<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
    
                                  FORM 10-K/A
     
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                        Commission File Number 0-16611

                                   RYKA INC.
            (Exact name of Registrant as specified in its charter)


          DELAWARE                        5139                    04-2958132
----------------------------  ----------------------------  -------------------
(State or other jurisdiction  (Primary standard industrial   (I.R.S. employer
       of incorporation                  classification     identification no.)
       or organization)                   code number)         


                             555 S. HENDERSON ROAD
                                    SUITE B
                          KING OF PRUSSIA, PA  19406
                                (610) 337-2200
              (Address, including zip code, and telephone number,
       including area code, of registrant's principal executive offices)
                             ____________________

          Securities registered pursuant to Section 12(b) of the Act:
                    Common Stock, par value $.01 per share
                               (Title of class)

          Securities registered pursuant to Section 12(g) of the Act:
                                     NONE

     Indicate by check mark whether the registrant (i) 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, and (ii) has been subject to such filing
requirements for the past 90 days.
                          YES    [X]             NO    [_]

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

     The aggregate market value of voting stock held by non-affiliates of the
Registrant is $13,236,998./(1)/  As of June 16, 1997, 59,135,326 shares of
Common Stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE
 (Specific sections incorporated are identified under applicable items herein)

     Certain exhibits from the Company's prior filings under the Securities
Exchange Act of 1934 and registration statements under the Securities Act of
1933 are incorporated by reference as Exhibits in Part IV of this Report.

_________________________

(1)  The aggregate dollar amount of the voting stock set forth equals the number
     of shares of the Company's Common Stock outstanding, reduced by the amount
     of Common Stock held by officers, directors and shareholders owning in
     excess of 10% of the Company's Common Stock, multiplied by the last
     reported sale price for the Company's Common Stock on June 16, 1997. The
     information provided shall in no way be construed as an admission that any
     officer, director or 10% shareholder in the Company may or may not be
     deemed an affiliate of the Company or that he/it is the beneficial owner of
     the shares reported as being held by him/it, and any such inference is
     hereby disclaimed. The information provided herein is included solely for
     record keeping purposes of the Securities and Exchange Commission.
<PAGE>
 
 
                                     INDEX

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
                                    PART I................................     1

ITEM 1:      BUSINESS.....................................................     1
               General Overview...........................................     1
               Products...................................................     2
               Marketing and Sales........................................     3
               Advertising and Promotion..................................     3
               Manufacturing and Distribution.............................     5
               Competition................................................     5
               Patents, Trademarks and other Proprietary Rights...........     6
               Employees..................................................     6
               Governmental Regulation....................................     6
ITEM 2:      PROPERTIES...................................................     7
ITEM 3:      LEGAL PROCEEDINGS............................................     7
ITEM 4:      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........     7
ITEM 4.1:    EXECUTIVE OFFICERS...........................................     7

                                    PART II...............................     9

ITEM 5:      MARKET FOR THE REGISTRANT'S COMMON EQUITY
             AND RELATED STOCKHOLDER MATTERS..............................     9
ITEM 6:      SELECTED CONSOLIDATED FINANCIAL DATA.........................    10
ITEM 7:      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS..........................    11
ITEM 8:      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................    17
ITEM 9:      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURE..........................    17

                                   PART III...............................    18

ITEM 10:     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........    18
ITEM 11:     EXECUTIVE COMPENSATION.......................................    18
ITEM 12:     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
             AND MANAGEMENT...............................................    18
ITEM 13:     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............    18

                                   PART IV................................    19

ITEM 14:     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
             ON FORM 8-K..................................................    19
</TABLE>
<PAGE>
 
 
                                    PART I

ITEM 1:   BUSINESS

GENERAL OVERVIEW

     RYKA Inc. ("RYKA" or the "Company") designs, develops and markets high 
performance athletic footwear specifically for women. RYKA's product line
currently consists of four categories: Aerobic Fitness, Cross-Training, Walking
and Aqua Conditioning. RYKA was organized in Delaware in 1986. RYKA commenced
operations and introduced its first two styles of high performance athletic
footwear in 1987 and began shipping its first products in 1988. RYKA maintains
its principal executive offices and warehouse at 555 S. Henderson Road, Suite B,
King of Prussia, PA 19406 and its telephone number is (610) 337-2200.

     In 1995 and 1996, RYKA entered into a series of transactions that
significantly changed the capital structure of RYKA and the manner in which RYKA
operates its business.
    
     TRANSACTIONS WITH MR ACQUISITIONS.  On July 31, 1995, RYKA consummated a
financing arrangement with MR Acquisitions, L.L.C. ("MR Acquisitions"), a
company that is indirectly wholly-owned by Michael Rubin, the current Chairman
and Chief Executive Officer of RYKA, pursuant to which MR Acquisitions provided
or arranged to provide RYKA with up to $8,000,000 of financing in the form
of (i) an aggregate of $1,000,000 equity and subordinated debt investment by MR
Acquisitions and KPR Sports International, Inc, ("KPR"), an affiliate of MR
Acquisitions, (ii) a $2,000,000 letter of credit facility from KPR, (iii) a
$4,000,000 revolving credit facility with a bank, and (iv) a $1,000,000 equity
investment through the private placement with certain investors of Common Stock
and a subordinated note which was converted into Common Stock.      
    
     SETTLEMENT WITH CREDITORS. In connection with the transactions with MR
Acquisitions, RYKA negotiated settlement arrangements with secured and unsecured
creditors, resulting in the settlement of approximately $3,060,000 of
indebtedness and recognizing a gain of approximately $1,650,000. RYKA entered
into an agreement with a secured lender which had provided inventory financing
to RYKA, pursuant to which $1,804,734 of secured indebtedness was settled for
$1,100,000 in cash and 500,000 shares of Common Stock and the secured creditor
was released from its obligations to certain vendors under letters of credit
opened on behalf of RYKA for the purchase of approximately $1,000,000 in
merchandise to be received in the future. In addition, RYKA entered into
arrangements with other creditors, pursuant to which RYKA settled an aggregate
of approximately $1,250,000 of indebtedness for approximately $180,000 in cash
and warrants to purchase 53,192 shares of Common Stock at $1.50 per share.     

     RELOCATION OF RYKA'S OFFICES.   In August 1995, RYKA terminated the lease
for its principal facility in Norwood, Massachusetts and moved its executive
offices and warehouse to a facility in King of Prussia, Pennsylvania, that it
subleases from KPR.

     NEW MANAGEMENT PERSONNEL.   On July 31, 1995, Michael Rubin became Chairman
of the Board and Chief Executive Officer. Since that time, Mr. Rubin has taken
an active role in the management of RYKA. Mr. Rubin does not receive any
compensation for his services. In addition, since August 1995, RYKA has hired
additional management personnel, including Dennis DiDominicis, the Company's
current Executive Vice President, Steven Wolf, the Company's Current Vice
President of Finance and Chief Financial Officer and Dan Brown, the Company's
current Vice President of Product Marketing. Effective April 1, 1997, RYKA
hired Kate Bednarski as its President. All of these individuals have substantial
experience in the athletic footwear industry.

     NEW SALES, MARKETING AND MANUFACTURING ARRANGEMENTS.   Since August 1995,
RYKA has engaged independent design groups to create new designs for RYKA's
footwear.  However, in February 1997, in-house 

<PAGE>
 
designers began to work full-time at RYKA headquarters in an effort to bring 
most of the design function in-house. In addition, RYKA has entered into
arrangements for the sourcing and manufacture of RYKA's footwear in the Far
East. RYKA has also entered into arrangements with eleven independent sales
representative organizations covering 50 states for the sale of RYKA's footwear.
See "Business -- Marketing and Sales" and "Business -- Manufacturing and
Distribution".

     REORGANIZATION.  On September 26, 1996, the Company entered into an
Agreement and Plan of Reorganization, as amended and restated (the
"Reorganization Agreement"), with KPR and certain affiliated companies
(collectively, the "KPR Companies") and Michael G. Rubin, Chairman and Chief
Executive Officer of RYKA and the sole stockholder of the KPR Companies,
pursuant to which, subject to the approval by the stockholders of RYKA and the
Company's current lender, RYKA would become a holding company by transferring
all of its assets and liabilities to a newly-formed, wholly-owned subsidiary and
would acquire the KPR Companies in exchange for 163,250,000 shares of RYKA (the
"Reorganization"). Although the Reorganization was originally scheduled to close
by December 31, 1996, due to recent events, the completion of the Reorganization
has been delayed. See "Business - Recent Events." RYKA expects the
Reorganization to become effective by the end of 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
    
     RECENT EVENTS. On August 15, 1996, the Company entered into a new credit 
facility with a bank. Concurrently with RYKA, KPR entered into a new credit 
facility with the same bank. On November 8, 1996, the bank notified KPR that KPR
was in default of certain financial convenants. At the time of KPR's default, 
RYKA's credit facility was not cross-defaulted with KPR's agreement and RYKA
was in compliance with its own financial covenants. Accordingly, RYKA was not in
default of its loan with the bank. Since November 1996, RYKA and KPR have been
in negotiations with the bank to extend their credit facilities. See 
"Management's Discussion and Analysis of Financial Conditions and Results of 
Operations - Liquidity and Capital Resources."       

     As of June 4, 1997, RYKA entered into an amended agreement, and KPR
entered into a forebearance agreement with its existing bank that, among other
things, extended the credit facilities of RYKA and KPR to the earlier of
November 30, 1997 or an occurrence of an event of default (as defined). Under
its amended agreement, RYKA may borrow under its revolving credit facility up to
the lesser of $4,500,000 or its borrowing base (as defined). Interest on its
borrowings is payable at the bank's prime rate plus 3 1/2%. RYKA is also
required to maintain certain receivables turnover ratios. RYKA's revolving
credit facility is guaranteed by Michael Rubin and MR Acquisitions and is cross-
defaulted with KPR's agreement with the bank. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations --Liquidity and
Capital Resources."

     In addition to its negotiations with its existing bank, RYKA and KPR have 
been in discussions with certain other banks to obtain a new credit facility and
with certain investors to obtain equity and/or subordinated debt. On April 21, 
1997, RYKA entered into an agreement with certain investors to sell 2,500,000
shares of Common Stock for an aggregate purchase price of $750,000. The proceeds
of this sale were used by the Company to repay $325,000 of the $851,000
subordinated loan from KPR. The remaining proceeds were used to open $810,000 of
letters of credit for the benefit of KPR. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".

     As a result the issues arising in connection with the Company's credit 
facility with its existing bank, the completion of the Company's audited
financial statements for the year ended December 31, 1996 was delayed, and the
Company was unable to file timely its Annual Report on Form 10-K for the year
ended December 31, 1996 or its Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.

PRODUCTS

     RYKA believes it is the only company to make performance footwear
exclusively for women.  All of RYKA's footwear are made on women's lasts.  As a
result, the shoes are designed and manufactured taking into account the
anatomical features unique to women's feet.

     RYKA's models incorporate RYKA's Nitrogen/ES(R) System, which is designed
to provide enhanced shock absorption, resiliency and durability. The
Nitrogen/ES(R) System in higher priced models consists of visible and non-
visible nitrogen spheres, grids and/or bridges which are placed in the heel, the
mid-sole and the forefoot of the shoe. In standard models, non-visible nitrogen
spheres are placed in the mid-sole only. During 1994, RYKA introduced what it
believes to be the first women's shoe designed specifically for the growing
activity of aqua fitness, the Aqueous(TM) 9H20. The Company intends to introduce
a new line of shoes based on a new specific technology in Spring 1998.

     The following table outlines RYKA's percentage of net sales by category for
the years ended December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
                CATEGORY                          1996   1995   1994
     ---------------------------------------     ------ ------ ------
     <S>                                         <C>    <C>    <C>
     Aerobic Fitness/Aqua Fitness...........      25%    50%    40%
     Walking................................      36%    24%    32%
     Cross-Training.........................      38%    25%    27%
     Outdoor /(1)/..........................       1%     1%     1%
</TABLE>

_________________________

     (1)  RYKA has phased-out its sales of the Outdoor category.


     FITNESS.  RYKA offers several models of lightweight aerobic footwear in
various color options at suggested retail prices of $45.00 to $75.00.  Many
models are available in both mid-cut and low-cut styles. Fashion accents and
other treatments have been added to the footwear to maintain a contemporary
look.

                                      -2-
<PAGE>
 
     CROSS TRAINING.   As a result of their multi-purpose uses, cross training
shoes represent a growing market.  RYKA offers four cross training styles,
available in various colors and at suggested retail prices from $45.00 to
$70.00.

     WALKING.   RYKA offers walking shoes in two categories:  traditional
walking and athletic.  The suggested retail prices range from $54.95 to $64.95.

     AQUA CONDITIONING.   RYKA currently offers two models of aqua conditioning
footwear at a suggested retail prices of $54.95 and $64.95.

     RUNNING. In April 1997, RYKA has introduced at retail three models of
running footwear with a fourth model expected to be introduced in Fall 1997 for
Spring 1997. This category was the number one in pre-bookings among the RYKA
product line for Spring 1997. The suggested retail prices range from $54.95 for
an entry level runner to $74.95 for the 10k stability shoe.

MARKETING AND SALES

     RYKA's marketing is targeted at physically active women who are interested
in a high-performance athletic shoe incorporating advanced technology, high
quality and fashion.  RYKA believes that consumers in its market prefer multi-
purpose, comfort and proper fit and that its footwear addresses these
preferences.

     RYKA currently sells its products to sporting goods stores, athletic
footwear specialty stores, catalog businesses and department stores, including
The Athlete's Foot, Foot Locker, Lady Foot Locker, Modell's, Oshman's, Sportmart
and The Sports Authority.  RYKA also sells its products in catalogs such as
Premier Sports and Road Runner and through telemarketer QVC.  Slow moving and
discontinued products are sold through selected distributors and retailers.
    
     RYKA uses commissioned independent representative organizations throughout
the United States to promote and sell its products to retailers. RYKA does
not have any written contractual arrangements with such representative
organizations. These representative organizations also handle products of other
sporting goods manufacturers, but they do not sell athletic shoes that compete
with RYKA's products. RYKA has supported its international marketing efforts by
working directly with its independent foreign distributors in Japan, South
Africa and Israel.       

     At June 13, 1997, the Company's backlog of orders was approximately
$6,300,000. Approximately $4,800,000 of such orders are scheduled for delivery
through the end of the third quarter of 1997 with the remainder scheduled for
delivery during the fourth quarter of 1997. The Company expects that most of the
backlog orders will be filled, although certain of such orders are cancelable.

     Two customers of RYKA, Kinney Corporation (Lady FootLocker, Footquarters,
FootLocker Canada, Kinney Stores and Champs) and Marshalls each accounted for
over 10% of RYKA's revenues in 1996.

ADVERTISING AND PROMOTION
    
     The competitive nature of the athletic footwear business makes advertising
and promotion critical to the creation of brand preference in consumers.
Accordingly, RYKA has employed and will continue to employ both conventional and
innovative advertising and promotional techniques. RYKA has begun to advertise
in consumer publications which target active women. RYKA has also developed a
variety of creative      
                                      -3-
<PAGE>
 
    
promotional programs, such as a marketing program with Lady Foot Locker, the
RYKA Instructor and Trainer Alliance (RITA) and an interactive site on the
Internet's World Wide Web. RYKA's focus on products "exclusively for women"
enables RYKA to promote the particular needs and concerns of women.      

     Because of RYKA's limited resources for advertising, it has historically
concentrated its efforts on relatively less costly, grass-roots approaches
designed to build brand awareness and demand at the retail level. In the third
quarter of 1996, however, RYKA began advertising its products in consumer
publications which target RYKA's key consumer, the physically active woman.
Such publications include Shape, Fitness Magazine and Women's Sports and
Fitness.

     In the second half of 1996, with commitments for 1997, RYKA has
participated in an integrated marketing program with Lady Foot Locker to
generate higher levels of awareness for RYKA's products and to promote Lady Foot
Locker as the foremost destination for RYKA's products.  The marketing program
has involved significant national advertising and in-store displays of RYKA's
athletic footwear in approximately 500 Lady Foot Locker stores across the United
States.

     RYKA's network of aerobics and fitness instructors, marketed as the RYKA
Training Body(TM), is a network of over several thousand certified aerobics and
fitness instructors who are offered the opportunity to purchase RYKA products at
a discount.  RYKA believes that many consumers rely on aerobics and fitness
instructors for advice and recommendations on purchasing appropriate athletic
footwear and apparel and that the network is therefore a cost-effective way for
RYKA to increase brand name awareness and stimulate sales.  The program also
functions as a wear-testing forum, as RYKA requests that members submit to RYKA
evaluations of RYKA's products and marketing programs.  In 1997, this program
will be housed under the RITA program mentioned above and be marketed more
aggressively.

     To complement these public relations initiatives, RYKA launched an
interactive site on the Internet's World Wide Web in early 1996.  RYKA plans to
provide information through its website about RYKA, as well as fitness and
safety tips.

     RYKA believes that its focus on products "exclusively for women"
differentiates it from the numerous other footwear manufacturers in the
marketplace.  Accordingly, RYKA has directed its advertising and promotion
efforts to cause both RYKA's athletic footwear products and RYKA as a whole to
be identified in the market as suited to the particular needs and concerns of
women.

     Additionally, RYKA is supportive of organizations which focus on the
particular needs and concerns of women.  For instance, RYKA supports LiveSafe, a
non-profit organization which promotes personal safety training.  RYKA's support
will help provide tuition assistance to selected women in high-risk areas.
    
     RYKA also is an active participant in fitness programs sponsored by the
Aerobics and Fitness Association of America and the International Dance and
Exercise Association and recently agreed to be the exclusive footwear for
the American Aerobic Association/International Sports Medicine Association. RYKA
actively solicits the placement of its products in articles and photo features
in consumer, trade and fitness magazines. Editorials, product reviews and/or
advertisements for RYKA's products appeared in such periodicals as Fitness
Magazine, IDEA Today, Women's Sports and Fitness, Shape, Prevention, Fortune,
News Journal and Footwear News.      

     RYKA retains the services of an outside agency with expertise in footwear
and premium brands to assist in the implementation of RYKA's public relations
programs.

                                      -4-
<PAGE>
 
 
MANUFACTURING AND DISTRIBUTION

     As is common in the athletic footwear industry, RYKA contracts for the
manufacture of its footwear products to its specifications through independent
overseas manufacturers in the Far East.  RYKA uses the services of an
independent buying agent, who acts under the direction of RYKA's management in
the negotiation of favorable pricing, the purchase of raw materials and
selection of component part suppliers, inspection of goods prior to shipment and
shipment of finished products.  RYKA pays a commission based on the cost of
product purchased through the buying agent.  Management believes that sourcing
of footwear products in this manner minimizes RYKA's investment in fixed assets,
reduces costs and mitigates various risks.

     RYKA has no contracts with manufacturers beyond the terms of purchase
orders issued.  RYKA places purchase orders on a volume basis through its agent
and generally receives the product within 120 days of the start of production.
Under special circumstances, RYKA reduces the time required to deliver the
footwear from the factory through the use of air transportation.

     The principal materials used in RYKA's footwear are leather, nylon, rubber,
ethyl vinyl acetate, polyurethane, cambrelle and hytrel.  Most of these
materials are available in the countries where manufacturing takes place and
from a number of sources within the United States and abroad, although a loss of
supply could temporarily disrupt operations and increase the costs to
manufacture RYKA's products.

     RYKA's supply arrangements are U.S. dollar denominated. Its importing of
footwear, however, could be adversely affected by fluctuations in currency
exchange rates, as well as the adoption of bilateral trade agreements between
the United States and countries in which RYKA's suppliers are located, work
stoppages or the imposition of unilateral restrictions on trade, including
quotas or additional duties, by either the United States or any supplier
country.

     RYKA has expanded its production alternatives and currently manufactures
substantially all of its product in China.  If, however, RYKA is prevented from
acquiring products from overseas manufacturers, RYKA's operations could be
materially and adversely affected until alternative suppliers are found.  See
"Business -- Governmental Regulation".

     RYKA imports its footwear from independent manufacturers in the Far East,
both to public third-party warehousing facilities in Long Beach and Gardena,
California with which RYKA contracts on an as-needed basis, and to a warehousing
facility in King of Prussia, Pennsylvania which is subleased from KPR. From
these warehousing facilities, RYKA distributes its footwear throughout the
United States, usually by common carrier. RYKA believes that by utilizing such
warehousing facilities, it both reduces inbound transportation costs and the
amount of time required to import its products from the Far East.

COMPETITION

     The athletic footwear industry is highly competitive.  RYKA's competitors
include specialized athletic shoe companies as well as companies with
diversified product lines.  RYKA believes that its unique niche, combined with
effective advertising and marketing, fashionable styling, high quality and
technological advances are the most important competitive factors.  However, due
to substantial growth and interest in the women's segment of the high
performance athletic footwear market, there has been increased competition from
established companies which have developed advertising and promotional programs
directed to this segment of the market. Most of these competitors including
Adidas, Avia, Asics, Converse, K-Swiss, New Balance, Nike, Reebok and Saucony,
have significantly greater financial and other resources and more extensive
marketing staffs than 

                                      -5-
<PAGE>
 
 
RYKA. There is considerable doubt that RYKA will be able to compete successfully
with any of these companies or to achieve any meaningful market share without
significant additional resources. Additionally, RYKA may be unable to remain
price competitive at the retail level as competitors with larger volume
production capabilities may achieve better economies of scale and, therefore,
better cost pricing for products offering similar or more advanced technology.

PATENTS, TRADEMARKS AND OTHER PROPRIETARY RIGHTS

     RYKA was granted a patent in November 1990, which expires in 2007, covering
certain uses of its Nitrogen/ES(R) System in athletic footwear.  There can be no
assurance that the patent granted will be enforceable or will provide RYKA with
meaningful protection from competitors.

     RYKA applies its stylized RYKA trademark and the dual parallelogram design
trademark to all its footwear products.  In addition, RYKA applies the
Nitrogen/ES(R) trademark on all of its products.  RYKA has filed trademark
applications covering these and other marks in the United States and in a number
of foreign countries.

     RYKA believes that the aforementioned trademarks are valuable to its
ability to market footwear products and the loss of the right to use any of
these marks could have a material adverse effect on RYKA's business.  RYKA
intends to defend these trademarks vigorously against infringements by third
parties, should any arise.

EMPLOYEES

     At December 31, 1996, RYKA employed 13 persons on a full-time basis.  RYKA
is not a party to any collective bargaining agreements with its employees.

GOVERNMENTAL REGULATION

     Substantially all of RYKA's footwear products are manufactured overseas and
subject to U.S. customs duties.  Under the fixed duty structure in effect since
July 1981, duties on the footwear products imported by RYKA to date approximate
10.0% of cost, plus administrative charges.  If RYKA were to significantly
increase the amount of synthetic raw material, as opposed to leather, in its
footwear, these duties would increase substantially.

     RYKA is unable to predict whether additional customs duties, quotas or
other restrictions may be imposed on the importation of its products in the
future.  Any such action could result in increases in the cost of footwear in
general and, accordingly, might adversely affect the sales or profitability of
RYKA and the imported footwear industry as a whole.  RYKA, however, believes
that the higher priced end of the footwear market, in which it participates,
would be better able to adjust its pricing in response to any such increases.

     From time to time, the United States enters into trade legislation with
other countries, including China, which may impact on the duty rates on footwear
imported into the Untied States and RYKA's ability to access foreign markets.
Any such legislation that would substantially  increase duty rates on footwear
imported into the United States or limit RYKA's ability to access foreign
markets could adversely affect RYKA's operations.

                                      -6-
<PAGE>
 
 
ITEM 2:   PROPERTIES

     The Company relocated to King of Prussia, Pennsylvania in August 1995 where
it maintains its executive offices in a 5,000 square foot portion of a 70,000
square foot facility subleased from KPR. In addition, under this sublease, the
Company has the right to use warehouse space at this facility. Pursuant to the
sublease, charges are approximately $4,000 per month for use of these facilities
and certain warehousing services, and the remaining term of the sublease is one
and one-half years. Any other costs related to the use of the joint facility or
for other services provided by KPR or its affiliates will be charged to the
Company on an arm's-length basis and will be subject to approval by a special
committee of the Board of Directors comprised of disinterested directors.

     Additionally, the Company uses the services of two third-party public
warehousing facilities in California.  See "Business--Manufacturing and
Distribution."

     Management believes that the Company's subleased properties are adequate
for its present needs and that suitable additional or replacement space will be
available as required.

ITEM 3:   LEGAL PROCEEDINGS

     While the Company is periodically involved in litigation incidental to its
business, there are no material legal proceedings to which the Company or its
subsidiary is a party or to which any of their properties are subject.



                                      -7-
<PAGE>
 
 
ITEM 4:   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996 through the solicitation of
proxies or otherwise. 

                                      -8-
<PAGE>
 
 
                                    PART II

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

     As of December 31, 1996, the Common stock was held by approximately 2,320
holders of record.  From March 28, 1988 until September 15, 1995, the Common
Stock was included for quotation on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") SmallCap Market under the symbol
RYKA.  Subsequent to its delisting on the NASDAQ SmallCap Market, the Common
Stock has traded on the NASD Over-the-Counter Bulletin Board.  The following
table sets forth the high and low sales prices per share of the Common Stock of
the Company as reported by NASDAQ for the period prior to September 16, 1995 and
by the NASD thereafter.  The prices shown do not include retail markups,
markdowns or commissions.

<TABLE>
<CAPTION>
                                                                  SALES PRICES
                                                               ------------------
                                                                 HIGH      LOW
                                                               -------- ---------
          <S>                                                  <C>      <C>
          1996
             First Quarter..................................     $0.85   $ 0.20
             Second Quarter.................................     $0.58   $ 0.27
             Third Quarter..................................     $0.55   $ 0.30
             Fourth Quarter.................................     $0.56   $ 0.28
          1995
             First Quarter..................................     $0.78   $ 0.38
             Second Quarter.................................     $0.84   $ 0.13
             Third Quarter
               (July 1 - September 15)......................     $0.69   $ 0.41
               (September 16 - September 30)................     $0.50   $ 0.25
             Fourth Quarter.................................     $0.49   $ 0.19
          1994
             First Quarter..................................     $0.88   $ 0.47
             Second Quarter.................................     $1.13   $ 0.50
             Third Quarter..................................     $1.09   $ 0.75
             Fourth Quarter.................................     $1.06   $ 0.53
</TABLE>
    
     The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain any future earnings for funding growth
and, therefore, does not anticipate declaring or paying any cash dividends on
its Common Stock for the foreseeable future. In addition, the Company's credit
facility with its bank restricts the payment of dividends on the Company's
Common Stock.      

     During the past fiscal year, the Company has issued unregistered securities
to a limited number of persons, as described below. No underwriters or 
underwriting discounts or commissions were involved. There was no public 
offering in any such transaction, and the Company believes that each transaction
was exempt from registration requirements of the Securities Act of 1933, as 
amended (the "Securities Act"), by reason of Section 4(2) thereof.

     1. Between May and August 1996, the Company issued an aggregate of 
10,000,000 shares of Common Stock to approximately 57 investors at a purchase 
price of $0.25 per share for an aggregate purchase price of $2,500,000.

     2. On April 21, 1997, the Company issued an aggregate of 2,500,000 shares
of Common Stock to Patrick Tang, Ura Tang and Erik Achten at a purchase price of
$0.30 per share for an aggregate purchase price of $750,000.
     
                                      -9-
<PAGE>
 
 
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

                     SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected financial data for the five years ended December 31,
1996 are derived from the Consolidated Financial Statements of the Company,
which have been audited.  This table should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<TABLE>    
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                          ----------------------------------------------------------------------------------------
                                                1996             1995              1994              1993               1992
                                          ---------------  ----------------  ----------------  ----------------  -----------------
<S>                                       <C>              <C>               <C>               <C>               <C>
STATEMENT OF OPERATIONS DATA:
Net sales...............................    $10,194,675    $     7,538,354     $16,024,991       $14,300,282        $12,193,643
Other revenues..........................             --             75,904         228,508            50,000                  0
                                          ---------------  ----------------  ----------------  ----------------  -----------------
     Total revenues.....................     10,194,675          7,614,258      16,253,499        14,350,282         12,193,643

Costs and expenses:
     Cost of goods sold.................      7,199,572          7,167,670/(1)/ 11,399,760        11,199,119         8,867,375
     Operating expenses.................      4,591,682(3)       4,608,319       4,566,236         5,887,070         3,110,821
                                          ---------------  ----------------  ----------------  ----------------  -----------------
Operating income (loss).................     (1,596,579)        (4,161,731)        287,503        (2,735,907)          215,447
Other expenses, net.....................        283,178          1,118,002/(2)/    798,918           692,584           512,260
                                          ---------------  ----------------  ----------------  ----------------  -----------------
Net loss before extraordinary gain......    $(1,879,757)   $    (5,279,733)    $  (511,415)      $(3,428,491)      $  (296,813)
Extraordinary gain - forgiveness of debt             --          1,650,256              --                --                --
                                          ---------------  ----------------  ----------------  ----------------  -----------------
Net loss................................    $(1,879,757)   $    (3,629,477)    $  (511,415)      $(3,428,491)      $  (296,813)
                                          ===============  ================  ================  ================  =================

Net loss per share:
     Loss before extraordinary gain.....          $(.04)            $(0.15)         $(0.02)           $(0.15)           $(0.01)
     Extraordinary gain.................             --               0.05              --                --                --
                                          ---------------  ----------------  ----------------  ----------------  -----------------
     Net loss per share.................          $(.04)            $(0.10)         $(0.02)           $(0.15)           $(0.01)
                                          ===============  ================  ================  ================  =================
Weighted average number of  common
 and common equivalent shares
 outstanding............................     51,368,619         34,540,653      24,210,083        23,573,316        19,847,283
Number of common shares outstanding.....     56,635,326         46,135,326      26,474,326        23,721,356        23,101,948
</TABLE>     

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                          ----------------------------------------------------------------------------------------
                                                1996              1995              1994              1993              1992
                                          ----------------  ----------------  ----------------  ----------------  ----------------
<S>.....................................  <C>               <C>               <C>               <C>               <C>
BALANCE SHEET DATA:
Total assets............................    $ 5,062,643      $   1,603,195     $ 7,349,872       $ 6,430,812       $ 8,319,229
Total long-term debt....................              0            851,440               0           142,878           410,673
Net working capital.....................        920,140            554,955       1,845,118         1,201,820         4,077,404
Stockholders' equity (deficiency).......      1,149,955           (370,902)      2,033,989         1,310,114         4,166,377
</TABLE>

_______________________

(1)  Includes Inventory write-down to lower of cost or market of $586,000 in
     1995.
(2)  Includes costs of $783,289 related to the termination of the proposed
     merger with L.A. Gear.
(3)  Includes contingent warrant expense of $511,614.      

                                      -10-
<PAGE>
 
  ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS

     The following discussion of the Company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto.

FORWARD LOOKING STATEMENTS

     Certain information contained in this Form 10-K contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
Company's financial condition, results of operations and liquidity and capital
resources and statements as to management's beliefs, expectations or options.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements.  Certain of these
risks, uncertainties and other factors, as and when applicable, are discussed in
the Company's filings with the Securities and Exchange Commission. Factors that
could cause actual results to differ naturally include, but are not limited to,
those discussed herein under "Risk Factors".

RISK FACTORS

     In addition to the other information contained in this Form 10-K, the 
following risk factors should be considered by investors in evaluating the 
Company and its business. The risk factors reflected below are not intended to 
be an exhaustive list of all risks involved, but merely a representative listing
of those risks currently contemplated by the Company.

     Operating Losses; Ability to Continue as Going Concern.  RYKA commenced 
operations in February 1987 and has incurred substantial losses in each year of 
its operations. Net losses amounted to $1,879,757, $3,629,477 and $511,415 for 
the years ended 1996, 1995 and 1994, respectively. At December 31, 1996, the 
Company had an accumulated deficit of $19,728,241. The report of RYKA's 
independent auditors with regard to the financial statements for each of the 
fiscal years ended 1987 through 1996 stated that there is substantial doubt 
about RYKA's ability to continue as a going concern. Management believes the 
Company's ability to continue as going concern is dependent upon securing 
adequate financing to fund operations until the Company achieves sustained 
profitability. In order for RYKA to achieve sustained profitability, management
believes it must increase sales, improve gross profit margins and reduce 
expenses as a percentage of total sales. There can be no assurance that RYKA 
will be successful in achieving these goals.

     Future Capital Needs.  On June 4, 1997, the Company and its bank entered 
into an amended forbearance agreement pursuant to which the bank agreed to 
extend both the RYKA and KPR credit facilities to November 30, 1997. If the 
Company is unable to obtain a new credit facility and/or additional equity 
and/or subordinated debt financing, there is no assurance that the Company will
be able to continue operations. Further, there is no assurance that if the
Company is able to obtain such financing, it will be on terms satisfactory for
the Company. Moreover, given the dependence of the Company on certain support
provided by KPR, including, but no limited to, financial support, administrative
support, warehousing and office rental, KPR's ability to obtain continued
financing or additional financing for its operations could significantly
adversely impact the ability of the Company to continue in business independent
of KPR. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."

     Risks Associated with the Reorganization. The consummation of the 
Reorganization is subject to a number of conditions, including but not limited
to, declaration of the effectiveness of the 1997 proxy statement relating to the
Reorganization by the Commission, approval by the respective boards of directors
and stockholders of the Company and KPR, and certain required consents,
including the consent of the Company's current bank. Therefore, there can be no
assurance that the Reorganization will be consummated.

     Competition. The athletic footwear industry in which RYKA markets and sells
its products is highly competitive. RYKA's competitors include specialized 
athletic shoe companies as well as companies with diversified product lines. The
Company believes that its unique niche, combined with effective advertising and 
marketing, fashionable styling, high quality and technological advances are the 
most important competitive factors. However, due to substantial growth and 
interest in the women's segment of the high performance athletic footwear 
market, there has been increased competition from established companies, 
especially Nike and Reebok, which have developed advertising and promotional 
programs directed to this segment of the market. RYKA's competitors include 
Adidas, Avia, Asics, Converse, K-Swiss, New Balance, Nike, Reebok and Saucony.  
The Company's competitors have significantly greater financial and other 
resources and more extensive marketing staffs than the Company. Accordingly, 
there is no assurance that the Company will be able to compete successfully with
any of these companies or achieve any meaningful market share without 
significant additional resources.

     Substantially All Assets Pledged.  In connection with its financing 
arrangements with the Company's current bank, the Company has pledged 
substantially all of its assets as security for the performance of its 
obligations. In addition, the Company has also pledged substantially all of its 
assets (after satisfying any obligations to its bank) to KPR in connection with 
its secured subordinated debt and the letter of credit facility provided by KPR.
In the event that the Company were to default on the payment of any amounts owed
under the agreements, the Company's lenders would have the ability to satisfy 
the Company's obligations to them by selling or causing the sale of some or all 
assets of the Company.
    
     Dependence Upon Key Personnel.  The Company's ability to market its 
products and to achieve profitability will depend, in large part, on its ability
to attract and retain qualified personnel. Competition for such personnel is 
intense and there can be no assurance that the Company will be able to attract 
and retain such personnel. In particular, RYKA is dependent upon the services of
Michael G. Rubin, its Chairman and Chief Executive Officer. RYKA does not 
currently have an employment agreement with Michael Rubin, however RYKA has 
entered into a five-year employment agreement with Mr. Rubin which will become 
effective upon the completion of the proposed Reorganization. RYKA maintains key
person life insurance policies on Mr. Rubin with coverage in amount of
$4,000,000. The loss of Mr. Rubin could have a material adverse effect on the
Company.       

     Reliance on Foreign Manufacturers. As is customary in the footwear 
industry, all of the footwear marketed by the Company is manufactured to its 
specifications by independent factories in the Far East. The Company's importing
of footwear may be adversely affected by fluctuations in currency exchange 
rates, the adoption of bilateral trade agreements between the United States and 
countries in which the Company's suppliers are located, work stoppages or the 
imposition of unilateral restrictions on trade, including quotas or additional 
duties, by either the United States or any supplier country. In addition, the 
current political climate in the Far East is not always stable and may cause 
delays in the Company's ability to deliver products to its customers in a timely
manner or, depending upon the severity of the situation, may limit or restrict 
the Company's ability to have its products manufactured at all. Although the 
Company does not believe that these factors have had a material impact on 
operations to date, such factors could ultimately increase the Company's cost of
goods, resulting in higher product prices and lower gross profits unless 
alternative manufacturing arrangements could be implemented.

         
    
     Customer Preferences and Competition.  The athletic footwear industry is 
intensely competitive and subject to rapid changes in consumer preferences, as 
well as technological innovations. A major technological breakthrough or 
unusual marketing or promotional success by one of the Company's competitors 
could adversely affect the Company's competitive position. Competition in the 
markets for the Company's products occurs in a variety of ways, including price,
quality, brand image and ability to meet delivery commitments to retailers. The 
intensity of the competition faced by the Company and the rapid changes in the 
consumer preference and technology that can occur in the footwear market 
constitute significant risk factors in the Company's operations.      

     No Dividends.  The Company has paid no dividends to its stockholders since 
its inception and does not plan to pay dividends in the foreseeable future.  The
Company currently intends to retain any earnings to finance the growth of the 
Company.  In addition, the Company's credit facility with its bank restricts the
amount of dividends which may be paid on the Common Stock.

     Limitation on Directors' Liabilities under Delaware Law.  Pursuant to the 
Company's Certificate of Incorporation and under Delaware law, directors of the 
Company are not liable to the Company or its stockholders for monetary damages 
for breach of fiduciary duty, except for liability in connection with a breach 
of duty of loyalty for acts or omissions not in good faith or which involve 
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchasing illegal under Delaware law or any transaction in which a 
director has derived an improper personal benefit.

     Securities Market Factors.  There have been periods of extreme volatility 
in the stock markets, which in many cases were unrelated to the operating 
performance of, or announcements concerning, the issuers of the affected stock. 
During such periods, the price of the affected stock, including the Company's 
Common Stock, has fluctuated substantially. General market price declines or 
market volatility in the future could adversely affect the price of the 
Company's Common Stock.
    
     NASDAQ Delisting.  The Company did not meet the listing standards for 
inclusion on the NASDAQ Small Cap Market and was delisted on September 15, 1995.
The Company's Common Stock is currently listed on the OTC - Bulletin Board. Such
delisting may have decreased the liquidity and transferability of the Company's 
common stock. The Company believes that the completion of the proposed 
Reorganization and related reverse stock split should better enable the Company 
to relist its common stock on the NASDAQ Stock Market, thereby increasing the 
liquidity and transferability of its common stock; however, there can be no 
assurance that the Reorganization will be consummated, or if consummated, will 
result in the inclusion of the Company's common stock on NASDAQ.      

     Possible Adverse Effect of Penny Stock Rules.  As a result of the delisting
of the Company's Common Stock from the NASDAQ Small Cap Market, the Company's 
Common Stock is subject to Rule 15g-9 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), which imposes additional sales practice 
requirements for broker-dealers which sell such securities to persons other than
established customers and accredited investors as defined in Regulation D under 
the Securities Act. For transactions covered by this rule, a broker-dealer must 
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, such
rule may adversely affect the ability of broker-dealers to sell the Company's 
Common Stock and may adversely affect the ability of persons acquiring 
shares in this offering to sell any of the shares acquired in the secondary 
market.

     The Commission regulations define a "penny stock" as any equity security 
not registered on a national securities exchange or for which quotation 
information is not disseminated on NASDAQ and has a market price (as therein
defined) of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require delivery, prior to a transaction in a
penny stock, of a disclosure schedule prepared by the Commission relating to the
penny stock market. Disclosure is also required to be made about commissions
payable to both the broker-dealer and registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.

     The foregoing required penny stock restrictions will not apply to the 
Company's Common Stock if such securities are included for quotation on NASDAQ 
and have certain price and volume information provided on a current and 
continuing basis or meet certain minimum net tangible assets or average revenue 
criteria. There can be no assurance that the Company's Common Stock will qualify
for exemption from these restrictions. In any event, even if the Company's 
Common Stock were exempt from such restrictions, it would remain subject to 
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority 
to prohibit any person that is engaged in unlawful conduct while participating 
in a distribution of a penny stock from associating with a broker-dealer or 
participating in a distribution of a penny stock, if the Commission finds that 
such a restriction would be in the public interest. The market liquidity for the
Company's Common Stock could be severely adversely affected by these rules.

GENERAL OVERVIEW
    
     The Company has not had a single profitable fiscal year since its inception
and had approximately $1,880,000 in losses in 1996.  In addition, the Company
had an accumulated deficit of approximately $19,728,241 and stockholders' equity
of approximately $1,149,955 as of December 31, 1996.      
    
     On July 31, 1995, the Company entered into a financing arrangement with MR
Acquisitions pursuant to which MR Acquisitions provided the Company with equity
and subordinated debt financing and the ability to obtain funds and letters of
credit through new financing facilities. As part of the financing, the Company
negotiated substantial debt forgiveness with both secured and unsecured
creditors and established a new management team to operate the restructured
Company. Upon closing of the transaction with MR Acquisitions, the Company had
stockholders' equity of approximately $580,000 as compared to stockholders'
deficiency of over $2,000,000 as of June 30, 1995. Since July 31, 1995,
operating losses have been incurred, which have diminished stockholders' equity
and an additional $2,500,000 of gross proceeds has been received from an equity
private placement which commenced in May 1996 and was concluded in August 1996
(the "1996 Private Placement"). As a result, stockholders' equity was
approximately $1,149,955 and subordinated debt remained at approximately
$851,440 as of December 31, 1996.     

     During the first half of 1995 and until the financing with MR Acquisitions
was consummated, staff reductions occurred on both a voluntary and involuntary
basis and temporary employees were required to handle daily operations.  Sales
efforts were limited for a variety of reasons, including the inability to obtain
product from the Company's overseas production sources.  After the financing
with MR Acquisitions was consummated, new management began to reposition the
Company by, among other things, relocating the Company from Norwood,
Massachusetts to King of Prussia, Pennsylvania, terminating remaining employees
in the Massachusetts location, hiring and training new employees in key
management positions, including a new President and a new Chief Financial
Officer, filling other necessary positions within the Company, and beginning
to develop new products and build or rebuild customer and supplier
relationships. While management believes that these activities will have a long-
term beneficial impact, they had significant negative impact on the Company's
sales and operations in 1995. To accomplish its goals, to develop and acquire
new merchandise, market and promote the Company's product and expand the
workforce in support of the Company's current plans, the Company will have to
incur substantial expenditures.

                                      -11-
<PAGE>
 
 
     As described in Note A to Notes to RYKA's  Consolidated Financial
Statements, on September 26, 1996, the Company entered into an Agreement and
Plan of Reorganization (the "Reorganization Agreement") with KPR and certain
affiliated companies (collectively, "the KPR Companies"), all of which are
wholly owned by the Chairman and Chief Executive officer of RYKA.  Pursuant to
the Reorganization Agreement, the KPR Companies would be merged with RYKA.
Although the Reorganization was originally scheduled to close by December 31, 
1996,  due to recent events, the completion of the Reorganization has been 
delayed. See "Business - Recent Events." RYKA expects the Reorganization will be
completed by the end of 1997. If such merger were to occur, RYKA believes that
the combined companies would realize certain operating benefits. However, there
is no assurance that the merger will occur or that such benefits will
materialize.

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Consolidated Statements of
Operations bear to net sales and the percentage change in those items from
period to period:

<TABLE>     
<CAPTION>
                                                                                 PERIOD TO PERIOD PERCENTAGE
                                                  PERCENTAGE OF NET SALES            INCREASE (DECREASE)
                                             ----------------------------------  ---------------------------
                                                              YEAR ENDED DECEMBER 31,
                                             ----------------------------------  ---------------------------
                                                1996        1995        1994     1996 VS 1995  1995 VS 1994
                                             ----------  ----------  ----------  ------------  -------------
<S>                                          <C>         <C>         <C>         <C>           <C>
Net sales...............................       100.0%      100.0%      100.0%        35.2%          (53.0)%
Other revenues..........................          --         1.0         1.4       (100.0)          (66.8)
                                             ----------  ----------  ----------  ------------  -------------
Costs and expenses:
  Cost of goods sold /(1)/..............        70.6%       95.1%       71.1%         0.4%          (37.1)%
General and administrative
       expenses /(2)/...................        12.2        27.4        10.8        (39.9)           19.0
  Sales, marketing and advertising
       expenses.........................        19.8        23.9        16.3         11.7           (30.7)
  Research and development
       expenses.........................         6.6         4.8         1.4         86.6            58.9
  Contingent warrant compensation.......         5.0         ---         ---          N/M             ---
  Special charges.......................         1.5         5.0          --        (59.8)        N/M /(3)/
                                             ----------  ----------  ----------  ------------  -------------
Total costs and expenses................       115.7%      156.2%       99.6%         0.1%          (26.2)%
                                             ----------  ----------  ----------  ------------  -------------
Operating income (loss).................       (15.7)%     (55.2)%       1.8%        61.6%       (1547.50)%
Other expense, net......................         2.8        14.8         5.0        (74.7)           39.9
                                             ----------  ----------  ----------  ------------  -------------
Net loss before extraordinary gain......       (18.5)      (70.0)       (3.2)        64.4          932.40
Extraordinary item - forgiveness
   of debt..............................          --        21.9          --       (100.0)        N/M /(3)/
                                             ----------  ----------  ----------  ------------  -------------
Net loss................................       (18.5)%     (48.1)%      (3.2)%       48.2%        (609.70)%
                                             ==========  ==========  ==========  ============  =============
</TABLE>      

____________________________________

(1)  Includes Inventory write down in 1995 to lower of cost or market of
     $568,000.
(2)  Includes provision for losses on doubtful accounts.
(3)  N/M means "not meaningful."

     Year Ended December 31, 1996 as Compared to the Year Ended December 31,
     -----------------------------------------------------------------------
1995.
-----

     Net Sales.  Net sales increased by $2,656,321, or 35.2% , from $7,538,354
for 1995 to $10,194,675 for 1996.  This increase in net sales was primarily due
to: (i) increased sales in the third quarter of 1996 as a 

                                      -12-
<PAGE>
 
result of improvements in the design and development of RYKA's fall product
line; (ii) the hiring of manufacturers' representatives, experienced in the
athletic footwear industry, covering the entire United States and (iii) the 
re-establishment of relationships with major retailers in the women's athletic
footwear market.
    
     Cost of Goods Sold. During 1995, the Company took a charge of $586,000 to
record inventory at the lower of cost or market. Costs of goods sold before this
inventory write-down increased by $617,902, or 9.4%, from $6,581,670 for 1995 to
$7,199,572 for 1996. The overall gross profit margin, exclusive of this write-
down, expressed as a percentage of net sales increased by 17.2%, from 12.7% for
1995 to 29.4% for 1996. The increase in gross profit for 1996 was primarily due
to (i) the impact of an improved product line sold for Fall 1996 at greatly
improved gross margins; (ii) the more timely delivery schedule of product to
retailers in 1996, thus eliminating certain incentive discounts which were
required to be offered to customers in 1995 and (iii) the improvement of the
financial position of the Company in 1996. During the first seven months of
1995, RYKA was under extreme financial pressures. As a result, the Company was
required to sell substantial amounts of inventory at significant losses or no
profit in order to raise cash for operations. The negative impact on gross
profit for the first two quarters of 1995 adversely affected the overall gross
profit for the year.     
   
      General and Administrative Expenses.  General and administrative expenses,
including the provision for losses on doubtful accounts, decreased by $823,893,
or 39.9%, from $2,065,553 for 1995 to $1,241,660 for 1996.  This decrease was
due primarily to: (i) a decrease in 1996 in the Company's provision for
estimated bad debts of approximately $345,000; (ii) a decrease in factoring
commissions of approximately $65,000; (iii) a decrease of approximately $133,000
in consulting fees incurred in 1995 in connection with the hiring of interim
management; (iv) a decrease in legal expense of approximately $70,000; and (v) a
decrease in other general and administrative expenses for 1995 which included
approximately $40,000 in legal fees incurred in connection with a failed attempt
to raise capital from investors and approximately $33,000 in trademark and
licensing fees incurred in connection with the dissolution of RYKA GMBH in
Germany which formerly held the trademark of RYKA.       

     Sales and Marketing Expenses.  Sales and marketing expenses increased by
$210,985, or 11.7%, from $1,803,686 for 1995 to $2,014,671 for 1996.  This
increase was due to (i) an increase in trade show expenses of approximately
$245,000 related to RYKA's attendance at the NSGA trade show in July 1996, a
show not attended by RYKA in 1995, as well as an increase in expenditures at the
Supershow in February 1996 compared to 1995; and (ii) an increase in
commissions of approximately $50,000 due to the increase in sales from 1995 to
1996, offset, in part, by a decrease in payroll and payroll related expenses of
approximately $40,000 and a decrease in international point of purchase
promotional items of $60,000. For 1996, sales commissions paid to sales
representatives was 2.9% of net sales compared to 3.3% of net sales for 1995.
The effective decrease in the commission rate was the result of lower commission
rates paid in connection with larger, key accounts.
    
     Research and Development Expenses.  Research and development expenses
increased by $311,376, or 86.6%, from $359,646 in 1995 to $671,022 in 1996.
This increase reflects a continuing effort by management to improve the
Company's product line.  The increase is comprised of (i) an increase in
salaries and consulting fees of approximately $200,000; (ii) an increase in
travel and entertainment of approximately $75,000 related to expenses incurred
in connection with trips by production and development personnel to China to
develop and supervise production; and (iii) an increase in sample costs of
approximately $40,000. The Company has reason to believe research and 
development expenses will decrease from this rate as a result of the Company's 
intention to hire in-house designers as opposed to engaging outside consultants;
however, there can be no assurance that a decrease in such expenses will occur.
     
     Contingent Warrant Compensation.  Contingent warrant compensation of
$511,614 relates to a non-cash charge for the vesting of 2,131,730 shares of
Common Stock issuable pursuant to a contingent stock purchase warrant
("Contingent Warrant") issued to MR Acquisitions. In July 1995, in connection
with the transactions with MR Acquisitions, the Company issued the Contingent
Warrant to purchase up to 4,000,000 shares of Common Stock at an exercise price
of $.01 per share. Pursuant to the terms of the Contingent Warrant, if at any
time within one year of its issuance, July 31, 1996, the Company issued a number
of shares of Common Stock which resulted in the Company having in excess of
50,000,000 shares of Common Stock issued and outstanding, provided that any such
shares above such 50,000,000 were issued for the purpose of (i) inducing a
lender to make loans to the Company, (ii) in connection with an infusion of
capital to the Company, (iii) a settlement of debts with the Company's
creditors or (iv) a combination thereof, then upon the occurrence of such stock
issuance, four shares of Common Stock issuable pursuant to the Contingent
Warrant would vest for every ten additional shares issued. Under accounting
rules governing the issuance of warrants, the charge is equal to the difference
between the strike price of $0.01 and the fair market value at the time the
contingency is satisfied.

     Special Charges.  Special charges decreased by $226,719, or 59.8%, from
$379,434 incurred in 1995 to $152,715 in 1996.  The special charges incurred in
1996 related to the "Partners Share Success" Equity 

                                      -13-
<PAGE>
 
 
     
Incentive Plan. The purpose of this program was to provide an ownership interest
in the Company through the grant of equity incentives to retail sales personnel
and store management of the Company's customers. As a result of the proposed
Reorganization between RYKA and the KPR Companies, the Company decided to
terminate this plan prior to the issuance of any shares and write off $152,715
of administrative costs related to this program. In 1995, special charges were
incurred in connection with the bank financing portion of the transactions with
MR Acquisitions and the related closing of the Massachusetts facility and
relocation of operations to King of Prussia, Pennsylvania.     
    
     Other (Income) Expense, Net. Other (income) expense, net, decreased by
$834,824, or 74.7%, from $1,118,002 for 1995 to $283,178 for 1996. This decrease
was primarily attributable to a write-off of $783,289 associated with the
termination of the proposed merger with L.A. Gear, Inc. in 1995 and a decrease
in interest expense of $126,996, or 36.5%, from $348,169 for 1995 to $221,173
for 1996. The decrease in interest expense was a result of additional capital
funds raised by the Company in July 1995, as well as in the second quarter of
1996. In connection with the financing transaction with MR Acquisitions, the
Company established a line of credit with interest at the prime rate plus one
percent. This line of credit was subsequently refinanced with a new lender at
similar rates. The Company's previous financing arrangement provided for
inventory financing at effective interest rates in excess of 20%.     

    Year Ended December 31, 1995 as Compared to the Year Ended December 31, 
    -----------------------------------------------------------------------
1994.
----

    Net Sales.  Net sales decreased by $8,486,637, or 53.0%, from $16,024,991
for 1994 to $7,538,354 for 1995.  The decrease in net sales was due to several
factors which continued to affect sales throughout 1995.  First, the uncertainty
as to the Company's future continued operations after the termination of the
proposed L.A. Gear merger adversely affected net sales.  Second, many customers,
including the Company's largest customer in 1994, did not place their planned
orders for the Fall or "back to school" product due to a combination of customer
apprehension and the fact that the Fall goods, traditionally shipped towards the
end of June or the beginning of July, were not available for delivery to
retailers until the middle of September through the end of the year. Further,
many customers either canceled their orders that had been placed or were given
additional discounts and extended terms, both of which adversely impacted net
sales.  Third, during the first seven months of 1995, the Company sold product
at large discounts in order to generate cash to continue to fund the Company's
operations. As a result of the Company's financial condition and the termination
of the Company's production financing arrangements, the Company was unable to
obtain additional product from its suppliers in a timely manner for the Fall
1995 season.  Due to the delay of the delivery of the Fall 1995 season product,
the Company would not have been able to sell its product at full margin.   As a
result, the Company negotiated reductions in its purchase commitments for the
originally scheduled production for the Fall 1995 season.  Fourth, the athletic
footwear 

                                      -14-
<PAGE>
 
 
industry was still experiencing sluggishness in 1995 and the volume of off-price
product continued at high levels. Fifth, the women's athletic footwear category
was becoming increasingly competitive with larger vendors increasing their focus
in this area thereby increasing the need to provide additional discounts.

    Costs of Goods Sold.  Cost of goods sold decreased $4,232,090, or 37.1%,
from $11,399,760 for 1994 to $7,167,670 for 1995 principally as a result of the
decrease in sales.  The overall gross profit on net sales decreased by 24.0%
from 28.9% in 1994 to 4.9% in 1995.  This decrease reflected the inventory mark-
down of $586,000 in 1995 and the Company's need to liquidate inventory in the
first half of 1995.  The negative impact on gross profit of the first two
quarters of 1995 adversely affected the overall gross profit for the year.  The
following table sets forth certain information relating to the Company's gross
profit (loss) for each quarter of 1995.

<TABLE>
<CAPTION>
                                                   QUARTER ENDED                         YEAR ENDED   
                                ---------------------------------------------------    ------------              
                                  MARCH 31   JUNE 30   SEPTEMBER 30   DECEMBER 31       DECEMBER 31  
                                ----------- --------- -------------- -------------     ------------  
<S>                               <C>        <C>       <C>            <C>               <C>          
                                                         (in thousands)                              
Sales......................         $4,135   $ 1,484         $1,300         $ 619            $7,538  
Cost of Sales..............          3,975     1,800            927           466             7,168  
Gross Profit...............            160      (316)           373           153               370  
Gross Profit Percentage....            3.9%   (21.3)%          28.7%         24.7%              4.9%  
</TABLE>

    General and Administrative Expenses.  General and administrative expenses,
including the provision for losses on doubtful accounts, increased by $329,865,
or 19.0%, from $1,735,688 for 1994 to $2,065,553 for 1995.  The increase was
primarily the result of (i) an increase in insurance expense due primarily to
directors and officers liability insurance for new directors and coverage for
former directors; (ii) an increase in  travel expenses; (iii) a significant
increase in bad debts from $130,000 in 1994 to $359,388 in 1995; and (iv) an
increase in consulting fees in connection with the hiring of interim management
until a permanent management team was hired. These increases were offset, in
part, by a decrease in factor commissions due to the termination of the
Company's relationship with its factor. As a percentage of sales, general and
administrative expenses increased significantly as many expenses remained
relatively constant. Provisions for losses on doubtful accounts accounted for
4.7% of sales in 1995 compared with 0.8% of sales in 1994 due, in part, to the
fact that net sales in 1995 were extremely low as a result of the difficulties
that the Company experienced.

    Sales and Marketing Expenses.  Sales and marketing expenses decreased by
$800,591, or 30.7%, from $2,604,277 for 1994 to $1,803,686 for 1995.  However,
sales and marketing expenses expressed as a percentage of net sales increased
from 16.3% for 1994 to 23.9% for 1995.  The dollar decrease in sales and
marketing expenses was primarily due to a reduction in sales commissions of
approximately $426,800, or 63.2% from 1994 to 1995.  The reduction in sales
commissions was proportionally greater than the decrease in net sales of 53.0%.
Sales commissions expressed as a percentage of net sales decreased from 4.2% for
1994 to 3.3% for 1995.  The reduction in sales commissions was the result of
reduced commission rates and a greater proportion of house accounts sold by
Company management at no commission.  The decrease in sales and marketing
expenses was also due to a reduction in promotional expenses such as clothing
giveaways and promotional allowances granted to retailers, a reduction in staff
salary and related expenses and a decrease in expenses related to trade shows.

    Research and Development Expenses.  Research and development expenses
increased by $133,375, or 58.9%, from $226,271 in 1994 to $359,646 in 1995.
This increase was attributable primarily to an increase in payroll and
consultant related costs offset, in part, by a reduction in sample costs. The
consultant-related costs

                                      -15-
<PAGE>
 
were incurred in connection with the hiring of designers to design and develop
the Fall 1996 line. In addition, the Company engaged the services of the former
Vice President of Production on a consulting basis.

    Special Charges.  Special charges in 1995 were incurred in connection with
the bank financing portion of the transactions with MR Acquisitions and the
related closing of the Massachusetts facility and relocation of operations to
King of Prussia, Pennsylvania.  These expenses included transaction costs,
termination of a significant portion of personnel prior to the financing,
temporary housing for certain relocated personnel, recruitment of new management
and personnel and costs associated with moving, start up of new operations and
winding down of prior operations.

    Other (Income) Expense, Net.  Other (income) expense, net, increased
$319,084, or 39.9%, from $798,918 for 1994 to $1,118,002 for 1995.  This
increase was due to (i) merger related costs of $783,289 incurred in 1995 in
connection with the failed merger with L.A. Gear, (ii) a reduction in interest
expense of $457,103, or 56.8%, from $805,272 for 1994 to $348,169 for 1995, due
to the termination and settlement with the Company's previous financing source,
and (iii)  the capital infusion resulting from the consummation of the financing
with MR Acquisitions.

    Extraordinary Item.  The extraordinary item of approximately $1,650,256 in
1995 related to gain on settlements with both secured and unsecured creditors in
connection with the financing with MR Acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

     Through July 31, 1995, RYKA continued to experience a critical shortage of
cash.  On July 31, 1995, the Company consummated a financing agreement with MR
Acquisitions, pursuant to which MR Acquisitions provided or arranged to provide
the Company with up to $8,000,000 of new financing in the form of (i) a
$1,000,000 equity and subordinated debt investment by MR Acquisitions and KPR,
an affiliate of MR Acquisitions, (ii) a $2,000,000 letter of credit facility
from KPR, (iii) a $4,000,000 revolving credit facility with a bank, and (iv) a
$1,000,000 equity investment through the private placement of Common Stock with
certain investors.  Prior to consummating the financing with MR Acquisitions,
the Company had a nominal cash balance and a working capital deficiency of
approximately $2,300,000.
    
     As a result of consummating the financing with MR Acquisitions, the Company
received proceeds from the sale of Common Stock and warrants and subordinated
notes aggregating approximately $1,750,000 net of transaction related costs.
Additionally, secured and unsecured creditors forgave certain indebtedness
resulting in a gain of approximately $1,650,000.  The financing with MR
Acquisitions resulted in an increase in working capital of approximately
$3,600,000, so that the Company's working capital deficiency of approximately
$2,300,000 was converted to positive working capital of approximately $1,300,000
at July 31, 1995. As of December 31, 1996, the Company's working capital was
approximately $920,140. The increase in working capital, in large part, relates
to the receipt of $2,500,000 in gross proceeds from the 1996 Private Placement
which occurred between May and August of 1996.

     On August 15, 1996, the Company entered into a credit facility with a bank
which replaced the Company's prior credit facility.  The new credit facility
initially had a term of one year and increased the amount that RYKA could borrow
to $4,500,000 based upon certain advance ratios with interest at prime plus
0.25%.  Concurrently with RYKA, KPR closed a new credit facility with the same
bank. At December 31, 1996, RYKA owed a total of $1,592,453 under its credit 
facility with the bank, RYKA's only lender.      

     On September 26, 1996, the Company entered into the Reorganization
Agreement with the KPR Companies and Michael Rubin, Chairman and Chief Executive
Officer of RYKA.  The Company anticipates  that the proposed Reorganization will
be completed by the end of 1997. In order for the Reorganization to become
effective, a majority vote of the stockholders of RYKA and consent by the
Company's bank, among other things, is required.
         
    
     On November 8, 1996, the Company's and KPR's bank notified KPR that KPR was
in default of certain financial covenants, specifically the debt to net worth 
ratio (which was required to be 5.50:1.0 though was 7.80:1.0 at August 31, 1997 
and 8.90:1.0 at September 30, 1997) and required tangible net worth (which was 
required to be at least $850,000 at September 30, 1997 though was $156,438 at 
such date), and certain provisions relating to financial information, 
specifically improper recognition of revenue and related expenses. On November 
8, 1997, at the time of KPR's default, RYKA's credit facility was not 
cross-defaulted with KPR's agreement and RYKA was in compliance with its own 
financial covenants. Accordingly, RYKA was not in default of its loan with the 
bank.      
    
     As a result of KPR's default, on February 7, 1997, KPR entered into a 
forbearance agreement regarding its credit facility pursuant to which, among 
other things, the bank agreed not to pursue its remedies under the credit 
facility until the earlier of April 18, 1997 (as amended) or an event of default
(as defined), established new financial covenants and provided for a termination
date of April 18, 1997 (as amended). Also on February 7, 1997, in conjunction 
with KPR's forbearance agreement, the Company entered into an amendment to its 
credit facility that provided for, among other things, a similar termination 
date of April 18, 1997 (as amended) for the Company's credit facility.
     
     As of June 4, 1997, the bank agreed to extend both the RYKA and KPR credit
facilities to November 30, 1997 or an event of default (as defined). Under its
amended agreement, RYKA may borrow under its revolving credit facility up to the
lesser of $4,500,000 or its borrowing base (as defined). Interest on its
borrowings is payable at the bank's prime rate plus 3 1/2%. RYKA is also
required to maintain certain receivables turnover ratios. RYKA's credit facility
is guaranteed by Michael Rubin and MR Acquisitions and is cross-defaulted with
KPR's agreement with the bank.

     The Company and KPR are in discussions with lenders to obtain a
new credit facility or facilities to replace their existing credit facilities
upon the expiration of such facilities.  During these discussions, certain
lenders have indicated that any credit facility that they would provide to the
Company and KPR would be conditional on, among other things, KPR raising
additional equity and/or subordinated debt.  The Company and KPR are seeking to
raise an additional $3.0 - $4.0 million in equity and/or subordinated debt
financing. The Company believes that it is in the best interests of the Company
to resolve the credit facility and equity and/or subordinated debt needs of both
the Company and KPR so that the Company can complete the proposed Reorganization
with the KPR Companies.
        
     On April 21, 1997, RYKA entered into an agreement with certain investors
to sell 2,500,000 shares of Common Stock for an aggregate purchase price of
$750,000 (the "1997 Private Placement"). The proceeds of this sale were used by
the Company to repay $385,000 of the $851,000 subordinated loan from KPR. The
remaining proceeds from this sale were used by the Company to open $810,000 in
letters of credit for the benefit of KPR. The Company is repaying a portion of
the subordinated loan for KPR and is opening letters of credit on behalf of KPR
in order to allow KPR to obtain sufficient financing for its operations until
the proposed Reorganization between RYKA and the KPR Companies can be completed
and a new credit facility for the combined companies can be negotiated.      

     Effective April 1, 1997, the Company negotiated 60-day payment terms with
two of its major suppliers for up to an aggregate of $1,500,000 in purchases at
an annual interest rate of 12.0%. Previously, the Company was on a wire
transfer on shipment basis with this supplier. 

     The Company believes that the extension that the Company and KPR received
from their current bank with respect to their existing credit facilities,
together with the additional cash flow from the payment terms from its
suppliers, will provide the Company with sufficient resources through November
30, 1997. During that period, the Company believes that it will be able to
negotiate a new credit facility or facilities and/or raise additional equity
and/or subordinated debt financing and complete the proposed Reorganization.

     If, however, the Company is unable to obtain a new credit facility and/or
additional equity and/or subordinated debt financing, there is no assurance that
the Company will be able to continue operations. Further, there is no assurance
that if the Company is able to obtain such financing, it will be on terms
satisfactory for the Company.  Moreover, given the dependence of the Company on
certain support provided by KPR, including, but not limited to, financial
support, administrative support, warehousing and office rental, KPR's ability to
obtain continued financing or additional financing for its operations could
significantly adversely impact the ability of the Company to continue in
business independent of KPR.
 
     Even if the Company were able to obtain the financing discussed above or
obtain alternative financing, RYKA may be required to raise additional equity
and/or subordinated debt.  However, no assurance can be given that RYKA will be
successful in raising additional capital, if necessary.  Further, there can be
no assurance that RYKA will achieve profitability or a positive cash flow even
with sufficient capital resources.

                                      -16-
<PAGE>
 
 
SEASONALITY

    The Company's business continues to be seasonal, with the first and third
quarter sales typically being the strongest, corresponding to the spring and
back-to-school seasons.

ITEM 7A:  QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

    Not applicable.

ITEM 8:   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See pages F-1 through F-28 and S-1 attached hereto.

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

    Incorporated by reference from the Company's Current Report on Form 8-K
dated November 26, 1996.

                                      -17-
<PAGE>
 
                                   PART III

ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following sets forth information regarding the executive officers and
directors of the Company at December 31, 1996:

<TABLE>
<CAPTION>
              NAME                 AGE                      POSITION
------------------------------    -----     ------------------------------------
<S>                               <C>       <C>
Michael G. Rubin..............     24        Chief Executive Officer and 
                                             Chairman of the Board

Dennis F. DiDominicis.........     52        President

Steven A. Wolf................     38        Chief Financial Officer and 
                                             Secretary

Kenneth J. Adelberg...........     44        Director

</TABLE>

     Michael G. Rubin has served as Chairman of the Board and Chief Executive 
Officer of the Company since July 31, 1995.  Since establishing KPR Sports 
International, Inc., a privately-held footwear distribution company in 1991, 
Mr. Rubin has served as its President and Director.  In 1994, Mr. Rubin received
the 1995 Entrepreneur of the Year Award for the Delaware Valley Region which is 
sponsored by Inc. magazine and Ernst & Young.  Mr. Rubin is the President of 
several privately-held companies based in King of Prussia, Pennsylvania and 
serves as the Manager of MR Acquisitions, L.L.C., a Delaware limited liability 
company.  Mr. Rubin attended Villanova University, Villanova, Pennsylvania.

     Dennis F. DiDominicis became the Company's President on September 25, 1995.
Currently, Mr. DiDominicis serves as the Company's Executive Vice President. Mr.
DiDominicis has over 25 years of sales, marketing, product development and
sourcing experience. From November 1988 to September 1995, Mr. DiDominicis
worked for Asics Tiger Corporation, a Japanese footwear and apparel manufacturer
and distributor, as a Senior Director of its footwear division and then as a
Vice President of its North American sales and operations. Prior to Asics, Mr.
DiDominicis worked at American Sporting Goods Corporation, Laconia Shoe Company,
Hyde Athletic Industries, Colgate-Kendall Division, and Proctor and Gamble.

     Steven A. Wolf is a certified public accountant who joined the Company on
August 1, 1995 as its Vice President of Finance and Chief Financial Officer.
From November 1990 to August 1995, Mr. Wolf was the Controller/Chief Financial
Officer of Ellessee USA, Inc., a $50 million footwear and sportswear company
which through September 1993 was a wholly-owned subsidiary of Reebok
International.  Mr. Wolf received a B.S. degree in accounting in 1980 from the
State University of New York at Binghamton and is a member of the American
Institute of Certified Public Accountants and the New York State Society of
CPAs.

     Kenneth J. Adelberg has served as a Director of the Company since July 31, 
1995.  Since 1977, he has been President and Chief Executive Officer of HiFi 
House Group of Companies, a privately-held company based in Broomall, 
Pennsylvania.  Mr. Adelberg was a director and founding stockholder of US Wats, 
Inc., a publicly-traded company specializing in business telecommunications 
services, located in Bala Cynwyd, Pennsylvania, which was established in 1989.  
Mr. Adelberg is a founding stockholder and director of First Republic Bank, 
Philadelphia, Pennsylvania, a publicly-traded bank which has been in operation 
since 1989.  Mr. Adelberg holds Bachelor of Science degrees in Biophysics and 
Physiological Psychology from Pennsylvania State University and attended the MBA
program at Drexel University, Philadelphia, Pennsylvania.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Exchange Act requires the Company's directors and 
executive officers, and persons who own more than 10% of a registered class of 
the Company's equity securities, to file with the Securities and Exchange 
Commission initial reports of ownership and reports of changes in ownership of 
Common Stock and other equity securities of the Company. Officers, directors and
greater than 10% shareholders are required by the Commission regulation to 
furnish the Company with copies of all Section 16(a) forms they file.

     To the Company's knowledge, based solely on review of the copies of such 
reports furnished to the Company and written representations that no other 
reports were required during the fiscal year ended December 31, 1996, all 
Section 16(a) filing requirements applicable to its executive officers, 
directors and greater than 10% beneficial owners were complied with, except that
Messrs. Adelberg, DiDominicis and Wolf and Ms. Poe each failed to file a Form 5.

ITEM 11:  EXECUTIVE COMPENSATION

Report of the Board of Directors

     The Compensation Committee currently consists of Messrs. Rubin and
Adelberg. For 1996, the Board of Directors reviewed the compensation of
executive officers, made decisions regarding executive compensation and
administered the Company's employee stock option plans.

     The Company's compensation policies for executive officers are to (i) 
provide compensation packages, so as to attract, motivate and retain executives,
(ii) link a significant portion of compensation to financial results, so as to 
reward successful performance, and (iii) provide long-term equity based 
compensation, so as to further align the interests of executives with those of 
the shareholders and further reward success and performance. The principal 
components of the Company's executive compensation are base salary, incentive 
compensation and stock options.

     In determining compensation levels, the Company considers compensation 
packages offered by similar sized companies within the athletic footwear 
industry. Compensation levels for individual executive officers may be more or 
less than those offered by such other companies, depending on a subjective 
assessment of individual factors, such as the executive's position, skills, 
achievements, tenure with the Company and historical compensation levels.

     As of December 31, 1996, the Company had employment agreements with Dennis 
F. DiDominicis, the Company's prior President and current Executive Vice 
President, and Steven A. Wolf, the Company's current Chief Financial Officer.
Mr. DiDominicis' agreement, which was effective as of September 25, 1995, has an
initial term of five years, subject to automatic annual extensions. Mr. Wolf's
agreement, which was effective as of August 1, 1995, has an initial term of
three years, subject to automatic annual extensions. Pursuant to the agreements,
total compensation is divided into three primary components: base salary, bonus
and stock options. The award of bonuses and stock options serve as incentives
for superior performance and are based upon both the performance of the
executives and the Company. Compensation of the named executive officers for
fiscal 1996 was determined in accordance with the employment agreements as
described herein.

     The Company does not have an employment agreement with Michael G. Rubin who
joined the Company on July 31, 1995 and who serves as the Company's Chief 
Executive Officer and Chairman of the Board without compensation.

     Under the stock option plans established by the Company, stock options are 
periodically granted to employees at the discretion of the Board of Directors or
Compensation Committee. It is contemplated that executives of the Company will
be eligible to receive stock option grants subject to individual performance and
the performance of the Company as a whole.
    
     During 1996, the Company's Chief Financial Officer was granted a total of
150,000 options to purchase Common Stock at an exercise price of $0.20 per
share, and in connection with her termination, the Company's prior Spokesperson
was granted a total of 500,000 options to purchase Common Stock at an exercise
price of $0.42 per share.     

     Section 162(m) of the Internal Revenue Code generally denies deduction to 
any publicly held company such as the Company for certain compensation exceeding
$1,000,000 paid to the chief executive officer and the four other highest paid 
executive officers, excluding among other things certain performance-based 
compensation. The Company has been advised that stock options granted before the
adoption of Section 162(m) are not subject to the limit on deductions and that 
its general stock option grants will qualify for the performance based 
exclusion. The Company has not yet recommended any change to the Company's 
executive compensation policies and plans as a result of Section 162(m), but the
Compensation Committee will continue to evaluate the impact of recently 
finalized tax regulations to ensure that the Company's executive compensation 
plans most effectively serve the interests of the Company and its shareholders.

                                                                Michael G. Rubin
                                                             Kenneth J. Adelberg

Summary Compensation Table

     The following table sets forth certain information regarding compensation 
paid to the Chief Executive Officer of RYKA, and to each of the three other most
highly compensated executive officers of RYKA, for services rendered in all 
capacities to RYKA during 1996 (collectively, the "named executive officers").

<TABLE> 
<CAPTION> 
                                                                                       Long Term
                                                             Annual Compensation      
                                                            ---------------------    --------------
                                                                                      Securities
                                                                                      Underlying
        Name and Principal Position           Fiscal Year   Salary ($)  Bonus ($)      Options #
-------------------------------------------   -----------  -----------  ---------   --------------
<S>                                           <C>           <C>         <C>         C> 
Michael G. Rubin/(1)/......................       1996             --         --            --
  Chief Executive Officer and                     1995             --         --            --
  Chairman of the Board                                                                 
                                                                                        
Dennis F. DiDominicis/(2)/.................       1996        $165,000        --            --
  President                                       1995         $45,688     $1,500        500,000 
                                                                                        
Steven A. Wolf/(3)/........................       1996        $101,563        --         150,000
  Chief Financial Officer                         1995         $44,687     $1,500        200,000
                                                                                        
Sheri Poe/(4)/.............................       1996        $ 83,333        --         500,000
  Founder, Spokesperson                           1995        $120,833     $1,000        500,000
                                                  1994        $150,000        --         370,000
</TABLE> 
--------------------------------

(1)  Mr. Rubin joined RYKA on July 31, 1995 and is serving as RYKA's Chief
     Executive Officer and Chairman of the Board without compensation.
(2)  Mr. DiDominicis joined RYKA on September 25, 1995 as its President.
     Currently, Mr. DiDominicis serves as the Company's Executive Vice
     President.
(3)  Mr. Wolf joined RYKA on August 1, 1995.
(4)  In August 1996, Ms. Poe resigned as an executive officer and director of 
     RYKA, although she continues to be consultant to RYKA.

Employment Agreements

     Michael G. Rubin.  RYKA does not currently have an employment agreement 
with Michael G. Rubin who joined RYKA on July 31, 1995 and who serves as RYKA's 
Chief Executive Officer and Chairman of the Board without compensation.  
However, RYKA has entered into an employment agreement with Mr. Rubin which will
become effective as of the Reorganization Effective Date.  See "THE PROPOSED 
REORGANIZATION AND RELATED MATTERS -- Management After the Reorganization."

     Dennis F. DiDominicis. On September 25, 1995, RYKA entered into an
employment agreement with Dennis F. DiDominicis, President of RYKA, for an
initial term of five years, subject to automatic annual extensions. Pursuant to
the terms of Mr. DiDominicis' employment agreement, Mr. DiDominicis is entitled
to receive (i) an annual base salary of $165,000 which will be increased $5,000
each year commencing in calendar year 1997, (ii) an annual bonus based on Mr.
DiDominicis' achievement of specified performance goals as determined by RYKA's
Board of Directors, and (iii) other benefits similar to those provided to RYKA's
other officers. Pursuant to the employment agreement, Mr. DiDominicis is also
entitled to receive a car allowance of $6,000 per year and has been granted a
five year option to purchase 500,000 shares of RYKA's Common Stock at an
exercise price per share equal to the fair market value of the underlying Common
Stock on the date of the grant, of which (i) 50,000 shares shall automatically
vest on each of the first, second, third, fourth, and fifth yearly anniversaries
of September 25, 1995, and (ii) 50,000 shares shall vest on each of the first,
second, third, fourth, and fifth yearly anniversaries of December 31, 1995 based
on the achievement by Mr. DiDominicis of performance goals to be established by
RYKA's Board of Directors. Subsequently, on [February 1997], the Company amended
Mr. DiDominicis' contract so that the 250,000 shares which were to vest pursuant
clause (ii) would vest at 50,000 shares per year on the first, second, third,
fourth, and fifth anniversaries of September 25, 1995.

     Mr. DiDominicis' employment agreement may be terminated by RYKA with or
without cause which is defined to include, among other things, the willful
failure or refusal by Mr. DiDominicis to comply with explicit directions of the
Board of Directors or to render the services required by the employment
agreement, willful breach or habitual neglect in the performance of his duties,
conviction of a felony or fraud or embezzlement involving assets of RYKA. In the
event of termination without cause by RYKA, Mr. DiDominicis will be entitled to
receive a lump sum amount in cash equal to one-half of his then current annual
base salary less any amounts owed to RYKA. In the event of termination by RYKA
for any other reason, Mr DiDominicis will be entitled to receive any unpaid
salary and benefits through the date of termination. Under the employment
agreement, Mr. DiDominicis is prohibited from disclosing confidential
information during and after the term of the agreement. In addition, Mr.
DiDominicis is prohibited from soliciting employees of RYKA or engaging or
participating in any business which competes with RYKA while he is employed by
RYKA and for one year thereafter.

     Steven A. Wolf. On August 1, 1995, RYKA entered into an employment
agreement with Steven A. Wolf, Vice President of Finance and Chief Financial
Officer of RYKA, for an initial term of three years, subject to automatic annual
extensions. Pursuant to the terms of Mr. Wolf's employment agreement, Mr. Wolf
is entitled to receive (i) an annual base salary of $107,500, subject to annual
adjustments determined by RYKA's Board of Directors, (ii) incentive compensation
up to 35% of his base salary based on sales and/or profit projections for RYKA
and based on his performance as determined by the Board of Directors, and (iii)
other benefits similar to those provided to RYKA's other officers. Pursuant to
the employment agreement, Mr. Wolf has been granted a five-year option to
purchase 200,000 shares of RYKA's Common Stock at an exercise price per share
equal to the fair market value of the underlying Common Stock on the date of the
grant, of which 50,000 shares shall vest on the date of grant and 50,000 shares
on each of the first, second, and third yearly anniversaries of August 1, 1995.
On January 2, 1997, Mr. Wolf was granted a ten-year option to purchase an
additional 150,000 shares of RYKA's Common Stock at an exercise price equal to
the fair market value of the underlying Common Stock on the date of the grant,
of which 50,000 shares shall vest on the date of grant and 50,000 shares on
each of the first and second yearly anniversaries of January 1, 1997.

     Mr. Wolf's employment agreement may be terminated by RYKA with or without 
cause which is defined identically to Mr. DiDominicis' employment agreement 
described above.  In the event of termination without cause by RYKA, Mr. Wolf 
will be entitled to receive a lump sum amount in cash equal to five-twelfths of 
his then current annual base salary less any amounts owed to RYKA and to have 
any unvested stock options accelerate and become fully exercisable.  In the 
event of termination by RYKA for any other reason, Mr. Wolf will be entitled to 
receive any unpaid salary and benefits through the date of termination.  Under 
the employment agreement, Mr. Wolf is prohibited from disclosing confidential 
information during and after the term of the agreement.  In addition, Mr. Wolf 
is prohibited from soliciting employees of RYKA or engaging or participating in 
the technical women's athletic footwear business while he is employed by RYKA 
and for one year thereafter.

Option Grants

     The following table sets forth certain information concerning options 
granted during 1995 to the executive officers named in the Summary Compensation 
Table.  The following table also sets forth the potential realizable value over 
the term of the options (the period from the grant date to the expiration date),
based on assumed rates of stock appreciation of 5% and 10%, compounded annually.
These amounts do not represent RYKA's estimate of future stock price.  Actual 
realizable values, if any, of stock options will depend on the future 
performance of the Common Stock.

                         OPTION GRANTS IN FISCAL 1996
<TABLE> 
<CAPTION> 
                                                                                             Potential Realizable Value
                                                                                                 at Assumed Annual
                                                                                               Rates of Stock Price
                                                                                                 Appreciation For
                                                  Individual Grants                               Option Term (1)
                           --------------------------------------------------------------   --------------------------
                             Number of                                                    
                             Securities      Percent of Total                                            
                             Underlying      Options Granted     Exercise                                 
                              Options        to Employees In      Price       Expiration                 
         Name               Guaranteed #       Fiscal Year       ($/share)       Date          5% ($)        10% ($)
-----------------------    --------------   -----------------   ----------   ------------   -----------    -----------
<S>                        <C>              <C>                 <C>          <C>            <C>             <C> 
Michael G. Rubin.......          --                 --              --             --            --             --
                                                                                                       
Dennis F. DiDominicis..          --                 --              --             --            --             --
                                                                                                       
Steven A. Wolf.........       150,000             14.35%          $0.20         1/1/06        $18,870        $47,805
                                                                                                       
Sheri Poe..............       500,000             47.85%          $0.42         8/3/99        $33,100        $69,500

---------------------------------------
</TABLE> 

(1)  Represents the difference between the market value of the Common Stock for
     which the option may be exercised, assuming that the market value of the
     Common Stock appreciates in value from the date of grant to the end of the
     option term at annualized rates of 5% and 10%, respectively, and the
     exercise price of the option.

Aggregated Option Exercises and Year-End Option Values

     No options were exercised in 1996 by any of the executive officers named 
in the Summary Compensation Table above. The following table sets forth, for
each of such executive officers, the number and value of options held at
December 31, 1996.

                  AGGREGATED OPTION EXERCISES IN FISCAL 1996 
                       AND FISCAL YEAR-END OPTION VALUES
<TABLE> 
<CAPTION> 
                                                                        Number of Securities                                     
                                                                       Underlying Unexercised                Value of Unexercised
                                                                             Options at                    In-the-Money Options at
                                                                          December 31, 1996                 December 31, 1996 (1) 
                                                                    -----------------------------       ----------------------------
                               Shares Acquired       Value        
            Name                 on Exercise        Realized        Exercisable     Unexercisable       Exercisable    Unexercisable
----------------------------   ---------------   -------------      -----------     -------------       -----------    -------------
<S>                            <C>               <C>                <C>             <C>                 <C>            <C> 
Michael G. Rubin..........           --                --                --               --                 --              --

Dennis F. DiDominicis.....           --                --             100,000           400,000              --              --

Steven A. Wolf............           --                --             150,000           200,000             2,500           5,000

Sheri Poe.................           --                --           1,520,000             --                 --              --
</TABLE> 

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

(1)   Calculated by determining the difference between the deemed fair value of
      the securities underlying the options on December 31, 1996 and the
      exercise price.

Stock Option Plans
 
     1996 Equity Incentive Plan.  In March 1997, the Board of Directors adopted
and in July 1996 the Company's stockholders approved the Company's 1996 Equity
Incentive Plan (the "Incentive Plan"). The purposes of the Incentive Plan are to
attract and retain key employees and certain other persons who are in a position
to make significant contributions to the success of the Company, to reward these
employees and other persons for their contributions, to provide additional
incentive to these employees and other persons to continue making similar
contributions and to further align the interests of these employees and other
persons with those of the Company's stockholders. To achieve these purposes, the
Incentive Plan permits grants of incentive stock options ("ISOs"), options not
intended to qualify as incentive stock options ("Non-ISOs"), stock appreciation
rights ("SARs"), restricted and unrestricted stock awards, performance awards,
loans, and supplemental cash awards and combinations of the foregoing (all
referred to as "Awards").

     The Incentive Plan permits Awards to be granted for a total of 2,000,000 
shares of the Company's Common Stock.  On September 24, 1996, the Board of 
Directors approved an amendment to the Incentive Plan that increased the maximum
number of shares issuable under the Incentive Plan from 2,000,000 by 18,000,000 
shares for a total of 20,000,000, subject to approval by the Company's 
stockholders.  Shares issuable under Awards that terminate unexercised, shares 
issuable under Awards that are payable in stock or cash but are paid in cash and
shares issued but later forfeited will be available for future Awards under the
Incentive Plan.

     All current and future employees of the Company, and other persons who, in 
the opinion of the Board of Directors, are in a position to make significant 
contributions to the success of the Company, such as consultants and 
non-employee directors, are eligible to receive Awards under the Incentive Plan.

     The Incentive Plan is administered by the Board of Directors, which 
determines, among other things and subject to certain conditions, the persons 
eligible to receive Awards, the persons who actually receive Awards,
the type of each Award, the number of shares of Common Stock subject to each 
Award, the date of grant, exercise schedule, vesting schedule and other terms 
and conditions of each Award, whether to accelerate the exercise or vesting 
schedule or waive any other terms or conditions of each Award, whether to amend 
or cancel an Award and the form of any instrument used under the Incentive Plan.
The Board of Directors has the right to adopt rules for the administration of 
the Incentive Plan, settle all controversies regarding the Incentive Plan or any
Award, and construe and correct defects and omissions in the Incentive Plan or 
any Award.  The Incentive Plan may be amended, suspended or terminated by the 
Board of Directors, subject to certain conditions, provided that stockholder 
approval will be required whenever necessary for the Incentive Plan to continue 
to satisfy the requirements of certain securities and tax laws, rules and 
regulations.  

        Recipients of stock options under the Incentive Plan will have the right
to purchase shares of Common Stock at an exercise price, during a period of 
time and on such other terms and conditions as are determined by the Board of 
Directors.  For ISOs, the recipient must be an employee, the exercise price must
be at least 100% (110% if issued to a 10% or greater stockholder of the Company)
of the fair market value of the Company's Common Stock on the date of grant and
the term cannot exceed ten years (five years if issued to a 10% or greater
stockholder of the Company) from date of grant. If permitted by the Board of
Directors and subject to certain conditions, and option exercise price may be
paid by delivery of shares of the Company's Common Stock that have been
outstanding, a promissory note, a broker's undertaking to promptly deliver the
necessary funds or by a combination of those methods. If permitted by the Board
of Directors, options (other than those granted in tandem with SARs) may be
settled by the Company, paying to the recipient, in cash or shares of Common
Stock (valued at the then fair market value of the Company's Common Stock), an
amount equal to such fair market value minus the exercise price of the option
shares.

        SARs may be granted under the Incentive Plan either alone or in tandem
with stock options. Generally, recipients of SARs are entitled to receive upon
exercise, cash or shares of Common Stock (valued at the then fair market value
of the Company's Common Stock) equal to such fair market value on the date of
exercise minus such fair market value on the date of grant of the shares subject
to the SAR, although certain other measurements also may be used. A SAR granted
in tandem with a stock option is exercisable only if and to the extent that the
option is exercised.

        The Incentive Plan provides for restricted and unrestricted stock 
awards.  Stock awards allow the recipient to acquire shares of the Company's 
Common Stock for their par value or any higher price determined by the Board of 
Directors.  In the case of restricted stock awards, the shares acquired are 
subject to a vesting schedule and other possible conditions determined by the 
Board of Directors. 

        The Incentive Plan provides for performance awards entitling the 
recipient to receive stock options, stock awards or other types of Awards 
conditional upon achieving performance goals determined by the Board of 
Directors.  Performance goals may involve overall corporate performance, 
operating group or business unit performance, personal performance or any other 
category of performance determined by the Board of Directors.  Financial 
performance may be measured by revenue, operating income, net income, earnings 
per share, Common Stock price, price-earnings multiple or other financial
factors determined by the Board of Directors.

        Under the Incentive Plan, loans or supplemental cash awards may be 
granted to recipients of Awards to help defray taxes due as a result of the 
Awards.  The terms and conditions of loans and supplemental cash awards, 
including the interest rate, which may be zero, and whether any loan will be
forgiven, are determined by the Board of Directors.

        Generally, upon termination of a recipient's employment or other 
relationship with the Company, stock options and SARs remain exercisable for a 
period of three months (one year if termination is due to death or disability) 
to the extent that they were exercisable at the time of termination, except as 
otherwise agreed between the employee and the Company, unvested shares under 
outstanding restricted stock awards vest immediately except in the case of a 
voluntary resignation or termination for cause (as defined in the Incentive 
Plan). Stock options, SARs and other Awards that are not exercisable at the 
time of termination automatically terminate, and payments or benefits under 
deferred stock awards, performance awards and supplemental cash awards that are 
not irrevocably due at the time of termination are forfeited.

      In addition to the 1996 Equity Incentive Plan, which is discussed above, 
the Company has adopted the following seven separate stock option plans (the 
"Plans"): the 1987 Stock Option Plan, the 1988 Stock Option Plan, the 1990 Stock
Option Plan, the 1992 Stock Option Plan, the 1993 Stock Option Plan, the 1995 
Stock Option Plan, and the 1995 Non-Employee Directors' Stock Option Plan. The 
following terms and conditions are virtually identical for each of the Plans, 
except for the 1995 Non-Employee Directors' Stock Option Plan which is 
separately summarized below.

      Pursuant to the Plans, options may be granted with respect to 626,420, 
350,000, 750,000, 875,000, 900,000, 1,500,000 and 250,000 shares of Common 
Stock, respectively.

      Options under the Plans may be granted as incentive stock options intended
to qualify under Section 422 of the Code or as options not intended to so 
qualify. In the case of both incentive stock options and non-qualified stock 
options, the option price must be equal to at least 100% of the fair market 
value of the Company's Common Stock on the date of grant. There is no limit on 
the number of shares for which options may be granted to any single employee 
under a Plan, except that incentive stock options first exercisable by a 
recipient in any one year under a Plan may not exceed $100,000 in value 
(determined at the time of grant). In addition, an incentive option granted to 
any person who owns 10% or more of the shares of voting stock of RYKA must have 
had an option price of not less than 110% of the fair market value of the shares
at the time of grant and the option must expire not more than five years after 
its grant.

      Payment of the option exercise price may be made in cash, shares of Common
Stock or a combination of cash and Common Stock. Except with respect to the 1995
Stock Option Plan, all officers, directors and key employees of RYKA or any 
current or future parent or subsidiary of RYKA are eligible to receive options 
under the Plans. Under the 1995 Stock Option Plan, non-employee members of the 
Board of Directors of RYKA are not eligible to receive options. The Plans are 
administered by the Board of Directors which selects the optionees, determines 
the number of shares subject to each option and prescribes other terms and 
conditions of each option.

      1995 Directors' Plan. On September 19, 1995, the Board of Directors 
adopted, and on November 15, 1995, the shareholders approved, the 1995 
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Pursuant to 
the Directors' Plan, options may be granted with respect to an aggregate of 
250,000 shares of Common Stock.

     Options granted under the Directors' Plan are nonstatutory stock options 
which do not qualify under Section 422 of the Code. Only non-employee directors 
of RYKA or any subsidiary of RYKA ("Non-Employee Director") are eligible to 
participate in the Directors' Plan. Mr. Adelberg qualified as a Non-Employee 
Director.

     While grants of stock options under the Directors' Plan are automatic and 
non-discretionary, all questions of interpretation of the Directors' Plan are 
determined by the Executive Committee of the Board of Directors. The Directors' 
Plan provides that commencing January 1, 1996 and annually on January 1 of each 
year thereafter, an option to purchase 25,000 shares of RYKA's Common Stock will
be granted to each Non-Employee Director. The option exercise price for each 
option granted under the Directors' Plan is the fair market value on the date 
the option is granted. All options granted under the Directors' Plan vest at the
rate of 25% per calendar quarter after the date of grant (or earlier in event of
the death or disability of the Non-Employee Director or sale of RYKA). Upon 
departure from the Board of Directors by reason of death or disability, all 
options held by a Non-Employee Director may be exercised by him or her or by his
or her executor or administrator, or by the person or persons to whom the option
is transferred by will or the applicable laws of descent and distribution, only 
during the one-year period after such departure. If a Non-Employee Directors' 
service with RYKA terminates for any other reason, all options held by the 
Non-Employee Director that are not then exercisable will terminate and options 
that are exercisable on the date of termination will continue to be exercisable 
for the original option exercise period. Upon sale of RYKA, all options held by 
Non-Employee Directors will terminate. In all other events, options granted 
under the Directors' Plan remain exercisable until the fifth anniversary of the 
date of grant. No option may be transferred other than by will or by the laws of
descent and distribution.

Director Compensation

     Each Director who is not an employee of RYKA received an option to purchase
25,000 shares of RYKA's Common Stock upon joining the Board of Directors and 
annual stock option grants to purchase 25,000 shares. The Directors do not 
receive any cash compensation for their services on behalf of RYKA but are 
reimbursed for reasonable travel and lodging expenses incurred in attending 
meetings of the Board of Directors and any Committee. Those Directors who are 
employees of RYKA do not receive any compensation for their services as 
Directors.

Compensation Committee Interlocks and Inside Transactions

      During 1996, RYKA had no compensation committee "interlocks" -- meaning 
that it was not the case that an executive officer of RYKA served as a director 
or member of the compensation committee of another entity and an executive 
officer of the other entity served as a director or member of the Compensation 
Committee or the Board of Directors of RYKA.

Stock Performance Graph

      The following graph sets forth the cumulative total shareholder return 
(assuming reinvestment of dividends, if any) to Ryka's shareholders during the 
five-year period ended December 31, 1996, as well as an overall stock market 
index (CRSP Index for NASDAQ Stock Market - U.S. Companies) and a 
self-determined peer group consisting of companies that Management believes to 
be in a similar business (Timberland Co., Wolverine World Wide Inc., Penobscot 
Shoe Co., K-Swiss, Inc. and Hyde Athletic Industries, Inc. 
The data points used for the performance graph are listed in the table below.

Comparision of Cumulative Total Return of Company, Peer Group and Broad Market

    [PERFORMANCE GRAPH APPEARS HERE. Assumes $100 invested on Jan. 1, 1992
    and Assumes Dividend Reinvested until Fiscal Year Ending Dec. 29, 1996]

Performance Graph Data Points

<TABLE> 
<CAPTION> 
------------------------------ FISCAL YEAR ENDING ------------------------------
COMPANY              1991    1992       1993      1994       1995         1996

<S>                  <C>    <C>        <C>        <C>        <C>         <C> 
RYKA INC             100    294.10     100.00     105.87      94.11      107.93
PEER GROUP           100    173.42     331.38     225.84     272.91      404.50
BROAD MARKET         100    100.98     121.13     127.17     164.96      204.98
</TABLE> 

SOURCE:  MEDIA GENERAL FINANCIAL SERVICES


ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT


      The following table sets forth information regarding beneficial ownership 
of RYKA's Common Stock as of June 16, 1997 by (i) by each person known to RYKA 
to be the beneficial owner of more than 5% of RYKA's Common Stock, (ii) each of 
RYKA's directors, (iii) each of the named executive officers, and (iv) all 
directors and executive officers as a group.

<TABLE> 
<CAPTION> 

                                                      Number of Shares of 
           Name and Address of                            Common Stock                   Percentage of
         Beneficial Owner /(1)/                     Beneficially Owned /(2)/             Common Stock
-----------------------------------------        -----------------------------       --------------------
<S>                                              <C>                                 <C> 
Michael G. Rubin.........................                21,381,730/(3)/                      32.2%

Kenneth J. Adelberg......................                   922,500/(4)/                       1.5%

Dennis F. DiDominicis....................                   102,000/(5)/                       *

Steven A. Wolf...........................                   250,000/(6)/                       *

All directors and executive officers
    as a group (4 persons)...............                22,656,230/(3)//(7)/                 33.9%
</TABLE> 

---------------------------
*less than 1.0%

(1)  Except as otherwise shown, the address of each person listed above is in
     care of RYKA, 555 S. Henderson Road, Suite B, King of Prussia, PA 19406.

(2)  Pursuant to the rules of the Securities and Exchange Commission, shares of
     Common Stock which an individual or member of a group has a right to
     acquire within 60 days pursuant to the exercise of options or warrants are
     deemed to be outstanding for the purposes of computing the percentage
     ownership of such individual or group, but are not deemed to be outstanding
     for the purpose of computing the percentage ownership of any other person
     shown in the table.

(3)  Includes 14,150,000 shares of Common Stock held by Mr. Rubin, 5,100,000
     shares of Common Stock issuable upon exercise of a warrant held by MR
     Acquisitions and 2,131,730 shares of Common Stock issuable upon exercise of
     a contingent common stock purchase warrant held by MR Acquisitions, all of
     which shares are vested.

(4)  Includes 62,500 shares of Common Stock issuable upon exercise of 
     outstanding options.

(5)  Includes 50,000 shares of Common Stock issuable upon exercise of 
     outstanding options.

(6)  Represents 250,000 shares of Common Stock issuable upon the exercise of 
     outstanding options.

(7)  Includes 7,644,230 shares of Common Stock issuable upon exercise of 
     outstanding options and warrants.


ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     RYKA relocated to King of Prussia, Pennsylvania in August 1995 where it 
maintains its executive offices in a 5,000 square foot portion of a 75,000 
square foot facility subleased from the KPR Companies. Under this sublease, RYKA
has the right to use warehouse space at this facility. Pursuant to the sublease,
charges are approximately $4,000 per month for use of these facilities and 
certain warehousing services, and the remaining term of the sublease is one and 
one-half years. Any other costs related to the use of the joint facility or for 
other services provided by the KPR Companies will be charged to RYKA on an 
arm's-length basis and will be subject to approval by a special committee of the
Board of Directors comprised of disinterested directors.
    
        On July 31, 1995, RYKA borrowed the sum of $851,440 from KPR in the form
of a secured subordinated loan with interest at the prime rate plus one percent 
and repayment terms coincident with the revolving credit facility with RYKA's 
principal lender. For 1996, RYKA paid $78,944 in interest to KPR. Of the 
$750,000 raised by the Company in the 1997 Private Placement, the Company repaid
to KPR $385,000 of the $851,000 subordinated loan. The remaining proceeds from 
the 1997 Private Placement were used by the Company to open $810,000 in letters 
of credit for the benefit of KPR. The Company is repaying a portion of the 
subordinated loan for KPR and is opening letters of credit on behalf of KPR in 
order to allow KPR to obtain sufficient financing for its operations until the 
proposed Reorganization between RYKA and the KPR Companies can be completed and 
a new credit facility for the combined companies can be negotiated.     

        In 1996, the KPR Companies made available to RYKA a letter of credit 
facility in the amount of $2,000,000. This facility was used by RYKA to finance
the purchase of manufactured inventory through the KPR Companies on RYKA's 
behalf, at the KPR Companies' cost, from overseas vendors.  Through this 
facility, during 1995, RYKA purchased inventory from the KPR Companies for 
$2,236,758.

        During 1996, the KPR Companies advanced a total of $1,148,366 to RYKA 
on a temporary basis, all of which, except for $6,431, had been repaid as of 
December 31, 1996. During 1996, RYKA sold footwear to the KPR Companies for 
$151,185. These goods were prior season's merchandise which were sold at 
negotiated terms on an arms-length basis.


                                      -18-
<PAGE>
 
 
                                    PART IV

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

<TABLE> 
<CAPTION> 
 (a)(1)   FINANCIAL STATEMENTS.                                                      PAGE
                                                                                     ----
 <S>                                                                                 <C> 
          Report of Independent Auditors - Deloitte & Touche, LLP ................   F-2
          Report of Independent Accountants - Margolis & Company P.C. ............   F-3
          Consolidated Balance Sheets as of December 31, 1996 and 1995 ...........   F-4
          Consolidated Statements of Operations for the years ended                     
            December 31, 1996, 1995 and 1994 .....................................   F-5
          Consolidated Statements of Stockholders' Equity (Deficiency) for the          
            years ended December 31, 1996, 1995 and 1994  ........................   F-6 
          Consolidated Statements of Cash Flows for the years ended
            December 31, 1996, 1995 and 1994 ................................. F-7 - F-8
          Notes to Consolidated Financial Statements .........................F-9 - F-28
 
(a) (2)   SCHEDULES.
 
          Schedule VIII - Valuation and Qualifying Accounts for the years
          ended 1996, 1995 and 1994 ................................................ S-1
</TABLE>

          All other schedules not listed have been omitted since the required
information is included in the financial statements or the notes thereto, or is
not applicable or required.

 (a)(3)     EXHIBITS.

 No.        Description
----        -----------

  2.1/1/    Securities Purchase Agreement dated June 21, 1995 by and between
            the Registrant and MR Acquisitions, Inc.

  2.2/2/    First Amendment to Securities Purchase Agreement by and between
            the Registrant and MR Acquisitions, Inc. dated July 31, 1995.

  3.1-A/11/ The Company's Certificate of Incorporation.

  3.1-B     Certificate of Amendment dated July 8, 1996 to the Company's
            Certificate of Incorporation.

  3.2/3/    The Company's Bylaws as amended.

  4.1/3/    Specimen of Common Stock Certificate.

 10.1/2/    Loan and Security Agreement by and between the Registrant and KPR
            Sports International, Inc.

 10.2/2/    Promissory Note in the principal amount of $851,440 by and between
            Registrant as maker and KPR Sports International, Inc. as payee.

                                      -19-
<PAGE>
 
 
 10.3/2/    Demand Promissory Note in the principal amount of $2,000,000 by and
            between Registrant as borrower and KPR Sports International, Inc. as
            lender.

 10.4/2/    Letter of Credit Financing Agreement by and between Registrant
            and KPR Sports International, Inc.

 10.5/2/    Warrant to Purchase 5,100,000 shares of the Registrant's Common
            Stock issued to MR Acquisitions, L.L.C.

 10.6/2/    Warrant to purchase 4,000,000 shares of the Registrant's Common
            Stock issued to MR Acquisitions, L.L.C.

 10.7/2/    Registration Rights Agreement by and between the Registrant and
            MR Acquisitions, Inc.

 10.8/2/    Promissory Note in the principal amount of $500,000 by and
            between the Registrant and Michael Rubin.

 10.9/2/    Sublease Agreement dated July 31, 1995 by and between KPR Sports
            International, Inc. as sublessor and Registrant as sublessee.

 10.10/2/   Settlement Agreement by and between Registrant and Pro-Specs
            America Corporation.

+10.11/2/   Employment Agreement dated July 31, 1995 by and between the
            Registrant and Sheri Poe.

+10.12      Key Employee Termination Agreement dated August 3, 1996 by and
            between the Registrant and Sheri Poe.

+10.13/2/   Employment Agreement dated July 31, 1995 by and between the
            Registrant and Steven Wolf.

+10.14/4/   Employment Agreement dated September 25, 1995 by and between
            the Registrant and Dennis F. DiDominicis.

+10.15/5/   1987 Stock Option Plan

+10.16/6/   1988 Stock Option Plan

+10.17/7/   1990 Stock Option Plan

+10.18/8/   1992 Stock Option Plan

+10.19/9/   1993 Stock Option Plan

+10.20/2/   1995 Stock Option Plan.

+10.21/10/  1995 Non-Employee Directors' Stock Option Plan.

+10.22      1996 Equity Incentive Plan.

                                      -20-
<PAGE>
 
 
 10.23      Revolving Credit Agreement dated August 15, 1996 by and between the
            Registrant and CoreStates Bank, N.A.

 10.24      Security Agreement dated August 15, 1996 by and between the
            Registrant and CoreStates Bank, N.A.

 10.25      Memorandum of Security Agreement dated August 15, 1996 by and
            between the Registrant and CoreStates Bank, N.A.

 10.26      Limited Guaranty of Michael Rubin dated August 15, 1996 in favor of
            CoreStates Bank, N.A.

 10.27      Letter Agreement dated February 7, 1997 by and among the
            Registrant, CoreStates Bank, N.A. and Michael Rubin.

 10.28      Second Amended Forbearance Agreement dated June 4, 1997 by and
            among the Registrant, Corestates Bank, N.A. and Michael Rubin.
 
 10.29      Letter Agreement dated June 4, 1997 by and among the Registrant, 
            CoreStates Bank, N.A. and Michael Rubin.
 
 11.1       Computation of Earnings Per Share.

 21.1       Subsidiaries of the Company.

_____________________________

+   Management contract or compensatory plan or arrangement.

1   Incorporated by reference to Form 8-K dated June 21, 1995.

2   Incorporated by reference to Form 8-K dated July 31, 1995.

3   Incorporated by reference to the Company's Registration Statement No. 33-
    33754.

4   Incorporated by reference to the Company's Registration Quarterly Report on
    Form 10-Q for the nine-month period ended September 30, 1995.

5   Incorporated by reference to the Company's Registration Statement No. 33-
    19754-B.

6   Incorporated by reference to the Company's Registration Statement No. 33-
    27501.

7   Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
    the nine-month period ended September 30, 1990.

8   Incorporated by reference to the Company's Annual Report on Form 10-K for
    the fiscal year ended December 31, 1991.

9   Incorporated by reference to the Company's Form S-8 Registration Statement
    filed on January 3, 1994.

10  Incorporated by reference to the Company's Proxy Statement filed on
    October 13, 1995 in connection with the 1995 Special Meeting in lieu of
    Annual Meeting held on November 15, 1995.

11  Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1995.

    (b)   REPORTS ON FORM 8-K.

                                      -21-
<PAGE>
 
 
          The Company filed a Current Report on Form 8-K dated October 16, 1996
     on October 16, 1996 and amended on October 23, 1996 filing financial
     statements of the Company for each of the fiscal years ended December 31,
     1993 and 1994 which were reaudited by Margolis & Company P.C., the
     Company's subsequent auditors.

          The Company filed a Current Report on Form 8-K dated November 26, 1996
     on December 4, 1996 reporting the change in the Company's independent
     auditors from Margolis & Company P.C. to Deloitte & Touche, LLP.
          
          The Company filed a Current Report on Form 8-K dated April 15, 1997
     reporting that the Company would not be timely filing its Form 10-K for the
     year ended December 31, 1996.

     (c)  EXHIBITS.  See Exhibit Volume.

                                      -22-
<PAGE>
 
 
               SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                                       
                                             BALANCES AT    CHARGED TO      CHARGED TO                                     
                                             BEGINNING OF    COSTS AND   OTHER ACCOUNTS     DEDUCTIONS-       BALANCES AT  
            DESCRIPTION                        PERIOD        EXPENSES      - DESCRIBE        DESCRIBE        END OF PERIOD 
----------------------------------          ------------- ------------- -----------------   ----------      ---------------
<S>                                         <C>           <C>           <C>                <C>              <C>
Year Ended December 31, 1994:
  Allowance for doubtful accounts.........       $665,605    $130,000          --          $(276,730)(1)        $518,875
Year Ended December 31, 1995:                                                         
  Allowance for doubtful accounts.........       $518,875    $359,388          --          $(820,690)(1)        $ 57,573
Year Ended December 31, 1996                                                          
  Allowance for doubtful accounts.........       $ 57,573    $ 16,000          --          $  (7,632)(1)        $ 65,941
</TABLE>
 
_______________________________________________
(1)  Accounts written off against the allowance

                                      -23-
<PAGE>
 
INDEPENDENT AUDITOR'S REPORT

The Board of Directors of Ryka Inc.:

We have audited the accompanying consolidated balance sheet of Ryka Inc. as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity (deficiency), and cash flows for the year then ended. Our
audit also included the financial statement schedule for the year ended December
31, 1996 listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.

We conducted our audit 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 used and significant estimates made by management, 
as well as evaluating the overall financial statement presentation. We believe 
that our audit provides a reasonable basis for our opinion.

In our opinion, the 1996 financial statement presents fairly, in all material 
respects, the financial position of the Company as of December 31, 1996 and the 
results of its operations and cash flows for the year then ended in conformity 
with generally accepted accounting principles. Also, in our opinion such 
financial statement schedule, when considered in relation to the basic 
consolidated financial statements taken as a whole, presents fairly in all 
material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that the 
Company will continue as a going concern. As discussed in Note A to the 
financial statements, the company has experienced significant net losses since 
its inception and has an accumulated deficit at December 31, 1996 of 
$19,728,000. In addition, the Company's bank agreement will be terminated on 
November 30, 1997. Such conditions raise substantial doubt about the Company's 
ability to continue as a going concern. Management's plans concerning these 
matters are also described in Note A to the financial statements. The financial 
statements do not include any adjustments that might result from the outcome of 
this uncertainty.

/s/ Deloitte & Touche
Deloitte & Touche
Philadelphia, Pennsylvania
April 18, 1997 except for notes A, E
and I as to which the date is June 6, 1997


                                      F-2


<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholders
RYKA Inc.
King of Prussia, Pennsylvania

We have audited the consolidated balance sheet of RYKA Inc. and Subsidiary as of
December 31, 1995 and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the two years in
the period ended December 31, 1995. We have also audited the financial statement
schedule listed in Item 14(a)(2) in this Form 10-K for the two years ended 
December 31, 1995. These financial statements and schedule 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 audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RYKA
Inc. and its Subsidiary at December 31, 1995, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule 
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information 
required to be included therein.

The accompanying financial statements for the year ended December 31, 1995 have 
been prepared assuming that RYKA Inc. will continue as a going concern. As more 
fully described in Note A, the Company has incurred significant operating losses
since its inception and has an accumulated deficit at December 31, 1995 of 
$17,848,484. These conditions raise substantial doubt about the Company's 
ability to continue as a going concern. The Company's plans in regard to this 
matter are described in Note A. The financial statements do not include any 
adjustments to reflect the possible future effects on the recoverability and 
classification of assets or the amounts and classification of liabilities that 
may result from the outcome of this uncertainty.


                                                    /s/  Margolis & Company P.C.

                                                         MARGOLIS & COMPANY P.C.

Bala Cynwyd, Pennsylvania
June 21, 1996

                                      F-3
<PAGE>
 
                            RYKA Inc and Subsidiary
                          Consolidated Balance Sheets


<TABLE> 
<CAPTION> 
                                                                                December 31,            December 31,
                                                                                   1996                     1995
                                                                               --------------           -----------
<S>                                                                           <C>                        <C>    
                                       ASSETS                                                 
                                                                                              
Current assets:                                                                               
    Cash and cash equivalents                                                         $37,469                $77,509
    Accounts receivable, net of allowance for doubtful                                        
         accounts of $ 65,941 in 1996 and $ 57,573 in 1995                          1,947,036                533,490
    Inventory                                                                       2,644,017                678,319
    Prepaid expenses and other current assets                                         149,306                118,294
    Note receivable, officer                                                           20,000                   -
                                                                                  -----------------------------------
                  Total current assets                                              4,797,828              1,407,612
                                                                                              
Fixed assets, net of accumulated depreciation                                         194,815                195,083
                                                                                              
Security deposits and other assets                                                     70,000                    500
                                                                                  -----------------------------------
                  Total assets                                                     $5,062,643             $1,603,195
                                                                                  ===================================
                                                                                              
    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)                                         
                                                                                              
Current liabilities:                                                                          
    Note payable, bank                                                             $1,592,453                   -           
    Accounts payable and accrued expenses                                           1,001,577               $437,324
    Due to customer                                                                   413,290                413,290
    Due to affiliate                                                                   18,928                  2,043
    Subordinated note payable                                                         851,440                   - 
                                                                                  -----------------------------------
                  Total current liabilities                                         3,877,688                852,657

Subordinated note payable                                                                 -                  851,440 
                                                                                              
Bridge loan payable                                                                       -                  120,000
                                                                                              
Other liabilities                                                                      35,000                150,000
                                                                                              
Commitments and contingencies                                                                 
                                                                                              
Stockholders' equity (deficiency):                                                            
     Preferred Stock, $0.01 par value, 1,000,000 shares authorized;                           
        none issued or outstanding                                                       -                     -
     Common Stock, $0.01 par value, 90,000,000 shares and 70,000,000                          
        shares authorized at December 31, 1996 and 1995, respectively;                        
        56,635,326 and 46,135,326 shares issued and outstanding at                            
        December 31, 1996 and 1995, respectively                                      566,353                461,353
     Additional paid in capital                                                    20,311,843             17,016,229
     Accumulated deficit                                                          (19,728,241)           (17,848,484)
                                                                                  -----------------------------------
                               Total stockholders' equity (deficiency)              1,149,955               (370,902)
                                                                                  -----------------------------------
                                  Total liabilities and stockholders' equity       $5,062,643             $1,603,195
                                                                                   ===================================
</TABLE> 

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

                                      F-4
<PAGE>
 
                           RYKA Inc. and Subsidiary
                     Consolidated Statements of Operations


<TABLE> 
<CAPTION> 
                                                                                    Year Ended December 31,
                                                                            1996           1995           1994
                                                                       --------------------------------------------  
<S>                                                                     <C>              <C>          <C>  
Net sales                                                                $10,194,675      $7,538,354   $16,024,991
Other revenues                                                                -               75,904       228,508 
                                                                       -------------------------------------------- 

                                                                          10,194,675       7,614,258    16,253,499
                                                                       --------------------------------------------
Costs and expenses:

      Cost of goods sold                                                   7,199,572       6,581,670    11,399,760
      Inventory write-down to lower of cost or market                          -             586,000          -
      General and administrative expense                                   1,241,660       2,065,553     1,735,688
      Selling and marketing expense                                        2,014,671       1,803,686     2,604,277
      Research and development expenses                                      671,022         359,646       226,271
      Contingent warrant compensation                                        511,614            -             -
      Special charges                                                        152,715         379,434          -
                                                                       --------------------------------------------
                                                                   
      Total costs and expenses                                            11,791,254      11,775,989    15,965,996
                                                                       --------------------------------------------

Operating income (loss)                                                   (1,596,579)     (4,161,731)      287,503
                                                                       --------------------------------------------
Other (income) expenses:

      Merger costs                                                            67,000         783,289          -
      Interest expense                                                       221,173         348,169       805,272
      Interest income                                                         (1,529)         (6,328)       (6,354)
      Gain on disposition of property and equipment                             -             (7,128)         - 
      Other                                                                   (3,466)           -             -                     
                                                                       --------------------------------------------
                                                              
      Total other expenses, net                                              283,178       1,118,002       798,918
                                                                       --------------------------------------------
Loss before extraordinary gain                                            (1,879,757)     (5,279,733)     (511,415)

Extraordinary gain -- forgiveness of debt                                     -            1,650,256          - 
                                                                       --------------------------------------------

Net loss                                                                 ($1,879,757)    ($3,629,477)    ($511,415)
                                                                       --------------------------------------------
Loss per share:
      Loss before extraordinary gain                                          ($0.04)         ($0.15)       ($0.02)
      Extraordinary gain                                                         -             $0.05           - 
Net loss per share                                                            ($0.04)         ($0.10)       ($0.02)
                                                                       --------------------------------------------
Weighted average common and common equivalent
      shares outstanding                                                  51,368,619      34,340,653    24,210,083
                                                                       --------------------------------------------
</TABLE> 


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

                                      F-5
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)


<TABLE>     
<CAPTION> 
                                                                     Additional
                                            Common Stock               Paid-in      Accumulated
                                      Shares           Amount          Capital        Deficit         Total
                                 -------------------------------------------------------------------------------
<S>                              <C>                  <C>            <C>           <C>              <C> 
Balance at December 31, 1993           23,721,356        $237,213    $14,780,493   ($13,707,592)    $1,310,114

Exercise of stock options                 197,175           1,972         58,781                       $60,753

Issuance of stock, net of
    offering costs                      2,555,795          25,558      1,148,979                    $1,174,537

Net loss                                                                               (511,415)     ($511,415)
                                 -------------------------------------------------------------------------------
Balance at December 31, 1994           26,474,326         264,743     15,988,253    (14,219,007)    $2,033,989

Issuance of stock in connection
    with forgiveness of debt              500,000           5,000        120,000                      $125,000

Issuance of warrants in connection
    with forgiveness of debt                                               5,319                        $5,319

Issuance of stock and warrants,
    net of offering costs              18,320,000         183,200        419,153                      $602,353

Issuance of stock for services
    related to stock offering              40,000             400          9,600                       $10,000

Issuance of stock for settlement
    of employment contract                 60,000             600         14,400                       $15,000

Issuance of warrants to lender in
    connection with credit facility                                      100,000                      $100,000

Exercise of stock options                  41,000             410          9,838                       $10,248

Exercise of warrants                      700,000           7,000        273,000                      $280,000

Contributed services                                                      41,666                       $41,666

Warrants issued below market value                                        35,000                       $35,000

Net loss                                                                             (3,629,477)   ($3,629,477)
                                 -------------------------------------------------------------------------------

Balance at December 31, 1995           46,135,326         461,353     17,016,229    (17,848,484)     ($370,902)

Issuance of stock, net of
    offering costs                     10,000,000         100,000      2,395,200                    $2,495,200

Issuance of stock and warrants             20,000             200         53,800                       $54,000
    for license agreements and 
    services

Contributed services                                                     100,000                      $100,000

Conversion of bridge
 loan repayment                           480,000           4,800        120,000                      $124,800

Conversion of other liability as                                          70,000                       $70,000
  contributed capital 

Issuance of warrants for failure to                                       45,000                        45,000
  register shares

Contingent warrant compensation                                          511,614                      $511,614

Net loss                                                                             (1,879,757)   ($1,879,757)
                                 -------------------------------------------------------------------------------

Balance at December 31, 1996           56,635,326        $566,353    $20,311,843   ($19,728,241)    $1,149,955
                                 ===============================================================================
</TABLE>      

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

                                      F-6
<PAGE>
 
                          RYKA INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOW


<TABLE> 
<CAPTION> 
                                                                         Year Ended December 31,
                                                                   1996            1995            1994
                                                               *************   *************  *************
<S>                                                            <C>             <C>            <C> 
Cash Flows from Operating Activities:
   Net Loss                                                       ($1,879,757)   ($3,629,477)      ($511,415)
   Adjustments to reconcile net loss to net cash              
     provided by (used in) operating activities:              
           Extraordinary item - forgiveness of debt                      -        (1,650,256)           -
           Depreciation and amortization                               59,052         52,640          45,291
           Contingent warrant compensation                            511,614           -                -
           Provision for losses on accounts receivable                 16,000        359,388         130,000
           Capital contributed as services                            100,000         41,666            -
           Issuance of common stock and warrants                         
              for services                                             23,000        150,000            -
           Loss on disposition of equipment                              -               504            -
   Changes in operating assets and liabilities:               
           Accounts receivable                                     (1,429,546)     2,041,116        (274,266)
           Inventory                                               (1,965,698)     3,085,516        (483,187)
           Prepaid expenses and other current assets                  (31,012)        48,652          (6,030)
           Note receivable, officer                                   (20,000)          -               - 
           Accounts payable and accrued expenses                      525,253        657,096        (604,145)
           Due to customer                                               -           413,290            -
           Payable to factories                                          -          (390,113)           -
           Due to affiliate                                            16,885          2,043            -
                                                                  -----------    ------------    ------------
               Net cash provided by (used for) operating
                activities                                         (4,074,209)     1,182,065      (1,703,752)
                                                                  -----------    ------------    ------------



Cash flows from investing activities:
   Purchase of property and equipment                                 (58,784)       (90,109)       (130,895)
   Proceeds from sale of equipment                                       -            15,000            -
   Security deposits and other assets                                     500         15,253          12,500
                                                                  -----------    ------------    ------------

               Net cash used for investing activities                 (58,284)       (59,856)       (118,395)
                                                                  -----------    ------------    ------------
</TABLE> 

                            CONTINUED ON NEXT PAGE

                                      F-7

<PAGE>
 
                           RYKA Inc. and Subsidiary
                     Consolidated Statements of Cash Flow

<TABLE>    
<CAPTION> 
                                                                                   Year Ended December 31,
                                                                                1996        1995        1994
                                                                            ************  **********  *********  
<S>                                                                         <C>         <C>          <C> 
Cash flows from financing activities:
       Increase (decrease) in payable to lender, net                         1,592,453  (2,078,730)   155,971
       Increase (decrease) in payable to factor, net                               -    (1,286,237)   786,237
       Proceeds from sale of common stock                                    2,500,000        -          -
       Proceeds from bridge financing                                              -       120,000    300,000
       Repayment of bridge financing                                               -          -      (300,000)
       Reduction in other liability                                                -       150,000       -
       Repayment of notes payable to stockholder                                   -          -      (125,000)
       Repayments of capital lease obligations                                     -          -       (17,878)
       Proceeds from exercise of stock options and                                  
               warrants                                                            -       290,248     60,753
       Proceeds from issuance of common stock, net of
               issuance costs                                                      -       612,353  1,174,537
       Proceeds from subordinated note payable, affiliate                          -       851,440       -
                                                                           ------------------------------------
                       Net cash provided by (used for) financing   
                         activities                                          4,092,453  (1,340,926) 2,034,620
                                                                           ------------------------------------
Net increase (decrease) in cash and cash                           
       equivalents                                                             (40,040)   (218,717)   212,473
                                                                   
Cash and cash equivalents, beginning of year                                    77,509     296,226     83,753
                                                                           ------------------------------------
                                                                   
Cash and cash equivalents, end of year                                         $37,469     $77,509   $296,226
                                                                           ====================================
Supplemental disclosure of cash flow information:                  
       Cash paid during the year for interest                                 $221,173    $340,715   $303,092
                                                                           ====================================
Supplemental disclosure of noncash investing and
       financing activities:

               Issuance of common stock and warrants in partial 
                  settlement of amounts due creditors                              -      $130,319      -
                                                                           ====================================
               Conversion of other liability into contributed capital          $70,000        -         -
                                                                           ====================================       
               Issuance of warrants as compensation and as settlement 
                  of employment agreement                                     $523,614        -         -
                                                                           ====================================
               Issuance of warrants for failure to register 1995
                  Private Placement shares                                      45,000        -         -
                                                                           ====================================
               Issuance of warrants for licensing agreement                    $31,000        -         -
                                                                           ====================================
               Issuance of common stock for services                               -       145,000      -
                                                                           ====================================
               Licensing agreement obtained under financing                    $70,000        -         -
                                                                           ====================================
</TABLE>     

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

                                      F-8
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________

NOTE A - ORGANIZATION AND BASIS OF PRESENTATION

RYKA Inc. ("RYKA" (R) or the "Company"), a Delaware corporation, designs,
develops and markets high-performance athletic footwear specifically for women
to retail outlets primarily located in North America and Europe.  Operations
commenced in February, 1987.

The Company's financial statements for the year ended December 31, 1996 have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business.  The Company has incurred significant recurring losses since its
inception and had an accumulated deficit at December 31, 1996 of $19,728,000.

The Company was involved in several significant transactions during 1995 which
included the sale of securities, a change in key management, the establishment
of a new loan and security agreement with a bank, the settlement of debts with
secured and unsecured creditors and moving the Company's principal offices.
During 1996 the Company incurred substantial expenditures in order to meet
ongoing needs and fund its operating plans, which included the development and
marketing of new products. The Company negotiated a credit facility with a new
lender which became effective August 15, 1996.  As a prerequisite to closing the
new credit facility, the Company was required to raise $2,000,000 in equity.
This requirement was satisfied with the sale of $2,500,000 of equity securities
through a Private Placement which commenced in May 1996 and was completed in
August 1996 (The "1996 Private Placement"). Subsequently, the Company was
informed by the new lender that the new credit facility was to be terminated on
March 31, 1997. As of June 4, 1997, the lender agreed to extend RYKA's credit
facility, as modified (see Note E) to November 30, 1997. If the Company is
unable to obtain alternative financing, there is no assurance that the Company
will be able to continue operations. Further, there is no assurance that the
Company will be able to obtain alternative financing, or, if obtained, such
financing will be on terms satisfactory for the Company.

On September 26, 1996 the Company entered into an Agreement and Plan of
Reorganization, as amended and restated (the "Reorganization Agreement") with
KPR Sports International, Inc. ("KPR") and certain affiliated companies
(collectively the "KPR Companies") and Michael G. Rubin, Chairman and Chief
Executive Officer of RYKA and the sole stockholder of the KPR Companies,
pursuant to which, subject to the approval by the Stockholders of RYKA and the
Company's lender, RYKA would become a holding company by transferring all of its
assets and liabilities to a wholly owned subsidiary and would acquire the KPR
Companies in exchange for 163,250,000 shares of RYKA.  The Company believes that
the proposed transaction will be completed by the end of 1997.

There is no assurance that the reorganization will be consummated or the
replacement financing obtained. In the event that the reorganization is not
consummated, or further delayed, the Company may sell additional equity
securities in order to generate sufficient capital resources to assure
continuation of the operations of the Company. Further, upon completion of the
reorganization, the Company may sell additional equity securities in order to
further support future operations.

Management recognizes that the Company may be required to obtain these or
similar additional resources or consider modifications to its operating plans
including reductions in operating costs to enable it to continue operations.
However, no assurance can be given that the Company will be successful in
raising sufficient additional capital if required, to support future operations.

The financial statements do not include any adjustments to reflect the possible
future effect on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the outcome of these
uncertainties.

                                      F-9
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE B - SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the
---------------------------                                                   
accounts of RYKA Inc. and its wholly owned subsidiary, RYKA GmbH, a German
corporation.  During 1994 RYKA GmbH was involuntarily dissolved by the Munich
Trade Register.  RYKA GmbH's sole business activity consisted of holding title
to the stylized RYKA and dual parallelogram trademarks, which are both key
trademarks of the Company, and licensing them back to the Company.  During 1995,
the Company had legal proceedings in Germany and caused full ownership of such
trademarks to be transferred to the Company from RYKA GmbH.  All intercompany
accounts and transactions have been eliminated in consolidation.  The Company
currently operates without subsidiary.

Cash Equivalents: The Company considers highly liquid investments with
----------------                                                      
maturities at date of purchase of less than three months to be cash equivalents.

Inventory: Inventory, primarily consisting of women's high-performance athletic
---------                                                                      
footwear, is valued at the lower of cost (determined by the first-in, first-out
method) or market.

Equipment: Equipment is stated at cost.  Depreciation is provided over the
---------                                                                 
estimated useful lives of the assets, generally five to seven years, using the
straight-line method. Included in these assets are leasehold improvements which
are amortized over the shorter of the useful life of the improvement or the
remaining term of the lease.  Expenditures for maintenance and repairs are
expensed as incurred.  Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is reflected in results of operations.
    
Licenses: The Company records licenses acquired at cost and amortizes such cost 
--------
over the term of the license or life of the underlying patent whichever is less.
     
Income Taxes: The Company follows the provisions of Statement of Financial
------------                                                              
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).  SFAS
109 requires recognition of deferred income taxes for all temporary differences
between the tax and financial reporting basis of the Company's assets and
liabilities based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.  SFAS
109 also requires a valuation allowance against net deferred assets if, based
upon available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.

Revenue Recognition: Sales, net of discounts, are recognized upon the shipment
-------------------                                                           
of footwear.

Other Revenues: Prior to July 1995, RYKA's independent foreign distributors
--------------                                                             
primarily purchased footwear directly from the Company's overseas manufacturers,
and the Company received royalty on those purchases. Income from direct
purchases by foreign distributors is included in Other Revenues.

Advertising Expense: The Company expenses the cost of advertising the first time
-------------------                                                             
the advertising takes place. Advertising expense was $229,919 and $212,307 for
1996 and 1995, respectively.

Loss Per Share: Loss per share is based on the weighted average number of shares
--------------                                                                  
of common stock and dilutive common stock equivalent shares outstanding during
each year.  Stock options and warrants are included as common stock equivalents,
using the treasury stock method, in the computation of weighted average shares
outstanding when dilutive.
    
Reclassifications: Certain 1994 and 1995 balances have been reclassified to
-----------------                                                          
conform with the 1996 financial statement presentation. These reclassifications 
included a $270,000 adjustment to liabilities for amounts originally classified 
as stockholders deficiency at December 31, 1995. $235,000 of such amount became 
permanent equity during 1996.     

Use of Estimates: The presentation 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.

                                     F-10
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE B - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Fair Value of Financial Instruments: The carrying amounts of cash and cash
-----------------------------------                                       
equivalents, accounts receivable, accounts payable, note payable bank, due to
affiliate and subordinated note payable, affiliate are a reasonable estimate of
their fair values at December 31, 1996 and 1995.

Stock Option Plans: The Company accounts for employee stock compensation plans
------------------                                                            
using the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock issued to Employees" (APB
25).  Under such method, compensation is measured by the quoted market price of
the stock at the measurement date less the amount, if any, that the employee is
required to pay.  The measurement date is the first date on which the number of
shares that any individual employee is entitled to receive and the option or
purchase price, if any, are known.

In October 1995, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123).  SFAS 123 permits companies to choose between a "fair value based
method of accounting" for employee stock options or to continue to measure
compensation cost for employee stock compensation plans using the intrinsic
value based method of accounting prescribed by APB 25.  The Company intends to
continue to use the APB 25 method.  Entities electing to remain with this method
must make pro-forma disclosures of net income (loss) and earnings (loss) per
share, as if the fair value based method of accounting defined in SFAS 123 had
been applied to all awards granted in fiscal years beginning after December 15,
1994.  The Company, as permitted under SFAS 123, has made such disclosures for
1995 awards in its 1996 annual financial statements.

Earnings Per Share: In February 1997, the Financial Accounting Standards Board 
-------------------
issued SFAS No. 128, "Earnings per Share."  This new standard requires dual 
presentation of basic and diluted earnings per share (EPS) on the face of the 
statement of earnings and requires reconciliation of the numerators and 
denominators of the basic and diluted EPS calculations.  This statement will be 
effective for both interim and annual periods ending after December 15, 1997.  
The Company anticipates that this statement will not have a material impact on 
its financial statements.

NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C.

On July 31, 1995, MR Acquisitions LLC ("MR") entered into a Securities Purchase
Agreement (the "Agreement) with the Company. The significant provisions of the
Agreement and related settlement of obligations due to various creditors are as
follows:

 .    MR purchased for consideration of $148,560 a total of 14,800,000 shares of
     Common Stock of the Company and a seven year warrant to purchase an
     additional 5,100,000 shares of Common Stock for $.01 per share. Further,
     KPR Sports International, Inc. ("KPR"), an affiliate of MR loaned $851,440
     to the Company in the form of a secured subordinated loan with interest at
     prime plus one percent and with repayment terms coincident with the
     revolving credit facility with the principal lender (see note E). 

     In connection with the bank loan obtained in 1995 (see note E) which has
     been terminated in 1996, MR was responsible for making future subordinated
     loans or capital infusions, or causing the same to occur, in amounts
     substantially equal to any losses incurred by the Company subsequent to the
     date of the Transaction such that by August 30, 1995 capital funds are
     maintained at a minimum of $2,000,000 as defined.
    
     In addition, the Company issued a seven year contingent stock purchase
     warrant (the "Contingent Warrant"), to MR to purchase up to an additional
     4,000,000 shares of Common Stock for an exercise price of $.01 per share
     for $560 when the fair value of such warrant was approximately $35,000
     according to an independent valuation of such transaction. Pursuant to the
     warrant terms, if at any time within one year from the date of issuance for
     the Contingent Warrant the Company issues a number of shares of Common
     Stock which results in the Company having in excess of 50,000,000 shares of
     Common Stock issued and outstanding, provided, that any such shares above
     such 50,000,000 were issued solely for the purpose of a) inducing a lender
     to make a loan or loans to the Company, or b) in connection with an
     infusion of capital to the Company, or c) a settlement of debts with the
     Company's creditors, or d) a combination thereof, then upon the occurrence
     of such stock issuance, for every ten (10) additional shares of Common
     Stock which are issued, four (4) of such shares shall vest under the
     Contingent Warrant to MR, who upon exercise shall pay an additional one
     cent ($.01) per share for the issuance of such additional shares. At
     December 31, 1996 2,131,730 shares related to this warrant are vested. In
     
                                     F-11
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________

NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED

     connection with the vesting of these warrants in 1996, the Company
     recognized a charge to earnings of $511,614 for the difference between the
     market value and the exercise price of the warrants.
         
     The Company reimbursed MR approximately $125,000 for its costs in
     connection with the Agreement.     

 .    As required by the Agreement, the Company negotiated the following
     settlement arrangements with secured and unsecured creditors:

     Secured Creditor:

     The Company entered into a Settlement Agreement with a secured creditor,
     under which $1,804,734 of secured indebtedness was settled by payment of
     $1,100,000 in cash and the issuance of 500,000 shares of Common Stock.
     These shares have been valued at $.25 each or $125,000 in the aggregate.
     This creditor was also obligated to certain vendors pursuant to letters of
     credit opened on behalf of the Company for the purchase of approximately
     $1,000,000 in merchandise to be received in the future.  In connection with
     the settlement, as a result of separate negotiations with such vendors,
     this creditor was released from any obligations in  connection with such
     letters of credit.

     Unsecured Creditors:

     Unsecured creditors who were owed approximately $839,000 elected to receive
     payment in cash of $.08 for each dollar they were owed during July 1995, or
     in certain cases at a later date, in full and complete elected settlement
     of each dollar owed to the creditor. The Company made payments to these
     creditors totaling approximately $68,000.

     Unsecured creditors who were owed approximately $98,000 elected to receive
     payment in cash of $.03 for each dollar they were owed during July 1995, or
     in certain cases at a later date, and the issuance of one warrant for the
     purchase of a share of Common Stock of the Company for each $2 due such
     creditor. The warrants are exercisable over a 5 year period at an exercise
     price of $1.50 per share. The value of each warrant was $.10. The Company
     made payments to these creditors totaling approximately $3,000 and issued
     53,192 warrants.

     In addition, approximately $315,000 of claims were settled under other
     negotiated arrangements requiring the payment of approximately $107,000 in
     the aggregate.

     The total 1995 settlements with secured and unsecured creditors who were
     owed approximately $3,050,000 resulted in a gain of approximately
     $1,650,000.

 .    Other matters:

     In connection with the Agreement, various other arrangements were made
     including the following:

     .    The lease for the Company's principal operating facility was
          terminated early with the payment of rent through August 15, 1995.

     .    Certain employment arrangements have been modified or new arrangements
          have been entered into involving, among other things, the granting of
          approximately 700,000 new options for the purchase of the Company's
          Common Stock at a price equal to the fair market value at the date of
          issuance.
              
     .    The Company incurred approximately $225,000 of professional fees and
          other costs in connection with this Agreement. The amount was paid
          in cash and by the issuance of 100,000     

                                     F-12
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________

NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED

     warrants valued at $20,000.  The warrants are exercisable over 5 years at a
     price of $.42 per share.
 
 .    A key employment agreement was terminated involving issuance of 60,000 
     shares of Common Stock, valued at $.25 per share.
         
 .    At the closing of the Agreement ("Closing"), the Company had 45,000,000
     shares of common stock authorized for issuance. Prior to the Closing,
     approximately 26,500,000 shares of common stock were issued and outstanding
     and approximately 3,600,000 additional shares of common stock were reserved
     for issuance of stock options and warrants unrelated to this Agreement. The
     stockholders of the Company were requested to approve and approved an
     increase in the number of authorized shares of Common Stock to 70,000,000
     at a special meeting on November 15, 1995, and subsequently to 90,000,000
     shares at its annual shareholders' meeting in order to enable the Company
     to issue shares, options and warrants as a result of the Agreement and to
     shares available for future financing and stock options.     

NOTE D - RELATED PARTY TRANSACTIONS
 
1.   Affiliates of MR Acquisitions, L.L.C. (MR):

     The Company relocated to King of Prussia, Pennsylvania in August 1995 where
     it conducts its operations and warehouses inventory in a facility subleased
     from an affiliate of MR. Terms of the sublease were negotiated on an arms
     length basis and require rental payments of approximately $4,000 per month
     for use of these facilities and warehousing services commencing August 1,
     1995 through July 31, 1997. Rent expense related to this lease totaled
     $47,500 and $19,792 for the years ended 1996 and 1995, respectively. Any
     other cost related to the use of the joint facility or for other services
     provided by MR or its affiliates will be charged to the Company on an arms
     length basis and will be subject to approval by a special disinterested
     committee of the Board of Directors. Rent expense charged to operations in
     connection with this lease, as well as other leases, was $47,500, $58,792,
     and $117,250 in the years ended December 31, 1996, 1995 and 1994,
     respectively.
     
     KPR Sports International, Inc., an affiliate of MR and an entity owned by
     the Chairman and Chief Executive Officer of the Company, has advanced
     certain funds to the Company on a temporary basis. Such amounts 
     remaining outstanding at December 31, 1996 and 1995 are included in the
     balance sheet under current liabilities as due to affiliate.

     MR through its affiliate, KPR, made available to the Company, a letter
     of credit facility in the amount of $2,000,000. The facility is used by the
     Company to finance the purchase of manufactured inventory with overseas
     vendors. At December 31, 1995, letters of credit in the amount of $168,652
     were issued by KPR on behalf of the Company. This arrangement was replaced 
     by a bank letter of credit facility in 1996 Merchandise inventory received
     under the terms of the facility is recorded in the financial statements
     upon transfer of title to the Company which, generally, occurs upon payment
     to KPR.
         
     In connection with the Agreement described in Note C, KPR loaned the
     Company $851,440 in the form of subordinated debt.     
         
     Included in the statement of operations for 1996 and 1995 are sales of
     $151,985 and $85,254, respectively, relating to footwear sold to KPR. These
     goods were prior season's merchandise which was sold at negotiated terms on
     an arms-length basis.           

     The Chairman and Chief Executive Officer of the Company devotes a portion
     of his time to the Company's operations and marketing and sales-related
     activities for which he does not receive any compensation. The value of
     these services for the year ended December 31, 1996 and the five months
     ended December 31, 1995, estimated at $100,000 and $41,666, respectively
     was recorded 

                                     F-13
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
   
     as compensation expense and included as part of general and administrative
     expenses in the statement of operations and as a contribution to capital
     and included as additional paid-in capital in the balance sheet.
     Additionally, as described in Note C, the Company recorded a charge in
     1996 of $511,614 relating to Contingent Warrants owned by MR.     

1.   Affiliates of MR Acquisitions, L.L.C. (MR) - continued:
   
     A summary of all related party transactions with MR or its affiliate for
     the years ended December 31, 1996 and 1995 are as follows:     


     --------------------------------- 1996 -------------------------------
     

<TABLE>    
<CAPTION>
                                                                                              Amount Included in
                                                                          Amount Included     Subordinated Note     Amount Included
                             Financial Statement                          In Due To           Payable               In Additional
Nature Of Transactions       Classification          Transaction Amount   Affiliate           Affiliate             Paid-In Capital
----------------------       ---------------         ------------------   -------------       ------------          ---------------
<S>                          <C>                     <C>                  <C>                 <C>                   <C>
Purchase Of 
Inventory                    Inventory               2,236,758
                                                     
Subordinated                 Subordinated Note       
Debt                         Payable                   851,440                                  $851,440
                                                     
Sale Of                                              
Merchandise                  Net Sales                 151,985              (685)

                             General and             
                             Administrative          
Rent                         Expense                    47,500
                                                     
Interest On Subordinated                             
Debt                         Interest Expense           78,944             13,162
                                                     
Interest On Letters Of                               
 Credit Advances             Interest Expense            1,779
                                                     
Temporary Advances                                   1,148,366              6,431
                                                     
Resolution of Contingent     Contingent Warrant      
 Warrant                     Expense                   511,614                                                     $511,614
                                                     
                             General and             
                             Administrative          
Services to Capital          Expense and             
 Contributed                 Additional Paid-In      
                             Capital                   100,000                                                      100,000
                                                                       ----------               --------           --------
                                                                           18,908               $851,440            611,614
                                                                       ==========               ========           ========
</TABLE>     

                                      F-14
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________

NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED

1.   Affiliates of MR Acquisitions, L.L.C. (MR) - continued:

     I--------------------------------- 1995 ----------------------------------I

<TABLE>
<CAPTION>
                                                                   Amount
                                                      Amount       Included in      Amount
                     Financial                        Included     Subordinated     Included In
Nature Of            Statement         Transaction    In Due To    Note Payable     Additional
Transactions         Classification    Amount         Affiliate    Affiliate        Paid-In Capital
------------         ---------------   -----------    ----------   ------------     ---------------
<S>                  <C>               <C>            <C>          <C>              <C>
Purchase Of                         
Inventory            Inventory            $256,892
                                    
Sale Of Property     Property               15,000

Proceeds From        Subordinated   
Subordinated         Note Payable   
Debt                                       851,440                     $851,440     
                                    
                                    
Sale Of                             
Merchandise          Net Sales              85,254
                                    
                     General and    
                     Administrative 
Rent                 Expense                19,792
                                    
                                    
Interest On                         
Subordinated         Interest       
Debt                 Expense                34,555
                                    
Temporary                           
Advances                                   172,591        $2,043
                                    
                     General and    
                     Administrative                                                           
Services             Expense and    
Contributed to       Additional Paid-             
Capital              In Capital             41,666                                          $41,666
                                                      ----------   ------------     ---------------
                                                          $2,043       $851,440             $41,666
                                                      ==========   ============     ===============
</TABLE>

NOTE E - NOTE PAYABLE BANK


In connection with the Agreement, the Company entered into a Loan and Security
Agreement with its principal lender to establish a $4,000,000 revolving credit
facility secured by all assets of the Company. The facility made funds available
to the Company based on a percentage of inventory and accounts receivable, as
defined. Interest on the amounts outstanding were paid monthly at the rate of
prime plus one percent and the facility was due on demand. This facility was
repaid in 1996. As of December 31, 1996 and 1995, the Company owed $ -0- under
the facility. Interest expense incurred in connection with this facility was
$48,141 and $6,907 for the years ended December 31, 1996 and 1995, respectively.

At December 31, 1995 and through August 15, 1996, the Company was in default of
certain provisions of the Loan and Security Agreement requiring certain credit
and life insurance to be obtained within prescribed time frames, losses incurred
by the Company subsequent to the Agreement date to be funded by MR making
subordinated loans or capital infusions, or causing the same to occur (the
"Funding Requirement"), and the covenant requiring establishment and maintenance
of certain minimum tangible net worth. The principal lender waived the defaults,
extended the time for the credit insurance to be obtained, and postponed the
Funding Requirement and minimum tangible net worth requirements, through August
15, 1996.

                                     F-15
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________

NOTE E - NOTE PAYABLE BANK-CONTINUED
   
In order to meet ongoing needs and fund its operating plans, the Company
negotiated a credit facility "Replacement Loan" with a new lender which became
effective August 15, 1996. As a prerequisite to closing this facility, the
Company was required to raise $2,000,000 in equity. This requirement was
satisfied with the sale of $2,500,000 of equity securities, (during the 1996
Private Placement). Maximum borrowings available under this Replacement Loan,
subject to borrowing base restrictions, are $4,500,000.  As of December 31, 1996
the Company owed $1,592,453 under this facility. Interest is accrued at a rate
of prime plus one percent on this lending agreement. The Interest rate in effect
at December 31, 1996 was 8.5%. Interest expenses incurred in connection with the
Replacement Loan was $86,660.     

The Replacement Loan Agreement granted the bank a security interest in the
Company's accounts receivable and inventory. In addition, under this agreement
the Company is restricted from paying any dividends to its shareholders.

Concurrently with RYKA, KPR closed a Replacement Loan with the same lender. On
November 8, 1996 the bank notified KPR that it was in default of certain
financial covenants, specifically the debt to net worth ratio and required
tangible net worth, and certain provisions relating to financial information.
RYKA satisfied its financial covenants and is not in default of its loan with
the Replacement Lender. 
    
On February 7, 1997 the Company entered into an agreement to modify the
Replacement Loan dated August 15, 1996 in anticipation of a complete refinancing
of the Company's obligation which was required to occur by March 31, 1997. The
terms of the modification called for an acceleration of the termination date to
March 31, 1997. Coincident with the signing of this agreement, KPR entered into
a Forbearance and Amendment Agreement with its lender. The terms of this
modification place certain additional financial covenants on KPR, and
accelerated the termination of KPR's Facility to March 31, 1997. The complete
refinancing of the Company's obligation was not successfully completed by March
31, 1997. On June 4, 1997, the Company and KPR obtained an extension of their
credit facilities to November 30, 1997 to allow the Company and KPR to continue
to attempt to obtain new financing. The terms of the extension modified the
original replacement loan agreement by increasing the interest rate to prime
plus 3 1/2%.  Given the dependance of RYKA on certain support provided
by KPR, KPR's inability to obtain continued funding or additional funding for
its operations could adversely impact the ability of RYKA to continue in
business independent of KPR.      


                                     F-16

<PAGE>
 
                           RYKA INC. AND SUBSIDIARY                             
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
________________________________________________________________________________


NOTE F - INCOME TAXES

For the years ended December 31, 1996, 1995 and 1994 the Company had no
provision for income taxes. The components of the net deferred tax assets at
December 31, 1996 and 1995, respectively, are as follows:

<TABLE>    
<CAPTION>
                                               December  31,
                                             1996          1995
                                         ------------  ------------
<S>                                      <C>           <C>
 Deferred Assets                         $    63,050   $    39,088
 
 Inventory                                    28,355        23,029     
     Provision for doubtful accounts       7,261,457     7,042,668
     Net operating loss carryforwards       (125,985)       39,776 
                                         -----------   -----------
Gross deferred tax asset                   7,226,877     7,144,561
     Valuation allowance                  (7,226,877)   (7,144,561)
                                       ---------------------------
Net deferred tax asset                   $        -      $      - 
                                       =============   ===========
</TABLE>     

Due to the uncertainty surrounding the realization of these favorable tax
attributes in future income tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets. As of December
31, 1996 the Company had available net operating loss carryforwards of
approximately $ 19,235,000 which expire in the years beginning 2002 through
2011. The use of net operating loss carryforwards may be subject to annual
limitations based on ownership changes of the Company's stock, as defined by
Section 382 of the Internal Revenue Code of 1986.


NOTE G - PROPERTY

Major classes of property, at cost, are as follows:

<TABLE>
<CAPTION>
                                                      December  31,
                                                     1996        1995
                                                  ----------  ----------
<S>                                               <C>         <C>
Equipment                                         $ 423,171   $ 364,969
Leasehold Improvements                            $   7,957   $   7,407
                                                  ---------   ---------
                                                  $ 431,128   $ 372,376
Less accumulated depreciation and amortization     (236,313)   (177,293)
                                                  ---------   ---------
                                                  $ 194,815   $ 195,083
                                                  =========   =========
 
</TABLE>

The Company relocated in August, 1995. As a result of the relocation the Company
abandoned leasehold improvements which had an original cost of $25,066 and a net
book value of $1,966, and terminated leases for equipment under capital leases
which had an original cost of $85,852 and a net book value of $1,683.

                                     F-17
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY                             
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
________________________________________________________________________________

NOTE H - COMMITMENTS AND CONTINGENCIES

 .    LEGAL PROCEEDINGS

The Company is involved in various routine litigation, including litigation in
which the Company is a plaintiff, incident to its business. The Company believes
that the disposition of the routine litigation will not have a material adverse
effect on the financial position or results of operations of the Company.



NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED

 .    LETTERS OF CREDIT

As of December 31, 1996 the Company had $ 157,804, of outstanding letters of
credit.

NOTE I - EQUITY

The Company is authorized to issue up to 1,000,000 shares of preferred Stock,
$.01 par value. The Preferred Stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights. No preferred
stock has been issued as of December 31, 1996.

During September through November 1994, the Company raised a total of
$1,174,537, net of offering costs of $218,896, through the sale of 2,555,795
shares of Common Stock in an unregistered offering to overseas investors. 

During 1995 and 1996, the Company was party to several equity transactions as
more fully described in Note C.
   
In connection with the Agreement, as described in Note C, the Company offered
for sale, through a private placement, (the 1995 Private Placement), 4,000,000
shares of Common Stock The results of the 1995 private placement were as
follows:     

<TABLE>
<CAPTION>
                         Cumulative         Cumulative
                        Shares Placed    Proceeds Received
                        -------------    -----------------
<S>                     <C>              <C>
At closing                  3,020,000           $  255,000
                            =========           ==========
At December 31, 1995        3,520,000           $  880,000
                            =========           ==========
At December 31, 1996        4,000,000           $1,000,000
                            =========           ==========
 
</TABLE>
    
As a condition of the 1995 Private Placement, in the event the Company was
unable to register such securities with the Securities and Exchange Commission
in a filing which was effective within 120 days of the Agreement, the Company
would be required to remit the investors $10,000 for each month such
registration statement was not effective up to a maximum of 20 months for a
maximum liability of $200,000.

As of December 31, 1995, the Company had reached a settlement agreement with an
investor representing 25% of the 1995 Private Placement to issue to such
investor warrants to purchase 20,000 shares of common stock for each months such
registration was not effective up to a maximum of 40,000 shares. No other
settlements had been reached or waivers received from other investors through
December 31, 1995. Accordingly, $150,000 of the proceeds have been classified as
other liabilities at December 31, 1995.

As of December 31, 1996, the Company obtained settlement agreements with 
investors representing 50% of the 1995 Private Placement which would result in 
the issuance of 40,000 shares of common stock (including the 20,000 shares with 
respect to the settlement discussed above) for each month such registration was 
not effective up to a maximum of 800,000 shares. In addition, through December 
31, 1996, the Company had obtained waivers from other investors which 
represented an additional 32.5% of the 1995 Private Placement. Accordingly, 
$35,000 of the proceeds have been classified as other liabilities at December 
31, 1996.     

From the date of the Agreement until completion of the private placement, the
Company's Chairman and Chief Executive Officer provided a subordinated bridge
loan to the Company.

                                     F - 18
 
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY                             
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
________________________________________________________________________________


NOTE I - EQUITY - CONTINUED

This loan is evidenced by a promissory note bearing no interest and is due upon
receipt by the Company of the proceeds of the 1995 Private Placement. At
December 31, 1995, a total of $120,000 remained outstanding on such loan. This
amount has been recorded as Bridge Loan Payable on the Balance Sheet at December
31, 1995. As of December 31, 1995, a total of 480,000 shares were not yet sold
to investors. At March 31, 1996 the remaining 480,000 shares were sold and the
bridge loan repaid with the proceeds. Originally, in the event the 1995 Private
Placement was not completed by August 26, 1995, such bridge loan was to be
converted to equity based on the same terms as the private placement, with the
exception of the provisions causing a contingent reduction in stock proceeds, as
described above. The conversion date was subsequently extended until March 31,
1996.

In May, 1996, the Company's Board of Directors, through the 1996 Private
Placement, authorized the sale of 10,000,000 shares of the Company's Common
Stock which were placed during the second and third quarters of 1996.

On April 21, 1997 the Company sold 2,500,000 shares of the Company's Common 
Stock for $750,000 to certain investors. The Proceeds from this sale were used 
to repay $385,000 of the Subordinated Note Payable and to enable the Company to 
open $810,000 in Letter of Credit agreements for the benefit of KPR.

In October, 1996, the Company filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission to register the shares placed in the 1995
Private Placement, 1996 Private Placement as well as the securities held by
others who were granted piggy-back registration rights. The Company has decided 
to withdraw this Registration Statement.

NOTE J-STOCK OPTIONS

Pursuant to option grant letters, but not pursuant to any formal plan ("Non-Plan
Grants"), the Company has issued options to certain individuals to purchase 
shares of the Company's Common Stock at prices which approximated fair market 
value at the date of grant. The options vest at various times over periods 
ranging up to four years and, if not exercised, expire up to ten years after the
date of grant.

The Company also has eight separate stock option plans (the "Plans"). Under the 
terms of the 1987 Stock Option Plan, 1988 Stock Option Plan, 1990 Stock Option 
Plan, 1992 Stock Option Plan, 1993 Stock Option Plan, 1995 Stock Option Plan, 
1996 Stock Option Plan and 1995 Non-employee Directors Plan, the Company may 
grant qualified and nonqualified options to purchase up to 626,421, 350,000, 
750,000, 875,000, 900,000, 1,500,000, 2,000,000 and 250,000 shares of Common 
Stock, respectively, to employees, Directors and consultants of the Company. The
options vest at various times over periods ranging up to five years. All options
have been granted at not less than fair market value of the Common Stock as of 
the date of grant. The options, if not exercised, expire up to 10 years after 
the date of grant.
                                     F-19
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE J- STOCK OPTIONS-CONTINUED

<TABLE>
<CAPTION>
                                                                   Number of Shares
                    ------------------------------------------------------------------------------------------------------------
                                                                                                                        Weighted
                                                                                                Non-                    Average  
                     Non-Plan  1987     1988     1990     1992     1993     1995       1996     employee   Price of     Exercise
                     Grants    Plan     Plan     Plan     Plan     Plan     Plan       Plan     Directors  Shares       Price
                     --------  -------  -------  -------  -------  -------  ---------  -------  ---------  --------     --------
<S>                   <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>               <C>    <C>
Outstanding at
 December 31, 1993     93,321  265,746  142,986  338,500  706,567  532,000                                 $0.25-$1.31  $0.80

 Granted              250,000   67,000           120,000  675,000  350,000                                 $0.55-$1.06  $0.65

 Exercised                                7,335  163,000   25,840    1,000                                 $0.25-$0.65  $0.31

 Cancelled             25,000   50,000    3,300  120,000  508,000    7,500                                 $0.56-$1.25  $1.16
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at
December 31, 1994     318,321  282,746  132,351  175,500  847,727  873,500                                 $0.25-$1.31  $0.66

Granted               100,000                                       10,000  1,200,000                      $0.25-$0.47  $0.45

Exercised                       20,000    2,500   18,500                                                   $      0.25  $0.25

Canceled                2,000   11,000                      9,167   22,000                                 $0.25-$0.84  $0.64
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at
 December 31, 1995    416,321  251,746  129,851  157,000  838,560  861,500  1,200,000                      $0.25-$1.31  $0.60
 
Granted                         13,000   10,500    3,500   10,500   37,500    300,000  670,000   25,000    $0.20-$0.47  $0.36 

Exercised

Canceled                                                                      100,000                      $0.25-$0.84  $0.34
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at
 December 31, 1996    416,321  264,746  140,351  160,500  849,060  899,000  1,400,000  670,000     25,000  $0.20-$1.31  $0.55
                      =======  =======  =======  =======  =======  =======  =========  =======  =========  ===========  =======
</TABLE>

    
During August 1996, in connection with a termination of employment of an officer
of the company, the Company elected to accelerate the vesting of certain
employee stock options amounting to 625,000 shares, so that these shares became
fully vested at the time of termination. Further in connection with this
termination, the Company granted the former officer stock options vesting
immediately to purchase an additional 500,000 shares of stock at $.47 per share.
As part of the terms of the agreement the former officer was engaged to act as a
consultant for a term of three years. There was no expense associated with the 
acceleration of the vesting of options to purchase 625,000 shares. There was, 
however, a $16,000 expense associated with the grant of options to purchase the 
additional 500,000 shares, which expense was recorded in 1996 and is included in
general and administrative expenses.     
     
The Company accounts for the Plans in accordance with Accounting Principles
Board Opinion No.25, under which no compensation cost has been recognized for
stock option awards. Had compensation cost for the Plans been determined
consistent with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock - Based Compensation" (SFAS123), the Company's pro forma net loss and
loss per share for 1995 and 1996 would have been as follows:

<TABLE> 
<CAPTION>                                                        Pro
                                      Reported                 Forma
                                   -------------             ----------
<S>                               <C>                      <C> 
1996 Net Loss                     $  1,879,757             $  1,929,257
1996 Net Loss per share                   $.04                     $.04
1995 Net Loss                     $  3,629,477             $  3,645,577
1995 Net Loss per share                   $.10                     $.10
</TABLE> 

The weighted average fair value of the stock options during 
1996 and 1995 were $.09 and $.02 respectively.

The fair value of options granted under the Plans during 1995 and 1996 was
estimated on the date of grant using the Black - Scholes option pricing model
with the following weighted average assumptions used:

  .  no dividend yield
    
  .  expected volatility of 35%      
  .  risk free interest rate of between 5.64% and 7.84%
  .  expected lives of 7 years

                                     F-20
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE K - COMMON STOCK PURCHASE WARRANTS

In addition to the Common Stock Purchase Warrants mentioned in Notes C and J,
the following warrants were outstanding at December 31, 1996.

In connection with the provisions of an investment banking agreement in 1994,
the Company issued warrants that entitle the investment banking firm to purchase
50,000 shares of Common Stock at a price of $.60 per share.  These warrants will
expire on January 3, 2004.

In connection with an unregistered overseas offering of the Company's Common
Stock during 1994, the Company issued warrants to a placement agent to purchase
a total of 150,000 shares of Common Stock at an exercise price of $1.00 per
share.  These warrants will expire on September 13, 1997.

In connection with a bridge financing composed of two short term notes of
$150,000 each during July 1994, the Company issued warrants to purchase a total
of 30,000 shares of Common Stock, as adjusted to a total of 38,031 shares based
upon the terms of each of the warrants, at an exercise price of $0.8125 per
share. If not exercised, 19,569 of these warrants will expire on July 14, 1999
and 18,462 will expire on July 25, 1999.
    
During 1995, the principal lender received warrants to purchase up to 500,000
shares of the Company's common stock for an exercise price of $.57 per share.
The price was based upon the average trading price of the stock for the five
days before and after Closing. The warrant may be exercised for a period of up
to five years after the Transaction date but may not be exercised during the
first twelve months. The value of the warrants was $100,000.     
    
On April 30, 1996 and May 15, 1996 in connection with the requirement, and
subsequent failure to register a total of 2,000,000 shares issued in connection
with the 1995 Private Placement, the Company committed to issue to two investors
warrants to purchase 20,000 shares each of RYKA common stock for each month that
the registration of the shares is not accomplished beyond the required 120 day
period.  The warrants have an exercise price of $.25 and expire in ten years
from issuance.  At December 31, 1996, 520,000 of such warrants had been awarded.
The value of these warrants, which were issued in return for forgiveness of 
other liabilities due as a result of the failure to register the shares, has 
been recorded as an equity transaction.      
    
On May 22, 1996 RYKA settled a patent infringement with a patent holder in
exchange for warrants to purchase 250,000 shares of Common Stock at $.265 a
share, and $75,000 payable over a three year period. This settlement granted
RYKA and affiliated companies a license to manufacture shoes using the patented
technology. The license agreement releases RYKA and affiliated companies (owned
100% by MR under the YUKON and APEX brands) a release from all past, existing
and future claims.  The cost of the license was recorded at $100,000 which was 
made up of two components: (i) $69,000, or the net present value of $75,000 
payable over three years, and (ii) $31,000, or the appraised value of 250,000 
warrants to the patent holders with an exercise price of $0.265 per share.     


NOTE L - SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

The Company's sales and accounts receivable are primarily with national chain
stores.  Sales to key customers each amounting to in excess of 10% are as
follows:

<TABLE>
<CAPTION>
                             1996       1995       1994
                            -----      -----      -----
<S>                         <C>        <C>        <C>
Customer 1                   15%       *           16%

Customer 2                   12%       *           *

Customer 3                   *         20%

Customer 4                   *         10%

Customer 5                   *         10%

Customer 6                   *         *           25%
</TABLE>

* Accounted for less than 10% of total revenues in a given year.


At December 31, 1996 accounts receivable for a significant customer amounted to
approximately $725,000 with the top three customers accounting for $1,039,476.

                                     F-21
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE L - SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK-CONTINUED

Accounts receivable for three significant customers at December 31, 1995
amounted to $323,000.  Accounts receivable for three significant customers at
December 31, 1994 was $1,600,000 of which $676,000 was secured by letter of
credit and the remaining $924,000 purchased by a Factor without recourse.


NOTE M - ECONOMIC DEPENDENCY - MAJOR SUPPLIER

During 1996 the Company purchased substantially all its finished goods inventory
from one supplier.  At December 31, 1996 the amount due to that supplier
included in accounts payable was approximately $407,000.


NOTE N - SPECIAL CHARGES

 .  EQUITY INCENTIVE PLAN

Included in special charges in 1996 is $152,715 of costs related to a "Partners
Share Success" Equity Incentive Plan implementation. This plan was canceled.

 .  REORGANIZATION

In connection with the Transaction described in Note C, the related closing of
the Massachusetts facility, and relocation of operations to Pennsylvania, the
Company incurred the following special charges in the year ended December 31,
1995.

<TABLE>
<CAPTION>
<S>                                                                   <C>
Professional fees and bank fees related to new credit facility,
including value of warrant to bank                                    $233,231

Temporary housing costs for relocated personnel                         21,851

Recruitment and relocation costs related to new management and          76,318
 personnel

Start-up and moving costs related to King of Prussia, PA warehouse      48,034
and office                                                            --------
 
                                                                      $379,434
                                                                      ========
</TABLE>

NOTE O - CONTINGENT STOCK OPTIONS AND WARRANTS

The Board of Directors of RYKA on March 9, 1997 authorized the issuance of
options to certain employees of KPR and RYKA and certain warrants to athletes
sponsoring or endorsing the Apex brand for KPR, to purchase shares of the
Company's Common Stock. The issuance of these options is contingent upon the
consummation of the Merger between Ryka and KPR . The exercise price for these
options will be the fair market value of the stock at the time of the Merger. A
summary of such contingent options is as follows:

<TABLE>
<CAPTION>
                                       Options       Warrants   
                                      ---------      ---------  
    <S>                               <C>            <C>        
    KPR Employees                       530,000         -       
                                                                
    RYKA Employees                      930,000         -       
                                                                
    KPR Athletes                          N/A        3,200,000  
                                      ---------      ---------  
                                      1,460,000      3,200,000  
                                      =========      =========   
</TABLE>

                                     F-22
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf on June 30, 1997 by the undersigned thereunto duly authorized.


                              RYKA INC.


                              By: /s/ Michael G. Rubin
                                  --------------------
                                  Michael G. Rubin,
                                  Chairman and Chief Executive Officer



      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 30, 1997.

<TABLE>
<CAPTION>
        SIGNATURE                        CAPACITY                     DATE
-------------------------  ------------------------------------  ---------------
<S>                        <C>                                   <C>
/s/ Michael G. Rubin       Chairman and Chief Executive Officer   June 30, 1997
-------------------------
Michael G. Rubin

/s/ Steven A. Wolf         Chief Financial Officer                June 30, 1997
-------------------------
Steven A. Wolf

/s/ Kenneth J. Adelberg    Director                               June 30, 1997
-------------------------
Kenneth J. Adelberg
</TABLE>