscal 2000 due primarily to increased  sales at our
factory outlet division, reflecting the net addition of one factory outlet store
and  increased  sales at  stores  open for more than one  year,  increased  Hyde
Authentics  footwear  unit  volume,  increased  unit volume of our Hind  apparel
brand,  partially  offset by the  elimination  of sales from our former  cycling
division, which was divested in fiscal 2000.

International  net sales of Other Products  decreased $395, or 17%, to $1,899 in
fiscal 2001 from $2,294 in fiscal 2000,  primarily due to decreased Hind apparel
sales in Europe.

Costs and Expenses
------------------

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.

Our gross  margin in fiscal  2001  decreased  5.2% to 31.9% from 37.1% in fiscal
2000 due primarily to the significant decline in Saucony domestic sales of first
quality  footwear  products at full margin.  Other factors  contributing  to the
fiscal  2001  margin  decrease  were  proportionately  higher  sales of closeout
products,  due to our decision to reduce inventory levels and of special make-up
footwear,   both  of  which  carry  lower  margins,   and  to  a  lesser  extent
manufacturing  inefficiencies,   domestic  pricing  pressures,  changes  in  the
geographic  mix of sales  and the  negative  impact  of the U.S.  dollar  on our
European margins.

The ratio of selling, general and administrative expenses to 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. In absolute dollars,  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.

The ratio of selling, general and administrative expenses to net sales increased
4.7% to 30.6% in  fiscal  2001 from  25.9% in 2000.  The  increase  in the ratio
resulted from advertising,  selling and administrative  expenses decreasing at a
lower rate than the rate of the sales decrease.  In absolute  dollars,  selling,
general and  administrative  expenses  decreased to $40,407 in 2001, or 7%, from
$43,541 in fiscal 2000.  Decreased  spending in fiscal 2001 was due primarily to
reduced  operating  expenses  resulting from the cycling  division  divestiture,
decreased  television and print media  advertising,  decreased  account-specific
advertising,  promotion and event  sponsorship  and decreased  variable  selling
expenses and incentive  compensation,  offset  partially by increased  operating
expenses  associated  with the  factory  outlet  division  expansion  and higher
provisions for doubtful accounts.

Plant Closing and Other Charges
-------------------------------

On November 9, 2001 we announced the cessation of  manufacturing  and 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.  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 and January 4, 2002 were $36 and
$1,461 of costs associated with the plant closing and other charges.  The charge
recorded for the Bangor,  Maine plant closing and the Taiwan office closing were
included in income  before tax for the Saucony  segment,  while the retail store
closing was included in income before tax for the Other Products segment.

As of January 4, 2002,  our Bangor,  Maine real property had a net book value of
$357 and was included on the balance  sheet under the caption  "Property,  plant
and  equipment".  We commenced  marketing the property for sale in February 2002
and have  reclassified  the real property to current  assets as "Assets Held For
Sale." The property is available  for immediate  sale in its current  condition,
and we expect that the property will be sold during 2003.

Sale of Cycling Division
------------------------

On June 29, 2000,  we sold  substantially  all of the assets and business of our
cycling  division,  consisting of  inventory,  prepaid  expenses,  equipment and
tradenames,  to QR Merlin  Acquisition LLC for $1,350 in cash and the assumption
of $39 in  liabilities.  In connection with the sale, we recorded a pre-tax loss
of $2,661,  inclusive of $1,012 of expenses  associated with the transaction and
expenses  resulting  from our exit of the cycling  business.  As a result of the
transaction,  a majority  of the cycling  division  employees  were  severed and
assets used  exclusively  in the  cycling  business,  which were not sold,  were
deemed impaired and were written off. Expenses associated with the sale and exit
of the cycling division were as follows:


         Transaction costs............................................$    358
         Costs to exit facility and equipment leases and
           other non-cancelable contractual commitments...............     142
         Employee severance and termination benefits..................     210
         Writeoff leasehold improvements..............................      84
         Writeoff goodwill and other deferred charges.................     218
                                                                      --------

         Total........................................................$  1,012
                                                                      ========

Net sales from the cycling  division,  which are included in our Other  Products
segment,  represented  approximately  1.9% of consolidated  net sales for fiscal
year 2000.  The loss on the sale of the  cycling  division  was  included in the
income before tax for the Other Products segment.

Interest Income
---------------

Interest  income  increased  to $332 in fiscal  2002  from $136 in fiscal  2001.
Interest  income  increased to $136 in fiscal 2001 from $78 in fiscal 2000.  The
increases  in both  2002 and 2001 were due  primarily  to  higher  average  cash
balances invested in money market funds.

Interest Expense
----------------

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.  Interest  expense  decreased  to $213 in  fiscal  2001 from $695 in
fiscal 2000 due  primarily to lower  average debt levels and reduced  borrowings
under our domestic and foreign credit facilities.

Income (Loss) Before Taxes and Minority Interest
------------------------------------------------

        Segment                       2002               2001              2000
        -------                       ----               ----              ----

    Saucony.......................$   10,288         $   (296)        $  18,507
    Other Products................    (1,007)             (68)           (2,994)
                                  ----------         --------         ---------
    Consolidated..................$    9,281         $   (364)        $  15,513
                                  ==========         ========         =========

We evaluate  business  performance  and the performance of key managers based on
profit or loss before  income  taxes.  Income  before tax increased by $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 before tax decreased by $15,877 in fiscal 2001 to a loss of $364 compared
to a profit of $15,513 in fiscal 2000 due primarily to the significant reduction
in the domestic  Saucony segment due to lower sales and lower gross margins and,
to a lesser extent, charges of $1,819 incurred in connection with the closure of
our Bangor,  Maine manufacturing  facility and the closure of our Taiwan office.
Our Other  Products  segment  income  before tax  increased  in fiscal  2001 due
primarily to the $2,661 loss on the sale of our former cycling division recorded
in fiscal 2000,  partially  offset by 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 $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 are not expected to be realized.
The $21 and $8 in income tax benefit of options exercised during fiscal 2002 and
fiscal 2001,  respectively,  were  credited to  additional  paid-in  capital and
therefore did not impact the effective tax rate.

The provision  for income taxes  decreased to $475 in fiscal 2001 from $6,461 in
fiscal 2000 due primarily to a decrease in domestic  pre-tax  income,  partially
offset  by  an  increase  in  deferred  valuation  allowances  on  foreign  loss
carryforwards  that  are  not  expected  to be  realized  and  a  shift  in  the
composition of domestic and foreign pre-tax earnings.


Minority Interest in Net Income of Consolidated Subsidiary
----------------------------------------------------------

Minority interest expense represents a minority shareholders' allocable share of
our Canadian subsidiary's earnings after deducting for income tax.

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.  Minority interest expense increased to $101 in fiscal 2001 from $89 in
fiscal 2000 due primarily to increased sales.

Net Income (Loss)
-----------------

Net income for fiscal 2002 was $5,243, or $0.85 per diluted share, compared to a
net loss of $940, or $0.15 per diluted share, in fiscal 2001.  Weighted  average
common shares and common stock  equivalents  of 6,186,000 were used to calculate
diluted  earnings per share for fiscal 2002.  Weighted  average common shares of
6,080,000  were used 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.

The net loss for fiscal 2001 was $940, or $0.15 per diluted  share,  compared to
net income of $8,963,  or $1.41 per  diluted  share,  in fiscal  2000.  Weighted
average common shares of 6,080,000 were used to calculate  diluted  earnings per
share for fiscal 2001,  while  weighted  average  common shares and common stock
equivalents of 6,341,000 were used to calculate  diluted  earnings per share for
fiscal 2000.  Common stock equivalents were not used in fiscal 2001 to calculate
diluted earnings per share because they were anti-dilutive.

Liquidity and Capital Resources
-------------------------------

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  increased $622, net of the provision for bad debts and
discounts,  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  2003 from 41 days in fiscal  2001.  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. 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 in fiscal 2002 due primarily to improvements in our
supply chain which is 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. 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
2002,  included an increase of $1,862 in account 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.  Since the approval of the stock buyback
program by the Board of Directors in May 1998,  we have  repurchased  a total of
562,000 shares of our common stock for a total expenditure of $5,244. Our credit
facility limits our repurchases of shares of our common stock to $3,000 over the
term of the facility,  which expires on August 30, 2004.  During the term of the
facility, we have repurchased a total of 95,000 shares of our common stock for a
total expenditure of $880.

Fiscal 2001
-----------

As of  January  4,  2002,  our cash and cash  equivalents  totaled  $22,227,  an
increase of $17,489 from January 5, 2001.  The increase was due primarily to the
generation of $21,588 of cash from operations,  partially offset by cash outlays
for capital assets of $1,326,  the repayment of short-term  borrowings under our
credit facilities of $2,474 and the repayment of long-term debt of $226.

Our accounts receivable decreased $11,827, net of the provision for bad debt and
discounts,  due  primarily  to  decreased  net  sales of our  Saucony  and other
products  in the fourth  quarter of fiscal 2001 and a decrease in our days sales
outstanding  for our accounts  receivable.  Our days sales  outstanding  for our
accounts  receivable  decreased to 41 days in fiscal 2001 from 58 days in fiscal
2000,  due  primarily  to a reduction  in payment  date sales  terms  reflecting
increased sales of special make-up and closeout  footwear and increased  foreign
distributor  volume,  for which dating  programs are shorter.  In addition,  the
increased  provisions for doubtful  accounts  reduced days sales  outstanding by
approximately two days in fiscal 2001. The provision for bad debts and discounts
increased to $5,767 in fiscal 2001 from $5,525 in fiscal 2000 due to an increase
in the provision for doubtful accounts.

Inventories  decreased  $9,418 in fiscal 2001 due  primarily  to our decision to
reduce domestic Saucony footwear inventories,  which had increased in the fourth
quarter of fiscal 2000 due to increased order  cancellations,  and lower factory
outlet  inventories,  which had  increased  due to the  expansion of the factory
outlet division.  The increase in domestic Saucony footwear  inventory in fiscal
2000 resulted from increased order  cancellations  in the fourth quarter of 2000
for both  technical  and  Originals  footwear.  The decision to reduce  domestic
Saucony footwear inventories  decreased fiscal 2001 gross margins. Our inventory
turns ratio decreased to 2.7 turns in fiscal 2001 from 2.9 turns in fiscal 2000.
The number of days sales in inventory  decreased to 115 days in fiscal 2001 from
132 days in fiscal 2000.

Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory,  affecting our operating cash flows in fiscal
2001  included a decrease  of $3,472 in  accrued  letters of credit,  due to new
inventory supplier payment terms, an increase of $3,484 in accounts payable, due
to a change in  inventory  purchase  terms,  a  decrease  of  $2,286 in  accrued
expenses,  due to decreased  performance-based  compensation  accruals and lower
operating  spending levels, and an increase of $344 in income tax payable due to
the timing of income tax payments.

During fiscal 2001,  we  repurchased  approximately  19,000 shares of our common
stock for a total expenditure of $132.

Credit Facility
---------------

On August 30, 2002, we entered into a revolving credit agreement under the terms
of which a bank committed to a maximum of $15,000 to us for cash  borrowings and
letters of credit.  The credit  facility,  which  terminates on August 31, 2004,
amends and restates in its entirety our prior revolving  credit  agreement which
terminated on August 30, 2002.  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 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  capital  expenditures  and  limits  on
repurchases  of our  common  stock to  $3,000  over  the  term of the  facility.
Furthermore,  for any fiscal quarter during the term of the credit facility, our
consolidated pre-tax income may not exceed a pre-tax loss of $2,500. For any two
consecutive  fiscal quarters,  our consolidated  pre-tax income may not exceed a
pre-tax loss of $1,000.

We were in compliance  with all  covenants of the credit  facility at January 3,
2003.  As  of  January  3,  2003  and  March  7,  2003,   $14,652  and  $15,000,
respectively, were 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  $1,024.  At March 7, 2003,  $1,024 was
available  for  borrowing  under the  facility.  See Note 8 to the  Consolidated
Financial Statements.

Capital Expenditures
--------------------

At January 3, 2003, our commitments for capital  expenditures were not material.
We anticipate  capital  expenditures to range between $1,000 to $1,500 in fiscal
2003. Of this amount,  we expect  approximately  $775 to $1,250 will be spent on
computer hardware and software and  approximately  $225 to $250 will be spent to
open three retail stores.

Contractual Obligations
-----------------------

Below is a table which presents our  contractual  obligations and commitments at
January 3, 2003.

<TABLE>
<CAPTION>

                                                                        Payments due by year
                                                 ------------------------------------------------------------------
                                                                                                            2007
        Contractual                                                                                          and
        Obligations                               Total       2003        2004        2005       2006    thereafter
        -----------                               -----       ----        ----        ----       ----    ----------

<S>                                             <C>         <C>         <C>         <C>         <C>        <C>
Long-term debt..................................$    --     $    --     $     --    $     --    $    --    $     --
Capital lease obligations.......................     --          --           --          --         --          --
Operating leases................................  3,050         962          842         523        254         469
Other long-term obligations (1).................  1,960       1,296          445         179         20          20
                            --                  -------     -------     --------    --------    -------    --------
Total contractual obligations...................$ 5,010     $ 2,258     $  1,287    $    702    $   274    $    489
                                                =======     =======     ========    ========    =======    ========
_______________

(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.  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.
</TABLE>

Overall Liquidity
-----------------

Our liquidity is  contingent  upon a number of factors,  principally  our future
operating  results.   Management   believes  that  our  current  cash  and  cash
equivalents,  credit  facilities and internally  generated funds are adequate to
meet our working capital  requirements and other operating  expenses and to fund
our capital  investment needs and debt service payments in the near term. During
fiscal 2002 we generated  $13,230 in cash from  operating  cash flows due to our
operating  profit  and an  increase  in our  accrued  liabilities  and  accounts
payable.  In 2001, we generated  $21,588 in cash from operating cash flows,  due
primarily to decreases in our accounts receivable and inventories. As of January
3, 2003, we had $15,496 in accounts receivable and $27,201 in inventories.

At  January  3,  2003,  we  had  no  borrowings  outstanding  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.

Inflation and Currency Risk
---------------------------

The effect of inflation on our results of  operations  over the past three years
has been  minimal.  The  impact  of  currency  fluctuation  on our  purchase  of
inventory  from  foreign  suppliers  has been minimal as the  transactions  were
denominated in U.S. dollars.  We are, however,  subject to currency  fluctuation
risk with  respect to the  operating  results of our  foreign  subsidiaries  and
foreign currency denominated  payables.  During fiscal 2001 the gross margins of
our  European  subsidiaries  were reduced 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 144
--------

In August 2001, the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets",  "SFAS 144". SFAS 144 addresses financial  accounting and
reporting for the  impairment or disposal of long-lived  assets,  and supersedes
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of",
"SFAS 121", and the accounting and reporting provisions of Accounting Principles
Board  Opinion No. 30,  "Reporting  the Results of  Operations  - Reporting  the
Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual and
Infrequently Occurring Events and Transactions", "APB 30", for the disposal of a
segment of a business  as  previously  defined in APB 30.  SFAS 144 also  amends
Accounting Research Bulletin No. 51, "Consolidated  Financial Statements",  "ARB
51" to eliminate  the  exception  to  consolidation  for a subsidiary  for which
control is likely to be temporary.  The provisions of SFAS 144 are to be applied
to all long-lived assets,  with the exception of goodwill.  SFAS 144 retains the
requirements  of SFAS 121 to  recognize  an  impairment  loss  only if the carry
amount of the long-lived  asset is not recoverable  from its  undiscounted  cash
flows and measure an  impairment  loss as the  difference  between the  carrying
amount and the fair  value of the  asset.  SFAS 144  expands  upon the  criteria
beyond that  previously  specified  in SFAS 121 to  determine  when a long-lived
asset is held for sale and provides  guidance on the  accounting  for long-lived
assets  classified as held for sale if the asset is being  reclassified  as held
and used.

Assets to be disposed of are  reported  at the lower of the  carrying  amount or
fair value less costs to sell. The statement retains the basic provisions of APB
30  for  the  presentation  of  discontinued  operations  in  the  statement  of
operations but broadens the definition of a discontinued operations to include a
component of an entity rather than a segment of a business.

The Company adopted SFAS 144 in the first quarter of fiscal 2002.  During fiscal
2002,  the Company  recorded an impairment  charge of $44 to reduce the carrying
amount of certain  long-lived  assets used in the Company's  retail  operations,
which  carrying  value was not deemed  recoverable  from its  undiscounted  cash
flows.

SFAS 148
--------

In December 2002, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
-  Transition  and  Disclosure - amendment  of SFAS 123",  "SFAS 148".  SFAS 148
amends  Statement of Financial  Accounting  Standards No. 123,  "Accounting  for
Stock-Based  Compensation",   "SFAS  123"  to  provide  alternative  methods  of
transition  for a voluntary  change to the fair value based method of accounting
for stock-based compensation.  In addition, this statement amends the disclosure
requirements  for SFAS 123, to require  prominent  disclosure in both annual and
interim  financial  statements  about the method of accounting  for  stock-based
employee  compensation and the effect of the method used on reported results. We
have  elected to  continue  to account for  stock-based  compensation  using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting   for  Stock   Issued  to   Employees",   "APB  25",   and   related
interpretations. Accordingly, compensation cost for stock options and restricted
stock  awards is measured 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 have adopted the annual  disclosure  provisions of SFAS
148 in our  financial  statements  for the year  ended  January 3, 2003 and will
adopt the interim  disclosure  provisions  in our financial  statements  for the
quarter ended April 4, 2003. Since the adoption of SFAS 148 involves  disclosure
only,  we do not expect a material  impact on our  earnings or on our  financial
position.

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.

Certain Other Factors That May Affect Future Results
----------------------------------------------------

We face intense competition
---------------------------

Competition is intense in the markets in which we sell our products.  We compete
with a large number of other  companies,  both domestic and foreign,  several of
which 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.  The intensity of the competition that we face constitutes
a significant risk to our business.

We depend on foreign suppliers
------------------------------

A number of manufacturers  located in Asia,  primarily in China, supply products
to us. During fiscal 2002, one of our suppliers, located in China, accounted for
approximately  35% 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,  administrative  trade cases,  trade  limitations  imposed by the
United States or foreign governments and political and labor instability.  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.

Our revenues are subject to foreign currency exchange fluctuations
------------------------------------------------------------------

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

Our business is affected by seasonal consumer buying patterns
-------------------------------------------------------------

The 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 third quarters. 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 certain key customers
----------------------------------

Approximately 42% of our gross trade  receivables  balance was represented by 18
customers at January 3, 2003.  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.

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. 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, but there
are no assurances  that this program will 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 3,
2003,  the fair value of our forward  exchange  contracts  was  $5,504.  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 $602,
which would affect our fiscal 2003 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.


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 Form 10-K following the certifications 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, (2) dated July 1, 2002 and
filed with the Securities and Exchange  Commission on July 1, 2002 and (3) dated
April 11, 2001 and filed with the  Securities  and Exchange  Commission on April
17, 2001.

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.


PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See  "Executive  Officers of the  Registrant" in Part I of this Annual Report on
Form 10-K. The  information  required by Items 401 and 405 of Regulation S-K and
appearing  in  our  definitive   Proxy  Statement  for  the  Annual  Meeting  of
Stockholders to be held on May 21, 2003, which will be filed with the Securities
and  Exchange  Commission  not later  than 120 days after  January  3, 2003,  is
incorporated herein by reference.


ITEM 11 - EXECUTIVE COMPENSATION

The  information  required by Item 402 of  Regulation  S-K and  appearing in our
definitive  Proxy Statement for the Annual Meeting of Stockholders to be held on
May 21, 2003,  which will be filed with the Securities  and Exchange  Commission
not later  than 120 days  after  January  3,  2003,  is  incorporated  herein by
reference.


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

The information required by Items 201(d) and 403 of Regulation S-K and appearing
in our definitive  Proxy  Statement for the Annual Meeting of Stockholders to be
held on May 21,  2003,  which will be filed  with the  Securities  and  Exchange
Commission not later than 120 days after January 3, 2003, is incorporated herein
by reference.


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required by Item 404 of  Regulation  S-K and  appearing in our
definitive  Proxy Statement for the Annual Meeting of Stockholders to be held on
May 21, 2003,  which will be filed with the Securities  and Exchange  Commission
not later  than 120 days  after  January  3,  2003,  is  incorporated  herein by
reference.


ITEM 14 - CONTROLS AND PROCEDURES

Within 90 days prior to the date of this Form 10-K,  the Company  carried out an
evaluation,  under the supervision and with the  participation  of the Company's
management,  including the Company's  President and Chief Executive  Officer and
the  Company's  Senior  Vice  President  and  Chief  Financial  Officer,  of the
effectiveness of the design and operation of the Company's  disclosure  controls
and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934.  Based upon that evaluation,  the Company's  President and
Chief  Executive  Officer  and the  Company's  Senior Vice  President  and Chief
Financial  Officer  concluded  that  the  Company's   disclosure   controls  and
procedures  are  effective  in  timely  alerting  them to  material  information
relating to the Company, including its consolidated subsidiaries, required to be
included in the  Company's  periodic  filings with the  Securities  and Exchange
Commission.  There have been no  significant  changes in the Company's  internal
controls or in other  factors that could  significantly  affect  those  internal
controls subsequent to the date of their most recent evaluation. 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
     certifications pages:

     - Independent Auditors Report - Deloitte and Touche LLP

     - Report of Independent Public Accountants - Arthur Andersen LLP

     -  Report  of  Independent  Accountants  -  PricewaterhouseCoopers   LLP  -
     Consolidated balance sheets at January 3, 2003 and January 4, 2002

     -  Consolidated  statements  of income for the years ended January 3, 2003,
     January 4, 2002 and January 5, 2001

     -  Consolidated  statements  of  stockholders'  equity for the years  ended
     January 3, 2003, January 4, 2002 and January 5, 2001

     -  Consolidated  statements  of cash flows for the years  ended  January 3,
     2003,  January 4,  2002,  and  January 5, 2001 - Notes to the  Consolidated
     Financial Statements

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

     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.

     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

     Saucony  did not file any  Current  Reports  on Form 8-K  during the fiscal
     quarter ended January 3, 2003.


                                   SIGNATURES


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


                                         SAUCONY, INC.
                                         (Registrant)


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

Date:    April 3, 2003

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

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


/s/ John H. Fisher             Chairman of the Board,              April 3, 2003
John H. Fisher                 President and
                               Chief Executive Officer
                               (Principal Executive Officer)

/s/ Charles A. Gottesman       Vice Chairman of the Board,         April 3, 2003
Charles A. Gottesman           and Executive Vice President,
                               Business Development

/s/ Michael Umana              Senior Vice President,              April 3, 2003
Michael Umana                  Chief Operating and Financial Officer
                               (Principal Financial Officer)

/s/ Roger P. Deschenes         Vice President, Controller and      April 3, 2003
Roger P. Deschenes             Chief Accounting Officer
                               (Principal Accounting Officer)

/s/ Phyllis H. Fisher          Director                            April 3, 2003
Phyllis H. Fisher

/s/ Jonathan O.  Lee           Director                            April 3, 2003
Jonathan O. Lee

/s/ Robert J. LeFort, Jr.      Director                            April 3, 2003
Robert J. LeFort, Jr.

/s/ John J. Neuhauser          Director                            April 3, 2003
John J. Neuhauser


                                  CERTIFICATION
                                  -------------

I, John H. Fisher, certify that:

1.   I have reviewed this annual report on Form 10-K of Saucony, Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   Presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


Dated: April 3, 2003            /s/ John H. Fisher
--------------------            ------------------
                                Name:     John H. Fisher
                                Title:    President and Chief Executive Officer







                                  CERTIFICATION
                                  -------------

I, Michael Umana, certify that:

1.   I have reviewed this annual report on Form 10-K of Saucony, Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   Presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.



Dated: April 3, 2003                   /s/ Michael Umana
--------------------                   -----------------
                                       Name:      Michael Umana
                                       Title:     Senior Vice President, Finance
                                                  Chief Financial Officer


Independent Auditors' Report

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

We have audited the accompanying consolidated balance sheet of Saucony, Inc. and
subsidiaries as of January 3, 2003, and the related  consolidated  statements of
income,  stockholders' equity, and cash flows for the year then ended. Our audit
also included the January 3, 2003  financial  statement  schedule  listed in the
Index  at Item  15(a)2.  These  financial  statements  and  financial  statement
schedule are the responsibility of the Company's management.  Our responsibility
is to  express  an  opinion on the  January  3, 2003  financial  statements  and
financial  statement  schedule based on our audit. The 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. The financial statements and financial
statement  schedule  of the  Company  for the year  ended  January  5, 2001 were
audited by other  auditors whose report,  dated February 26, 2001,  expressed an
unqualified opinion on those statements and financial statement schedule.

We conducted our audit 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 January 3, 2003 consolidated  financial  statements present
fairly, in all material respects,  the financial  position of Saucony,  Inc. and
subsidiaries  as of January 3, 2003,  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 of America.  Also,  in our
opinion,  the January 3, 2003 financial statement  schedule,  when considered in
relation to 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 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  financial
statements have been revised to include the transitional disclosures required by
Statement  of  Financial  Accounting  Standards  No.  142,  Goodwill  and  Other
Intangible  Assets (SFAS 142), 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 those periods 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 142.

/s/ Deloitte & Touche LLP
-------------------------

Boston, Massachusetts
February 13, 2003 (March 11, 2003 as to Note 22)



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





Report of Independent Accountants


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

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing  under  Item  14(a)(1)  for the year ended  January  5, 2001,  present
fairly,  in all material  respects,  the results of operations and cash flows of
Saucony,  Inc.  and its  subsidiaries  for the year ended  January  5, 2001,  in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index  appearing  under  Item  14(a)(2)  presents  fairly,  in all  material
respects,  the information  set forth therein when read in conjunction  with the
related consolidated  financial  statements.  These financial statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards  generally accepted in
the United  States of America,  which require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable basis for our opinion.




                                            PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2001

<TABLE>




                                          SAUCONY, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                     AS OF JANUARY 3, 2003 AND JANUARY 4, 2002
<CAPTION>

                                (in thousands, except share and per share amounts)

                                                      ASSETS

                                                                                        January 3,     January 4,
                                                                                           2003           2002
                                                                                           ----           ----
<S>                                                                                    <C>             <C>
Current assets:
   Cash and cash equivalents...........................................................$   34,483      $  22,227
   Accounts receivable, net of allowance for doubtful accounts
     and discounts (2002, $2,406; 2001, $2,457)........................................    15,496         14,742
   Inventories ........................................................................    27,201         28,404
   Deferred income taxes...............................................................     1,916          2,098
   Prepaid expenses and other current assets...........................................     1,217          2,067
   Assets held for sale................................................................       357             --
                                                                                       ----------      ---------
     Total current assets..............................................................    80,670         69,538
                                                                                       ----------     ----------

Property, plant and equipment, net ....................................................     5,714          6,989
                                                                                       ----------     ----------

Other assets:
   Goodwill, net of accumulated amortization (2002, $551; 2001, $551)..................       912            912
   Deferred charges, net of accumulated amortization (2002, $1,320; 2001, $1,249)......       208            217
   Marketable securities...............................................................        --            296
   Other...............................................................................        36            148
                                                                                       ----------      ---------
     Total other assets................................................................$    1,156      $   1,573
                                                                                       ----------      ---------

Total assets...........................................................................$   87,540      $  78,100
                                                                                       ==========      =========


                                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable....................................................................$    8,543      $   6,635
   Accrued expenses....................................................................     7,800          5,602
   Current portion of long-term debt and capital lease obligations.....................        --             88
                                                                                       ----------      ---------
     Total current liabilities.........................................................    16,343         12,325
                                                                                       ----------      ---------

Long-term obligations:
   Deferred income taxes...............................................................     1,859          1,949
   Other long-term obligations.........................................................        --            204
                                                                                       ----------      ---------
     Total long-term obligations.......................................................     1,859          2,153
                                                                                       ----------      ---------

Commitments and contingencies:

Minority interest in consolidated subsidiary...........................................       642            460
                                                                                       ----------      ---------

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 2002, 2,711,127 and 2001, 2,711,127)....................................       904            904
     Class B, $.333 par value per share; authorized 20,000,000 shares
       (issued 2002, 4,106,343 and 2001, 4,037,399)....................................     1,369          1,346
   Additional paid-in capital..........................................................    17,769         17,398
   Retained earnings...................................................................    55,945         50,702
   Accumulated other comprehensive loss................................................      (870)        (1,301)
   Common stock held in treasury, at cost (2002, 760,806; 2001, 665,976)...............    (6,297)        (5,417)
   Notes receivable....................................................................        --           (303)
     Unearned compensation.............................................................      (124)          (167)
                                                                                       ----------      ---------
     Total stockholders' equity........................................................    68,696         63,162
                                                                                       ----------      ---------
Total liabilities and stockholders' equity.............................................$   87,540      $  78,100
                                                                                       ==========      =========

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

                                          SAUCONY, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF INCOME
                  FOR THE FISCAL YEARS ENDED JANUARY 3, 2003, JANUARY 4, 2002 AND JANUARY 5, 2001
<CAPTION>

                                     (in thousands, except per share amounts)


                                                                            2002           2001          2000
                                                                            ----           ----          ----

                                                                                        (53 weeks)

<S>                                                                      <C>           <C>           <C>
Net sales................................................................$  133,196    $  132,261    $  167,797
Other revenue............................................................       303           103           123
                                                                         ----------    ----------    ----------

Total revenue............................................................   133,499       132,364       167,920
                                                                         ----------    ----------    ----------

Costs and expenses:
   Cost of sales.........................................................    87,350        90,118       105,595
   Selling expenses......................................................    17,790        21,910        25,503
   General and administrative expenses...................................    19,488        18,497        18,038
   Plant closing and other charges (credits).............................       (72)        2,108            --
   Loss on disposition of cycling division...............................        --            --         2,661
                                                                         ----------    ----------    ----------
     Total costs and expenses............................................   124,556       132,633       151,797
                                                                         ----------    ----------    ----------

Operating income (loss)..................................................     8,943          (269)       16,123

Non-operating income (expense):
   Interest income.......................................................       332           136            78
   Interest expense......................................................        (5)         (213)         (695)
   Foreign currency gains (losses).......................................        20           (46)          (28)
   Other.................................................................        (9)           28            35
                                                                         ----------    ----------    ----------

Income (loss) before income taxes and minority interest..................     9,281          (364)       15,513

Provision for income taxes...............................................     3,865           475         6,461

Minority interest in income of consolidated subsidiary...................       173           101            89
                                                                         ----------    ----------    ----------

Net income (loss)........................................................$    5,243    $     (940)   $    8,963
                                                                         ==========    ==========    ==========

Per share amounts:
   Earnings (loss) per common share - basic..............................$     0.86    $    (0.15)   $     1.45
                                                                         ==========    ==========    ==========
   Earnings (loss) per common share - diluted............................$     0.85    $    (0.15)   $     1.41
                                                                         ==========    ==========    ==========

Weighted-average shares outstanding:
   Basic.................................................................     6,107          6,080         6,192
   Diluted...............................................................     6,186          6,080         6,341


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

                                                 SAUCONY, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                         FOR THE FISCAL YEARS ENDED JANUARY 3, 2003, JANUARY 4, 2002 AND JANUARY 5, 2001
<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, December 31, 1999...........................$  904   $ 1,318   $ 16,815   $42,679     346,900    $(2,179)

Issuance of 64,160 shares of common stock upon
   exercise of stock options.........................    --        22        297        --          --         --
Interest income on notes receivable..................    --        --         --        --          --         --
Amortization of unearned compensation................    --        --         --        --          --         --
Repurchase of 299,600 shares of common stock, at cost    --        --         --        --     299,600     (3,106)
Net income...........................................    --        --         --     8,963          --         --
Foreign currency translation adjustments.............    --        --         --        --          --         --
                                                     ------   -------    -------   -------     -------    -------

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)
                                                     ======   =======   ========   =======     =======    =======


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

                                              SAUCONY, INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
                      FOR THE FISCAL YEARS ENDED JANUARY 3, 2003, JANUARY 4, 2002 AND JANUARY 5, 2001
<CAPTION>

                                           (in thousands, except share amounts)

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


<S>               <C> <C>                          <C>          <C>           <C>            <C>           <C>
Balance, December 31, 1999.........................$    --      $   (11)      $  (564)       $58,962       $ 10,283

Issuance of 64,160 shares of common stock upon
   exercise of stock options.......................   (276)          --            --             43             --
Interest income on notes receivable................    (20)          --            --            (20)            --
Amortization of unearned compensation..............     --            6            --              6             --
Repurchase of 299,600 shares of common stock, at cost   --           --            --         (3,106)            --
Net income.........................................     --           --            --          8,963          8,963
Foreign currency translation adjustments...........     --           --          (228)          (228)          (228)
                                                   -------      -------       -------        -------       --------

Balance, January 5, 2001...........................$  (296)     $    (5)      $  (792)       $64,620       $  8,735
                                                                                                           ========

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
                                                   =======      =======       =======        =======       ========

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


                                              SAUCONY, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE FISCAL YEARS ENDED JANUARY 3, 2003, JANUARY 4, 2002 AND JANUARY 5, 2001
<CAPTION>

                                                  (in thousands)


                                                                              2002           2001           2000
                                                                              ----           ----           ----
                                                                                          (53 weeks)
<S>                                                                        <C>            <C>             <C>
Cash flows from operating activities:
   Net income (loss).......................................................$   5,243      $    (940)     $   8,963
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
     Plant closing and other (credits) charges ............................     (123)         1,725             --
     Loss on disposition of cycling division...............................       --             --          2,661
     Depreciation and amortization.........................................    1,597          1,969          1,958
     Provision for bad debt and discounts..................................    4,752          5,767          5,525
     Deferred income tax provision (benefit)...............................       91           (656)           678
     Compensation from stock grants and options............................       87             38              6
     Minority interest in income of consolidated subsidiaries..............      173            101             89
     Marketable securities - unrealized (gains) losses.....................       --             32             50
     Other.................................................................      (20)            12            (12)
Changes in operating assets and liabilities, net of effects
   of dispositions and foreign currency adjustments:
Decrease (increase) in assets:
   Accounts receivable.....................................................   (5,374)         6,060         (8,599)
   Inventories.............................................................    1,848          9,418         (6,018)
   Prepaid expenses and other current assets...............................       45             (8)           125
Increase (decrease) in liabilities:
   Letters of credit payable...............................................       --         (3,472)         1,210
   Accounts payable........................................................    1,862          3,484           (412)
   Accrued expenses........................................................    1,295         (2,286)        (1,185)
   Income taxes............................................................    1,754            344           (889)
                                                                           ---------      ---------      ----------
Total adjustments..........................................................    7,987         22,528         (4,813)
                                                                           ---------      ---------      ----------
Net cash provided by operating activities..................................   13,230         21,588          4,150
                                                                           ---------      ---------      ---------

Cash flows from investing activities:
   Proceeds from the sale of cycling division..............................       --             --          1,350
   Purchases of property, plant and equipment..............................     (777)        (1,326)        (1,669)
   Change in deposits and other............................................       94             62            (30)
   Marketable securities - realized (gain) loss............................       99             15            (86)
   Proceeds from the sale of Marketable securities.........................      197             --             --
   Proceeds from the sale of equipment.....................................       90              1             --
                                                                           ---------      ---------      ----------
Net cash used by investing activities......................................     (297)        (1,248)          (435)
                                                                           ---------      ---------      ----------

Cash flows from financing activities:
   Net short-term borrowings (payments)....................................       --         (2,474)           335
   Repayment of long-term debt and capital lease obligations...............      (88)          (226)          (360)
   Common stock repurchased................................................     (880)          (132)        (2,688)
   Issuances of common stock, stock option exercises.......................      329             84             43
   Debt financing costs....................................................      (87)            --             --
   Receipt of payment on notes receivable..................................      312             --             --
                                                                           ---------       --------      ----------
Net cash used by financing activities......................................     (414)        (2,748)        (2,670)
Effect of exchange rate changes on cash and cash equivalents...............     (263)          (103)           178
                                                                           ---------       --------      ----------
Net increase (decrease) in cash and cash equivalents.......................   12,256         17,489          1,223
Cash and cash equivalents at beginning of period...........................   22,227          4,738          3,515
                                                                           ---------      ---------      ---------
Cash and cash equivalents at end of period.................................$  34,483      $  22,227      $   4,738
                                                                           =========      =========      =========


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


                         SAUCONY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    For the Years Ended January 3, 2003, January 4, 2002 and January 5, 2001

     (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 2002, 2001 and 2000 represent the fiscal
     years  ended  January  3,  2003,  January  4,  2002 and  January  5,  2001,
     respectively.  There were 52 weeks in fiscal 2002,  52 weeks in fiscal 2001
     and 53 weeks in fiscal 2000.

     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.

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

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

     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 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 3 to 15  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.  Any gain or loss
     resulting  from the  retirement  or  disposition  of  property,  plant  and
     equipment is included in other non-operating income.

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

     Deferred  charges  consist  primarily  of acquired  software  licenses  and
     trademarks. Software licenses and trademarks are amortized over five years.

     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 3, 2003 and January 4, 2002 are as follows:
<TABLE>
<CAPTION>

                                                          2002                                   2001
                                                       Accumulated                             Accumulated
                                             Cost     Amortization     Net            Cost    Amortization     Net
                                             ----     ------------     ---            ----    ------------     ---


<S>                                        <C>         <C>           <C>            <C>         <C>          <C>
          Software licenses................$  1,060    $    (928)    $  132         $  1,041    $   (839)    $   202
          Capitalized debt
             financing costs...............      87          (14)        73               44         (39)          5
          Other............................     381         (378)         3              381        (371)         10
                                           --------    ---------     ------         --------    --------     -------

          Total............................$  1,528    $  (1,320)    $  208         $  1,466    $ (1,249)    $   217
                                           ========    =========     ======         ========    ========     =======

</TABLE>

     Amortization of intangible assets was $117, $91 and $87,  respectively,  in
     fiscal 2002, fiscal 2001 and fiscal 2000.

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

                2003................................$       93
                2004................................        81
                2005................................        29
                2006................................         5
                2007 and thereafter.................        --

     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 an annual test for
     impairment  at  January  3,  2003  and  determined  that  goodwill  was not
     impaired.  At January 3, 2003 and January 4, 2002,  the  carrying  value of
     goodwill was $912.

     The transitional disclosure of reported earnings for the fiscal years ended
     January 3, 2003,  January 4, 2002 and  January  5, 2001,  as  adjusted,  is
     presented in the table below:
<TABLE>
<CAPTION>

                                                                       2002             2001            2000
                                                                       ----             ----            ----

<S>                                                                  <C>             <C>             <C>
         Net income (loss), as reported..............................$  5,243        $    (940)      $   8,963
         Addback amortization of goodwill, net of tax................      --               79              80
                                                                     --------        ---------       ---------

         Adjusted net income (loss)..................................$  5,243        $    (861)      $   9,043
                                                                     ========        =========       =========

         Earnings per share:
           Basic
              Net income (loss), as reported.........................$   0.86        $    (0.15)     $    1.45
              Addback amortization of goodwill, net of tax...........      --              0.01           0.01
                                                                     --------        ----------      ---------
              Adjusted net income (loss).............................$   0.86        $    (0.14)          1.46
                                                                     ========        ==========      =========

           Diluted
              Net income (loss), as reported.........................$   0.85        $    (0.15)     $    1.41
              Addback amortization of goodwill, net of tax...........      --              0.01           0.01
                                                                     --------        ----------      ---------
              Adjusted net income (loss).............................$   0.85        $    (0.14)     $    1.42
                                                                     ========        ==========      =========
</TABLE>

     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
     3, 2003 and  January 4, 2002  reflect  the  estimated  future  tax  effects
     attributable  to  temporary  differences  and  carryforwards  based  on the
     provisions of enacted tax law.

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

     Basic earnings per share is computed by dividing income available to common
     shareholders  (the  numerator)  by the  weighted-average  number  of common
     shares  (the  denominator)  for the  period.  The  computation  of  diluted
     earnings per share is similar to basic earnings per share,  except that the
     denominator is increased to include the number of additional  common shares
     that would have been outstanding if the potentially  dilutive common shares
     had been  issued.  See Note 11 for the  calculation  of basic  and  diluted
     earnings per share.

     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  Loss, a component of stockholders'  equity. Net income
     from foreign currency translation amounted to $431 in 2002. Net losses from
     foreign currency  translation  amounted to $509 and $228 for 2001 and 2000,
     respectively and are recorded in Accumulated Other Comprehensive Loss.

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

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

     Had the Company  determined the  stock-based  compensation  expense for the
     Company's  stock  options  based  upon the fair value at the grant date for
     stock option awards in 2002, 2001 and 2000,  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:
<TABLE>
<CAPTION>

                                                   2002                       2001                     2000
                                                   ----                       ----                     ----
                                              Basic      Diluted        Basic       Diluted       Basic     Diluted
                                              -----      -------        -----       -------       -----     -------

<S>                                        <C>         <C>           <C>          <C>           <C>         <C>
       Net income (loss):
        As reported........................$  5,243    $  5,243      $   (940)    $   (940)     $  8,963    $  8,963

       Add:   Stock-based compensation
        expense included in reported net
        income (loss), net of related tax
        benefit............................      26          26            22           22             4           4

       Less:  Total stock-based compensation
        expense determined under the fair
        value based method for all rewards,
        net of related tax benefit.........    (710)       (710)         (768)        (768)         (539)       (539)
                                           =========   =========     =========    =========     =========   =========

       Pro forma net income (loss).........$  4,559    $  4,559      $ (1,686)    $ (1,686)     $  8,428    $  8,428
                                           ========    ========      ========     ========      ========    ========



       Pro forma earnings per share:
        As reported                        $   0.86    $   0.85      $  (0.15)    $  (0.15)     $   1.45     $  1.41

       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 rewards,
        net of related tax benefit            (0.11)      (0.11)        (0.12)       (0.12)        (0.09)      (0.08)
                                           ---------   ---------     ---------    ---------      --------    --------

       Pro forma net income (loss)
        per share                          $   0.75    $   0.74      $  (0.27)    $  (0.27)      $  1.36     $  1.33
                                           ========    ========      ========     ========       =======     =======

</TABLE>


     See  Note 12 for the  weighted-average  assumptions  incorporated  into the
     Black-Scholes  option-pricing  model,  used to  calculate  the  fair  value
     stock-based employee compensation.

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

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

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

     Advertising and promotion costs,  including print media  production  costs,
     are expensed as incurred,  with the exception of co-operative  advertising,
     which is  accrued  and the  advertising  costs  expensed  in the  period of
     revenue recognition.  Advertising and promotion expense amounted to $7,313,
     $10,885 and $12,904 for 2002, 2001 and 2000, 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  undiscounted future cash flows.
     If an impairment is indicated,  the Company  measures the loss based on the
     fair  value  of  the  asset  using  various  valuation  techniques.  If  an
     impairment  exists,  the  amount  of  the  loss  will  be  recorded  in the
     consolidated statements of operations. It is possible that future events or
     circumstances could cause these estimates to change.

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

     Expenditures  for  research  and  development  of products  are expensed as
     incurred.  Research  and  development  expenses  amounted to  approximately
     $1,611, $1,135 and $1,083 for 2002, 2001 and 2000, 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 are
     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, $18 and $20
     for 2002, 2001 and 2000.

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

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

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

     SFAS 144
     --------

     In August 2001, the Financial  Accounting  Standards Board issued Statement
     of Financial  Accounting  Standards No. 144,  "Accounting for Impairment or
     Disposal of Long-Lived  Assets",  "SFAS 144". SFAS 144 addresses  financial
     accounting  and  reporting  for the  impairment  or disposal of  long-lived
     assets, and supersedes Statement of Financial Accounting Standards No. 121,
     "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
     Assets to Be Disposed Of",  "SFAS 121",  and the  accounting  and reporting
     provisions of Accounting  Principles  Board Opinion No. 30,  "Reporting the
     Results of Operations - Reporting the Effects of Disposal of a Segment of a
     Business, and Extraordinary,  Unusual and Infrequently Occurring Events and
     Transactions",  "APB 30",  for the  disposal  of a segment of a business as
     previously  defined in APB 30.  SFAS 144 also  amends  Accounting  Research
     Bulletin No. 51, "Consolidated Financial Statements" "ARB 51", to eliminate
     the exception to consolidation for a subsidiary for which control is likely
     to be  temporary.  The  provisions  of SFAS  144 are to be  applied  to all
     long-lived  assets,  with the  exception of goodwill.  SFAS 144 retains the
     requirements  of SFAS  121 to  recognize  an  impairment  loss  only if the
     carrying  amount  of the  long-lived  asset  is not  recoverable  from  its
     undiscounted  cash flows and measure an impairment  loss as the  difference
     between  the  carrying  amount and the fair  value of the  asset.  SFAS 144
     expands upon the criteria beyond that  previously  specified in SFAS 121 to
     determine when a long-lived asset is held for sale and provides guidance on
     the  accounting for  long-lived  assets  classified as held for sale if the
     asset is being reclassified as held and used.

     Assets to be disposed of are reported at the lower of the  carrying  amount
     or fair  value  less  costs  to  sell.  The  statement  retains  the  basic
     provisions of APB 30 for the presentation of discontinued operations in the
     statement  of  operations  but broadens the  definition  of a  discontinued
     operations  to include a component of an entity  rather than a segment of a
     business.

     The Company  adopted SFAS 144 in the first  quarter of fiscal 2002.  During
     fiscal 2002,  the Company  recorded an impairment  charge of $44, to reduce
     the  carrying  amount of certain  long-lived  assets used in the  Company's
     retail operations, which carrying value was not deemed recoverable from its
     future undiscounted cash flows.

     SFAS 148
     --------

     In December 2002, the Financial Accounting Standards Board issued Statement
     of Financial  Accounting  Standards No. 148,  "Accounting  for  Stock-Based
     Compensation - Transition and Disclosure - an amendment of SFAS 123", "SFAS
     148". SFAS 148 amends Statement of Financial  Accounting Standards No. 123,
     "Accounting   for  Stock-Based   Compensation",   "SFAS  123",  to  provide
     alternative  methods of transition for a voluntary change to the fair value
     based method of accounting for stock-based compensation.  In addition, this
     statement  amends  the  disclosure  requirements  for SFAS  123 to  require
     prominent  disclosure in both annual and interim financial statements about
     the method of accounting  for  stock-based  employee  compensation  and the
     effect of the method used on reported  results.  The Company has elected to
     continue to account for stock-based  compensation using the intrinsic value
     method   prescribed  by  Accounting   Principles   Board  Opinion  No.  25,
     "Accounting  for  Stock  Issued  to  Employees",   "APB  25",  and  related
     interpretations.  Accordingly,  compensation  cost for  stock  options  and
     restricted  stock  awards is measured as the excess,  if any, of the quoted
     market  price of the  Company's  stock at the  date of the  grant  over the
     exercise  price an employee must pay to acquire the stock.  The Company has
     adopted  the  annual  disclosure  provisions  of SFAS 148 in its  financial
     statements  for the year ended  January 3, 2003 and will adopt the  interim
     disclosure  provisions  in its financial  statements  for the quarter ended
     April 4, 2003. Since the adoption of SFAS 148 involves disclosure only, the
     Company  does not  expect  a  material  impact  on its  earnings  or on the
     Company's financial position.


2.   Marketable Securities:
     ----------------------

     The Company  liquidated  its  investment  in its  marketable  securities in
     December 2002. As of January 4, 2002, the Company's  holdings in marketable
     securities consisted primarily of equity securities which are classified as
     trading securities.

     The cost of the securities  held at January 4, 2002 was $204. As of January
     4, 2002, the market value of such securities was $296.

     Included in the  determination of net income for the years ended January 3,
     2003,  January 4, 2002 and January 5, 2001 were:  2002,  realized losses of
     $99;  2001, net realized  losses of $15 and  unrealized  losses of $32; and
     2000, net realized gains of $86 and unrealized losses of $50.

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

     Inventories  at  January  3,  2003 and  January  4, 2002  consisted  of the
     following:

                                                  2002                  2001
                                                  ----                  ----

         Finished goods........................$  26,528            $   25,466
         Raw materials and supplies............      480                 1,501
         Work-in-process.......................      193                 1,437
                                               ---------            ----------
         Total.................................$  27,201            $   28,404
                                               =========            ==========

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

     In February,  2002, the Company commenced marketing its Bangor,  Maine real
     property,  which had been previously used for the assembly of the Company's
     domestic Saucony footwear.  The property is available for immediate sale in
     its current  condition  and the Company  expects that the property  will be
     sold during fiscal 2003. The property is being  actively  marketed for sale
     at a price that  management  believes  is  reasonable  in  relation  to its
     current fair value.  As of January 3, 2003, the fair value of the property,
     based  upon an  independent  appraisal,  exceeds  the net book value of the
     property,  which  was  $357 as of  January  3,  2003.  As a  result  of the
     Company's  decision to sell the property,  the Bangor,  Maine real property
     has been  reclassified  to "Assets  Held for Sale" and is  included  on the
     balance sheet at January 3, 2003 in Current Assets.

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

     Major  classes  of  property,  plant and  equipment  at January 3, 2003 and
     January 4, 2002 were as follows: 2002 2001

         Land and improvements.................$     494            $     598
         Buildings and improvements............    5,920                6,270
         Machinery and equipment...............   12,280               11,523
         Capitalized leases....................       --                1,696
         Leasehold improvements................      556                  793
                                               ---------            ---------
                                               $  19,250            $  20,880
         Less accumulated depreciation
         and amortization......................   13,536               13,891
                                               ---------            ---------

         Total.................................$   5,714            $   6,989
                                               =========            =========

     Accumulated amortization of leased property was $1,473 at January 4, 2002.



6.   Accrued Expenses:
     ----------------

     Accrued  expenses at January 3, 2003 and January 4, 2002  consisted  of the
     following:

                                                        2002             2001
                                                        ----             ----

       Payroll and incentive compensation............$  2,350        $   1,223
       Income taxes..................................     936               --
       Inventory freight and duty....................     818              479
       Professional fees.............................     307              352
       Sales commissions.............................     301              289
       Selling and advertising.......................     300              130
       Plant closing and other charges...............      36            1,461
       Other.........................................   2,752            1,668
                                                     --------        ---------
       Total.........................................$  7,800        $   5,602
                                                     ========        =========


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 $155,
     $175 and $211 for 2002, 2001 and 2000, respectively.

     In 1995, the Company established a deferred  compensation  program (DCP) to
     provide key executives and highly  compensated  employees with supplemental
     retirement  benefits.  Eligibility is determined by the Company's  Board of
     Directors.  The DCP is not  qualified  under  Section  401 of the  Internal
     Revenue Code. The Company may make  discretionary  contributions to the DCP
     equal to a  certain  percentage  of the  participants'  contributions.  The
     Company's  contributions  amounted to $17,  $19 and $18 for 2002,  2001 and
     2000, 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. 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 exercise
     date, whichever is lower. The plan qualifies as an "Employee Stock Purchase
     Plan" under Section 423 of the Internal Revenue Code and its provisions are
     construed so as to extend and limit  participation  in a manner  consistent
     with the requirements of that section of the code.

     All employees who meet minimum age and service requirements are eligible to
     participate  in the 2001 Employee Stock  Purchase  Plan.  Employee  payroll
     deductions  associated  with the 2001 Employee Stock Purchase Plan began in
     September  2001. As of January 3, 2003,  there were 11,294 shares of common
     stock  purchased  under the plan.  There were no  purchases of common stock
     made under the plan as of January 4, 2002.

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 2002,
     2001 and 2000 were $1,602, $1,720 and $1,261, respectively.

       Future minimum equipment and rental payments:

                  2003 ..............................$     962
                  2004 ..............................$     842
                  2005 ..............................$     523
                  2006 ..............................$     254
                  2007 and thereafter................$     469


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

     On August 30, 2002, the Company entered into a revolving  credit  agreement
     under the terms of which a bank  committed  to a maximum  of $15,000 to the
     Company  for cash  borrowings  and letters of credit.  The credit  facility
     which terminates on August 31, 2004, amends and restates,  in its entirety,
     the revolving credit agreement which terminated on August 30, 2002. 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 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,
     restrictions  on the annual amount of capital  expenditures  and limits the
     repurchase of our common stock to $3,000 over the term of the facility. The
     credit  facility is subject to the bank's  periodic review of the Company's
     operations.  The Company was in compliance with all covenants of the credit
     facility at January 3, 2003.  At January 3, 2003,  there were no borrowings
     outstanding  under the facility.  We had open commitments  under letters of
     credit in the amount of $348 at January 3, 2003.

     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 3, 2003,
     there were no borrowings or letters of credit outstanding under this credit
     facility.

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

     On August 17, 2000, the Company entered into employment agreements with two
     key executives.  The employment  agreements  provide for minimum  aggregate
     annual base salaries of $925, 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  are
     scheduled to expire in August 2003, but 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 the key  executives  of $511,  $0 and $853 in
     general and administrative expenses for 2002, 2001 and 2000,  respectively.
     Included in accrued  expenses  at January 3, 2003 and January 4, 2002,  are
     accrued bonus expense of $511 and $0, respectively.

     Litigation
     ----------

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

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  cash  dividends  equal to 110% of the 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 5, 2001, January 4,
     2002 and January 3, 2003:
<TABLE>
<CAPTION>

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

        <S>                                                <C>                       <C>
        Shares outstanding at December 31, 1999..........   2,668,127                 3,651,409
        Shares issued....................................          --                    64,160
        Shares repurchased...............................     (98,000)                 (201,600)
                                                            ---------                 ---------
        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
                                                            =========                 =========
</TABLE>

     As of January 3, 2003,  January 4, 2002 and January 5, 2001,  the number of
     shares of Class A Common  Stock and Class B Common  Stock held in  Treasury
     were as follows:
<TABLE>
<CAPTION>

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

           <S>                                           <C>              <C>                 <C>
           January 3, 2003...............................186,080          574,726             760,806
           January 4, 2002...............................144,380          521,596             665,976
           January 5, 2001...............................141,000          505,500             646,500

</TABLE>

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

     Under the Company's  1993 Equity  Incentive Plan (Equity  Incentive  Plan),
     approved by the  Company's  shareholders  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 expires on April 7, 2003, at
     which time no further options or stock awards may be granted.

     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.

     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 3,
     2003,  a total of 1,900,000  shares,  in the  aggregate,  of Class A Common
     Stock and Class B Common Stock have been reserved by the Company and may be
     issued under the Plan.

     The following  table  summarizes  the awards  available for grant under the
     Company's 1993 Equity  Incentive Plan for the three-year  reporting  period
     ended January 3, 2003: Shares

          Shares available at December 31, 1999..............    339,460
          Additional shares reserved.........................    750,000
          Awards granted.....................................   (239,847)
          Options expired or cancelled.......................     21,300
                                                                --------
          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
                                                                --------
          Shares available at January 3, 2003.................   627,198
                                                                ========

     The following table  summarizes the Company's stock option activity for the
     periods ended January 5, 2001, January 4, 2002 and January 3, 2003:
<TABLE>
<CAPTION>

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

<S>                                                             <C>             <C>           <C>          <C>
           Outstanding at December 31, 1999...................   488,290         $  7.99       $  4.00   -  $  23.63

                Granted.......................................   239,847         $ 11.75       $  9.88   -  $  14.25
                Exercised.....................................   (64,160)        $  4.73       $  4.00   -  $   6.50
                Forfeited.....................................   (25,300)        $ 12.91       $  4.88   -  $  23.63
                                                                 -------

           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
                                                                 =======


</TABLE>

     Options  exercisable for shares of the Company's Class A and Class B Common
     Stock as of  January 5,  2001,  January 4, 2002 and  January 3, 2003 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 5, 2001................     --         232,090         232,090        --          $   7.89
          January 4, 2002................     --         396,209         396,209        --          $   8.81
          January 3, 2003................     --         435,736         435,736        --          $   9.30
</TABLE>

     The following table summarizes  information about stock options outstanding
     at January 3, 2003:
<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        01/03/03       Life (Years)       Price           01/03/03          Price
                  ---------------        --------       ------------       -----           --------          -----

              <S>         <C>              <C>              <C>          <C>                <C>            <C>
              $  4.00   - $  4.88            5,250          2.73         $  4.54              3,400        $  4.48
              $  5.00   - $  5.90          152,420          4.01         $  5.46             83,176        $  5.30
              $  6.00   - $  6.95          163,150          7.78         $  6.27             77,750        $  6.25
              $  7.01   - $  7.77          168,893          7.89         $  7.14             82,631        $  7.08
              $  8.06   - $  9.88            7,500          8.56         $  9.03                600        $  8.67
              $ 10.00   - $ 10.19            1,000          2.55         $ 10.09                400        $ 10.09
              $ 11.25   - $ 11.38          136,900          6.21         $ 11.26             76,900        $ 11.26
              $ 12.13   - $ 12.50           57,421          2.08         $ 12.16             23,968        $ 12.17
              $ 13.38   - $ 14.69           49,028          1.95         $ 14.01             34,161        $ 14.30
              $ 16.16   - $ 17.75           60,250          1.80         $ 16.53             52,150        $ 16.42
              $ 19.88                        1,000          1.60         $ 19.88                600        $ 19.88
                                           -------                                          -------
                                           802,812                                          435,736
                                           =======                                          =======
</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  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.  The  warrants  vest in five equal  annual  installments,
     commencing  on March 12,  2002 and expire on March 12,  2006.  The right to
     exercise  the  warrants  is  subject  to  the   satisfaction   of  specific
     performance criteria by the recipients.  See Note 12 for further discussion
     of the  stock  warrant  fair  value  and  annual  stock-based  compensation
     expense.

     On  February  20,  2003,  the  Company's  Board of  Directors  adopted  the
     Company's 2003 Stock Incentive Plan (Plan). Under the Stock Incentive Plan,
     the Company may grant incentive  stock options and restricted  stock awards
     to employees and officers of the Company. The Company's directors,  outside
     consultants  and  advisors  are  eligible  to receive  non-statutory  stock
     options and restricted  stock awards. 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.  The Plan is
     subject to approval at the Company's 2003 Annual Meeting of Shareholders to
     be held on May 21, 2003.

11.  Earnings Per Share

     The following table sets forth the computation of basic earnings per common
     share and diluted earnings per common share:
<TABLE>
<CAPTION>

                                                    2002                       2001                      2000
                                                    ----                       ----                      ----

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

       <S>                                  <C>          <C>           <C>          <C>          <C>          <C>
       Net income (loss) available for
         common shares and
         assumed conversions...............$  5,243     $  5,243      $  (940)     $  (940)     $  8,963     $  8,963
                                           ========     ========      =======      =======      ========     ========

       Weighted-average common shares
         and equivalents outstanding:

       Weighted-average shares
          outstanding......................   6,107        6,107        6,080        6,080         6,192        6,192

         Effect of dilutive securities:
         Stock options.....................      --           76           --           --            --          149
         Stock purchase warrants...........      --            3           --           --            --           --
                                           --------     --------      -------      -------      --------     --------

                                              6,107        6,186        6,080        6,080         6,192        6,341
                                           ========     ========      =======      =======      ========     ========
       Earnings per share:
         Net income (loss).................$   0.86     $   0.85      $  (.15)     $  (.15)     $   1.45     $   1.41
                                           ========     ========      =======      =======      ========     ========

</TABLE>

     Options  to  purchase  312,000  and  833,000  shares of common  stock  were
     outstanding at January 3, 2003 and January 4, 2002, respectively,  but were
     not  included in the  computations  of earnings per share since the options
     were anti-dilutive.  Stock warrants to purchase 47,000 and 50,000 shares of
     common  stock were  outstanding  at  January  3, 2003 and  January 4, 2002,
     respectively,  but were not  included in the  computations  of earnings per
     share since the warrants were anti-dilutive.

12.  Accounting for Stock-Based Compensation
     ---------------------------------------

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

     The Company recognizes  stock-based  compensation arising from the issuance
     of  restricted  stock  warrants and below  market  options over the vesting
     period of the stock grant or option term. Stock-based compensation amounted
     to $1, $7 and $6 for 2002, 2001 and 2000, 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 $42 and $31 for 2002 and 2001,  respectively,
     and is recorded as a component of cost of goods sold.

     The  weighted  average  fair value at date of grant for options  granted in
     2002,  2001 and 2000 was  $3.18,  $3.57 and $6.45 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
     2002, 2001 and 2000,  respectively:  risk-free interest rates of 3.7%, 5.0%
     and  6.5%;  dividend  yields of 0%, 0% and 0%;  volatility  factors  of the
     expected  market price of the  Company's  common stock of 67.3%,  71.9% and
     70.0%; and a weighted-average  expected life of the options of 3.3, 3.5 and
     3.7 years.

13.  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:
<TABLE>
<CAPTION>

                                                                     2002             2001              2000
                                                                     ----             ----              ----

         <S>                                                     <C>               <C>               <C>
         Pre-tax income (loss):

               United States.....................................$    7,502        $   (1,261)       $  14,660
               Foreign...........................................     1,779               897              853
                                                                 ----------        ----------        ---------
               Total.............................................$    9,281        $     (364)       $  15,513
                                                                 ==========        ==========        =========

     The provision for income taxes consists of the following:

                                                                      2002            2001              2000
                                                                      ----            ----              ----
           Current:
               Federal...........................................$    2,293        $      426        $   4,129
               State.............................................       686               165            1,129
               Foreign...........................................       795               540              525
                                                                 ----------        ----------        ---------
                                                                      3,774             1,131            5,783
                                                                 ==========        ==========        =========
           Deferred:
               Federal...........................................       144              (828)             523
               State.............................................       (81)             (176)             132
               Foreign...........................................       (66)              (39)             (62)
                                                                 ----------        ----------        ---------
                                                                         (3)           (1,043)             593
                                                                 ==========        ==========        =========

           Change in valuation allowance.........................        94               387               85
                                                                 ----------        ----------        ---------
               Total.............................................$    3,865        $      475        $   6,461
                                                                 ==========        ==========        =========
</TABLE>

     The net  deferred  tax  asset or  liability  reported  on the  consolidated
     balance  sheet  consists of the  following  items as of January 3, 2003 and
     January 4, 2002:
<TABLE>
<CAPTION>

                                                                                        2002             2001
                                                                                        ----             ----
<S>                                                                                   <C>            <C>
         Net current deferred tax assets:
           Allowance for doubtful accounts and discounts..............................$     753      $     785
         Deferred compensation........................................................      568            549
           Inventory allowances and tax costing adjustments...........................      392            287
           Other accrued expenses.....................................................      203            514
           Unrealized gain on marketable securities...................................       --            (37)
                                                                                      ---------      ---------
              Total...................................................................$   1,916      $   2,098
                                                                                      ---------      ---------

           Foreign loss carryforwards.................................................$     612      $     570
           State loss carryforward....................................................       52              0
           Valuation allowance........................................................     (664)          (570)
                                                                                      ---------      ---------
              Total...................................................................$       0      $       0
                                                                                      ---------      ---------

         Net long-term deferred tax liabilities:
           Investment in limited partnership..........................................$   1,195      $   1,210
           Property, plant and equipment..............................................      664            739
                                                                                      ---------      ---------
              Total...................................................................$   1,859      $   1,949
                                                                                      ---------      ---------

         Net deferred tax asset ......................................................$      57      $     149
                                                                                      =========      =========
</TABLE>

     The foreign loss carryforwards  relate to operating losses of approximately
     $1,935, which may be carried forward indefinitely.  At January 3, 2003, the
     Company  has  determined  that it is more  likely  than not that all 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  $4,055 at
     January 3, 2003.

     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>

                                                                                 2002         2001        2000
                                                                                 ----         ----        ----

         <S>                                                                 <C>          <C>           <C>
         Expected tax at 34%.................................................$   3,155    $    (124)    $  5,275
         State income tax, net of federal benefit............................      399           (7)         833
         Non-deductible expenses and tax-exempt income.......................      121           40          100
         International tax rate differences..................................      100          124          174
         Valuation allowance relating to foreign and state
           operating losses..................................................       94          387           85
         Low-income housing tax credits......................................       (4)          (5)          (6)
         Adjustment of prior years' estimated tax liabilities................       --           60           --
                                                                             ---------    ---------     --------
         Provision for income taxes..........................................$   3,865    $     475     $  6,461
                                                                             =========    =========     ========

</TABLE>

14.  Sale of Cycling Division:
     -------------------------

     On June 29,  2000,  the Company  sold  substantially  all of the assets and
     business  of  its  cycling  division,   consisting  of  inventory,  prepaid
     expenses, equipment and tradenames, to QR Merlin Acquisition LLC for $1,350
     in cash and the assumption of $39 in  liabilities.  In connection  with the
     sale, the Company recorded a pre-tax loss of $2,661, inclusive of $1,012 of
     expenses associated with the transaction and resulting from the exit of the
     cycling business. As a result of the transaction, a majority of the cycling
     division   employees  were  severed  and  certain  long-lived  assets  used
     exclusively  in  the  cycling  business  were  deemed  impaired.   Expenses
     associated with the sale and exit of the cycling division are as follows:

         Transaction costs............................................$    358
         Costs to exit facility and equipment leases and other
           non-cancelable contractual commitments.....................     142
         Employee severance and termination benefits..................     210
         Writeoff leasehold improvements..............................      84
         Writeoff goodwill and other deferred charges.................     218
                                                                      --------
         Total........................................................$  1,012
                                                                      ========

     Net  sales  from the  cycling  division,  which are  included  in our Other
     Products segment,  represented approximately 1.9% of consolidated net sales
     for  fiscal  year 2000.  The loss on the sale of the  cycling  division  is
     included in the income  before tax for the Other  Products  segment.  As of
     January 3, 2003,  the  Company  has no  remaining  reserves  related to the
     cycling division sale.

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

     On November 9, 2001, the Company  announced the cessation of  manufacturing
     at and closing of its Bangor, Maine facility.  During the fourth quarter of
     fiscal 2001, the Company  relocated the 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.  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 have been  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.

     Included in accrued expenses at January 3, 2003 and January 4, 2002 are $36
     and $1,461 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 and January 3,
     2003:

<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
                                       ========         =======           ========          ======          ========

</TABLE>

16.  Geographic Segment Data:
     ------------------------

     The following table summarizes the Company's  operations by geographic area
     for the years  ended  January 3, 2003,  January 4, 2002 and January 5, 2001
     and assets as of January 3, 2003, January 4, 2002 and January 5, 2001:
<TABLE>

                                                                              2002           2001          2000
                                                                              ----           ----          ----
<S>                                                                      <C>            <C>             <C>
       Revenues:

         United States...................................................$   103,444    $   106,450     $   145,744
         Canada..........................................................     11,700          8,464           7,194
         Other international.............................................     18,355         17,450          14,982
                                                                         -----------    -----------     -----------
                                                                         $   133,499    $   132,364     $   167,920
                                                                         ===========    ===========     ===========
       International revenues:

         United States - sales to foreign distributors...................      7,048          8,164           5,119
         Canada..........................................................     11,700          8,464           7,194
         Other international.............................................     11,307          9,286           9,863
                                                                         -----------    -----------     -----------
                                                                         $    30,055    $    25,914     $    22,176
                                                                         ===========    ===========     ===========
       Inter-area revenues:

         United States...................................................$       247    $     1,228     $       870
         Canada..........................................................      6,386          5,363           4,222
         Other international.............................................      5,191          4,211           5,077
                                                                         -----------    -----------     -----------
                                                                         $    11,824    $    10,802     $    10,169
                                                                         ===========    ===========     ===========
       Total revenues:

         United States...................................................$   103,691    $   107,678     $   146,614
         Canada..........................................................     18,086         13,827          11,416
         Other international.............................................     23,546         21,661          20,059
         Less:  Inter-area eliminations..................................    (11,824)       (10,802)        (10,169)
                                                                         -----------    -----------     -----------
                                                                         $   133,499    $   132,364     $   167,920
                                                                         ===========    ===========     ===========
       Operating income (loss):

         United States...................................................$     5,531    $    (2,565)    $    13,855
         Canada..........................................................      1,931          1,304           1,080
         Other international.............................................      1,659          1,151           1,332
         Less:  Inter-area eliminations..................................       (178)          (159)           (144)
                                                                         -----------    -----------     -----------
                                                                         $     8,943    $      (269)    $    16,123
                                                                         ===========    ===========     ===========
       Assets:

         United States...................................................$    81,538    $    78,942     $    78,130
         Canada..........................................................      6,906          5,222           4,119
         Other international.............................................      9,396          7,403           9,346
         Less:  Inter-area eliminations..................................    (10,300)       (13,467)         (8,310)
                                                                         -----------    -----------     -----------
                                                                         $    87,540    $    78,100     $    83,285
                                                                         ===========    ===========     ===========
</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  loss on the  sale  of the  cycling
     division.

17.  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
     ---------------

     Performance running, walking and outdoor trail 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,  leather walking and workplace footwear; Hyde
     Authentics casual footwear; the Company's retail factory outlet stores; and
     the Company's former cycling division.

     The  following  table  summarizes  the results of the  Company's  operating
     segments for the years ended  January 3, 2003,  January 4, 2002 and January
     5, 2001 and identifiable  assets as of January 3, 2003, January 4, 2002 and
     January 5, 2001:
<TABLE>
<CAPTION>

                                                                     2002           2001           2000
                                                                     ----           ----           ----
          <S>                                                    <C>             <C>            <C>
          Revenues:
              Saucony...........................................$   111,035     $  110,393     $   146,596
              Other Products....................................     22,464         21,971          21,324
                                                                -----------     ----------     -----------
              Total.............................................$   133,499     $  132,364     $   167,920
                                                                ===========     ==========     ===========
           Pre-tax income (loss):
              Saucony...........................................$    10,288     $     (296)    $    18,507
              Other Products....................................     (1,007)           (68)         (2,994)
              Total segment pre-tax income (loss)...............      9,281           (364)         15,513
              Provision for income taxes........................      3,865            475           6,461
              Minority interest.................................        173            101              89
                                                                -----------     ----------     -----------
           Net income (loss)....................................$     5,243     $     (940)    $     8,963
                                                                ===========     ==========     ===========
           Assets:
              Saucony...........................................$    75,918     $   62,488     $    68,268
              Other Products....................................     11,622         15,612          15,017
                                                                -----------     ----------     -----------
              Total.............................................$    87,540     $   78,100     $    83,285
                                                                ===========     ==========     ===========
           Depreciation and amortization:
              Saucony...........................................$     1,332     $    1,668     $     1,701
              Other Products....................................        265            301             257
                                                                -----------     ----------     -----------
              Total.............................................$     1,597     $    1,969     $     1,958
                                                                ===========     ==========     ===========
           Goodwill, net:
              Saucony...........................................$        19     $       19     $        30
              Other Products....................................        893            893           1,013
                                                                -----------     ----------     -----------
              Total.............................................$       912     $      912     $     1,043
                                                                ===========     ==========     ===========
           Interest, net income (expense):
              Saucony...........................................$       327     $      (28)    $      (276)
              Other Products....................................         --            (49)           (341)
                                                                -----------     ----------     -----------
              Total.............................................$       327     $      (77)    $      (617)
                                                                ===========     ==========     ===========
           Components of interest, net
              Interest expense..................................$        (5)    $     (213)    $      (695)
              Interest income...................................        332            136              78
                                                                -----------     ----------     -----------
                Interest, net...................................$       327     $      (77)    $      (617)
                                                                ===========     ==========     ===========
</TABLE>

18.  Concentration of Credit Risk:
     ----------------------------

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

     The  Company  maintains  cash  and  cash  equivalents  with  various  major
     financial institutions.  Cash equivalents include investments in commercial
     paper of companies  with high credit  ratings,  investments in money market
     securities  and  securities  backed by the U.S.  Government.  At times such
     amounts may exceed the 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 42% and 45% of the
     Company's gross trade  receivables  balance was represented by 18 customers
     and 16  customers,  respectively,  at January 3, 2003 and  January 4, 2002,
     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 2002, 2001 or 2000.

19.  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 3, 2003. At January 3, 2003 and January 4, 2002, the notional value
     of the  Company's  foreign  currency  exchange  contracts to purchase  U.S.
     dollars  was  $5,685 and  $2,300,  respectively.  At  January 4, 2002,  the
     notional value of the Company's foreign currency exchange  contracts to buy
     and sell Euros was $100 Euros and $96  Euros,  respectively.  At January 4,
     2002, the national value of the Company's foreign exchange contracts to buy
     British pounds sterling was $25. There were no outstanding foreign currency
     exchange contracts involving Euros or British Pounds Sterling at January 3,
     2003.  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 $181 and $35,
     at January 3, 2003 and January 2, 2002,  respectively,  against fiscal 2003
     and fiscal 2001 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 3, 2003 and January 4, 2002, the fair
     value of derivatives in a loss position are recorded in accrued expenses.

20.  Quarterly Information: (Unaudited)
<TABLE>
<CAPTION>


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

<S>                                                             <C>          <C>          <C>           <C>
              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...........................................      0.21         0.25         0.26         0.13
                Diluted.........................................      0.21         0.25         0.26         0.13



              2001                                                Quarter 1    Quarter 2    Quarter 3  Quarter 4 (1)
              ----                                                ---------    ---------    ---------  -------------

              Net sales.........................................$   43,693   $   35,491   $   31,488    $   21,589
              Gross profit......................................    13,699       11,853       10,307         6,284
              Net income........................................     1,346          176          362        (2,824)
              Earnings per share:
                Basic...........................................      0.22         0.03         0.06        (0.46)
                Diluted.........................................      0.22         0.03         0.06        (0.46)


       ______________

(1)  The Company closed its Bangor, Maine manufacturing facility, terminated and
     exited a retail store lease,  closed its Taiwan  office and incurred  other
     reorganization  related  expenses.  See  Note  15 for  further  information
     relating to these transactions

</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 2002 and 2001.


21.  Supplemental Cash Flow Disclosure
     ---------------------------------

     The  following  table  summarizes   additional   disclosure  of  cash  flow
     information  for the years  ended  January  3,  2003,  January  4, 2002 and
     January 5, 2001:

<TABLE>
<CAPTION>

                                                                               2002           2001           2000
                                                                               ----           ----           ----

<S>                                                                        <C>            <C>             <C>
          Supplemental disclosure of cash flow information:
              Cash paid during the period for:
              Income taxes, net of refunds.................................$   2,036      $     857       $   6,695
                                                                           =========      =========       =========
              Interest.....................................................$       4      $     205       $     605
                                                                           =========      =========       =========
          Non-cash Investing and Financing Activities:
              Property purchased under capital leases......................$      --      $     102       $      --
                                                                           =========      =========       =========

          Plant closing and other related charges..........................$     (72)     $   2,108              --
              Cash received................................................       --              3              --
              Severance and other payments.................................      (51)          (386)             --
                                                                           ---------      ---------       ---------
                                                                           $    (123)     $   1,725              --
                                                                           ---------      ---------       ---------
          Non-cash portion:
              Accrued expenses.............................................$    (214)     $   1,461              --
              Property, plant and equipment................................       91            264              --
                                                                           ---------      ---------       ---------

                                                                           $    (123)     $   1,725              --
                                                                           =========      =========       =========

</TABLE>

22.  Subsequent Event
     ----------------

     On March 11,  2003,  the Company was notified by counsel  representing  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,
     that  the  trustee  had  agreed  to  settle  all  claims  for  preferential
     transfers. Under the terms of the settlement agreement, which is contingent
     upon approval by the bankruptcy  court, the Company will pay $530 to settle
     all preferential  transfer claims.  Furthermore,  the trustee will allow an
     unsecured  claim  by the  Company  for  $1,358.  As a  consequence  of this
     settlement, the Company, upon formal approval by the bankruptcy court, will
     record a pre-tax benefit of $566 to reduce the amount accrued as of January
     3,  2003.  The  benefit  will be  recorded  in general  and  administrative
     expenses.



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

<TABLE>

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

    For the Years Ended January 3, 2003, January 4, 2002 and January 5, 2001

                                 (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 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

Year ended January 5, 2001:
  Allowance for doubtful accounts and discounts...................$   3,534      $  5,525      $   7,012     $   2,047

</TABLE>





                                                   Exhibit Index

Exhibit
Number                              Description


3.1  Restated  Articles of  Organization,  as  amended,  of the  Registrant  are
     incorporated   herein  by   reference  to  Exhibits  3.1  and  3.2  to  the
     Registrant's Current Report on Form 8-K dated May 21, 1998.

3.2  By-Laws, as amended.

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.

10.2*1993 Equity Incentive Plan, as amended, is incorporated herein by reference
     to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the
     fiscal year ended January 2, 1998.

10.3* Amendment No. 3 to 1993 Equity Incentive Plan, as amended, is incorporated
     herein by reference to Exhibit 10.5 to the  Registrant's  Annual  Report on
     Form 10-K for the fiscal year ended December 31, 1999.

10.4* Amendment No. 4 to 1993 Equity Incentive Plan, as amended, is incorporated
     by reference to Exhibit 10.1 to the  Registrant's  Quarterly Report on Form
     10-Q for the fiscal quarter ended June 30, 2000.

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

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).

10.7* 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.

10.8* 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.

10.9* 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.

10.10* 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.

10.11* Severance  Agreement as of January 31, 2002 by and between the Registrant
     and Arthur E. Rogers  incorporated  by  reference  to Exhibit  10.20 to the
     Registrant's  Annual  Report on Form 10-K for the fiscal year ended January
     2, 2002.

10.12* Saucony, Inc. Non-Qualified Retirement Plan

21   Subsidiaries of the 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.

23.3 Consent of PricewaterhouseCoopers LLP.

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

99.2 Certification  of 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 14(a)(3) of the instructions to Form 10-K.