<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               -----------------
 
                                  FORM 10-K/A
                                AMENDMENT NO. 2
 
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
   ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
 
                        COMMISSION FILE NUMBER 0-27002
 
                               -----------------
 
                            MORROW SNOWBOARDS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                   OREGON                                        93-1011046
        (STATE OR OTHER JURISDICTION                          (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
</TABLE>
 
                 2600 PRINGLE ROAD, S.E., SALEM, OREGON 97302
                   (ADDRESS OF PRINCIPAL, EXECUTIVE OFFICES)
 
                                (503) 375-9300
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                               -----------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
 
<TABLE>
<S>                                            <C>
            (TITLE OF EACH CLASS)                (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
                    NONE                                            N/A
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                               (TITLE OF CLASS)
           COMMON STOCK, NO PAR VALUE (REGISTERED DECEMBER 13, 1995)
 
                               -----------------
 
  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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  The aggregate market value of voting shares held by non-affiliates of the
registrant's common stock on February 27, 1998 was approximately $16,986,000
(based on last sale price of such stock as reported by Nasdaq National
Market).
 
  The number of shares outstanding of the registrant's common stock, no par
value, as of February 27, 1998 was 6,176,556.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Part III is incorporated by reference from the proxy statement to be filed
in connection with the Company's 1998 Annual Meeting of Shareholders.
 
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<PAGE>
 
                                    CONTENTS
 
<TABLE>
 <C>      <S>                                                               <C>
 PART I  .................................................................    1
 Item 1.  Business........................................................    1
 PART II .................................................................   13
 Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations..........................................   13
 Item 8.  Financial Statements and Supplemental Data......................   20
 SIGNATURES...............................................................   40
</TABLE>
 
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
INTRODUCTION
 
  Morrow Snowboards ("Morrow") is a well recognized designer, manufacturer and
marketer of premium snowboards, bindings, boots and related accessories.
Morrow strives to be one of the leaders in the industry by using innovative
technology to design snowboards that are strong and lightweight with high-
performance characteristics and bindings which are also performance-enhancing
as well as comfortable and easy to use. Morrow's 1998/99 product line includes
52 snowboard models which it manufactures at its facility in Salem, Oregon. In
addition, Morrow assembles 5 types of bindings at its Salem facility for the
1998/99 product line. Morrow also has the new step-in binding "Engage 3
System," and 8 styles of boots manufactured to its specifications. The
manufacturing facility currently is one of the largest producers of snowboards
in North America with additional capacity to manufacture private label
snowboards and bindings.
 
  Morrow's product line, marketed under the "Morrow" brand name, targets a
broad range of consumers, including the young core consumer group, crossover
skiers and new snowboard participants of all ages. Morrow products are sold
predominantly in the United States, Canada, Japan and Europe primarily through
specialty snowboard, outdoor recreation, skate, surf and ski shops ("specialty
retailers"). This distribution channel typically offers superior customer
service and enhances the appeal of the "Morrow" brand name.
 
  Morrow was incorporated in 1989 as an Oregon corporation.  In November 1997,
Morrow acquired all of the outstanding securities of Westbeach Snowboard Canada
Ltd. ("Westbeach"), a British Columbia company established in 1979 as a
merchandiser of clothing products.  Westbeach was subsequently amalgamated with
two acquisition entities to form Morrow Westbeach Canada ULC, a Nova Scotia
unlimited liability company.  Westbeach is well recognized for its designs,
manufacturing, wholesaling and retailing of snowboarding apparel and casual
clothing. Wholesale clothing sales account for approximately 2/3 of Westbeach's
sales which are sold in 15 countries through a network of distributors and sales
representatives.  Westbeach also sells snowboards, boots, bindings and a full
line of apparel and accessories through its three retail stores in Canada and
the U.S.  Westbeach has three subsidiaries: an Austrian Corporation whose
principal activity consists of a European sales and warehousing operation, a
United Kingdom corporation whose principal activity consists of European sales
and a Washington corporation whose principal activity is U.S. wholesale and
retail sales. Morrow also has a Guam foreign sales corporation, Morrow
International, Inc.
 
  As discussed herein, since the acquisition, the consolidated Morrow and
Westbeach companies (the "Company") have established a reorganized and
integrated distribution network that is expected to expand Westbeach
distribution to additional countries and to increase both Morrow and Westbeach
penetration in certain existing markets.
 
  Management believes that "Westbeach" brand clothing presents a strong
complement to Morrow's product lines, and that the combined companies'
increased size and capacity should lead to greater market recognition and
opportunity for both brands.
 
  Unless otherwise indicated, all financial numbers and operating results
presented for the Company for 1997 include information for Morrow for the
entire fiscal year January 1, 1997 through December 27, 1997 and Westbeach
only for the period since Westbeach's acquisition by Morrow (November 13, 1997
through December 27, 1997). Further, all pro forma Westbeach financial
information which is normally expressed in Canadian dollars has been converted
to U.S. dollars at the assumed exchange rate of 1.384 (except as otherwise
indicated herein).
 
INDUSTRY
 
  In the late 1980s and early 1990s, Morrow was among a small group of
companies that helped pioneer fundamental changes in the construction and
performance characteristics of snowboards. These advances contributed
significantly to the broadening of the industry's consumer base and the
increase in the overall number of snowboard enthusiasts. As an indicator of
its mainstream appeal, snowboarding was designated a full medal sport
beginning with the 1998 Olympic Winter Games.
 
                                       1
<PAGE>
 
  While the vast majority of snowboarders are young males between the ages of
12 and 24, the snowboard industry is experiencing an increasing percentage of
both male and female participants of all ages, including crossover skiers.
According to the National Sporting Goods Association (the "NSGA"), there were
3.7 million snowboarders in the U.S. in 1996, up from 1.2 million in 1992, a
compound annual growth rate of 33%. According to the NSGA, in recent years the
snowboard industry has experienced rapid growth, whereas the ski industry has
experienced a slight decline.
 
  The recent growth of snowboarding is attributable in part to the perceived
advantages that the sport holds over downhill skiing. Many participants find
snowboarding a more desirable sport in part because of its steeper learning
curve, allowing the rider to advance more quickly, the elimination of poles
and the use of lighter and more comfortable boots and apparel. Snowboarding is
also more easily adaptable to a broader range of conditions than skiing
because of its wider, single carving platform.
 
  The snowboard industry is highly fragmented with more than 100 companies
marketing snowboards. In the U.S. snowboard market, Morrow estimates the
"Morrow" brand has approximately 9-10% market share and ranks third behind
Burton (38%) and K2 (15%) overall and ranks second only to Burton within the
specialty shop distribution channel. The Company believes that significant
consolidation is occurring and will continue to occur over the next two years,
in part as the result of prior production in excess of actual growth.
 
OPERATING STRATEGY
 
  The Company has implemented its operating strategy based on advanced
technology, extensive in-house snowboard manufacturing capabilities and
focused brand positioning.
 
  Commitment to Technology. The Company incorporates innovative technology to
produce high-quality, high-performance snowboards and bindings. Building on
its foundation in research and development, the Company also leverages its
engineering capabilities to enhance the performance characteristics of its
product line.
 
  Advantages of On-Site Manufacturing. By controlling the manufacturing
process, the Company retains greater flexibility to take advantage of market
opportunities and adjust product line mix to reflect changes in demand. The
Company's manufacturing and administrative facility enables it to spread out
production evenly over the year and realize certain economic benefits.
 
  Focused Brand Positioning. The Company believes that the advanced technology
and high-performance characteristics of its snowboard and binding products
appeal to a broad cross-section of consumers and, based on feedback from its
sales representatives, distributors and customers, provide a basis for brand
loyalty. To increase exposure to the high end of the consumer market, the
Company strategically places its premium line of products with specialty
retailers. Due to the Westbeach acquisition, the Company also now operates
three retail stores selling "Westbeach" brand and other products.
 
GROWTH STRATEGY
 
  The Company is well positioned to continue to take advantage of expansion in
the industry. The Company's growth strategy is to: (i) maintain technological
leadership through continuous product innovation; (ii) increase efficiencies
in the manufacturing process; (iii) increase distribution of "Morrow" brand
products in Canada and Europe through Westbeach's sales representative and
dealer network; and (iv) increase distribution of "Westbeach" brand products
through the combined companies' increased marketing, finance and manufacturing
expertise.
 
  Product Innovation. The Company will continue to devote significant
resources to research and development to ensure that the Company's products
incorporate the latest technology. The Company has the ability to implement
changes in design to snowboards and bindings during the manufacturing cycle
based on new technology and the feedback it receives from the field.
 
                                       2
<PAGE>
 
  Increased Manufacturing Efficiencies. The Company expects to continue to
benefit from further plant automation.
 
  Enhanced Distribution and International Growth. The Company's strategic
promotion and sales programs are aimed at increasing market penetration within
the Company's current distribution channel. The Company will continue to
enhance and expand its product lines to capture an increased share of the
growing snowboard market. The Company also focuses on providing superior
service to its retailers. In addition, the Company believes there are
significant opportunities to increase sales internationally, primarily in
Canada and Europe, through Westbeach's sales representative and dealer
network, and will aggressively pursue this growth strategy.
 
  Clothing Line Expansion. In 1980, Westbeach developed and introduced a line
of street clothing aimed at youths ages 16-24 under the Westbeach Streetwear
label. The basic product line of street clothing is aimed at snowboarders, but
has growth potential in all markets, particularly in the U.S. where the
Westbeach brand is becoming better established and more well known. Westbeach
introduced a line of women's snowboard clothing in 1995. Westbeach's design
teams continue to develop new concepts for possible future development.
 
  Strategic Acquisitions. As discussed above, Morrow acquired Westbeach in
November 1997 and as a result now includes "Westbeach" brand snowboarding and
casual clothing in its product line.
 
TECHNOLOGY AND DESIGN
 
  Since inception, Morrow has been dedicated to the development and
construction of technologically advanced premium snowboards. Using innovative
design techniques and advanced composite technology, Morrow combines a diverse
group of materials with varying physical properties to create product lines
with high-performance characteristics.
 
  The Company has pioneered a number of fundamental elements in its snowboard
construction that are featured in varying combinations throughout the
Company's board lines, including the following:
 
  Composite Core. The Company uses a full-length molded (not injected) polymer
composite core in all of its snowboards to ensure consistent flex and reduce
weight.
 
  Continuous Torsion Box. The Company employs monocoque construction
techniques which feature vertical fiberglass walls connecting the top and
bottom layers, increasing strength while retaining camber and flex
characteristics. Fibers fully encompass the board to give added strength,
while decreasing the weight.
 
  Continuous Braided Torsion Sock (Torque Rod). The Company uses what is
basically a mini torsion box, which provides extra strength near the edges of
the board, allowing the rider extra carving power while maintaining a soft
freestyle feel. This construction concentrates energy from nose to tail,
strengthening the sidewall and adding considerable "spring."
 
  Double Barrel(TM) Construction (Two Torque Rods). The Company has developed
double torque rod construction which offers more independent suspension than
single torque rod construction. The Double Barrel composite torsion box
controls the torsional flex and lateral flex, allowing the board to
continuously "read" the changing terrain.
 
  Triple Barrel Construction (Three Torque Rods). The Company's Triple Barrel
Construction allows even greater control of the board for freestyle maneuvers
and uneven terrain. Added carbon fiber eliminates some of the fiberglass and
weight while retaining the strength of the board.
 
  These innovative features make the "Morrow" brand of snowboards among the
lightest, most durable and responsive snowboards available.
 
                                       3
<PAGE>
 
  The Company's bindings feature aircraft grade aluminum for light weight and
strength. Its standard bindings feature a ratchet system on its straps for
ease in tightening and release and anatomically correct base plates for right
and left feet. The introduction in the 1998/99 season of the step-in binding
system incorporates a unique boot design featuring custom foot form and
internal highback which can be locked into a supportive position. These
features increase both comfort and performance.
 
  The Company's clothing line includes men's and women's outerwear pants and
jackets, fleece insulating garments, sweaters and T-shirts. The outerwear line
uses adjustable hood technology to allow custom fit at eye level for better
visibility, zip out lining systems and flow through systems to create free air
flow to carry away perspiration while exhaust vents provide a cooling down
ability if required. The fleece product line incorporates both "polyolefin"
and "polartec" fabrics. These fabrics are designed to wick moisture away from
the body, keeping the wearer dry. "Polyolefin" is a light weight fabric
engineered with "micro-ban", an anti-microbial which is built into the
molecular structure so that it does not wash out. "Polartec" is a Malden Mills
branded fabric and is offered in different weights. "Polartec" provides
insulation and breathability.
 
  The Westbeach design team is comprised of senior management, clothing
designers, a product coordinator, retail managers and Westbeach-sponsored
snowboarders. The design team obtains market feedback from distributors,
customer feedback from the retail stores and feedback from its snowboarders.
In addition, senior management travels extensively to all markets to follow
trends among both snowboarding youth and lifestyle customers.
 
PRODUCTS
 
  The following table sets forth the contribution to net sales attributable to
each of the Company's product groups for the years ended December 27, 1997 and
December 31, 1996 and 1995.
 
<TABLE>
<CAPTION>
                                      1997                        1996                         1995
                          ---------------------------- ---------------------------- ----------------------------
                                         PERCENTAGE OF                PERCENTAGE OF                PERCENTAGE OF
                            NET SALES      NET SALES     NET SALES      NET SALES     NET SALES      NET SALES
                          -------------- ------------- -------------  ------------- -------------  -------------
                          (IN THOUSANDS)               (IN THOUSANDS)               (IN THOUSANDS)
<S>                       <C>            <C>           <C>            <C>           <C>            <C>
PRODUCT GROUP
Snowboards..............     $12,833          63.3%       $21,246          67.0%       $15,868          64.5%
Bindings................       3,683          18.2          8,337          26.3          6,148          25.0
Boots...................       1,248           6.2          1,432           4.5          1,725           7.0
Accessories and apparel.       1,365           6.8            684           2.2            845           3.5
Retail..................       1,124           5.5            --            --             --            --
                             -------         -----        -------         -----        -------         -----
  Total.................     $20,253         100.0%       $31,699         100.0%       $24,586         100.0%
                             =======         =====        =======         =====        =======         =====
</TABLE>
 
  Through product innovation, the Company continued to expand its market base
with the introduction of new products for the 1997/98 product line. These
introductions included 6 snowboard models, designed for riders who enjoy
freeriding (carving and powder) and are more interested in performance than
image, and updates to the current A1 & M1 bindings which are designed
especially for better fit with various boot styles and sizes.
 
                                       4
<PAGE>
 
  The following table sets forth Westbeach's unaudited proforma sales by
product group for the years ended December 27, 1997 and December 31, 1996 and
1995 by product group.
 
<TABLE>
<CAPTION>
                                      1997                        1996                         1995
                          ---------------------------- ---------------------------- ----------------------------
                                         PERCENTAGE OF                PERCENTAGE OF                PERCENTAGE OF
                            NET SALES      NET SALES     NET SALES      NET SALES     NET SALES      NET SALES
                          -------------- ------------- -------------  ------------- -------------  -------------
                          (IN THOUSANDS)               (IN THOUSANDS)               (IN THOUSANDS)
<S>                       <C>            <C>           <C>            <C>           <C>            <C>
PRODUCT GROUP
Snowboards..............      $  --            -- %       $  --             -- %       $  --             -- %
Bindings................         --            --            --             --            --             --
Boots...................         --            --            --             --            --             --
Accessories and apparel.       6,271          68.6         6,018           68.4         4,807           66.6
Retail..................       2,875          31.4         2,777           31.6         2,412           33.4
                              ------         -----        ------          -----        ------          -----
  Total.................      $9,146         100.0%       $8,795          100.0%       $7,219          100.0%
                              ======         =====        ======          =====        ======          =====
</TABLE>
 
  Snowboards. The Company designs and manufactures a full product line of
snowboards with a variety of performance characteristics. For the 1998/99
model year, the Company offers 52 snowboards in 12 performance categories
under the "Morrow" brand name, including five "Signature" models, named for
Matt Goodwill and Todd Richards, internationally recognized snowboard
champions and members of the Company's professional snowboarding team.
 
                           SNOWBOARD SPECIFICATIONS
 
<TABLE>
<CAPTION>
   MODEL NAME        PRIMARY RIDING STYLE           CONSTRUCTION METHOD
   ----------        --------------------           -------------------
   <S>             <C>                      <C>
   Mach..........  Entry level all mountain Torsion Box w/spring channels
   Rail..........  Freeride/Freestyle       Torsion Box, Carbon FiberTorque rods
   Dimension.....  Freeride/Freestyle       Torsion Box, Carbon FiberTorque rods
   Wildflower....  All Mountain             Torsion Box, Carbon FiberTorque rods
   Escape........  Freeride                 Torsion Box, Carbon FiberTorque rods
   Escape +......  Freeride (large feet)    Torsion Box, Carbon FiberTorque rods
   Indy..........  Freeride/Freecarve       Torsion Box, Carbon FiberTorque rods
   Revert X......  Technical Freestyle      Torsion Box, Carbon FiberTorque rods
   Lithium.......  Freestyle/Freeride       Torsion Box, Carbon FiberTorque rods
   Masters.......  Freeride                 Torsion Box Triple Barrel
   Rocket........  G.S. Race/Freecarve      Torque rods/Titanal/IDS
   Todd Richards.  Freestyle/Freeride       Torsion Box, Carbon FiberTorque rods
</TABLE>
 
  Bindings. The Company manufactures and markets 5 models of "Morrow" bindings
that are designed to provide both comfort and performance for a variety of
riding styles and experience levels. The Company's bindings are crafted of
high-grade aircraft aluminum and lightweight plastic resin and are designed to
absorb vibrations, increase range of motion and eliminate pressure points. The
Company's bindings include ratchet buckles, which facilitate use of the
bindings, and anatomically correct base plates, which increase comfort and
performance. In addition to the 5 conventional bindings, the Company has also
developed and introduced an innovative step-in binding system for the 1998/99
product line providing both convenience of entry and enhanced performance.
 
  Boots. The Company markets 8 styles of "Morrow" boots, which incorporate
several high-performance features to provide riders with excellent traction,
shock absorption and stability.
 
  Apparel and Accessories. The Company markets a line of apparel and
accessories with "Morrow" logo, including T-shirts, sweatshirts, hats, caps,
backpacks, and bags. Since the Westbeach acquisition, the Company also markets
a line of technical snowboarding apparel and accessories for men and women
under the "Westbeach" brand.
 
                                       5
<PAGE>
 
SALES AND DISTRIBUTION
 
 Sales
 
  The Company's promotion and sales strategy for "Morrow" snowboards and
related products is to increase penetration into the growing domestic and
international snowboard markets, especially at the mid-range to high-end price
points. Domestic penetration will continue through the specialty retail
distribution channel, while international sales will be further developed
through the Company's international dealer and distributor network. The
Company and its distributors participate in North American, European and
Japanese trade shows and advertise in international trade publications.
 
  Due to the seasonal nature of the snowboard industry, a significant portion
of the Company's sales of snowboards and related products occur in the third
and fourth quarters. In 1997, 86% of the Company's sales were made in the last
six months of the year of which 9% were attributed to Westbeach. Typically,
there are limited amounts of sales occurring during the first quarter. These
sales are comprised primarily of close-out sales. The second quarter sales are
comprised largely of international sales and a limited amount of domestic
sales. The last six months of the year are comprised of domestic sales,
typically occurring from August through the end of the year, and the balance
of international sales, typically shipped by the end of the third quarter.
 
  The Company's promotion and sales strategy for "Westbeach" products is to
increase penetration in the North American and international snowboard apparel
markets, as well as to expand Westbeach's presence in the casual wear market.
North American and European market penetration will continue through
Westbeach's specialty retail distribution channel. International sales will be
developed through sales representatives and Westbeach's dealer and distributor
network. Since the acquisition, Morrow's and Westbeach's sales and
distribution networks have been partially combined to create 26 commissioned
sales representatives and 20 distributors covering 17 countries including the
United States and Canada. Westbeach and its distributors historically have
participated in United States, European and Japanese trade shows and
advertised in international trade publications.
 
  Due to the seasonal nature of the snowboard industry and predominance of
snowboarding apparel in Westbeach's product line, a significant portion of
Westbeach's sales occur in the third and fourth quarters. In 1997, more than
70% of the pro forma 12 months sales were made in the last six months of the
year.
 
 Distribution
 
  The Company's primary distribution channels for "Morrow" brand products are
specialty retailers and, to a lesser extent, select regional sporting goods
stores. The primary distribution channels for "Westbeach" brand products are
specialty retailers and Westbeach's three retail stores in the U.S. and
Canada, which comprised 31% of Westbeach's 1997 revenues. Specialty retailers
cater to experienced riders, existing skiers, other winter sport enthusiasts
and new snowboarding participants. These distribution channels allow the
Company to achieve the higher margins associated with the premium snowboard
market and enhance the appeal of the "Morrow" and "Westbeach" brand names.
Within such distribution channels, the Company will continue to focus on and
enhance customer service, including timely delivery of products, high-quality
product information materials and increased access to customer service
representatives.
 
  In the key U.S. markets, the Company distributes its products through
independent sales representatives, who in most cases are subject to a standard
three-year written sales representative agreement that is cancelable on 30
days' notice by either party. Internationally, the Company distributes its
products pursuant to informal agreements to a network of independent local
distributors who, in turn, market and sell the Company's products to retailers
in those markets.
 
 
                                       6
<PAGE>
 
  K.K. Morrow Japan, Inc., Morrow's exclusive distributor of "Morrow" brand
products in Japan, accounted for approximately 30% and 21% of Morrow net sales
for the years ended December 27, 1997 and December 31, 1996, respectively.
Morrow has an exclusive distributorship agreement with K.K. Morrow Japan
through 1999 subject to extension through 2002. The Company has no economic
interest in Morrow Japan, Inc. No other customer accounted for more than 10%
of Morrow's net sales in 1997 or 1996.
 
  Levante, Inc., the exclusive distributor of "Westbeach" brand products in
Japan, accounted for approximately 21% and 31% of Westbeach's net sales for
the years ended December 27, 1997 and December 31, 1996, respectively.  Morrow 
believes the decline in clothing sales to Japan during 1997 is attributable to 
economic conditions in that country, including lower disposable income and the 
reduced exchange value of the Yen.  Westbeach has an exclusive distributorship
agreement with Levante through 2000. While Levante has been required to purchase
certain minimum quantities of Westbeach products in the past, the minimum
purchase requirements, if any, are being discussed and renegotiated currently.
The contract may be canceled if minimum orders are not received. Westbeach has
no economic interest in Levante. No other customer accounted for more than 10%
of Westbeach's net sales in 1997 or 1996.
 
  The Company's U.S., Canada and export net sales are set forth below for the
years ended December 27, 1997 and December 31, 1996 and 1995. Generally, the
margins for export sales of boots, bindings and snowboards are lower than for
domestic sales, while the margins for apparel and accessory sales are
comparable.
 
<TABLE>
<CAPTION>
                                     1997                        1996                         1995
                         ---------------------------- ---------------------------- ----------------------------
                                        PERCENTAGE OF                PERCENTAGE OF                PERCENTAGE OF
                           NET SALES      NET SALES     NET SALES      NET SALES     NET SALES      NET SALES
                         -------------- ------------- -------------  ------------- -------------  -------------
                         (IN THOUSANDS)               (IN THOUSANDS)               (IN THOUSANDS)
<S>                      <C>            <C>           <C>            <C>           <C>            <C>
United States...........    $11,147          55.0%       $19,810          62.5%       $16,446          66.9%
Canada(1)...............      1,619           8.0            --            --             --            --
Japan...................      5,738          28.3          6,551          20.7          4,973          20.2
Europe and other(1).....      1,749           8.7          5,338          16.8          3,167          12.9
                            -------         -----        -------         -----        -------         -----
  Total.................    $20,253         100.0%       $31,699         100.0%       $24,586         100.0%
                            =======         =====        =======         =====        =======         =====
</TABLE>
--------
(1) Prior to 1997, Canadian sales were included in Europe and other, as
    amounts were not material.
 
  The following table sets forth Westbeach's unaudited pro forma sales for
Canada, U.S., Japan and Europe for the years ended December 27, 1997 and
December 31, 1996 and 1995.
 
<TABLE>
<CAPTION>
                                     1997                        1996                         1995
                         ---------------------------- ---------------------------- ----------------------------
                                        PERCENTAGE OF                PERCENTAGE OF                PERCENTAGE OF
                           NET SALES      NET SALES     NET SALES      NET SALES     NET SALES      NET SALES
                         -------------- ------------- -------------  ------------- -------------  -------------
                         (IN THOUSANDS)               (IN THOUSANDS)               (IN THOUSANDS)
<S>                      <C>            <C>           <C>            <C>           <C>            <C>
Wholesale
  Canada................     $2,051          22.4%       $1,615           18.4%       $1,442           20.0%
  United States.........      1,080          11.8         1,031           11.7           911           12.6
  Japan.................      1,915          20.9         2,751           31.3         1,832           25.4
  Europe................      1,225          13.5           621            7.1           622            8.6
Retail
  Canada................      2,438          26.6         2,369           26.9         2,033           28.2
  United States.........        437           4.8           408            4.6           379            5.2
                             ------         -----        ------          -----        ------          -----
    Total...............     $9,146         100.0%       $8,795          100.0%       $7,219          100.0%
                             ======         =====        ======          =====        ======          =====
</TABLE>
 
  Westbeach opened its first retail store in Vancouver, British Columbia in
1984 and currently operates three retail stores. Two of the stores are in
British Columbia at locations in Vancouver and Whistler. The third store is
located in Bellevue, Washington, and is operated through Westbeach's wholly-
owned subsidiary, Westbeach Snowboard U.S.A. Inc. Westbeach closed a North
Vancouver, B.C. store in April 1996 to concentrate on the then four remaining
stores and closed its Richmond, B.C. store in January 1997. Retail sales
represented approximately 31.4% of total sales in 1997 and 31.5% of total
sales in 1996.
 
                                       7
<PAGE>
 
  In the retail stores, Westbeach's products account for approximately 1/3 of
sales. Clothing from other manufacturers also account for approximately 1/3 of
sales, with snowboards and other accessories representing the balance.
Westbeach has historically carried between five and eight brands of
snowboards, plus several brands of boots and bindings in each of its retail
stores.
 
  All store locations are leased. A breakdown of unaudited pro forma sales by
store for the periods ended December 27, 1997 and December 31, 1996 and 1995
is as follows:
 
<TABLE>
<CAPTION>
                                     1997                        1996                         1995
                         ---------------------------- ---------------------------- ----------------------------
                                        PERCENTAGE OF                PERCENTAGE OF                PERCENTAGE OF
                           NET SALES      NET SALES     NET SALES      NET SALES     NET SALES      NET SALES
                         -------------- ------------- -------------  ------------- -------------  -------------
                         (IN THOUSANDS)               (IN THOUSANDS)               (IN THOUSANDS)
<S>                      <C>            <C>           <C>            <C>           <C>            <C>
Vancouver...............     $1,525          53.0%       $1,379           49.7%       $  891           36.9%
North Vancouver(1)......        --            --             90            3.3           338           14.0
Richmond(2).............          2           0.1           243            8.7           278           11.5
Whistler................        911          31.7           656           23.6           527           21.8
Bellevue (Washington)...        437          15.2           409           14.7           378           15.8
                             ------         -----        ------          -----        ------          -----
  Total.................     $2,875         100.0%       $2,777          100.0%       $2,412          100.0%
                             ======         =====        ======          =====        ======          =====
</TABLE>
--------
(1) The North Vancouver store was closed at the end of April 1996.
 
(2) The Richmond store was closed at the end of January 1997.
 
  The Whistler store has been in operation since December 1993 and the
Bellevue store and related warehouse space opened in August 1993. The
Vancouver store is the original store and flagship of the group. The Vancouver
store underwent major renovations in 1996 and 1997. Margins in the retail
stores averaged 34.8% in 1997, including Westbeach and non-Westbeach goods.
Margins on Westbeach goods are in the 40-50% range, which are significantly
higher than non-Westbeach goods.
 
  Westbeach found the retail stores offered an outlet for Westbeach clothing
while at the same time provided an opportunity to stay in touch with trends in
apparel. The Company plans to continue to support the retail outlets but has
no plans to expand this distribution outlet at the current time.
 
MANUFACTURING
 
  The Company manufactures all of its snowboards and bindings at its Salem,
Oregon facility. The Company's manufacturing facility currently is one of the
largest producers of snowboards and bindings in North America. The Company's
experienced in-house manufacturing capability provides advantages over those
snowboard companies that place snowboard orders on an annual basis with OEM
manufacturers. The Company has the ability to implement changes in design and
product mix that may arise during the manufacturing season based on new
technology and the feedback it receives from its customers, sales
representatives, distributors, retailers and professional team riders. The
facility also allows the Company to manufacture product relatively evenly
throughout the year to maintain a stable workforce, reduce down time and
maintain quality.
 
  Each of the products produced by the Company undergoes quality assurance
testing throughout the manufacturing process. The Company has a quality
assurance department which works with the Company's inspectors at various
stages of the manufacturing process. The Company is able to produce uniform
products as a result of its integrated manufacturing process and continuous
quality assurance program.
 
  The Company also has the capability to manufacture private label snowboards
and bindings under short-term agreements. However, it is currently not
actively pursuing this option as part of its overall strategy, which is to
maximize development of the "Morrow" brand products.
 
                                       8
<PAGE>
 
  The Company has taken certain steps to further position itself for future
growth and, in connection therewith, has implemented and improved certain
controls and systems, including improving its perpetual inventory system. In
addition, the Company has implemented a year 2000 compliant integrated
manufacturing and accounting software system.
 
  "Westbeach" brand products are subcontracted on a fixed contract basis to
independent clothing manufacturers. Approximately 35% of Westbeach's 1997
production was contracted to a single manufacturer in Hong Kong, China, with
the balance contracted 55% to approximately five manufacturers located in the
lower mainland of British Columbia and 10% to a manufacturer in Europe. In
1996, 35% of production was subcontracted to two Chinese manufacturers.
Westbeach has an outside consultant assigned to quality control inspection at
the Chinese manufacturer's plants and who checks production at other plants.
While there are no written contracts with Westbeach's Hong Kong, China or
other manufacturers, relations with such manufacturers are good and Westbeach
expects to continue to source products from those or other manufacturers.
 
  The Company imports finished goods (apparel and accessories) in the U.S.
under multilateral and bilateral trade agreements between the U.S. and China.
These agreements impose import quotas on the amount and types of textile and
products that can be imported into the U.S. from the affected country. To
expand U.S. sales, the Company must ensure its manufacturing sources have
adequate import quotas for the goods. The Company does not anticipate these
restrictions will adversely affect Westbeach's expected growth since the
Company could meet its demands within the U.S. from countries not affected by
the restrictions. Similarly, European sales are primarily subject to European
Economic Community rules. Under those rules, there are few internal trade
barriers but many goods imported to Europe are subject to constraints,
including quotas and duty charges. The Company does not anticipate these
restrictions will materially or adversely affect projected growth.
 
PRODUCT DEVELOPMENT
 
  The Company strives to be a technology leader in the snowboard industry by
drawing on the expertise of its in-house product development team, outside
design consultants, sales representatives, distributors, retailers and
founders to develop high-performance products. The Company's research and
development efforts have produced significant innovations in the design and
construction of its snowboards and bindings. In addition, the Company has
integrated its professional team riders into its product development process,
allowing regular testing of both prototypes and finished products. This
collaboration continues to produce new products and enhancements to existing
technology. The Company's product development programs are augmented by
research and development assistance provided by principal suppliers of raw
materials to the Company. The Company significantly increased its commitment
to product development of boards and the step-in binding in 1997, with
expenditures of $1,662,000 compared to $769,000 and $787,000 in 1996 and 1995,
respectively.
 
  With the acquisition of Westbeach, the Company has acquired the Westbeach
expertise in the apparel industry. The need for style and design sensitivity
will be factors the in-house expertise incorporate in their collaboration with
outside design consultants, sales representatives and it's retail outlets to
stay on top of the changing trend in apparel.
 
MARKETING
 
  Snowboards. The goal of the Company's marketing program is to maintain
Morrow's image as one of the leading high-performance snowboard brands in the
specialty retail channel. Whereas many snowboard companies have marketing
strategies that rely primarily on image and graphics, the Company's marketing
efforts also focus on the high-performance characteristics of the Company's
products to appeal to a broad cross-section of consumers. The Company employs
print and broadcast advertising in addition to regularly attending North
American and international trade shows to market its products. The Company
 
                                       9
<PAGE>
 
also utilizes a team of professional snowboard riders who provide significant
brand exposure through photographic and editorial coverage in major industry
magazines and at organized snowboarding events, as well as in television
sports coverage and in certain ski/snowboard movies. Additionally, the Company
uses its field support team to promote the "Morrow" brand name in key domestic
snowboarding regions through on-mountain and in-store demonstrations. These
programs are designed to improve the visibility of the Company's products
while enhancing the reputation of the "Morrow" brand.
 
  Snowboarding Apparel and Accessories. The Company's target market for
"Westbeach" snowboard apparel is young people age 16 to 24 years.
Historically, the target market has been heavily weighted toward males;
however, the changing trend is for a greater proportion of females in that age
group to take up snowboarding and become Westbeach customers. Westbeach
introduced a full line of women's outerwear and casual clothing in 1995.
 
  Street Clothing. Snowboarding retailers often market complementary products,
such as skateboarding equipment and clothing, in the non-snowboarding seasons.
While the 16-24 year olds have been significant buyers of Westbeach's street
clothing, the brands have had increased popularity among other age groups as
well. This trend is believed to be due in part to the products' image, styling
and quality and in part to the fact that as traditional customers have grown
older, the brand appeal has simply spilled over into both younger and older
age groups. To reflect this broader appeal, Westbeach's designs have been
trending toward a more "mainstream" look.

  The Company markets its snowboarding apparel and accessories and street
clothing through the same channels as its snowboards.
 
CUSTOMER AND RETAILER SUPPORT
 
  The Company provides customer support through its field staff and in-house
personnel, with a focus toward enhancing end-user and retailer satisfaction.
The Company's field support team provides technical support to retailers and
riders and works in conjunction with the Company's independent sales
representatives to provide hands-on education and product demonstrations using
the Company's user-friendly "technical manual." The Company's customer service
group facilitates order entry, tracking and delivery, and is responsible for
oversight of the Company's warranty policy. The Company provides a one-year
warranty on all of its products against defects in materials and workmanship.
The Company repairs or replaces a defective product promptly at no cost to the
owner during the warranty period.
 
SUPPLIERS
 
  "Morrow" brand products. Based on its internal estimates and discussions
with suppliers, the Company believes that its current or identified suppliers
can meet its raw materials requirements for the foreseeable future, although
there have been shortages generally in the availability of certain raw
materials used in manufacturing snowboards, including aluminum, fiberglass and
certain plastics. Most of the Company's suppliers are domestically based, with
several suppliers located in the Pacific Northwest. The Company's snowboard
boots are manufactured to its specifications under agreements with independent
footwear manufacturers located in Korea, Taiwan and China. The Company has
developed second sources of supply for all of its significant raw materials.
The Company's accessory products are sourced through a variety of U.S. and
foreign manufacturers. The Company has no long-term contracts with any
suppliers of components for its snowboards, bindings, apparel or accessories.
 
  "Westbeach" brand products. Four manufacturers located in Korea, Republic of
China, and People's Republic of China have been contracted to manufacture the
Company's Westbeach line of snowboard outerwear and certain of its casual
streetwear styles for the 1998/99 season. A small portion of Westbeach apparel
is manufactured in Canada. For goods manufactured in Asia, the independent
contractors are responsible for the purchase of raw materials under the
Company's direction. For goods manufactured in Canada, the Company purchases
fabric and other raw materials and the contractor is contracted for cutting
and sewing only. Based on discussions with the independent contractors and
with
 
                                      10
<PAGE>
 
fabric mills and suppliers of other raw materials, the Company believes that
adequate supplies of fabric and other raw materials are available for the
foreseeable future. The Company has no long-term contracts with either its
independent contractors or its suppliers of fabric and other raw materials.
 
COMPETITION
 
  The snowboard industry is highly competitive, and the Company expects this
competition to increase as market interest in snowboards continues to grow. The
Company's snowboards and apparel compete principally on performance,
brand/product image and price. The Burton Corporation is currently the leader in
the industry, followed by K-2, Ride and Morrow, with several other companies
having smaller but significant market shares, and over 100 other smaller
manufacturers and distributors sharing the remainder of the market. The Company
believes that significant consolidation will occur over the next two years. The
Company competes with a number of established manufacturers and distributors. In
addition, manufacturers and large ski and sporting goods companies could
introduce additional competition by developing new snowboard brands or acquiring
other snowboard companies. Nike, Inc. has indicated it intends to market Nike(R)
brand snowboards and boots and bindings in the 1999/2000 season.
 
  The market for snowboarding apparel and casual clothing is also highly
competitive and the Company expects competition to increase as market interest
in snowboards continues to grow. The Burton Corporation is currently the
leader in the snowboard apparel industry, with several other companies,
including Westbeach, having smaller but significant market shares, and many
smaller manufacturers and distributors sharing the remainder of the market.
Other significant competitors in the apparel area include Sims, AGC (Nike,
Inc.), Bonfire, NFA, Sessions and Special Blend in the high end specialty
markets. The Company believes Westbeach's strongest markets are Canada and
Europe, and that Westbeach is not yet a major competitor in the U.S. market.
Westbeach competes with a number of established manufacturers and
distributors. In addition, other established manufacturers could introduce
additional competition by introducing snowboard apparel under existing brands,
developing new sports apparel brands or acquiring other snowboard apparel
brands. Nike, Inc., which already manufactures snowboard and other clothing
under the AGC brand, has announced its intention to enter the snowboarding
industry on a broader scale, including introducing snowboards, bindings and
boots.
 
INTELLECTUAL PROPERTY
 
  Except for the Company's advanced boot-binding (step-in) system, the Company
does not generally rely on proprietary rights associated with its technology.
The Company believes its product development and marketing capabilities have
been of greater importance to its business than patent or trademark
protection. Due in part to rapid technological changes in snowboarding, the
Company does not believe that its business depends on obtaining and enforcing
broad protection of its intellectual property, although it believes that
obtaining patent and other intellectual property protection may provide it
with benefits. The Company has a patent application pending in the U.S. for an
advanced boot-binding system. In addition, the Company anticipates that it
will seek patent protection for future innovations, where available.
 
  The Company has federal trademark registrations in the U.S. for the "Morrow"
name used alone and in connection with certain designs. The Company has been
assigned trademark rights to the "Morrow" name in Japan. In addition, the
Company has applied for trademark registration in the U.S. and Japan for the
Morrow crescent moon symbol and other marks appearing on certain of its
products. The Company has applied for trademark registration in Japan, Peru,
Chile and the European Economic Community for the "Morrow" name. The Company
also claims common law rights to the foregoing and to various other trademarks
arising out of the use of such marks.
 
  The Company also has trademark protection for the "Westbeach" name in 17
countries, including Japan, the U.S. and Canada, and is seeking protection in
all of the European Economic Community and 8 additional countries for the
"Westbeach" brand for use with snowboarding apparel and, to a lesser degree,
trademark protection for the "3 surfer" and other marks. The Company also
claims common law rights to the foregoing and various other trademarks arising
out of its use of such marks.
 
                                      11
<PAGE>
 
  From time to time, the Company has received, and may in the future receive,
third-party claims asserting intellectual property rights relating to the
Company's products and product features. The Company investigates any such
claims and determines an appropriate response depending on the claim's
strength, its significance to the Company's business, and financial
considerations. The Company has incurred no material liabilities as a result
of any such third-party claims.
 
EMPLOYEES
 
  As of December 27, 1997, the Company had 284 employees, including 167 in
manufacturing; 22 in general and administrative; 47 in sales, marketing and
customer service; 22 in product engineering, research and development; and 26
in Westbeach's retail sales operations. The Company's employees are not
subject to a collective bargaining agreement. The Company considers its
employee relations to be good.
 
  The Company also engages the services of 26 independent sales
representatives who are responsible for selling the Company's products to
retailers in the United States and Canada, 4 independent field representatives
in the United States and 11 professional team riders in Europe, Canada and the
United States, all of whom the Company considers to be independent
contractors. The number of professional riders is under review.
 
ENVIRONMENTAL
 
  Based on a review of its manufacturing practices and activities, the Company
believes that it is currently in substantial compliance with environmental
laws and regulations, and does not believe that it will be required to make
significant capital expenditures in order to comply with such laws and
regulations as they currently exist.
 
                                      12
<PAGE>
 

                                    PART II
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
OVERVIEW
 
  Since its formation, the Company has focused its business activities on
designing, manufacturing and marketing premium snowboards and related products
under the "Morrow" brand name. The Company acquired Westbeach, a merchandiser
of snowboarding apparel and casual clothing, on November 13, 1997. The
Company's consolidated net sales have decreased 36.1% to $20,253,000 for the
year ended December 27, 1997 ("1997 fiscal year") from $31,699,000 in 1996.
Net sales for Westbeach for the period of November 13, 1997 through December
27, 1997 included in consolidated net sales were $1,810,000 at an average
exchange rate of 1.4227 U.S. dollars, which makes up 8.9% of the consolidated
net sales of $20,253,000. Net sales generated by Westbeach for the period
ended January 1, 1997 through November 12, 1997 were $ 7,336,000 and
$9,146,000 for the year ended December 27, 1997, assuming an annual average
exchange rate of 1.384 U.S. dollars. Unless otherwise indicated financial
results and numbers herein include Westbeach sales and financial information
for the period November 13, 1997 to December 27, 1997 for the 1997 fiscal
year.
 
  Due to the seasonal nature of the snowboard industry, a majority of the
Company's sales occur in the last two quarters of the year. In 1997 and 1996,
over 86% (85% without Westbeach sales) and 90% of the Company's net sales
occurred in the last six months of the year, respectively. Gross margins vary
significantly throughout the year depending on product mix, price, production
volumes, fixed and semi-variable cost components, changes in raw materials and
other manufacturing costs. In 1997, close-out sales of 1996/97 product
occurred during the first six months of the year and were at lower margins
than 1997/98 "Morrow" brand products. The Company's production utilization has
a significant impact on gross margins because when production is at lower
levels, fixed and semi-variable manufacturing costs are spread over a smaller
production base. Conversely, as the Company increases production, margins
improve because of the higher production base. The Company's operating and
growth strategies focus on increasing overall sales of all product lines,
further improving the quality of its products and increasing manufacturing
efficiencies. These strategies enable the Company to manufacture at more
consistent levels, thus maintaining higher quality and a more stable work
force, reducing down time and maximizing the use of capital assets.
 
                                      13
<PAGE>
 
  The Company accumulates a significant backlog of sales orders in February
and March of each year as a result of preseason orders placed in connection
with winter sports trade shows. As the Company begins delivery of preseason
orders, backlog sales orders decrease and are usually eliminated by the end of
the year.
 
  The Company has taken certain steps to position itself for future growth,
including focusing on other product lines offered by the Company, such as
apparel, boots and bindings, improving operating efficiencies, maintaining an
efficient management staff with expertise in core areas of the business and
implementing financial and accounting controls and systems.
 
RESULTS OF OPERATIONS
 
  The following table sets forth certain financial data for the periods
indicated as a percentage of net sales.
 
<TABLE>
<CAPTION>
                                                       YEARS ENDED
                                          --------------------------------------
                                          DECEMBER 27, DECEMBER 31, DECEMBER 31,
                                              1997         1996         1995
                                          ------------ ------------ ------------
   <S>                                    <C>          <C>          <C>
   Net sales............................     100.0 %      100.0 %      100.0 %
   Cost of goods sold...................      78.9         65.8         69.8
                                             -----        -----        -----
       Gross profit.....................      21.1         34.2         30.2
   Operating expenses:
     Selling, marketing and customer
      service...........................      23.0         14.5         14.1
     Engineering, research and product
      development.......................       8.2          2.4          3.2
     General and administrative.........      18.7          8.1          6.5
     Loss on write-down of fixed assets.       7.8          --           --
                                             -----        -----        -----
       Total operating expenses.........      57.7         25.0         23.8
                                             -----        -----        -----
   Operating income (loss)..............     (36.6)         9.2          6.4
   Interest expense.....................      (0.4)        (0.5)        (3.5)
   Other income.........................       1.7          2.1          0.1
                                             -----        -----        -----
   Income (loss) before income taxes....     (35.3)        10.8          3.0
   Income tax benefit (expense).........       0.6         (4.0)        (1.0)
                                             -----        -----        -----
   Net income (loss)....................     (34.7)%        6.8%         2.0%
                                             =====        =====        =====
</TABLE>
 
COMPARISON OF THE YEARS ENDED DECEMBER 27, 1997 AND DECEMBER 31, 1996
 
  Net Sales. Net sales for 1997 decreased 36.1% to $20,253,000, ($18,443,000
or 41.8% if Westbeach sales are excluded) from $31,699,000 for 1996. The
decrease in sales was primarily due to the general oversupply of snowboards in
the market in 1996 and Company efforts to combat "gray market" sales into
conventional distribution channels. "Gray market" sales are sales of products 
that have been diverted from the normal distribution channels, usually 
involving diversion of product from one geographic area to another.  Such sales
on a short-term basis may actually increase product sales, but because they 
disrupt marketing of the normal distribution channel, the normal distribution 
channel may order fewer boards due to uncertainty regarding orders.  Gray market
sales are difficult to police in advance, as the products are generally not 
discovered until they reach the retail stores. The Company's efforts to control
such sales were adding serial numbers on its snowboards to identify the
diverters, and in the fiscal year ended December 27, 1997, eliminating, reducing
or imposing controls on sales to apparently legitimate distribution sources
shown to have engaged in "gray market" activity in the prior year. The reduced
sales resulted from the Company refusing to take orders from known "gray
marketers" and lower worldwide sales, including gray market sales, due to the
oversupply of snowboard products. The "gray market" sales caused a decrease in
pre-season sales orders for 1997, as well as reorders during 1997. The sale of
snowboards in 1997 decreased 39.6% to $12,833,000 from $21,246,000 in 1996. 

  The sale of bindings decreased 55.8% to $3,683,000 in 1997 from $8,337,000 for
1996. The sale of boots decreased 12.8% to $1,248,000 for 1997 compared to
$1,432,000 in 1996. As a percentage of net sales, snowboards represented 63.3%
in 1997 (69.6% if Westbeach sales are excluded) compared to 67% in 1996. In
1997, "Morrow" brand snowboards represented 59.6%, (94.0% of total snowboard
sales), (65.4% if Westbeach sales are excluded) of net sales compared to 65.2%
(97.2% of total snowboard sales) in 1996. OEM snowboard sales represented 3.7%
of net sales in 1997 (4.0% if Westbeach sales are excluded) compared to 1.8% in
1996. As a percentage of net sales, binding sales decreased to 18.2% in 1997
(20.0% if Westbeach sales are excluded) compared to 26.3% for 1996 partially due
to the lack of a step-in binding. Boot sales increased to 6.2% of net sales in
1997 (6.8% if Westbeach sales are excluded) from 4.5% in 1996. Apparel sales
increased to 6.8% of net sales in 1997 from 2.2% in 1996 largely due to
Westbeach sales which were 3.3% of net sales in 1997. Retail sales constituted
5.5% of total sales as a result of the Westbeach acquisition in November 1997.
Except for discounting of excess carryover inventory in the first fiscal quarter
and leftover inventory in the fourth quarter, changes in the net sales are
principally attributable to changes in the number of units of various products
sold.
 
                                      14
<PAGE>
 
  Gross Profit. Gross profit for 1997 decreased 60.6% to $4,282,000 from
$10,856,000 for 1996 as a result of the overall decrease in sales and
increased manufacturing overhead costs. Total gross margin for 1997 decreased
to 21.1% from 34.2% for 1996.
 
  Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for 1997 remained fairly constant at $4,666,000 from
$4,592,000 for 1996, representing 23.0% and 14.5% of net sales, respectively.
The increase in the percentage of net sales is due to the decrease in net
sales and the fact that expenses remained constant during 1997. Although these
types of expenditures remained constant, the Company increased it's efforts at
market exposure by increases in team rider travel, participating in the
Montreal trade show for the first time and providing for improvements to the
Company show booths. In addition, the Company significantly increased its
internal advertising activities in an effort to eliminate agency fees and
control long term costs.
 
  Engineering, Research and Product Development. Engineering, research and
product development expenses for 1997 increased 116.1% to $1,662,000 from
$769,000 for 1996, representing 8.2% and 2.4% of net sales, respectively.
Increased product development expense in 1997 also reflected significantly
increased staff and consulting fees and significant efforts in development of
the Company's proprietary step-in binding system.
 
  General and Administrative. General and administrative expenses for 1997
increased 46.8% to $3,789,000 from $2,581,000 for 1996, representing 18.7% and
8.1% of net sales, respectively. This increase was primarily due to the
increase in bad debt expense to $960,000 in 1997 compared to $110,000 for
1996. The increase in bad debt expense is a reflection of the soft snowboard
market in 1997 and its effect on Morrow customers. All other expense
categories remained relatively consistent on a dollar year-to-date basis.
 
  Loss on Write-down of Fixed Assets. As mentioned above, in 1997 the Company
experienced a significant reduction in net sales due to soft market conditions
and oversupply of snowboards which, among other factors, resulted in
significant loss. Accordingly, the Company evaluated its equipment for
snowboards, boots and bindings in light of current and future usage and
expected market demand and provided a write-down in the 1997 statement of
operations of $1,568,000 to reflect the equipment at net realizable value.
 
  Interest Expense. Interest expense decreased 43.1% to $87,000 for 1997 from
$153,000 for 1996. This decrease was primarily a result of using cash raised
in the December 1995 initial public offering, which significantly reduced the
need for outside borrowing in 1997.
 
  Other Income. Other income decreased to $341,000 for 1997 from $666,000 in
1996, largely as a result of the decrease in interest income. The Company sold
all short term investments throughout the year ended December 27, 1997.
 
  Income Tax Benefit (Expense). The income tax benefit for 1997 was $129,000
compared to an expense of $1,280,000 for 1996. The effective income tax rates
were 1.8% and 37.4% for 1997 and 1996, respectively. The low effective tax
rate for 1997 is due to the fact that the Company provided a valuation
allowance on its net deferred tax assets as of December 27, 1997.
 
  Net (Loss) Income. Net loss for 1997 was $7,020,000 compared to net income
of $2,147,000 for 1996.
 
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
 
  Net Sales. Net sales for 1996 increased 28.9% to $31,699,000 from
$24,586,000 for 1995. This increase was due to increased sales to domestic and
international customers of "Morrow" brand
 
                                      15
<PAGE>
 
snowboards, bindings and boots, primarily during the last six months of 1996.
The sale of snowboards in 1996 increased 33.9% to $21,246,000 from $15,868,000
in 1995. The sale of bindings increased 35.6% to $8,337,000 in 1996 from
$6,148,000 for 1995. The sale of boots decreased 17.0% to $1,432,000 for 1996
compared to $1,725,000 in 1995. As a percentage of net sales, snowboards
represented 67.0% in 1996 compared to 64.5% in 1995. In 1996, "Morrow" brand
snowboards represented 65.2% (97.2% of total snowboard sales) of net sales
compared to 50.3% (77.9% of total snowboard sales) in 1995. OEM snowboard
sales represented 1.8% of net sales in 1996 compared to 14.2% in 1995. As a
percentage of net sales, binding sales remained relatively constant at 26.3%
and 25.0% for 1996 and 1995, respectively. Boot sales decreased to 4.5% of net
sales in 1996 from 7.0% in 1995.
 
  Gross Profit. Gross profit for 1996 increased 46.3% to $10,856,000 from
$7,421,000 for 1995 as a result of the overall increase in sales and increased
manufacturing efficiencies. Total gross margin for 1996 increased to 34.2%
from 30.2% for 1995. The gross margin on boards and bindings manufactured for
the 1996 selling season increased as a result of increases in the level of
production and manufacturing efficiencies throughout the year and an increase
in the sale of higher margin "Morrow" brand snowboards and bindings. During
1996, management focused on increasing the sale of "Morrow" brand snowboards
and bindings and decreasing the sale of lower margin OEM snowboards and
bindings.
 
  Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for 1996 increased 32.8% to $4,592,000 from $3,459,000 for
1995, representing 14.5% and 14.1% of net sales, respectively. The Company's
growth required increased expenses associated with additional staff and
increased promotion and marketing activities, consulting expenses, trade show
expenses and sales commissions. As a percentage of net sales, the more
significant changes were consulting expenses increasing 0.4%, commissions
increasing 0.3% and promotional and marketing expenses decreasing 0.4%. All
other expense categories remained relatively consistent as a percentage of net
sales on a period-to-period basis.
 
  Engineering, Research and Product Development. Engineering, research and
product development expenses for 1996 decreased 2.3% to $769,000 from $787,000
for 1995, representing 2.4% and 3.2% of net sales, respectively. This decrease
was primarily due to a reduction in staff and employee-related expenses. As a
percentage of net sales, staff and employee-related expenses decreased 0.7%
and research and development expenses decreased 0.3%. All other expense
categories remained relatively consistent as a percentage of net sales on a
year-to-year basis.
 
  General and Administrative. General and administrative expenses for 1996
increased 61.8% to $2,581,000 from $1,595,000 for 1995, representing 8.1% and
6.5% of net sales, respectively. This increase was primarily due to additional
staff and employee-related expenses and increased professional fees, partially
due to the increased cost of operating as a public company in 1996, compared
to 1995. As a percentage of net sales, professional services increased 0.9%.
All other expense categories remained relatively consistent as a percentage of
net sales on a year-to-year basis.
 
  Interest Expense. Interest expense decreased 82.3% to $153,000 for 1996 from
$865,000 for 1995. This decrease was primarily due to the Company's purchase
of its manufacturing and administrative facility in March 1996. Prior to the
purchase, the facility was leased by the Company. As a result of the cash
raised in the December 1995 initial public offering, the Company did not have
any other significant borrowings outstanding in 1996.
 
  Other Income. Other income increased to $666,000 for 1996 from $34,000 in
1995, largely as a result of interest income on the cash raised in the
Company's initial public offering in December 1995.
 
  Income Tax Expense. The income tax expense for 1996 was $1,280,000 compared
to $264,000 for 1995. The effective income tax rates were 37.4% and 35.2% for
1996 and 1995, respectively.
 
  Net Income. Net income for 1996 was $2,147,000 compared to $485,000 for
1995.
 
                                      16
<PAGE>
 
YEAR 2000
 
  During 1997, the Company implemented new Year 2000 compliant financial
systems to replace its older financial systems as part of its normal course of
business. The Company is in the process of assessing any additional Year 2000
compliance issues, but does not expect the potential effect on operations to
be material. However, there can be no guarantee that the systems of other
companies on which the Company relies will be converted on a timely basis and
would not have an adverse effect on the Company's operations.
 
MARKET RISK
 
  The Company accumulates foreign currency in payment of accounts (principally
Canadian dollars) which it then uses to pay its foreign vendors or converts to
U.S. dollars, exposing the Company to fluctuations in currency exchange rates.
The Company currently holds foreign currencies which are translated into
dollars using the year-end exchange rate, for a total of $867,000. The
potential loss in fair value resulting from an adverse change in quoted
foreign currency change rates of 10% amounts to $105,000. Actual results may
differ. The Company does not hold other market risk sensitive instruments and
therefore does not expect to be affected by any adverse changes in commodity
prices, marketable equity security prices, or interest rates.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company requires capital for the development of its technology and
products, procurement of raw materials and other supplies, and capital
equipment for its manufacturing facility. At December 27, 1997, the Company
had $855,000 in cash and revolving loans of $1,923,000, compared to $8,762,000
in cash and short term investments and no revolving loans outstanding at
December 31, 1996.
 
  Net cash used in operating activities for 1997 was $211,000, resulting
primarily from net loss of $7,020,000, with add backs for depreciation and
amortization of $1,593,000, loss on write-off of fixed assets of $1,568,000,
decreases in accounts receivable of $5,155,000, decreases in inventories of
$1,732,000, offset by decreases in accounts payable and accrued liabilities of
$1,894,000. The decrease in accounts receivable is attributable to the
decrease in sales for the year.
 
  Net cash used in investing activities for 1997 was $1,829,000, of which
$2,975,000 was used for the acquisition of property and equipment and
$2,554,000 was used for the purchase of the securities of Westbeach, off-set
by $3,700,000 from the proceeds of sales of short-term investments.
 
  Net cash used in financing activities for 1997 was $2,167,000, consisting of
$1,923,000 from net borrowings under the revolving credit facility, less
$596,000 from the repurchase of common stock and $3,546,000 from payments on
short- and long-term borrowings, primarily those assumed in the Westbeach
acquisition.
 
  The Company has a revolving credit facility with LaSalle Business Credit,
Inc. (the "Bank"). The Company's line of credit under the revolving credit
facility is up to $7,000,000 for the period between October 15 and February
28, and up to $14,000,000 for the period between March 1 and October 14. As a
sub-limit to the revolving credit facility, the Company has a letter of credit
facility with the Bank for an amount up to $5,000,000. The line of credit
available under the revolving credit facility from time to time is reduced by
the amount then outstanding under this sub-limit.
 
  The credit facility bears interest at the Bank's Prime Rate plus .25
percent. The Company has the option under the credit facility to request a
fixed interest rate for specified periods equal to the Bank's LIBOR Rate plus
2.75 percent. Upon the Company's achievement of certain profitability
requirements, the interest rate would be reduced to the Bank's Prime Rate, or
its LIBOR Rate plus 2.5 percent.
 
  The Company is required to pay the Bank a monthly fee equal to .25 percent
per annum on the daily average unused amount of the revolving credit facility.
The Company is also required to pay the Bank a
 
                                      17
<PAGE>
 
monthly fee equal to 1.5 percent per annum on the aggregate undrawn face
amount of all outstanding letters of credit for the Company's account.
 
  The credit facility is available through November 10, 2000, with one-year
renewal periods thereafter. At December 27, 1997, the outstanding principal
balance under the facility was $1,923,000.
 
  The revolving facility is secured by substantially all of the Company's
assets. The revolving credit facility contains various covenants that require
the Company, among other things, to meet certain objectives with respect to
net worth, capital expenditures, interest coverage and debt service coverage.
 
  The Company's net worth is currently below that required in the revolving
credit facility, an event of default under the revolving credit facility. The
Bank, to preserve its rights, has noted the default, and agreed to forbear
from exercising its rights and remedies under the revolving credit facility
until April 10, 1998 to give the Company time to address the Bank's concerns.
During the forbearance period, the Bank has invoked the Default Rate of
Interest (two percent (2%) above the normal rate), suspended the LIBOR
conversion rate, and limited advances under certain lines to $-0- on raw
materials, $7,000,000 on the revolver amount and $4,000,000 on inventory
advances.
 
  To address the Bank's concerns, as well as its own projected working capital
needs, the Company may need to raise additional capital. If the Company were
unsuccessful in addressing the Bank's concerns during the forbearance period
or in raising additional working capital, the Company's operations and ability
to realize on its business plan could be adversely affected.
 
  The Company's debt structure is comprised of the following:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 27,
                                                                        1997
                                                                    ------------
     <S>                                                            <C>
     Short-term debt:
       Borrowings under revolving line of credit...................  $1,923,000
       Current portion of capital lease obligations................     139,000
     Long-term debt:
       Capital lease obligation, net of current portion............     254,000
</TABLE>
 
  Assuming certain minimum pre-book orders for the 1998/99 season, the Company
believes that it has adequate resources at its disposal to raise additional
working capital either under the existing revolving credit facility, or by
selling or mortgaging the building where its snowboards are manufactured, or
issuing new subordinated debt or preferred securities. In addition, the
Company believes it will be able to trim its operating costs significantly in
1998 such that the amount of additional working capital required will be
reduced. The Company expects to trim operating costs in 1998 through two
sources: (1) the realization of efficiencies from consolidating the Company and
Westbeach Snowboard Canada Ltd. and (2) reviewing and eliminating discretionary
costs where possible, a common business practice. The expected efficiencies from
the Westbeach merger were disclosed in the Form 8-K/A filed January 20, 1998.
However, there can be no assurance that the Company will be able to raise
additional capital on terms acceptable to the Company or that it will be able to
do so on a timely basis.
 
FACTORS THAT MAY AFFECT FUTURE RESULTS
 
  This report contains forward-looking statements which are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially from the forward-looking
statements. The Company wishes to caution readers that important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause actual consolidated results in the
future to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These factors include,
without limitation, cure or waiver of the existing bank line default, adequate
sales volume, new initiatives by competitors, price pressures, cancellation of
preseason orders, inventory risks due to shifts in market demand, raw
materials costs, the ability to manufacture product at planned costs, weather
in primary winter resort areas of the world, the Company's ability to obtain
 
                                      18
<PAGE>
 
adequate financing, address lenders' concerns and achieve sufficient sales
levels and the risk factors listed from time to time in the Company's SEC
reports, including, but not limited to, this report.
 
  Management is unaware of any other trends or conditions that could have a
material adverse effect on the Company's consolidated financial position,
future results of operations or liquidity. However, investors should also be
aware of factors which could have a negative impact on prospects and the
consistency of progress. These include political, economic or other factors
such as currency exchange rates, inflation rates, recessionary or expansive
trends, taxes and regulations and laws affecting the worldwide business in
each of the Company's markets; competitive product, advertising, promotional
and pricing activity; dependence on the rate of development and degree of
acceptance of new product introductions in the marketplace; and the difficulty
of forecasting sales at certain times in certain markets.
 
                                      19
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors of
Morrow Snowboards, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Morrow
Snowboards, Inc. (an Oregon corporation) and subsidiaries as of December 27,
1997 and December 31, 1996 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 27, 1997. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Morrow Snowboards, Inc.
and subsidiaries as of December 27, 1997 and December 31, 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 27, 1997 in conformity with generally accepted
accounting principles.
 
  The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant losses in 1997 and
is in default of the minimum net worth covenant under the Company's line of
credit agreement. The lender has agreed to forbear its rights and remedies
under the line of credit agreement until April 10, 1998. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments relating to the
recoverability and classifications of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable
to continue as a going concern.
 
  Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule of Valuation
and Qualifying Accounts is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our 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
 
Portland, Oregon
March 17, 1998
 
                                      20
<PAGE>
 
                    MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                      DECEMBER 27, DECEMBER 31,
                                                          1997         1996
                                                      ------------ ------------
<S>                                                   <C>          <C>
                       ASSETS
                       ------
Current Assets:
  Cash and cash equivalents..........................   $   855      $ 5,062
  Short-term investments.............................       --         3,700
  Accounts receivable, less allowance for
   uncollectible accounts of $659 and $134, at
   12/27/97 and 12/31/96 respectively................     6,058        8,736
  Inventories........................................     5,926        4,533
  Prepaid expenses...................................       628          536
  Refundable income taxes............................       285          --
  Deferred income taxes..............................       --           450
  Other current assets...............................       159          --
                                                        -------      -------
    Total Current Assets.............................    13,911       23,017
Property, plant and equipment, net...................     9,547        9,183
Other assets
  Goodwill, net......................................     4,061          --
  Other assets, net..................................       134           43
                                                        -------      -------
    Total Assets.....................................   $27,653      $32,243
                                                        =======      =======
        LIABILITIES AND SHAREHOLDERS' EQUITY
        ------------------------------------
Current Liabilities:
  Line of credit.....................................   $ 1,923      $   --
  Accounts payable...................................     1,648        1,552
  Accrued liabilities................................     1,601        2,009
  Current portion of capital lease obligations.......       139          228
                                                        -------      -------
    Total Current Liabilities........................     5,311        3,789
Long-Term Liabilities:
  Capital lease obligations, net of current portion..       254          258
  Deferred income taxes..............................        30          304
                                                        -------      -------
    Total Long-Term Liabilities......................       284          562
Commitments and contingencies (Note 9)
Shareholders' Equity
  Preferred stock, no par, 10,000,000 shares
   authorized, no shares issued or outstanding.......       --           --
  Common stock, no par, 20,000,000 shares authorized,
   6,176,556 and 5,667,749 shares issued and
   outstanding.......................................    27,116       25,980
  Notes receivable for common stock..................       (94)         (94)
  Retained earnings (accumulated deficit)............    (5,014)       2,006
  Cumulative translation adjustment..................        50          --
                                                        -------      -------
    Total Shareholders' Equity.......................    22,058       27,892
                                                        -------      -------
    Total Liabilities and Shareholders' Equity.......   $27,653      $32,243
                                                        =======      =======
</TABLE>
 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 
                                       21
<PAGE>
 
                    MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED
                                            ---------------------------------
                                                            DECEMBER 31,
                                            DECEMBER 27, --------------------
                                                1997       1996       1995
                                            ------------ ---------  ---------
<S>                                         <C>          <C>        <C>
Net Sales..................................  $  20,253   $  31,699  $  24,586
Cost of Goods Sold.........................     15,971      20,843     17,165
                                             ---------   ---------  ---------
  Gross Profit.............................      4,282      10,856      7,421
Operating Expenses:
  Selling, marketing and customer service..      4,666       4,592      3,459
  Engineering, research and development....      1,662         769        787
  General and administrative...............      3,789       2,581      1,595
  Loss on write-down of fixed assets.......      1,568         --         --
                                             ---------   ---------  ---------
    Total Operating Expenses...............     11,685       7,942      5,841
                                             ---------   ---------  ---------
Operating Income (Loss)....................     (7,403)      2,914      1,580
Other Income (Expense):
  Interest expense (includes $0, $1 and $42
   for related parties)....................        (87)       (153)      (865)
  Other income.............................        341         666         34
                                             ---------   ---------  ---------
    Total Other Income (Expense)...........        254         513       (831)
                                             ---------   ---------  ---------
Income (Loss) Before Income Tax............     (7,149)      3,427        749
Income Tax Benefit (Expense)...............        129      (1,280)      (264)
                                             ---------   ---------  ---------
Net Income (Loss)..........................  $  (7,020)  $   2,147  $     485
                                             =========   =========  =========
Net Income (Loss) Per Share:
  Basic....................................  $   (1.24)  $    0.38  $    0.15
                                             =========   =========  =========
  Diluted..................................  $   (1.24)  $    0.36  $    0.14
                                             =========   =========  =========
Weighted Average Number of Shares Used in
 Computing Per Share Amounts:
  Basic....................................  5,671,634   5,684,053  3,130,636
                                             =========   =========  =========
  Diluted..................................  5,671,634   5,929,674  3,822,569
                                             =========   =========  =========
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       22
<PAGE>
 
                    MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                            NOTES      RETAINED
                            COMMON STOCK                  RECEIVABLE   EARNINGS   CUMULATIVE
                          ------------------   WARRANTS   FOR COMMON (ACCUMULATED TRANSLATION
                           SHARES    AMOUNT   OUTSTANDING   STOCK      DEFICIT)   ADJUSTMENT   TOTAL
                          ---------  -------  ----------- ---------- ------------ ----------- -------
<S>                       <C>        <C>      <C>         <C>        <C>          <C>         <C>
Balance, December 31,
 1994...................  2,901,103  $ 4,545     $ 56       $ --       $  (626)      $--      $ 3,975
 Sale of common stock
  for cash..............  1,919,500   18,517      --          --           --         --       18,517
 Debt conversion........    414,398    1,521      --          --           --         --        1,521
 Common stock options
  exercised.............    208,103      268      --          --           --         --          268
 Notes issued for stock
  options exercised.....        --       --       --         (110)         --         --         (110)
 Cash payments received
  on notes issued for
  stock options
  exercised.............        --       --       --           16          --         --           16
 Stock option
  compensation expense..        --        23      --          --           --         --           23
 Warrant activity.......     57,344      165      (56)        --           --         --          109
 Tax benefit for
  exercise of non-
  qualified stock
  options...............        --       346      --          --           --         --          346
 Net income.............        --       --       --          --           485        --          485
                          ---------  -------     ----       -----      -------       ----     -------
Balance, December 31,
 1995...................  5,500,448   25,385      --          (94)        (141)       --       25,150
 Common stock options
  exercised.............    114,953      318      --          --           --         --          318
 Repurchase of common
  stock.................    (92,500)    (657)     --          --           --         --         (657)
 Warrant activity.......    144,848      211      --          --           --         --          211
 Tax benefit for
  exercise of non-
  qualified stock
  options...............        --       723      --          --           --         --          723
 Net income.............        --       --       --          --         2,147        --        2,147
                          ---------  -------     ----       -----      -------       ----     -------
Balance, December 31,
 1996...................  5,667,749   25,980      --          (94)       2,006        --       27,892
 Stock issued for
  acquisition...........    584,240    1,680      --          --           --         --        1,680
 Common stock options
  exercised.............     12,250       40      --          --           --         --           40
 Repurchase of common
  stock.................    (92,583)    (596)     --          --           --         --         (596)
 Warrant activity.......      4,900       12      --          --           --         --           12
 Net loss...............        --       --       --          --        (7,020)       --       (7,020)
 Translation adjustment.        --       --       --          --           --          50          50
                          ---------  -------     ----       -----      -------       ----     -------
Balance, December 27,
 1997...................  6,176,556  $27,116     $--        $ (94)     $(5,014)      $ 50     $22,058
                          =========  =======     ====       =====      =======       ====     =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       23
<PAGE>
 
                    MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                                     -------------------------
                                                      DEC.       DEC. 31,
                                                       27,    ----------------
                                                      1997     1996     1995
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Cash Flows From Operating Activities:
  Net income (loss)................................. $(7,020) $ 2,147  $   485
  Adjustments to reconcile net income (loss) to net
   cash used in operating activities:
    Depreciation and amortization...................   1,593    1,205      892
    Loss on write-down of fixed assets..............   1,568      --       --
    Deferred income taxes...........................     146       67      (82)
    Effect on income tax from excercise of stock
     options........................................     --       723      346
    Other...........................................      28       26       27
    Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable....   5,155   (2,850)  (2,928)
      (Increase) decrease in inventories............     732   (1,786)  (1,212)
      (Increase) decrease in prepaid expenses.......      18     (284)     (74)
      Increase in refundable income taxes...........    (285)     --       --
      Increase in other assets......................    (252)     --        (7)
      Decrease in accounts payable..................  (1,486)    (305)    (179)
      Increase (decrease) in accrued liabilities....    (408)   1,045      111
                                                     -------  -------  -------
    Net Cash Used In Operating Activities...........    (211)     (12)  (2,621)
Cash Flows From Investing Activities:
  Proceeds from sale of short term investments......   3,700      --       --
  Purchase of short term investments................     --    (3,700)     --
  Acquisition of Westbeach, net of cash acquired....  (2,554)     --       --
  Acquisition of property and equipment.............  (2,975)  (3,481)  (1,228)
  Proceeds from sale of equipment...................     --         3       40
                                                     -------  -------  -------
    Net Cash Used In Investing Activities...........  (1,829)  (7,178)  (1,188)
Cash Flows From Financing Activities:
  Proceeds from issuance of common stock............      52      529   18,759
  Payments for repurchase of common stock...........    (596)    (657)     --
  Proceeds from subordinated debentures.............     --       --     1,496
  Proceeds from issuance of long-term liabilities...     --       --       800
  Proceeds from payment of note receivable for
   stock............................................     --       --        16
  Principal payments on long-term liabilities.......    (275)  (2,646)  (1,536)
  Principal payments on debt assumed from Westbeach.  (3,271)     --       --
  Line of credit borrowings (payments), net.........   1,923      --    (1,209)
                                                     -------  -------  -------
    Net Cash Provided By (Used In) Financing
     Activities.....................................  (2,167)  (2,774)  18,326
                                                     -------  -------  -------
Net Increase (Decrease) In Cash and Cash
 Equivalents........................................  (4,207)  (9,964)  14,517
Cash and Cash Equivalents at Beginning Of Year......   5,062   15,026      509
                                                     -------  -------  -------
Cash and Cash Equivalents at End Of Year............ $   855  $ 5,062  $15,026
                                                     =======  =======  =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       24
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND CURRENT EVENTS
 
 Description of Business
 
  Morrow Snowboards, Inc. and subsidiaries (the "Company"), headquartered in
Salem, Oregon, was organized in October 1989 to design, manufacture and market
snowboards, boots, bindings, apparel and accessories to retail outlets in the
United States and to international distributors in several foreign countries.
On November 13, 1997, the Company acquired all of the outstanding securities
of Westbeach Snowboard Canada Ltd., a manufacturer, wholesaler and retailer of
snowboarding apparel and casual clothing. Westbeach has three subsidiaries, an
Austrian organization whose principal activity consists of a European sales
warehousing operation, a United Kingdom organization consisting of European
sales and a Washington State corporation whose principal activity is U.S.
wholesale and retail sales.
 
  The consolidated financial statements include the wholly-owned subsidiaries,
Morrow Westbeach Canada ULC, a Canadian corporation and Morrow International,
Inc., a Guam foreign sales corporation. All significant intercompany accounts
and transactions have been eliminated.
 
  The Company operates in a relatively new and rapidly growing segment of the
sporting goods industry which is highly seasonal. Further, the Company has
undergone significant expansion since its inception in 1989, related to its
manufacturing, marketing and sales activities. These and other factors present
certain risks to the future operations of the Company.
 
 Current Events
 
  In 1997 the Company experienced a significant reduction in net sales due to
soft market conditions and oversupply of snowboards which, among other
factors, resulted in a significant loss. In addition, the Company evaluated
its equipment used in the manufacture of snowboards, boots and bindings in
light of current and future usage and expected market demand and provided a
write-down in the 1997 statement of operations of $1,568,000 to reflect the
equipment at net realizable value.
 
  As a result of the 1997 loss, the Company is in default of the minimum net
worth covenant under the Company's line of credit agreement. The lender has
declared the loan in default but has agreed to forbear its rights and remedies
under the line of credit agreement until April 10, 1998. The Company's
operations are very seasonal with the majority of the revenue recorded in the
third and fourth quarters. Accordingly, the Company has a liquidity problem.
The Company is continuing to work with its lender to address the lender's
concerns, including the adequacy of the Company's working capital during the
forbearance period granted by the lender regarding such default. After
reviewing its working capital needs, the Company expects to need additional
working capital for 1998. The Company is working on limiting the amount of
working capital needed and pursuing alternatives to raise that capital without
issuing additional equity.
 
  The above matters raise a substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
 
2. WESTBEACH ACQUISITION
 
  On November 13, 1997, the Company acquired all of the outstanding securities
of Westbeach Snowboard Canada Ltd. (Westbeach) in exchange for 584,240 newly-
issued shares of the Company's common stock valued at $1,680,000, cash of
approximately $2,251,000 and fees and expenses of $425,000. Subsequent to the
acquisition, Westbeach was merged into Morrow Westbeach Canada ULC, a wholly
 
                                      25
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
owned subsidiary of the Company. The transaction has been accounted for as a
purchase with the excess of the purchase price over the fair value (which
approximated historical carrying value) of the net assets acquired allocated
to goodwill. The operations of Westbeach have been included in the
accompanying financial statements since the date of acquisition.
 
  Summarized unaudited pro forma results of operations, assuming the Westbeach
acquisition took place on January 1 of each year, are as follows:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                       -------------------------
                                                       DECEMBER 27, DECEMBER 31,
                                                           1997         1996
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Net Sales..........................................   $27,890      $40,600
   Net income (loss)..................................    (7,703)       1,941
   Earnings (loss) per share
     Basic............................................     (1.27)         .31
     Diluted..........................................     (1.27)         .30
</TABLE>
 
3. SIGNIFICANT ACCOUNTING POLICIES
 
 Fiscal Year
 
  Effective January 1, 1997, the Company changed its year end from a calendar
year ended December 31st to a 52 or 53 week fiscal year ending on the Saturday
nearest December 31st. Accordingly, the 1997 fiscal year ended on December
27th, whereas the prior year fiscal year ended on December 31st.
 
 Cash and Cash Equivalents
 
  Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid investments purchased with a maturity of three months or less.
 
 Financial Instruments
 
  A financial instrument is cash or a contract that imposes or conveys, a
contractual obligation, or right, to deliver or receive cash or another
financial instrument. The fair value of financial instruments approximated
their carrying value as of December 27, 1997.
 
 Inventories
 
  Inventories are stated at the lower of cost or market using standard costs
which approximate the first-in, first-out (FIFO) method. Costs for inventory
valuation include labor, materials and manufacturing overhead. Retail
inventories are stated at average cost.
 
 Depreciation and Amortization
 
  Property, plant and equipment are carried at cost. Depreciation of property,
plant and equipment is provided using the straight-line method over the
estimated useful lives of the assets, which are 10 to 35 years for buildings and
improvements, and 3 to 12 years for equipment, fixtures and other. Amortization
of leasehold improvements and equipment under capital lease is provided using
the straight-line method over the expected useful lives of the assets or the
initial term of the lease (including periods related to renewal options which
are expected to be exercised), whichever is shorter. Amortization is included in
depreciation expense.
 
                                      26
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Goodwill and Other Long Lived Assets
 
  Goodwill resulting from the Westbeach acquisition is being amortized over 15
years using the straight-line method and is net of amortization of $34,000 at
December 27, 1997. Goodwill and other long-lived assets are periodically
evaluated when facts and circumstances indicate that the value of such assets
may be impaired. Evaluations are based on undiscounted projected earnings. If
the valuation indicates that undiscounted earnings are insufficient to recover
the recorded assets, then the projected earnings are discounted to determine
the revised carrying value and a write-down for the difference is recorded.
 
 Deferred Loan Costs
 
  Deferred loan costs included in other assets are amortized over the life of
the related debt on a straight-line basis, which does not differ materially
from the effective rate method.
 
 Warranty Costs
 
  The Company offers a one-year warranty on its products. The Company provides
for anticipated warranty expense related to products sold.
 
 Advertising and Promotion Costs
 
  Advertising and promotion costs are expensed as incurred and included in
selling, marketing and customer service expenses. Advertising and promotion
expenses totaled $1,440,000, $1,284,000, and $1,067,000, in 1997, 1996 and
1995 respectively.
 
 Revenue Recognition
 
  The Company recognizes revenue from the sale of its products when the
products are shipped to customers.
 
 Income Taxes
 
  The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS 109 uses the liability method so that deferred taxes are
determined based on the estimated future tax effects of differences between
the financial statement and tax bases of assets and liabilities given the
provisions of enacted tax laws and tax rates. Deferred income tax expenses or
credits are based on the changes in the financial statement bases versus the
tax bases in the Company's assets or liabilities from period to period.
 
 Stock-Based Compensation Plans
 
  The Company accounts for its stock-based plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In
1996, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123).
 
 Product Development Costs
 
  Expenditures associated with the development of new products and
improvements to existing products are expensed as incurred.
 
                                      27
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Net Income Per Share
 
  Effective December 27, 1997, the Company adopted SFAS 128, "Earnings Per
Share". SFAS 128 prescribes new calculations for Basic and Diluted Earning Per
Share (EPS), which replaces the former calculations for Primary and Fully
Diluted EPS. Basic EPS is computed by dividing net income (loss) by the
weighted average shares outstanding; no dilution for any potentially dilutive
securities is included. Diluted EPS is calculated differently than the Fully
Diluted EPS calculation under the old rules. When applying the treasury stock
method for Diluted EPS to compute dilution for options, SFAS 128 requires use
of the average share price for the period, rather than the greater of the
average share price or end-of-period share price. Prior period EPS data has
been restated. EPS is computed as follows:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED
                                             ----------------------------------
                                                              DECEMBER 31,
                                             DECEMBER 27, ---------------------
                                                 1997        1996       1995
                                             ------------ ---------- ----------
<S>                                          <C>          <C>        <C>
Earnings:
Net income (loss) for Basic EPS.............  $  (7,020)  $    2,147 $      485
Add interest on convertible debentures......        --           --          59
                                              ---------   ---------- ----------
Net income (loss) for Diluted EPS...........  $  (7,020)  $    2,147 $      544
                                              =========   ========== ==========
Shares:
Weighted average shares outstanding for
 Basic EPS..................................  5,671,634    5,684,053  3,130,636
Stock option and convertible debenture
 dilution(1)................................        --       245,621    691,933
                                              ---------   ---------- ----------
Weighted average shares for Diluted EPS.....  5,671,634    5,929,674  3,822,569
                                              =========   ========== ==========
  Basic EPS.................................  $   (1.24)  $      .38 $      .15
                                              =========   ========== ==========
  Diluted EPS...............................  $   (1.24)  $      .36 $      .14
                                              =========   ========== ==========
</TABLE>
--------
(1) The effect of potential common securities are excluded from the dilutive
    calculation in 1997 as their effect would be antidilutive.
 
 Foreign Currency Translation
 
  The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars using exchange rates at the balance sheet date
for assets and liabilities, and average exchange rates for the period for
revenues and expenses. Adjustments resulting from translating foreign
functional currency financial statements into U.S. dollars are included in the
Cumulative Translations Adjustment in the Consolidated Statements of
Shareholders' Equity.
 
 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 and
disclosure of contingent 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.
 
                                      28
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Short-Term Investments
 
  Short-term investments consist of certain tax exempt securities, which are
classified as trading securities under the provisions of Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities". The short-term investments are stated on the
balance sheet at cost, which approximates fair market value. There were no
unrealized holding gains or losses at December 31, 1996.
 
4. INVENTORIES
 
  Inventories consisted of the following:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 27, DECEMBER 31,
                                                           1997         1996
                                                       ------------ ------------
                                                            (IN THOUSANDS)
   <S>                                                 <C>          <C>
   Finished goods.....................................   $ 2,836      $ 2,115
   Retail goods.......................................       818          --
   Work-in-process....................................       413          197
   Raw materials......................................     2,394        2,357
                                                         -------      -------
                                                           6,461        4,669
   Less reserve for obsolete inventory................      (535)        (136)
                                                         -------      -------
     Total inventories, net...........................   $ 5,926      $ 4,533
                                                         =======      =======
 
5.  PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment consisted of the following:
 
<CAPTION>
                                                       DECEMBER 27, DECEMBER 31,
                                                           1997         1996
                                                       ------------ ------------
                                                            (IN THOUSANDS)
   <S>                                                 <C>          <C>
   Land...............................................   $   500      $   500
   Building and improvements..........................     3,060        2,480
   Equipment, fixtures and other......................     9,420        7,443
   Equipment and fixtures under construction..........       856        1,513
                                                         -------      -------
                                                          13,836       11,936
   Less accumulated depreciation, amortization and
    reserve for write-down............................    (4,289)      (2,753)
                                                         -------      -------
     Property, plant and equipment, net...............   $ 9,547      $ 9,183
                                                         =======      =======
</TABLE>
 
  Included in equipment and fixtures was $902,000 and $1,055,000 of equipment
under capital lease as of December 27, 1997 and December 31, 1996,
respectively. In July, 1994, the Company entered into a long-term agreement to
lease its manufacturing and administrative facility in Salem, OR. The
agreement provided the Company an option to purchase the facility at a fixed
cost. In March, 1996, the Company exercised its option to purchase the land
and building at a price of $2,449,000.
 
  As more fully discussed in Note 1, the Company performed an evaluation of
its machinery and equipment and as a result, has recognized in 1997 a write-
down of its fixed assets of $1,568,000.
 
                                      29
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. ACCRUED LIABILITIES
 
  Accrued liabilities consisted of the following:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 27, DECEMBER 31,
                                                           1997         1996
                                                       ------------ ------------
                                                            (IN THOUSANDS)
   <S>                                                 <C>          <C>
   Accrued commissions................................    $  275       $  700
   Accrued payroll and related liabilities............       508          475
   Accrued inventory purchases........................       154          --
   Accrued warranty...................................       260          300
   Accrued income taxes...............................        55          460
   Other..............................................       349           74
                                                          ------       ------
     Total Accrued Liabilities........................    $1,601       $2,009
                                                          ======       ======
</TABLE>
 
7. LINES OF CREDIT
 
  Lines of credit consisted of the following:
 
<TABLE>
<CAPTION>
                                                      DECEMBER 27, DECEMBER 31,
                                                          1997         1996
                                                      ------------ ------------
                                                           (IN THOUSANDS)
<S>                                                   <C>          <C>
Operating line of credit with Bank of America Oregon
 of $5,000,000 for the periods between August 1
 through March 31 of each calendar year, increasing
 to $7,500,000 for the periods April 1 through July
 31 of each calendar year, collateralized by
 personal property of the Company. Monthly interest
 payments were made at the bank's reference rate
 (8.5% at October 31, 1997). The agreement expired
 on October 31, 1997................................     $  --        $  --
                                                         ------       -----
Operating line of credit with LaSalle Business
 Credit, Inc. of $7,000,000 for the period between
 October 15 through February 28 of each calendar
 year, increasing to $14,000,000 for the periods
 March 1 through October 14 of each calendar year,
 collateralized by accounts receivable, inventory,
 personal property, investment property, intangibles
 and all deposit accounts. Monthly interest payments
 are made at 0.25% above the prime rate. The
 agreement expires on November 20, 2000.............      1,923          --
                                                         ======       =====
                                                         $1,923       $  --
                                                         ======       =====
</TABLE>
 
  The LaSalle operating line of credit above contains a facility for
commercial letters of credit. An unused line fee, payable annually, is equal
to 0.25% on the daily average amount the outstanding Revolving Loan and Letter
of Credit obligations is less than the Revolver Maximum Amount. The Company
has the option under the loan agreement to enter into a Term Loan provided
certain conditions are met. The credit agreement with the Bank contains
various covenants which require the Company, among other things, to meet
certain objectives with respect to tangible net equity and capital expenditure
limits, and beginning in 1998 the ratio of EBITDA to interest expense and the
ratio of debt service coverage. At December 27, 1997, the Company was in
default of the tangible net equity covenant contained in the credit agreement.
The Bank is not waiving this default but will forbear in the exercise of its
rights and remedies until April 10, 1998. Until that time the Company will pay
a default interest rate of 2.25% over the prime rate as required by the loan
agreement. During this time the Company will seek to obtain additional capital
and work on limiting the amount of working capital needed. However, if not
obtained and the Company is unsuccessful in addressing the lender's concerns
during this forbearance period, this default could have a material adverse
impact on the Company's operations.
 
                                      30
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
8. CAPITAL LEASE OBLIGATIONS
 
  Capital lease obligations consisted of the following:
 
<TABLE>
<CAPTION>
                                                        DECEMBER 27, DECEMBER 31,
                                                            1997         1996
                                                        ------------ ------------
                                                             (IN THOUSANDS)
   <S>                                                  <C>          <C>
   Lease of certain equipment with lease terms ranging
    from 24 to 60 months, monthly payments totaling
    $19,000 secured by the equipment under lease, with
    certain leases guaranteed by a shareholder........      $393         $486
                                                            ----         ----
   Total capital lease obligations....................       393          486
   Less current portion...............................       139          228
                                                            ----         ----
     Total capital lease obligations, net of current
      portion.........................................      $254         $258
                                                            ====         ====
</TABLE>
 
  Minimum annual lease payments for the 12-month periods ending December are
as follows (in thousands):
 
<TABLE>
       <S>                                                                  <C>
       1998................................................................ $175
       1999................................................................  144
       2000................................................................   89
       2001................................................................   36
       2002................................................................   36
                                                                            ----
       Net minimum lease payments for capital leases.......................  480
       Less amount representing interest...................................  (87)
                                                                            ----
         Present value of net minimum lease payments for capital leases.... $393
                                                                            ====
</TABLE>
 
9. COMMITMENTS AND CONTINGENCIES
 
  The Company currently leases five locations to house its distribution
operations, its retail operations and its graphics department.
 
  Minimum annual real property lease obligations for the 12 month period
ending December are as follows (in thousands):
 
<TABLE>
     <S>                                                                   <C>
     1998................................................................. $136
     1999.................................................................   64
     2000.................................................................   64
     2001.................................................................   57
     2002.................................................................   60
                                                                           ----
     Minimum lease payments for real property leases...................... $381
                                                                           ====
</TABLE>
 
  From time to time the Company is involved in litigation arising out of the
normal course of its business. In the opinion of management, the disposition
of all claims or litigation currently pending will not have a material effect
on the Company's financial position, results of operations or liquidity.
 
 
                                      31
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
10. SHAREHOLDERS' EQUITY
 
 Stock Option Plans
 
  In September 1990, the Company adopted a stock option plan (the "Plan") for
selected executives, employees and directors which reserved 490,000 shares of
common stock for issuance under the Plan. In January 1995, the Plan was
amended to increase the number of shares of common stock under the Plan to
857,500. In July 1995, the Plan was further amended to increase the number of
shares of common stock under the Plan to 1,102,500. In February, 1997 a new
stock option plan was adopted with the number of shares subject to all plans
unchanged.
 
  The Plan permits the granting of options for terms not to exceed ten years
from date of grant. The options generally vest ratably over a four-year period
and are exercisable on terms established in the Plan document. The exercise
price of the options granted under the Plan must be equal to or greater than
the fair market value of the shares on the date of grant for incentive stock
options and not less than 85 percent of the fair market value for nonqualified
stock options. The exercise price of the options granted by the Company has
generally been equal to or greater than fair market value at the date of
grant. Fair market value for periods prior to the Company's initial public
offering were determined by the Board of Directors without an independent
valuation. Information regarding the Plan is shown below:
 
<TABLE>
<CAPTION>
                                                           WEIGHTED
                                                  NUMBER   AVERAGE
                                                    OF     EXERCISE  AGGREGATE
                                                  SHARES    PRICE      PRICE
                                                 --------  -------- -----------
<S>                                              <C>       <C>      <C>
Options outstanding at December 31, 1994........  465,498   $ 1.97  $   915,000
  Granted.......................................  316,050     4.12    1,302,000
  Lapsed........................................   (6,863)    2.62      (18,000)
  Exercised..................................... (208,103)    1.29     (268,000)
                                                 --------   ------  -----------
Options outstanding at December 31, 1995........  566,582     3.41    1,931,000
  Granted.......................................  131,200    11.27    1,478,000
  Lapsed........................................  (17,105)    5.39      (92,000)
  Exercised..................................... (114,953)    2.77     (318,000)
                                                 --------   ------  -----------
Options outstanding at December 31, 1996........  565,724     5.30    2,999,000
  Granted.......................................   83,750     3.90      326,000
  Re-Issued.....................................   90,500     9.20      833,000
  Lapsed/Canceled............................... (183,300)    8.57   (1,570,000)
  Exercised.....................................  (12,250)    3.27      (40,000)
                                                 --------   ------  -----------
Options outstanding at December 27, 1997........  544,424   $ 4.68  $ 2,548,000
                                                 ========   ======  ===========
</TABLE>
 
  In accordance with the terms of option agreements, in August 1995, certain
employees exercised their stock options in exchange for notes receivable. The
notes bear interest at 10 percent per annum and were due and payable August 1,
1997; however, these notes have been extended to August 1, 1998. The notes
receivable, net of any payments received, have been reflected in shareholders'
equity in the accompanying consolidated financial statements.
 
  Effective November 1, 1995, the shareholders approved the Stock Option Plan
for Non-Employee Directors (the "Directors Plan"), which plan reserves 122,500
shares of the Company's common stock for future grants to Eligible Directors
(as defined in the Directors Plan). Options granted pursuant to the Directors
Plan reduce the number of underlying shares available under the Plan on a one-
to-one basis. The Directors Plan provides for an annual grant of 2,450 shares
of common stock to each Eligible Director immediately following each annual
meeting of shareholders commencing with the 1996 annual meeting.
 
                                      32
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Grants are made at the fair market value of the common stock on the date of
grant and are fully vested after six months.
 
 Statement of Financial Accounting Standards No. 123
 
  During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for employee stock options and
similar equity instruments, and encourages all entities to adopt that method
of accounting for all of their employee stock compensation plans. However, it
also allows an entity to continue to measure compensation costs for those
plans using the method of accounting prescribed by APB 25. Entities electing
to remain with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been adopted.
 
  The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed, for pro forma disclosure
purposes, the value of all options granted during 1997, 1996 and 1995 using
the Black-Scholes options pricing model as prescribed by SFAS 123 using the
following weighted average assumptions for grants for the years ended:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                     DECEMBER 27 --------------
                                                        1997      1996    1995
                                                     ----------- ------  ------
     <S>                                             <C>         <C>     <C>
     Risk-free interest rate........................     6.0%       6.5%   7.1%
     Expected dividend yield........................     0.0%       0.0%   0.0%
     Expected lives (Years).........................     6.0        6.0    5.3
     Expected volatility............................    64.3%      57.1%   0.0%
</TABLE>
 
  Using the Black-Scholes methodology, the total value of options granted
during 1997, 1996 and 1995 was $ 752,000, $918,000 and $403,000, respectively,
which would be amortized on a pro forma basis over the vesting period of the
options (typically four years). The weighted average fair value of options
granted during 1997, 1996 and 1995 was $4.32 per share, $6.99 per share and
$1.27 per share, respectively.
 
  If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income (loss) and net income
(loss) per share would approximate the pro forma disclosures below, for the
years ended December 27, 1997, and December 31, 1996 and 1995 (in thousands
except per share data):
 
<TABLE>
<CAPTION>
                                    1997              1996            1995
                              -----------------  --------------- --------------
                                 AS       PRO       AS     PRO      AS     PRO
                              REPORTED   FORMA   REPORTED FORMA  REPORTED FORMA
                              --------  -------  -------- ------ -------- -----
<S>                           <C>       <C>      <C>      <C>    <C>      <C>
Net income (loss)............ $(7,020)  $(7,366)  $2,147  $1,901   $485   $419
Net income (loss) per share:
  Basic...................... $ (1.24)  $ (1.35)  $  .38  $  .34   $.15   $.14
  Diluted.................... $ (1.24)  $ (1.35)  $  .36  $  .33   $.14   $.11
</TABLE>
 
  The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
January 1, 1995, and additional awards are anticipated in future years.
 
                                      33
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table summarizes information about stock options outstanding
at December 27, 1997:
 
<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                  ------------------------------------ ------------------------
                                   WEIGHTED   WEIGHTED                 WEIGHTED
                                    AVERAGE   AVERAGE     NUMBER OF    AVERAGE
                      NUMBER       REMAINING  EXERCISE     SHARES      EXERCISE
    RANGE OF        OUTSTANDING   CONTRACTUAL  PRICE     EXERCISABLE    PRICE
 EXERCISE PRICES  AT DECEMBER 27,    LIFE       PER    AT DECEMBER 27,   PER
    PER SHARE          1997         (YEARS)    SHARE        1997        SHARE
 ---------------  --------------- ----------- -------- --------------- --------
<S>               <C>             <C>         <C>      <C>             <C>
$ 1.63-$ 4.50....     420,474         4.4      $ 3.45      296,877      $ 3.36
$ 5.31-$ 8.50....      61,250         8.6      $ 7.17       49,250      $ 7.25
$10.62-$11.50....      62,700         8.5      $10.45       14,700      $10.77
</TABLE>
 
  Total options exercisable at December 27, 1997, December 31, 1996 and 1995
were 360,827, 106,934 and 7,252, respectively, at a weighted average exercise
price of $4.19 per share, $4.19 per share and $1.84 per share, respectively.
 
 Stock Warrants
 
  The Company, from time to time, has issued stock warrants as payment for
fees, interest and services rendered. At December 27, 1997, December 31, 1996
and 1995, the Company had outstanding warrants to purchase 58,801, 63,701 and
208,549 shares of common stock, respectively. The warrants are exercisable at
weighted average exercise prices per share of $2.45, $2.45, and $1.76
respectively. Warrants are valued at the excess of the fair value of the
common stock over the exercise price at the date of the grant. Any excess of
the fair value over the grant price of the common stock at the date of grant
is recognized as a capital contribution to warrants outstanding and
corresponding expense. During 1997, 1996 and 1995, warrants to purchase 4,900,
144,848 and 57,344 shares of common stock were exercised at weighted average
exercise prices of $2.45, $1.46 and $2.88 per share, respectively. During
1997, 1996 and 1995, no warrants were granted. No warrants lapsed during 1997
or 1996. During 1995, 25,726 warrants lapsed at a weighted average exercise
price of $2.45.
 
 Initial Public Offering
 
  In December 1995, the Company completed an initial public offering of
1,919,500 shares of Common Stock at $11.00 per share. The net proceeds were
$18,517,000.
 
 Cancellation and Reissuance of Stock Options
 
  In February 1997, the Company canceled and reissued certain options granted
to employees during 1996 under the 1990 Stock Option Plan as amended. The
options canceled were for 90,500 shares of common stock at a weighted average
exercise price of $11.41 per share. The option price for the reissued options
were at or above market value of the stock at the date the options were
issued, therefore no compensation expense was recognized.
 
 Repurchase of Common Stock
 
  On December 18, 1996, the Board of Directors passed a resolution to
repurchase and retire up to 300,000 shares of the Company's outstanding common
stock. During 1997 and 1996, 92,583 and 92,500 shares of common stock,
respectively, had been repurchased and retired.
 
                                      34
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
11. RELATED PARTY TRANSACTIONS
 
  During 1995, related party notes for $94,000 bearing interest at 10 percent
per annum were issued in exchange for employee stock options.
 
  During 1996 and 1995, the Company paid a guarantee fee of $1,000, and
$42,000, respectively, to shareholders of the Company for personal guarantees
of certain Company obligations. The guarantee fees are recorded as interest
expense in the accompanying consolidated statements of income.
 
  During 1997 and 1996, the Company purchased certain manufacturing tooling
and supplies from a company owned by shareholders of the Company. The Company
recorded $105,000 and $4,000 of manufacturing expenses and capitalized
$448,000 and $63,000 for tooling related to these transactions respectively.  

  The Company, pursuant to an agreement, retained Pacific Crest Securities, Inc.
("Pacific Crest") to act as its investment banking representative in connection
with the Westbeach acquisition. A director of the Company is also an officer and
director of Pacific Crest. In connection wit this agreement, the Company paid
Pacific Crest fees and expenses of approximately $163,000. The Company believes
that the agreement with Pacific Crest was on terms comparable to those available
in the market place.
 
12. INCOME TAXES
 
  The provisions for income taxes consist of taxes currently due plus deferred
taxes for the net change in items with different bases for financial and
income tax reporting purposes. The items with different bases are primarily
fixed assets, allowance for doubtful accounts, accrued liabilities for
employee vacation and sick leave, and inventory and warranty reserves. The
deferred tax assets and liabilities represent the future tax consequences of
those differences, which will either be deductible or taxable when the assets
and liabilities are recovered or settled, using enacted marginal income tax
rates in effect when the differences are expected to reverse. Deferred tax
assets are recognized for operating losses and tax credits that are available
to offset future federal income taxes. Net deferred taxes consist of the
following tax effects relating to temporary differences and carryforwards:
 
<TABLE>
<CAPTION>
                                 DECEMBER 27, DECEMBER 31,
                                     1997         1996
                                 ------------ ------------
                                      (IN THOUSANDS)
   <S>                           <C>          <C>
   Deferred Tax Assets:
     Accrued expenses and
      reserves.................    $   715       $ 341
     Net operating loss and tax
      credit carryforwards.....      3,092         309
                                   -------       -----
       Gross deferred tax
        assets.................      3,807         650
       Less valuation
        allowance..............     (2,988)        --
                                   -------       -----
       Net deferred tax asset..        819         650
   Deferred Tax Liabilities:
       Depreciation and
        amortization...........       (849)       (504)
                                   -------       -----
   Net deferred tax assets
    (liability)................    $   (30)      $ 146
                                   =======       =====
</TABLE>
 
  At December 27, 1997, and December 31, 1996, the Company has an estimated
federal net operating loss carryforward of $7,928,000 and $321,000,
respectively, expiring through 2012. For the year ended December 27, 1997, the
Company increased its valuation allowance $2,988,000.
 
                                      35
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The components of income tax (benefit) expense are as follows:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                       ------------------------
                                                                     DECEMBER
                                                                        31,
                                                       DECEMBER 27, -----------
                                                           1997      1996  1995
                                                       ------------ ------ ----
                                                            (IN THOUSANDS)
   <S>                                                 <C>          <C>    <C>
   (Benefit) expense for income taxes:
     Current:
       Federal........................................   $  (275)   $1,034 $288
       State..........................................       --        179   58
                                                         -------    ------ ----
       Total..........................................      (275)    1,213  346
     Deferred.........................................    (2,842)       67  (82)
     Valuation allowance..............................     2,988       --   --
                                                         -------    ------ ----
       Total (benefit) expense for income taxes.......   $  (129)   $1,280 $264
                                                         =======    ====== ====
</TABLE>
 
  Taxes related to foreign subsidiaries were immaterial for the year ended
December 27, 1997.
 
  A reconciliation of the income tax expense at the federal statutory income
tax rate to the income tax (benefit) expense as reported is as follows:
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED
                                                    ---------------------------
                                                                 DECEMBER 31,
                                                    DECEMBER 27, --------------
                                                        1997      1996    1995
                                                    ------------ ------  ------
   <S>                                              <C>          <C>     <C>
   Expense computed at statutory rates.............     34.0 %     34.0%   34.0%
   State taxes, net of federal benefit.............      4.4        4.4     4.4
   Change in valuation allowance...................    (41.8)       --      --
   Other...........................................      1.6       (1.0)   (3.2)
                                                       -----     ------  ------
   Income tax rate (benefit) expense as reported...     (1.8)%     37.4%   35.2%
                                                       =====     ======  ======
</TABLE>
 
13. CASH FLOW ACTIVITIES
 
  The following are supplemental disclosures to the statement of cash flows:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                       ------------------------
                                                                     DECEMBER
                                                                        31,
                                                       DECEMBER 27, -----------
                                                           1997     1996  1995
                                                       ------------ ---- ------
                                                            (IN THOUSANDS)
   <S>                                                 <C>          <C>  <C>
   Supplemental Disclosure:
     Cash paid for interest...........................     $ 80     $154 $  878
     Cash paid for income taxes.......................      --        22     13
   Noncash Transactions:
     Assets acquired under capital lease..............      182      --     513
     Conversion of debt to common stock...............      --       --   1,521
     Stock option and warrant activity................      --       --     191
     Tax benefit on exercise of non-qualified stock
      options.........................................      --       723    346
</TABLE>
 
                                      36
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company purchased all of the outstanding securities of Westbeach
Snowboard Canada Ltd. for cash and common stock of $4,356,000. In conjunction
with the acquisition, liabilities were assumed as follows (dollars in
thousands):
 
<TABLE>
   <S>                                                                  <C>
   Fair value of assets acquired, including goodwill................... $ 9,241
   Cash paid for the securities, including expenses....................  (2,676)
   Common stock issued for the securities..............................  (1,680)
   Cash received from Westbeach........................................    (122)
                                                                        -------
     Liabilities assumed............................................... $ 4,763
                                                                        =======
</TABLE>
 
14. CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC DATA
 
  Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, short term
investments and trade receivables. The Company places its temporary cash
investments and short term investments with high quality financial
institutions.
 
  The Company sells to customers located predominantly throughout the United
States, Japan, Canada and Europe. The concentrations of credit risk with
respect to trade receivables are, in management's opinion, considered not
significant due to the Company's ongoing performance of credit evaluations of
its customers' financial condition and the fact that a significant portion of
export sales are made on a letter-of-credit basis. The Company generally does
not require collateral from its domestic branded-label customers. The Company
maintains policies and procedures to consistently monitor the reserves for
potential credit losses. In 1997, due to adverse market conditions, the
Company recognized additional reserves on certain outstanding accounts
receivable balances. Such reserves are reflected in Accounts Receivable in the
Consolidated Balance Sheets. Total bad debt expense for 1997, 1996 and 1995 of
$960,000, $110,000 and $123,000, respectively, are included in the General and
Administrative section of the Consolidated Statements of Operations. In 1997,
1996 and 1995, one customer accounted for 28%, 21% and 19% of net sales,
respectively.
 
  Export sales are made primarily to customers in Japan and Europe. Net sales
by the Company to international customers were:
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED
                                                     ---------------------------
                                                                   DECEMBER 31,
                                                     DECEMBER 27, --------------
                                                         1997      1996    1995
                                                     ------------ ------- ------
                                                           (IN THOUSANDS)
   <S>                                               <C>          <C>     <C>
   Japan............................................    $5,738    $ 6,551 $4,793
   Europe and other.................................     1,749      5,338  3,167
                                                        ------    ------- ------
                                                        $7,487    $11,889 $7,960
                                                        ======    ======= ======
</TABLE>
 
                                      37
<PAGE>
 
                   MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
15. EMPLOYEE SAVINGS PLAN
 
  The company created an Employee savings plan on July 1, 1996, under the
provisions of Section 401(k) of the Internal Revenue Code. The plan covers
substantially all full-time employees. The Company's matching contributions
take two forms; a basic matching contribution of 30 percent of employee
contributions, and a discretionary supplemental matching contribution based
upon parameters set by management on an annual basis. The basic matching
contribution is allocable each month to participants who have made
contributions for that month, and who remain employed as of the end of that
month. Supplemental matching contributions are allocable to participants who
are actually employed by the Company as of the last day of the plan year.
Participants are fully vested in their 401 (k) contributions and basic
matching contribution accounts. Supplemental matching contributions are
subject to a three year (one-third per year) vesting schedule. Company
matching contributions expensed in 1997 and 1996 were $36,000 and $26,000,
respectively.
 
16. QUARTERLY INFORMATION (UNAUDITED)
 
  The following is a summary of operating results by quarter for the years
ended December 27, 1997 and December 31, 1996:
 
<TABLE>
<CAPTION>
                                            1997 QUARTER ENDED
                             -------------------------------------------------
                             MARCH 29, JUNE 28, SEPTEMBER 27, DECEMBER 27, (1)
                             --------- -------- ------------- ----------------
                                     (IN THOUSANDS, EXCEPT SHARE DATA)
   <S>                       <C>       <C>      <C>           <C>
   Net sales................  $   689   $2,149     $10,173        $ 7,242
   Gross profit (loss)......     (105)     712       3,088            587
   Net income (loss)........   (1,238)    (830)        450         (5,402)
   Net income (loss) per
    share(2)
     Basic..................    (0.22)   (0.15)       0.08          (0.92)
     Diluted................    (0.22)   (0.15)       0.08          (0.92)
<CAPTION>
                                            1996 QUARTER ENDED
                             -------------------------------------------------
                             MARCH 31, JUNE 30, SEPTEMBER 30,   DECEMBER 31,
                             --------- -------- ------------- ----------------
                                     (IN THOUSANDS, EXCEPT SHARE DATA)
   <S>                       <C>       <C>      <C>           <C>
   Net sales................  $   647   $2,038     $19,667        $ 9,347
   Gross profit.............       99      651       7,706          2,400
   Net income (loss)........     (897)    (474)      3,069            449
   Net income (loss) per
    share(2)
     Basic..................    (0.16)   (0.08)       0.54           0.08
     Diluted................    (0.16)   (0.08)       0.51           0.07
</TABLE>
--------
(1) In the fourth quarter of 1997 the Company recorded significant changes in
    estimates for a write-down of fixed assets of $1,568,000, increases in the
    allowance for doubtful accounts and direct write-offs of accounts
    receivable of $524,000, an increase in the reserve for inventory
    obsolescence of $638,000, and increases in the deferred tax valuation
    allowance of $770,000.
 
(2) Earnings per share has been restated to conform to the presentation
    required by SFAS 128, "Earnings Per Share".
 
                                      38
<PAGE>
 
                                                                     SCHEDULE II
 
                    MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                      CHARGED
                           BALANCE AT TO COSTS CHARGED                BALANCE
                           BEGINNING    AND    TO OTHER               AT END
DESCRIPTION                OF PERIOD  EXPENSES ACCOUNTS DEDUCTIONS   OF PERIOD
-----------                ---------- -------- -------- ----------   ---------
<S>                        <C>        <C>      <C>      <C>          <C>
DECEMBER 31, 1995
Reserves deducted from
 asset accounts:
  Allowance for doubtful
   accounts...............    $ 30      $123     $ --     $(103)(a)    $ 50
  Obsolete inventory
   reserve................      16       168       --      (118)(a)      66
DECEMBER 31, 1996
Reserves deducted from
 asset accounts:
  Allowance for doubtful
   accounts...............      50       110       --       (26)(a)     134
  Obsolete inventory
   reserve................      66       221       --      (151)(a)     136
DECEMBER 27, 1997
Reserves deducted from
 asset accounts:
  Allowance for doubtful
   accounts...............     134       960       --      (435)(a)     659
  Obsolete inventory
   reserve................     136       888       --      (489)(a)     535
</TABLE>
--------
(a)Balances written-off, net of recoveries
 
                                       39
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Amendment 
No. 2 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Salem, State of Oregon, on October 13, 1998.
 
                                       MORROW SNOWBOARDS, INC.
 
                                                 /s/ P. Blair Mullin
                                       By: ___________________________________
                                                     P. Blair Mullin
                                           President, Chief Financial Officer,
                                                 Treasurer and Secretary
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Amendment No. 2 has been signed by the following persons in the
capacities indicated on October 13, 1998.
 
 
 
<TABLE>
 <S>                                       <C>
 
          /s/ P. Blair Mullin              Chief Financial Officer (principal
 ________________________________________  executive officer, principal    
              P. Blair Mullin              financial officer and principal 
                                           accounting officer)            
 
         /s/ Victor G. Petroff             Chairman of the Board
 ________________________________________
             Victor G. Petroff

         /s/ Ray E. Morrow Jr.             Chairman Emeritus
 ________________________________________
             Ray E. Morrow Jr.
 
          /s/ Gregory M. Eide              Director
 ________________________________________
              Gregory M. Eide
 
          /s/ Erik J. Krieger              Director
 ________________________________________
              Eric J. Krieger
 
         /s/ James V. Zaccaro              Director
 ________________________________________
             James V. Zaccaro
 
        /s/ Maurice C. Bickert             Director
 ________________________________________
            Maurice C. Bickert
</TABLE>
 
                                      40