<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
                                 ANNUAL REPORT
 
    PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 FOR THE YEAR ENDED DECEMBER 31, 1996        COMMISSION FILE NO. 1-4290
 
                                    K2 INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                   DELAWARE                                95-2077125
           (STATE OF INCORPORATION)                    (I.R.S. EMPLOYER
                                                      IDENTIFICATION NO.)
    4900 SOUTH EASTERN AVENUE
     LOS ANGELES, CALIFORNIA                                 90040
      (ADDRESS OF PRINCIPAL                                (ZIP CODE)
        EXECUTIVE OFFICES)                                
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (213) 724-2800
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 

                                               NAME OF EACH EXCHANGE ON
          TILE OF EACH CLASS                        WHICH REGISTERED
          ------------------                   ------------------------
 Common Stock, par value $1                    New York Stock Exchange
                                                Pacific Stock Exchange
 Series A Preferred Stock Purchase Rights      New York Stock Exchange
                                                Pacific Stock Exchange   

 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                     NONE
 
INDICATE BY AN "X" WHETHER THE REGISTRANT 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 HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE
PAST 90 DAYS. YES  X
                  ---
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 PAT III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. [_]
 
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANTS HELD BY
NONAFFILIATES WAS APPROXIMATELY $370,535,000 AS OF MARCH 14, 1997.
 
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF MARCH 14, 1997.
 
      Common Stock, par value $1                  16,542,295 Shares
 
DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the proxy statement for the Annual Meeting of Shareholders to
  be held May 8, 1997 are incorporated by reference in Part III.
 
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<PAGE>
 
                            FORM 10-K ANNUAL REPORT
 
                                    PART I
 
ITEM 1. BUSINESS:
 
GENERAL
 
  K2 Inc. ("K2 Inc." or the "Company") is a leading designer, manufacturer and
marketer of brand name sporting goods and other recreational products. The
Company is also a major supplier of selected industrial products. K2 Inc.'s
sporting goods and other recreational products include several brand name
lines such as K2 and Olin alpine skis, K2 snowboards, K2 in-line skates,
Shakespeare fishing rods and reels, Stearns personal flotation devices,
rainwear and wet suits, ProFlex full-suspension mountain bikes, Dana Design
and K2 Outdoor backpacks and hydration systems and Garuda tents. The Company
also produces and markets Hilton active apparel and K2 ski apparel. K2 Inc.'s
industrial products consist primarily of Shakespeare monofilament line which
is used, among others, in weed trimmers, in paper mills and as fishing line;
Shakespeare fiberglass marine antennas, light, transmission and distribution
poles and Simplex coated and laminated products. Founded in 1946 as Anthony
Pools, K2 Inc. has grown to over $600 million in annual sales through a
combination of internal growth and strategic acquisitions. For segment and
geographic financial information, see Note 12 of Notes to Consolidated
Financial Statements.
 
  In recent years, the Company has aggressively expanded into several new
sporting goods markets in the United States, Europe and Japan including in-
line skates, snowboards and full-suspension mountain bikes. Management
believes these newer products have benefited from the market share positions
of other Company products, several of which are now the #1 brands in their
respective markets. For example, in the United States, K2 has the #1 market
position in alpine skis, and management believes that Stearns has the #1
market position in personal flotation devices and Shakespeare's Ugly Stik is
the top selling line of fishing rods.
 
  On March 5, 1996, the Company completed the sale of substantially all of the
assets of its swimming pool and motorized pool cover business to General
Aquatics, Inc. (see Note 2 of Notes to Consolidated Financial Statements for
further discussion). Following the sale in 1996, the Company changed its name
to K2 Inc. The discussion which follows focuses on the continuing operations
of the Company.
 
  The Company's common stock was first offered to the public in 1959 and is
currently traded on the New York and Pacific Stock Exchanges (symbol: KTO). On
June 1, 1995, the Company completed a secondary public offering of 4.6 million
new shares of common stock of the Company, resulting in net proceeds of
$67.2 million. For further information regarding the stock offering see Note
11 of Notes to Consolidated Financial Statements.
 
                                       1
<PAGE>
 
SPORTING GOODS AND OTHER RECREATION PRODUCTS
 
  Net sales for sporting goods and other recreational products were $407.3
million in 1996, $349.4 million in 1995 and $264.7 million in 1994. The
following table lists the Company's principal sporting good products and the
brand names under which they are sold.
 
<TABLE>
<CAPTION>
     PRODUCT                          BRAND NAME
     -------                          ----------
     <S>                              <C>
     Alpine Skis                      K2, Olin
     Cross-Country Skis               Madshus
     Snowboards and Accessories       K2
     In-line Skates                   K2
     Fishing Rods and Reels           Shakespeare, Ugly Stik, Pfleuger
     Active Water Sports Products     Stearns
     Full-Suspension Mountain Bikes   ProFlex, Girvin
     Backpacks and Hydration Systems  Dana Design, K2 Outdoor
     Tents                            Garuda
     Imprinted Active Apparel         Hilton, USA
     Ski Apparel                      K2
</TABLE>
 
  Alpine Skis. The Company sells its alpine skis under the names K2 and Olin
in the 3 major ski markets of the world--the United States, Europe and Japan.
K2 offers skis in a broad range of styles for a variety of conditions and
types of skiing at numerous price points. While participation rates for alpine
skiing have been relatively flat during the past few years, the market shares
of K2 and Olin skis have increased due to their popularity among retail
purchasers resulting from their high-quality innovative features, attractive
graphics, creative marketing and their U.S. production.
 
  K2 and Olin skis are manufactured by the Company in the United States and
Norway. They are sold to specialty retail shops and sporting goods chains in
the U.S. by independent sales representatives and in Europe and Japan through
independent and Company-owned distributors. K2 alpine skis are marketed to
skiers ranging from beginners to top racers using youthful and often fun
advertising. Olin skis are marketed toward more mature and affluent
purchasers. To assist in its marketing efforts, the Company sponsors amateur
and professional skiers including Phil and Steve Mahre and Glen Plake.
 
  Cross-Country Skis. The Company's cross-country skis, which are manufactured
in the Company's plant in Norway, are sold under the name Madshus by a
retailer/distributor which owns the rights to the Madshus name and resells the
skis principally in Europe.
 
  Snowboards. The Company introduced K2 snowboards and snowboard bindings in
1990 and snowboard boots in 1993. High performance snowshoes integrating the
Clicker bindings (see below) and backpacks for carrying snowboards and other
gear when hiking into the backcountry were introduced this year. While the
snowboard market is highly fragmented with over 200 competitors, K2 is one of
the few companies which manufactures its own snowboards (most of its
competitors source their products from other manufacturers). In 1996, the
Company also began manufacturing for the OEM market. The Company believes that
its manufacturing capability will provide a competitive advantage as the
industry begins to consolidate. Like its alpine skis, K2 snowboards are of
high quality, have attractive graphics and are creatively marketed.
 
  The Company made an important innovation in its snowboarding line in early
1995 when it introduced the Clicker, a revolutionary step-in binding system
for snowboards jointly developed with Shimano Inc. under a distribution
agreement. The Clicker is among the first commercially available step-in
binding systems for snowboards. The Clicker has enabled snowboarders to
release and refasten the binding easily which facilitates entering and exiting
ski lifts.
 
                                       2
<PAGE>
 
  K2 snowboards are manufactured by the Company in the United States. They are
sold to specialty retail shops and sporting goods chains in the U.S. by
independent sales representatives and in Europe and Japan through independent
and Company-owned distributors. Like K2 skis, K2 snowboards are marketed using
youthful and irreverent advertising, and the Company sponsors professional and
amateur snowboarders.
 
  In-Line Skates. The Company introduced its K2 in-line skates in 1994. The
in-line skate market has grown dramatically in recent years. K2's in-line
skates are priced at the mid to upper end of the industry's product line. K2
skates are attractive, are of high quality and feature an innovative soft mesh
and leather upper, designed for improved comfort, with a rigid plastic cuff
for support. The Company's in-line skates also offer high quality in-line
skate components such as HyperTM wheels and TwinCamTM bearings, which are
manufactured by others.
 
  K2 in-line skates are manufactured to Company specifications primarily by
vendors in Korea and China. They are sold to specialty retail shops and
sporting goods chains in the U.S. by independent sales representatives and in
Europe and Japan through independent and Company-owned distributors.
 
  Fishing Rods and Reels. The Company sells fishing rods, reels and fishing
line in most of the world. The Company believes that Shakespeare's Ugly Stik
models have been the best selling fishing rods in the U.S. over the past 19
years. The success of these fishing rods has allowed the Company to establish
a strong position with retailers, thereby increasing sales of new rods, reels
and kits and combos. Shakespeare rods and reels are manufactured principally
in the People's Republic of China, although blanks for the Ugly Stik fishing
rod are made by the Company in the United States. Shakespeare products are
sold through independent sales representatives to specialty shops and chain
stores and directly by the Company to mass merchandisers (two of which in the
aggregate purchase more than one-half of the Company's fishing rods and
reels).
 
  Active Water Sports Products. The Company sells Stearns flotation vests,
jackets and suits ("personal flotation devices"), cold water immersion
products, wet suits, outdoor products and rainwear in the United States and in
certain foreign countries. Stearns has recently introduced towables, which are
inflatable flotation products towed behind waterski boats. In the United
States, occupants of boats are required by law either to wear or have
available personal flotation devices meeting Coast Guard standards. Stearns
personal flotation devices are manufactured to such standards and are subject
to rigorous testing for certification by Underwriters Laboratories. Stearns
manufactures its personal flotation devices in the U.S. and sources its other
products in Asia. Stearns products are sold to mass merchandisers through an
in-house marketing staff and to specialty shops and chain stores and to the
off-shore oil industry, commercial fishermen and other commercial users
through independent sales representatives.
 
  Full-Suspension Mountain Bikes. Girvin, which was acquired by the Company in
October 1993, designs and distributes high quality full-suspension mountain
bikes and components under the names ProFlex, Girvin and Flexstem in the
United States and internationally. The Company believes that full-suspension
bikes are a fast growing segment of the mountain bike market. Performance and
comfort are provided by these bikes through shock absorbing elements in both
front and rear wheels, thereby improving climbing ability and decreasing rider
fatigue and off-road vibration. Girvin is a pioneer of full-suspension, and
the Company believes it is one of the largest wholesale distributor of these
bikes in the United States. Girvin manufactures certain components, including
some front forks, at its facility in the United States. The bikes are
assembled to Girvin's specifications by a vendor in Taiwan and are distributed
through an in-house marketing staff and by independent sales representatives
to independent bicycle dealers in the U.S. and through distributors
internationally. As part of its promotional and marketing efforts, Girvin
sponsors the ProFlex mountain bike team.
 
  Backpacks. Dana Design, which was acquired by the Company in February 1995,
manufactures and distributes high-end backpacks in the U.S. Dana Design
products are known for their comfort, high quality and innovative features,
such as custom fitting. In 1996 the K2 Outdoor line of external frame mid-
priced backpacks was introduced. The line features a patented fiberglass wand
fitting system and a hydration system with a patented bite valve. The line
also includes a series of unique day packs. Dana Design and K2 Outdoor
 
                                       3
<PAGE>
 
backpacks are primarily manufactured by the Company in the United States for
sale by independent sales representatives to specialty retailers in the United
States. In December 1995, the Company acquired Garuda, a U.S. manufacturer of
high-end tents, which are sold by independent sales representatives to
specialty retailers in the United States.
 
  Active Wear. The Company manufactures and distributes jackets, shirts, fleece
tops and other active wear under the Hilton and USA brand names. These products
are sold in the United States to advertising specialty customers, embroiderers
and screen printers who in turn sell the imprinted garments, principally to
corporate buyers. Hilton and USA apparel, which are manufactured by the Company
primarily in the United States, are sold through catalogs, by a direct sales
force and by independent sales representatives.
 
  Ski Apparel. K2 ski apparel is manufactured to the Company's specifications
by various suppliers in Europe and Asia. The apparel is sold in Germany through
a Company-owned distributor and through the remainder of Europe through
independent distributors from whom the Company receives a royalty.
 
INDUSTRIAL PRODUCTS
 
  Net sales of industrial products were $195.4 million in 1996, $194.9 million
in 1995 and $170.3 million in 1994. The Company's industrial products segment
has historically provided a base of generally consistent earnings and cash
flow. The following table lists certain of the Company's principal industrial
products and the brand names under which they are sold.
 
<TABLE>
<CAPTION>
     PRODUCT                                        BRAND NAME
     -------                                        ----------
     <S>                                            <C>
     Monofilament line                              Shakespeare
     Fiberglass Utility and Decorative Light Poles  Shakespeare
     Marine Radio Antennas                          Shakespeare
     Coated and Laminated Paperboard Products       Thermo-ply, Studio Board
     Protective Building Wrap                       Barricade, R-Wrap
     Synthetic Commercial Building Coatings         Finestone
</TABLE>
 
  Monofilament Line. Nylon and polyester monofilament line is domestically
manufactured by the Company in a variety of diameters, tensile strengths and
softness. Shakespeare monofilament is primarily used in the manufacture of
woven mats for use by paper producers in the United States, Europe and South
America and for use as line in weed trimmers in the United States. Monofilament
sold in Europe for woven mats is manufactured primarily in the Company's U.K.
facility. Shakespeare monofilament also manufactures fishing line domestically
and marketed by Shakespeare's fishing tackle division to retailers and mass
merchandisers.
 
  Fiberglass Utility and Decorative Light Poles. The Company produces and sells
fiberglass utility and decorative light poles sold under the Shakespeare name
in the United States principally to public and private utilities and
developers. The Company believes that a large majority of major utility
companies in the United States have approved the use of fiberglass for its
light and utility poles.
 
  Marine Radio Antennas. The Company manufactures fiberglass radio antennas
under the Shakespeare name in the United States for marine and citizen use and
for military application. These products are sold primarily in the United
States. The Company also distributes marine radios and other marine electronics
under the Shakespeare name which are manufactured in Asia to the Company's
specifications. These antennas, radios and other marine electronics are sold by
an in-house sales department and through independent sales representatives to
specialty marine dealers.
 
  Coated and Laminated Paperboard Products. K2's Simplex business manufactures
a wide range of coated and laminated paperboard products which include
insulative sheathing marketed under the trademark Thermo-ply, container
components for fiber drums and flexible packaging paperboard products. These
products are
 
                                       4
<PAGE>
 
manufactured in the United States and are sold to a large number of customers
in the domestic residential and manufactured housing, container and industrial
packaging industries, and in the case of Thermo-ply, to the Japanese
residential housing industry. The Company also operates a paper recycling mill
which produces chip paperboard primarily used in the manufacture of Thermo-ply
and secondarily sold to others in nonconstruction related markets. The Company
has recently introduced Studio Board which is used in set construction for the
entertainment industry. Studio Board is made from 85% recycled material and is
also recyclable itself.
 
  Protective Building Wrap. The Company manufactures and sells protective
building wrap in the United States under the names R-Wrap and Barricade to the
domestic residential and manufacturing housing industries. These products are
generally sold through distributors to home builders.
 
  Synthetic Commercial Building Coatings. The Company manufactures and sells
synthetic commercial building coatings in the United States under the name
Finestone to the domestic commercial construction industry. These products are
marketed primarily to architects and builders.
 
COMPETITION
 
  The Company's competition varies among its business lines. The sporting
goods and recreational products markets are generally highly competitive, with
competition mainly centering on product innovation, performance, styling,
price, marketing and delivery. Competition in these products (other than
snowboards and active apparel) consists of a relatively small number of large
producers, some of whom have greater financial and other resources than the
Company. A large number of companies compete in snowboards and active apparel.
While the Company believes that its well-recognized brand names, established
distribution networks and reputation for developing and introducing innovative
products have been key factors in the successful introduction of its sporting
goods products, there are no significant technological or capital barriers to
entry into the markets for many sporting goods and recreational products.
These markets face competition from other leisure activities, and sales of
leisure products are affected by changes in consumer tastes, which are
difficult to predict.
 
  While the Company believes that in its industrial products segment it
competes based on product quality, service and delivery, the Company's
industrial products are, in most instances, subject to price competition,
ranging from moderate in marine antennas and monofilament line to intense for
commodity-type products such as paperboard container components. Insulative
sheathing products compete with substitute products. Fiberglass utility and
light poles compete with products made of other materials, such as wood and
aluminum. Certain industrial competitors have greater financial and other
resources than the Company.
 
FOREIGN SOURCING AND RAW MATERIALS
 
  The Company has not experienced any substantial difficulty in obtaining raw
materials, parts or finished goods inventory for its sporting goods and other
recreational products businesses. Certain components and finished products,
however, are manufactured or assembled abroad and therefore could be subject
to interruption as a result of local unrest, currency exchange fluctuations,
increased tariffs, trade difficulties and other factors. A major portion of
the Company's fishing rods, including its Ugly Stik models, and reels and
certain in-line skates and components are currently manufactured in the
People's Republic of China which trades with the United States under a Most
Favored Nation ("MFN") trade status. While the Company believes that
alternative sources for these products produced in China could be found,
maintaining its existing costs of such products will depend on China's
continuing to be treated under MFN tariff rates, which the United States from
time to time has threatened to rescind. In 1996, the United States again
threatened trade sanctions against certain products made in China, including
fishing rods, although no sanctions were imposed.
 
  The Company has not experienced any substantial difficulty in obtaining raw
materials for its industrial products segment, although the cost of recycled
corrugated scrap paper, a raw material used in the production of the Company's
insulative sheathing, has fluctuated significantly over the past two years.
The variation in cost has had a significant impact on the cost of the products
of the insulative sheathing line. While the Company has
 
                                       5
<PAGE>
 
been able to adjust its insulative sheathing prices to offset the cost of this
raw material, no assurances can be given of the Company's continued ability to
do so. The Company has recently expanded its recycling capabilities to lessen
its reliance on recycled corrugated scrap paper.
 
SEASONALITY AND CYCLICALITY; BACKLOG
 
  Sales of the Company's sporting goods are generally highly seasonal and in
many instances are dependent on weather conditions. The Company's industrial
products are mildly seasonal. This seasonality causes the Company's financial
results to vary from quarter to quarter, and the Company's sales and earnings
are usually weakest in the first quarter. In addition, the nature of the
Company's ski, snowboard and in-line skate businesses requires it to make
relatively large investments in inventory in anticipation of selling seasons
for these products, which, in the case of skis and snowboards, runs from
August through December, and in the case of in-line skates, runs primarily
from February through July. Relatively large investments in receivables are
consequently made during and shortly after such seasons. The rapid delivery
requirements of the Company's customers for its sporting goods products and
active apparel also result in investment in significant amounts of inventory.
The Company believes that another factor in its level of inventory investment
is the shift by certain of its sporting goods customers from substantial
purchases of pre-season inventories to deferral of deliveries until the
products' retail seasons.
 
  Sales of sporting goods depend to a large extent on general economic
conditions including the amount of discretionary income available for leisure
activities and consumer confidence. Sales of the Company's industrial products
are dependent to varying degrees upon economic conditions in the domestic
housing, container and paper industries.
 
  As a result of the nature of many of the Company's businesses, backlog is
generally not significant except for the in-line skate business. The backlog
of in-line skate sales as of February 28, 1997 and 1996 was approximately
$61.3 million and $20.8 million, respectively. Management believes that the
current backlog demonstrates strong demand for its in-line skates. The backlog
may be subject to cancellation or other adjustments and is not necessarily
indicative of future sales.
 
CUSTOMERS
 
  The Company believes that its customer relationships are excellent, and no
one customer of the Company accounted for ten percent or more of its
consolidated annual net sales or 5% of its operating income in 1996 or 1995.
 
RESEARCH AND DEVELOPMENT
 
  Consistent with the Company's business strategy of continuing to develop
innovative brand name products and improving the quality, cost and delivery of
products, the Company maintains decentralized research and development
departments at several of its manufacturing centers which are engaged in
product development and the search for new applications and manufacturing
processes. Expenditures for research and development activities totalling
approximately $9.8 million in 1996, $7.1 million in 1995 and $6.3 million in
1994 were expensed as part of general and administrative expenses in the year
incurred.
 
ENVIRONMENTAL FACTORS
 
  The Company is one of several potentially responsible parties ("PRP") named
in an Environmental Protection Agency matter involving discharge of hazardous
materials at an old waste site in South Carolina. Although environmental laws
technically impose joint and several liability upon each PRP at each site, the
extent of the Company's required financial contribution to the cleanup of
these sites is expected to be limited based on the number and financial
strength of the other named PRPs and the volume and types of waste involved
which might be attributable to the Company.
 
 
                                       6
<PAGE>
 
  Environmental and related remediation costs are difficult to quantify for a
number of reasons including the number of parties involved, the difficulty in
determining the extent of the contamination, the length of time remediation
may require, the complexity of environmental regulation and the continuing
advancement of remediation technology. The Company's environmental engineers,
consultants and legal counsel have developed estimates based upon cost
analyses and other available information for this particular site. The Company
accrues for these costs when it is probable that a liability has been incurred
and the amount can be reasonably estimated. At December 31, 1996 and 1995,
reserves of approximately $882,000 were provided, with no provision for
expected insurance recovery.
 
EMPLOYEES
 
  The Company had approximately 4,000 and 4,600 employees at December 31, 1996
and 1995, respectively. The Company believes that its relations with employees
generally have been good. The decline was generally due to consolidation of
certain foreign and domestic manufacturing plants.
 
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
 
  While product innovation is a highly important factor in the Company's
sporting goods and other recreational products segments and many of the
Company's innovations have been patented, the Company does not believe that
the loss of any one patent would have a material effect on it. Certain of its
brand names, such as K2, Olin, Shakespeare, Ugly Stik, Stearns, Girvin,
ProFlex, Hilton, Dana Design and K2 Outdoor are believed by the Company to be
well recognized by consumers and therefore important in the sales of these
products. Registered and other trademarks and tradenames of Company products
are italicized in this Form 10-K.
 
                                       7
<PAGE>
 
ITEM 2. PROPERTIES
 
  The table below provides information with respect to the principal
production and distribution facilities utilized by the Company for continuing
operations as of December 31, 1996.
 
<TABLE>
<CAPTION>
                                           OWNED FACILITIES  LEASED FACILITIES
                                           ----------------- -----------------
                               TYPE OF      NO. OF   SQUARE   NO. OF   SQUARE
         LOCATION              FACILITY    LOCATIONS FOOTAGE LOCATIONS FOOTAGE
         --------              --------    --------- ------- --------- -------
<S>                         <C>            <C>       <C>     <C>       <C>
SPORTING GOODS AND OTHER
 RECREATIONAL PRODUCTS
  Alabama.................. Distribution
                            and production      1    170,000      1     15,000
  California............... Distribution
                            and production                        1     10,000
  Illinois................. Distribution                          1     85,000
  Minnesota................ Distribution
                            and production      2    302,000      5    208,000
  Montana.................. Distribution
                            and production                        4     17,000
  North Carolina........... Distribution                          1      7,000
  Rhode Island............. Distribution
                            and production                        1     55,000
  South Carolina........... Distribution
                            and production      1    100,000
  Washington............... Distribution
                            and production      1    160,000      2     67,000
  Foreign.................. Distribution
                            and production      3     68,000      9    125,000
                                              ---    -------    ---    -------
                                                8    800,000     25    589,000
                                              ===    =======    ===    =======
INDUSTRIAL PRODUCTS
  Florida.................. Production          2     77,000
  Michigan................. Production          2    298,000
  South Carolina........... Distribution
                            and production      2    515,000
                                              ---    -------
                                                6    890,000
                                              ===    =======
</TABLE>
 
  The corporate headquarters of the Company is located in 15,000 square feet
of leased office space in Los Angeles, California. The terms of the Company's
leases range from one to eight years, and many are renewable for additional
periods. The termination of any lease expiring during 1997 or 1998 would not
have a material adverse effect on the Company's continuing operations.
 
  The Company believes that, in general, its plants and equipment are
adequately maintained, in good operating condition and are adequate for the
Company's present needs. The Company regularly upgrades and modernizes its
facilities and equipment and expands its facilities to meet production and
distribution requirements.
 
ITEM 3. LEGAL PROCEEDINGS
 
  Certain of the Company's products are used in relatively high-risk
recreational settings and from time to time the Company is named as a
defendant in lawsuits asserting product liability claims relating to its
sporting goods products. To date none of these lawsuits has had a material
effect on the Company, and the Company
 
                                       8
<PAGE>
 
does not believe that any lawsuit now pending could reasonably be expected to
have such an effect. The Company maintains product liability, general
liability and excess liability insurance coverages. No assurances can be given
that such insurance will continue to be available at an acceptable cost to the
Company or that such coverage will be sufficient to cover one or more large
claims, or that the insurers will not successfully disclaim coverage as to a
pending or future claim.
 
  On December 5, 1995, two of the directors of the Company, Robert T. Anthony
and Abraham L. Gray, and Mr. Anthony's mother, acting as stockholders of the
Company, filed a complaint in the California Superior Court for Los Angeles
County (No. BC 140251) entitled Marilyn Anthony, Robert T. Anthony and Abraham
L. Gray vs. John B. Simon, Hugh V. Hunter, Anthony Industries, Inc. and Does 1
through 100. The complaint purports to be a derivative complaint brought on
behalf of the Company and arises out of the negotiation and approval of a
retirement agreement in November 1995 between the Company and B.I. Forester,
then the Company's Chairman of the Board and Chief Executive Officer. Under
the agreement, Mr. Forester stepped down as Chief Executive Officer two years
prior to the expiration of his employment contract, allowing for an orderly
and timely management succession, and agreed to continue as the Company's
Chairman of the Board and provide consulting services to the Company. To avert
a deadlock on the Board, without the necessity of Mr. Forester voting on his
own retirement agreement, the retirement agreement was approved by the
Executive Committee, with Mr. Forester abstaining. The two members of the
Executive Committee, in addition to Mr. Forester, are Messrs. Hunter and
Simon. At a meeting of the full Board of Directors held the same day, the full
Board, including Mr. Forester, voted to approve the actions of the Executive
Committee, by vote of five to four. Those in favor were Messrs. Forester,
Hunter, Offermans, Rodstein and Simon. Those opposed were Messrs. Anthony,
Goldberg, Gray and Weiner. The complaint seeks recovery of damages from the
two defendant directors of not less than $10 million allegedly suffered by the
Company as a result of the Executive Committee's approval of the Forester
retirement agreement. The complaint alleges that the agreement is unfair to
the Company and that the defendants breached their duties of loyalty; acted in
bad faith; engaged in intentional misconduct; and engaged in a knowing
violation of law in approving the agreement. In the opinion of management of
the Company, the allegations of the complaint are without merit.
 
  The plaintiffs have conducted substantial discovery in the case, but have
not completed such discovery; and except for certain requests for document
production the defendants have not yet begun discovery. No trial date has been
set in the action.
 
  On September 11, 1996, the Board of Directors appointed a Special Committee
and delegated to it various matters including the task of evaluating whether
continuance of the lawsuit is in the best interests of the Company. The
Special committee is comprised of three outside independent directors who were
not on the Board when the challenged activities occurred.
 
  On February 18, 1997, the Special Committee, after interviewing 23 witnesses
and reviewing over 55,000 pages of documents (directly or through counsel),
issued its report. The report concluded that the litigation is meritless and
the continuation of the lawsuit is not in the best interests of the Company
and instructed the Company to seek its dismissal. Thereupon, the Company
requested that Mr. Gray and Mr. Anthony and his mother dismiss the lawsuit.
When they did not do so, on March 4, 1997, the Company filed a motion for
summary judgment seeking dismissal of the case. The motion is currently
pending.
 
  The Company is one of several potentially responsible parties ("PRP") named
in an Environmental Protection Agency matter involving discharge of hazardous
materials at an old waste site in South Carolina. Although environmental laws
technically impose joint and several liability upon each PRP at each site, the
extent of the Company's required financial contribution to the cleanup of
these sites is expected to be limited based on the number and financial
strength of the other named PRPs and the volume and types of waste involved
which might be attributable to the Company.
 
  Environmental and related remediation costs are difficult to quantify for a
number of reasons including the number of parties involved, the difficulty in
determining the extent of the contamination, the length of time
 
                                       9
<PAGE>
 
remediation may require, the complexity of environmental regulation and the
continuing advancement of remediation technology. The Company's environmental
engineers, consultants and legal counsel have developed estimates based upon
cost analyses and other available information for this particular site. The
Company accrues for these costs when it is probable that a liability has been
incurred and the amount can be reasonably estimated. At December 31, 1996 and
1995, reserves of approximately $882,000 were provided, with no provision for
expected insurance recovery.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  Not applicable.
 
EXECUTIVE OFFICERS OF THE COMPANY
 
<TABLE>
<CAPTION>
        NAME                                  POSITION                         AGE
        ----                                  --------                         ---
<S>                   <C>                                                      <C>
Richard M. Rodstein   President and Chief Executive Officer                    42
Robert E. Doyle       Senior Vice President; President of Simplex Products     50
John J. Rangel        Senior Vice President--Finance                           43
Tony H. Chow          Vice President and Director of Taxes                     49
David G. Cook         Vice President; President of Stearns                     59
Timothy C. Cronin     Vice President; President of Hilton Active Apparel       46
Woodrow P. Greene     Vice President--Quality and Process Improvement          52
David H. Herzberg     Vice President; President of Shakespeare Monofilament    54
J. Wayne Merck        Vice President; President of Shakespeare Electronics and
                      Fiberglass                                               37
Harry Miller          Vice President                                           38
James A. Vandergrift  Vice President                                           46
Susan E. McConnell    Secretary                                                53
</TABLE>
 
  Mr. Rodstein has been President of the Company for more than the past five
years and Chief Executive Officer since January 1, 1996.
 
  Mr. Doyle has been a Senior Vice President of the Company and president of
Simplex Products for more than the past five years.
 
  Mr. Rangel, a CPA, has been Senior Vice President-Finance of the Company for
more than the past five years.
 
  Mr. Chow has been a Vice President of the Company for more than the past
five years.
 
  Mr. Cook has been a Vice President of the Company and president of Stearns
for more than the past five years.
 
  Mr. Cronin has been a Vice President of the Company since January 1, 1996
and president of Hilton Active Apparel since November 1996. Mr. Cronin was
Executive Vice President of Hilton Active Apparel from October 1992 to
December 1995. From February to October 1992 Mr. Cronin was a design and
sourcing executive with Odyssey International Ltd.
 
  Mr. Greene has been Vice President-Quality and Process Improvement of the
Company since January 1, 1993. From June 1995 to June 1996 Mr. Greene was
president of Shakespeare Electronics and Fiberglass, and for more than one
year prior to 1993 he was Director of Quality and Process Improvement of the
Company.
 
  Mr. Herzberg has been a Vice President of the Company and president of
Shakespeare Monofilament for more than the past five years.
 
                                      10
<PAGE>
 
  Mr. Merck has been a Vice President of the Company since January 1, 1996 and
president of Shakespeare Electronics and Fiberglass since June 1996. Mr. Merck
was president of the Company's former Anthony Pools business from February
1994 to June 1996, manager of quality and process improvement of the Company
from August 1992 to February 1994, and director of manufacturing of
Shakespeare Electronics and Fiberglass for one year previous to that.
 
  Mr. Miller has been a Vice President of the Company since January 1, 1996.
From June 1992 to December 1995 Mr. Miller was director of business
development of the Company, and for more than one year previous to that he was
a vice president of Omega Corporation.
 
  Mr. Vandergrift has been a Vice President of the Company since January 1,
1996 and vice president of product development of K-2 Corporation for more
than the past five years.
 
  Mrs. McConnell, a California attorney, has been Secretary of the Company for
more than the past five years.
 
  Officers of the Company are elected for one year by the directors at their
first meeting after the annual meeting of shareholders and hold office until
their successors are elected and qualified.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
    MATTERS
 
PRINCIPAL MARKETS
 
  The Company's Common Stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange under the symbol "KTO." At March 14, 1997 there were
1,747 holders of record of Common Stock of the Company.
 
COMMON STOCK PRICES AND DIVIDENDS
 
  The following table sets forth, for the quarters indicated, the reported
high, low and closing sales prices of the Company's Common Stock, as reported
by the New York Stock Exchange during the Company's two most recent fiscal
years:
 
<TABLE>
<CAPTION>
                                                                       DIVIDENDS
                                                     STOCK PRICES      PER SHARE
                                                ---------------------- ---------
                                                 HIGH   LOW    CLOSE     CASH
                                                ------ ------ -------- ---------
   <S>                                          <C>    <C>    <C>      <C>
   1996
     Fourth.................................... 27 1/2 21 1/4 27 1/2     $.11
     Third..................................... 27 1/4 23 3/8 26 1/8      .11
     Second.................................... 30 1/8 23 7/8 27 1/8      .11
     First..................................... 26 7/8 20 3/8 26 1/2      .11
   1995
     Fourth.................................... 23 1/4 16 7/8 23         $.11
     Third..................................... 20 5/8 18 1/8 18 15/16    .11
     Second.................................... 18 1/2 15 1/4 18 1/2      .11
     First..................................... 16 7/8 15 1/8 16 1/4      .11
</TABLE>
 
DIVIDENDS
 
  The Company has paid a cash dividend on the Common Stock since 1978. The
timing and amounts of dividends depend on, among other things, the Company's
results of operations, financial condition, cash requirements and other
factors deemed relevant by the Board of Directors. The Company is subject to
credit
 
                                      11
<PAGE>
 
agreements which limit its ability to pay cash dividends. As of December 31,
1996, $12.2 million of retained earnings were free of such restrictions. See
Note 5 of Notes to Consolidated Financial Statements for further description
of the Company's credit facilities.
 
Transfer Agent, Registrar and Dividend Disbursing Agent for Common Stock
 
Harris Trust Company of California
601 South Figueroa Street, Suite 4900
Los Angeles, California 90017
 
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                         YEAR ENDED DECEMBER 31
                              ------------------------------------------------
                                1996      1995      1994      1993      1992
                              --------  --------  --------  --------  --------
                                (IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<S>                           <C>       <C>       <C>       <C>       <C>
INCOME STATEMENT DATA:
  Net sales.................. $602,734  $544,268  $434,995  $373,712  $341,545
  Cost of products sold......  432,775   400,840   319,021   276,759   249,707
                              --------  --------  --------  --------  --------
  Gross profit...............  169,959   143,428   115,974    96,953    91,838
  Selling expenses...........   73,844    61,256    49,575    41,519    40,802
  General and administrative
   expenses..................   51,759    45,086    38,713    31,759    28,428
                              --------  --------  --------  --------  --------
  Operating income...........   44,356    37,086    27,686    23,675    22,608
  Interest expense...........    9,294     9,916     7,481     5,759     6,687
  Other income, net..........   (1,480)   (1,449)   (1,239)     (903)     (872)
                              --------  --------  --------  --------  --------
  Income before provision for
   income taxes..............   36,542    28,619    21,444    18,819    16,793
  Provision for income taxes.   11,325     8,820     7,690     6,455     5,730
                              --------  --------  --------  --------  --------
  Income from continuing
   operations................   25,217    19,799    13,754    12,364    11,063
  Discontinued operations,
   net of taxes(a)...........             (4,920)     (721)   (1,243)   (2,542)
                              --------  --------  --------  --------  --------
  Net Income................. $ 25,217  $ 14,879  $ 13,033  $ 11,121  $  8,521
                              ========  ========  ========  ========  ========
  Per share data:
    Continuing operations.... $   1.51  $   1.37  $   1.15  $   1.05  $    .95
    Discontinued
     operations(a)...........               (.34)     (.06)     (.11)     (.22)
                              --------  --------  --------  --------  --------
    Net income............... $   1.51  $   1.03  $   1.09  $    .94  $    .73
                              ========  ========  ========  ========  ========
  Dividends:
    Cash--per share.......... $    .44  $    .44  $   .425  $   .405  $   .385
    Stock....................                            5%        5%        5%
  Weighted average shares
   outstanding...............   16,734    14,498    11,919    11,798    11,635
BALANCE SHEET DATA:
  Total current assets....... $274,409  $300,455  $226,474  $181,790  $163,729
  Total assets...............  367,831   384,423   301,536   254,093   232,507
  Total current liabilities..   74,250   120,533    79,724    66,790    69,402
  Long-term debt.............   89,096    75,071   109,921    87,271    68,525
  Shareholders' equity.......  188,988   175,816    98,996    88,656    83,598
MARGINS:
  Gross profit...............     28.2%     26.4%     26.7%     25.9%     26.9%
  Operating profit...........      7.4%      6.8%      6.4%      6.3%      6.6%
</TABLE>
--------
(a) See Note 2 of Notes to Consolidated Financial Statements.
 
                                      12
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS
 
  K2 Inc. is a leading designer, manufacturer and marketer of brand name
sporting goods and other recreational products, which represents $407.3
million, or 68% of the Company's 1996 consolidated net sales. The Company is
also a supplier of selected industrial products, which had sales of $195.4
million in 1996.
 
  The Company maintains its books using a 52/53-week year ending on the last
Sunday of December. The years ended December 31, 1996 and 1994 consisted of 52
weeks. The year ended in 1995 consisted of 53 weeks. The Company believes that
the impact on the financial statements of the additional week in 1995 was not
significant.
 
  In October 1995, the Company signed a letter of intent to sell the assets
and business of its swimming pool and motorized pool cover business (the
"Division"). As a result, the Company reclassified the Division as
discontinued operations in 1995 and 1994. On March 5, 1996, the Company
completed the sale of substantially all of the assets of the Division to
General Aquatics, Inc. (see Note 2 of Notes to Consolidated Financial
Statements). Following the sale in 1996, the Company changed its name to K2
Inc. The discussion which follows focuses on the continuing operations of the
Company.
 
REVIEW OF OPERATIONS: COMPARISON OF 1996 TO 1995
 
  Net sales from continuing operations increased 10.7% to $602.7 million
compared to $544.3 million in 1995. Income from continuing operations grew
27.3% to $25.2 million from $19.8 million in 1995. Earnings per share from
continuing operations, reflecting the completion on June 1, 1995 of the
Company's public offering of 4.6 million shares, was $1.51 per share, as
compared with $1.37 per share a year ago. Net income totaled $25.2 million, or
$1.51 per share, as compared to $14.9 million, or $1.03 per share in 1995,
which included a loss of $4.9 million related to the disposition of the
Division.
 
  Net Sales. In the sporting goods and other recreational products group, net
sales increased 16.6% to $407.3 million compared to $349.4 million in 1995.
While the increase was broad based, the largest share was attributable to the
growth of K2 in-line skates, primarily in the European and domestic markets,
and to K2 snowboards, bindings and original equipment manufacturer snowboard
sales. The improvement in domestic sales of Shakespeare fishing tackle
products benefited from a one-year promotional program entered into earlier in
the year. Stearns wetsuits, rainwear and other new products as well as
Hilton's apparel sales to the ad specialty market also contributed to the
improvement. Partially offsetting these gains were lower sales of full-
suspension mountain bikes due to increased competition and softness in the
mountain bike market.
 
  In the industrial products group, net sales increased modestly to $195.4
million compared to $194.9 million in 1995. Improved sales were reported by
the Shakespeare monofilament business through new product introductions.
Offsetting the sales increase was a decline in Thermo-ply insulative sheathing
and paperboard product sales due to increased competition, adverse weather
conditions and a reduction in selling prices. Sales of fiberglass light and
utility poles were comparable to the prior year as utilities reevaluated all
their pole programs in light of the deregulation of the utility industry.
 
  Gross Profit. Gross profit advanced 18.5% to $170.0 million, or 28.2% of net
sales, compared to $143.4 million, or 26.3% of net sales, in 1995. The
improvement in gross profit as a percentage of net sales resulted from the
sales mix which included a larger proportion of higher margin products and
gains in efficiency, particularly at K2 and Stearns. Volume related gains from
K2 in-line skates as well as the return to more normal costs of recycled
corrugated scrap paper as compared with the prior year also contributed to the
increase. The improvement in gross profit was partially diminished by higher
costs incurred to manufacture active apparel and backpacks and lower prices on
sales of full-suspension mountain bikes.
 
  Costs and Expenses. Selling expenses increased 20.4% to $73.8 million
compared to $61.3 million in 1995. The increase was volume driven, especially
by new products in the in-line skate, mountain bike, snowboard, ski
 
                                      13
<PAGE>
 
and backpack businesses. Higher expenses were also incurred to further promote
these products and support them in the market place.
 
  General and administrative expenses increased 14.9% to $51.8 million
compared to $45.1 million in 1995, although as a percentage of net sales they
were comparable to the prior year. The dollar increase is attributable to
spending on new product development, investment in systems and personnel in
various divisions to support growth and the inclusion of acquired product
lines.
 
  Operating Income. Operating income increased by 19.7% to $44.4 million, or
7.4% of net sales, compared to $37.1 million, or 6.8% of net sales, in 1995.
The percentage increase is due to the higher gross profit percentage partially
offset by slightly higher selling expenses as a percentage of net sales.
 
  Interest Expense. Interest expense declined by a net amount of $.6 million
in 1996. Lower interest rates which resulted in a decrease of $1.0 million,
were offset by an increase of $.4 million due to higher average borrowings to
support the growth of several product lines.
 
  Other Income. Other income of $1.5 million includes certain royalty,
interest and other miscellaneous income, of which $1.2 million is reported as
a component of segment operating profit.
 
  Income Taxes. The income tax rate for 1996 remained comparable to 1995 as a
result of the continuation of the utilization of prior years' foreign net
losses in the current period.
 
  Segment Information. Total segment operating profit (before interest,
corporate expenses and taxes) increased 16.7% to $52.4 million compared to
$44.9 million in 1995. In the sporting goods products group, operating profit
rose 18.6% to $31.9 million in 1996 compared to $26.9 million in 1995. The
increase was fueled by sales-related gains of in-line skates, improved margin
on new skis and from higher sales and lower costs of Stearns new water
products. The worldwide fishing tackle business, reflecting the impact of the
one-year promotional program also contributed to the improvement. Partially
offsetting these profit gains was a loss in the full-suspension mountain bike
business reflecting increased competition and softness in the worldwide
mountain bike market. In the industrial products group, operating profits
increased 13.9% to $20.5 million in 1996 compared to $18.0 million in 1995.
The improvement was mainly due to sales-related gains at the Shakespeare
Monofilament business and increased cost efficiencies at the Shakespeare
Electronics and Fiberglass and Simplex businesses. For additional information
regarding the segment information, see Note 12 of Notes to Consolidated
Financial Statements.
 
REVIEW OF OPERATIONS: COMPARISON OF 1995 TO 1994
 
  Net sales from continuing operations increased 25.1% to $544.3 million in
1995 compared to $435.0 in 1994. Income from continuing operations rose 44.0%
to $19.8 million from $13.8 million in 1994. Earnings per share from
continuing operations, reflecting the completion on June 1, 1995 of the
Company's public offering of 4.6 million shares, advanced to $1.37 per share
in 1995, as compared with $1.15 per share in 1994. Net income for 1995 was
$14.9 million, or $1.03 per share as compared to $13.0 million or $1.09 per
share in 1994.
 
  Net Sales. In the sporting goods and other recreational products group, net
sales increased 32.0% to $349.4 million in 1995 compared to $264.7 million in
1994. The increase in sales was widespread and was led by the rapid growth of
K2 Exotech in-line skates in both the international and domestic markets,
increased demand worldwide for K2 snowboards and step-in bindings and strong
shipments of Shakespeare's new Ugly Stik Lite fishing rod, together with other
new reels and kits and combos. New models of Stearns wetsuits, towables and
flotation vests also contributed significantly to the overall sales growth.
Sales of ProFlex full-suspension mountain bikes increased more than 75 % due
to market demand for the new frame design in the U.S. and Europe and expansion
of its domestic dealer and international distributor base. Hilton's new active
apparel styles, the growth of its Charles Bastion golf shirt line and the
inclusion of the Dana Design business, which was acquired in early 1995, also
contributed to the sales growth for the year.
 
                                      14
<PAGE>
 
  In the industrial products group, net sales advanced 14.4% to $194.9 million
in 1995 compared to $170.3 million in 1994. The increase in sales was fairly
broad based. Half of the sales improvement was attributable to the Simplex
products business, which produces coated and laminated paperboard products,
protective building wrap and synthetic commercial building coatings. The
business benefited from record sales of Thermo-ply insulative sheathing,
continued market penetration of Finestone commercial coatings, expanded sales
of new laminated paper products and from price increases which partially
reduced the impact of some significant cost increases. Improved market
penetration of fiberglass light, electric transmission and distribution poles
and paperweaving monofilament line in the worldwide markets, generated the
majority of the sales gains in the Shakespeare electronics and fiberglass
business and the Shakespeare monofilament business, respectively, which are
the other two businesses of the industrial products group.
 
  Gross profit. Gross profit rose 23.7% to $143.4 million, or 26.3% of net
sales, in 1995 as compared to $116.0 million, or 26.7% of net sales, in 1994.
The decline of gross profit as a percentage of net sales was primarily
attributable to the cost of increasing the production capacity of the rapidly
growing line of Shakespeare fiberglass light, distribution and transmission
poles and from certain raw material cost increases. The gross profit was
adversely affected by the dramatic increase in the cost of recycled corrugated
scrap paper, which was subsequently offset by corresponding price increases in
the latter part of the year. Higher sales of lower margin international
shipments, introductory price point flotation vests and active apparel was
offset by the profit impact of greater skate, snowboard and mountain bike
sales.
 
  Costs and Expenses. Selling expenses increased 23.6% to $61.3 million in
1995 compared to $49.6 million in 1994. However, as a percentage of net sales,
selling expenses were consistent from year to year. The dollar increase was
primarily due to new product growth of in-line skates, snowboards, full-
suspension mountain bikes and fiberglass light poles and the inclusion of the
recently acquired backpack businesses.
 
  General and administrative expenses increased 16.5% to $45.1 million in 1995
compared to $38.7 million in 1994, although as a percentage of net sales they
were comparable to the prior year. The increase is attributable to spending on
new product development, continued investment in the infrastructure of various
divisions to support the growth of the Company and the inclusion of the 1995
acquisitions of Dana Design and Wilderness Experience, partially reduced by
lower ESOP-related expenses.
 
  Operating Income. Operating income improved by 34.0% to $37.1 million, or
6.8% of net sales, in 1995 compared to $27.7 million, or 6.4% of net sales, in
1994. The percentage increase was due to lower selling, general and
administrative expenses as a percentage of net sales, which was partially
offset by the reduction in gross profit margin percentage.
 
  Interest Expense. Interest expense rose $2.4 million in 1995 compared to
1994. Higher average borrowings of $13.9 million, net of proceeds from the
Company's secondary public offering, were incurred to support the growth of
several product lines and accounted for $1.1 million of additional interest,
while $1.3 million reflected higher rates.
 
  Other income. Other income of $1.4 million includes certain royalty,
interest and other miscellaneous income, of which $1.2 million is reported as
a component of segment operating profit.
 
  Income taxes. The effective income tax rate for 1995 has been reduced as a
result of a favorable $0.3 million foreign tax settlement and reduction of the
valuation reserve to reflect the impact of foreign net operating losses
realized.
 
  Segment information. Total segment operating profit (before interest,
corporate expenses and taxes) increased 32.8% to $44.9 million in 1995
compared to $33.8 million in 1994. The sporting goods and other recreational
products group, reported operating profit of $26.9 million in 1995, up 57.3%
from $17.1 million in 1994. Gains from higher sales of snowboards and in-line
skates fueled the increase. The continued strength of sales of new fishing
rods, reels and kits and combos along with higher sales from Stearns also
provided earnings
 
                                      15
<PAGE>
 
gains. Partially offsetting these gains were lower profitability of the active
apparel business. Mountain bike sales contributed to the profit increase as
the Company's sales growth exceeded the growth of its expenses. The industrial
products group's segment operating profit increased 7.8% to $18.0 million in
1995 from $16.7 million in 1994. The increase was attributable to the
increased volume and cost efficiencies of the Shakespeare Monofilament and
Simplex businesses. For additional segment information see Note 12 of Notes to
Consolidated Financial Statements.
 
LIQUIDITY AND SOURCES OF CAPITAL
 
  The Company's continuing operations provided $19.7 million of cash in 1996
as contrasted with $36.3 million of cash used in 1995. The $56.0 million net
improvement reflects increased earnings, improved accounts receivable and
inventory management and the absence of a need for a proportional increase in
working capital to support the significant growth in new product sales. The
disposition of the Division did not have a significant impact on the liquidity
and cash flows of the Company in 1996, 1995 or 1994.
 
  Net cash used in investing activities increased to $22.5 million from $19.7
million in 1995. The increase was attributable to expenditures to increase
manufacturing capacity in the recreational products group and to improve
manufacturing efficiencies, principally in the industrial products group. The
acquisition of Basic Designs also required a moderate use of cash. No material
commitments for capital expenditures existed at year end.
 
  During 1996, the Company entered into a new $75 million Credit Line ("Credit
Line") as its principal long-term facility, which becomes due on May 20, 2001
and a $50 million accounts receivable purchase facility ("Purchase Facility").
The proceeds of the Credit Line and Purchase Facility were used to repay the
amounts outstanding under a $40 million 364-day unsecured revolving credit
line and an $85 million long-term revolving credit line, which have been
terminated. At December 31, 1996, $54.5 million was outstanding under the
Credit Line and $46.7 million of accounts receivable had been sold under the
Purchase Facility. Under the Credit Line, the Company is subject to an
agreement which, among other things, restricts amounts available for payment
of cash dividends by the Company. As of December 31, 1996, $12.2 million of
retained earnings were free of such restrictions. The Company also has $35.6
million of 8.39% unsecured senior notes due through 2004, payable in eight
equal principal payments. The notes are subject to agreements which are
generally less restrictive than the long-term borrowing facilities.
Additionally, the Company had several foreign and domestic short-term lines of
credit available totaling $42.4 million, of which $7.3 million was outstanding
at December 31, 1996. For further information regarding the Company's
borrowings, see Note 5 of Notes to Consolidated Financial Statements.
 
  On June 1, 1995, the Company completed a secondary public offering of 4.6
million shares of its common stock, resulting in net proceeds of $67.2
million. For further information regarding the stock offering see Note 11 of
Notes to Consolidated Financial Statements.
 
  The Company anticipates its cash needs in 1997 will be provided from
operations and from borrowings principally under its Credit Line and Purchase
Facility and other existing credit lines.
 
ENVIRONMENTAL MATTERS
 
  The Company is one of several named potentially responsible parties ("PRP")
in an Environmental Protection Agency matter involving discharge of hazardous
materials at an old waste site in South Carolina. Although environmental laws
technically impose joint and several liability upon each PRP at each site, the
extent of the Company's required financial contribution to the cleanup of
these sites is expected to be limited based on the number and financial
strength of the other named PRPs and the volume and types of waste involved
which might be attributable to the Company.
 
  Environmental and related remediation costs are difficult to quantify for a
number of reasons including the number of parties involved, the difficulty in
determining the extent of the contamination, the length of time remediation
may require, the complexity of environmental regulation and the continuing
advancement of
 
                                      16
<PAGE>
 
remediation technology. The Company's environmental engineers, consultants and
legal counsel have developed estimates based upon cost analyses and other
available information for this particular site. The Company accrues for these
costs when it is probable that a liability has been incurred and the amount
can be reasonably estimated. At December 31, 1996 and 1995, reserves of
$882,000 were provided with no provision for expected insurance recovery.
 
  The ultimate outcome of this matter cannot be predicted with certainty,
however. Taking into consideration reserves provided, management currently
does not believe this matter will have a material adverse effect on the
Company's financial conditions.
 
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
  On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
which requires that impaired assets or assets to be disposed of be accounted
for at the lower of the carrying amount or fair value of the assets less costs
of disposal. The adoption of the new standard did not have a material effect
on the Company's financial statements.
 
  In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation,"
was issued. Companies have the option of recognizing compensation expense for
virtually all stock-based compensation arrangements based upon the fair value
of the option at the grant date, or alternatively, continuing to recognize
compensation expense based on the excess of the quoted market price over the
option price on the measurement date in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." The
Company accounts for stock-based awards in accordance with APB No. 25. It was
determined that the effect of applying SFAS No 123's fair value method to the
Company's stock-based award method is not materially different from amounts
reported in accordance with APB No. 25.
 
IMPACT OF INFLATION AND CHANGING PRICES
 
  The inflation rate, as measured by the Consumer Price Index, has been
relatively low in the last few years, and therefore pricing decisions by the
Company have largely been influenced by competitive market conditions. During
1995, however, the cost of recycled corrugated scrap paper dramatically
increased, particularly in the first half of the year, resulting in price
increases of Thermo-ply insulative sheathing. In 1996, the cost returned to a
more normal level. The Company uses the LIFO method of inventory pricing for
30% of its inventories, which results in the most recent costs of LIFO-priced
inventory being reflected in the income statement. From a practical
standpoint, current costs of the Company's inventories priced on a FIFO basis
are also reflected in the income statement because of the relatively high
turnover of these inventories.
 
  Depreciation expense is based on the historical cost to the Company of its
fixed assets and therefore is considerably less than it would be if it were
based on current replacement cost. While buildings, machinery and equipment
acquired in prior years will ultimately have to be replaced at significantly
higher prices, it is expected that this will be a gradual process over many
years.
 
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
 
  This Annual Report on Form 10-K contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning
future events, including, but not limited to, the following: statements
regarding consolidation in the snowboarding industry and the competitive
advantage provided by the Company's manufacturing capability; statements
regarding growth in the full-suspension bike segment of the mountain bike
market; statements regarding the Company's ability to raise insulated
sheathing product prices to offset raw material cost increases; statements
regarding the seasonality of the Company's business; statements regarding
expected remediation and other costs relating to an environmental condition;
statements regarding the merits and effect of pending lawsuits on the Company;
and statements regarding the consistency of the Company's industrial products
segment's earnings and cash flow. The Company
 
                                      17
<PAGE>
 
cautions that these statements are further qualified by important factors that
could cause actual results to differ materially from those in the forward
looking statements, including, without limitation, the following: demand for
snowboard products and the availability of third party snowboard manufacturing
capacity; increased competition in the snowboard market; changes in consumer
tastes and new product development in the mountain bike industry; the
availability and pricing of competing insulative sheathing materials; changes
in historical seasonal buying patterns, including changes caused by climatic
conditions, such as a lack of snow in the winter months or adverse weather
conditions during the summer months; changing environmental regulations and the
various environmental factors discussed under "Business--Environmental
Matters"; changes in demand for the Company's industrial products; significant
changes in the cost of key raw materials used in the Company's industrial
products; increased competition in the markets in which the Company sells its
industrial products; and general economic conditions. Results actually achieved
thus may differ materially from expected results included in these and any
other forward looking statements contained herein.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                                    K2 INC.
 
                       STATEMENTS OF CONSOLIDATED INCOME
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31
                                                   ----------------------------
                                                     1996      1995      1994
                                                   --------  --------  --------
                                                   (IN THOUSANDS, EXCEPT PER
                                                         SHARE FIGURES)
<S>                                                <C>       <C>       <C>
Net sales......................................... $602,734  $544,268  $434,995
Cost of products sold.............................  432,775   400,840   319,021
                                                   --------  --------  --------
  Gross profit....................................  169,959   143,428   115,974
Selling expenses..................................   73,844    61,256    49,575
General and administrative expenses...............   51,759    45,086    38,713
                                                   --------  --------  --------
  Operating income................................   44,356    37,086    27,686
Interest expense..................................    9,294     9,916     7,481
Other income, net.................................   (1,480)   (1,449)   (1,239)
                                                   --------  --------  --------
  Income before provision for income taxes........   36,542    28,619    21,444
Provision for income taxes........................   11,325     8,820     7,690
                                                   --------  --------  --------
  Income from continuing operations...............   25,217    19,799    13,754
Discontinued operations:
  Loss from operations, net of taxes..............               (664)     (721)
  Loss on disposal, net of taxes..................             (4,256)
                                                   --------  --------  --------
                                                               (4,920)     (721)
                                                   --------  --------  --------
  Net Income...................................... $ 25,217  $ 14,879  $ 13,033
                                                   ========  ========  ========
Per share data:
  Continuing operations........................... $   1.51  $   1.37  $   1.15
  Discontinued operations.........................               (.34)     (.06)
                                                   --------  --------  --------
  Net Income...................................... $   1.51  $   1.03  $   1.09
                                                   ========  ========  ========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       18
<PAGE>
 
                                    K2 INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31
                                                            ------------------
                                                              1996      1995
                                                            --------  --------
                                                               (DOLLARS IN
                                                               THOUSANDS)
<S>                                                         <C>       <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents................................ $ 10,860  $  7,357
  Accounts receivable, net.................................   94,079   140,202
  Inventories, net.........................................  155,376   140,679
  Deferred taxes...........................................    8,195     6,683
  Prepaid expenses and other current assets................    5,899     5,534
                                                            --------  --------
    Total current assets...................................  274,409   300,455
PROPERTY, PLANT AND EQUIPMENT
  Land and land improvements...............................    2,629     1,704
  Buildings and leasehold improvements.....................   30,303    28,963
  Machinery and equipment..................................  115,190   103,434
  Construction in progress.................................    9,249     5,605
                                                            --------  --------
                                                             157,371   139,706
  Less allowance for depreciation and amortization.........   89,848    82,599
                                                            --------  --------
                                                              67,523    57,107
OTHER ASSETS
  Intangibles, principally goodwill, net...................   16,346    14,108
  Investments..............................................    6,408
  Net assets of discontinued operations....................              8,650
  Other....................................................    3,145     4,103
                                                            --------  --------
    Total Assets........................................... $367,831  $384,423
                                                            ========  ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Bank loans............................................... $  7,307  $ 50,219
  Accounts payable.........................................   26,639    27,985
  Accrued payroll and related..............................   20,410    21,443
  Other accruals...........................................   15,012    16,031
  Current portion of long-term debt........................    4,882     4,855
                                                            --------  --------
    Total current liabilities..............................   74,250   120,533
Long-term Debt.............................................   89,096    75,071
Deferred Taxes.............................................   15,497    13,003
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
  Preferred Stock, $1 par value, authorized 12,500,000
   shares, none issued
  Common Stock, $1 par value, authorized 40,000,000 shares,
   issued shares--
   17,131,662 in 1996 and 17,064,065 in 1995...............   17,132    17,064
  Additional paid-in capital...............................  131,627   130,995
  Retained earnings........................................   55,047    37,121
  Employee Stock Ownership Plan and stock option loans.....   (7,087)   (4,778)
  Treasury shares at cost, 575,928 in 1996 and 481,059
   shares in 1995..........................................   (6,719)   (4,189)
  Cumulative translation adjustments.......................   (1,012)     (397)
                                                            --------  --------
    Total Shareholders' Equity.............................  188,988   175,816
                                                            --------  --------
    Total Liabilities and Shareholders' Equity............. $367,831  $384,423
                                                            ========  ========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       19
<PAGE>
 
                                    K2 INC.
 
                 STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                       FOR THE THREE YEARS ENDED DECEMBER 31, 1996
                         --------------------------------------------------------------------------
                                                      EMPLOYEE-STOCK
                                 ADDITIONAL           OWNERSHIP PLAN TREASURY  CUMULATIVE
                         COMMON   PAID-IN   RETAINED    AND STOCK     SHARES   TRANSLATION
                          STOCK   CAPITAL   EARNINGS   OPTION LOANS  AT COST   ADJUSTMENTS  TOTAL
                         ------- ---------- --------  -------------- --------  ----------- --------
                                       (IN THOUSANDS EXCEPT FOR PER SHARE FIGURES)
<S>                      <C>     <C>        <C>       <C>            <C>       <C>         <C>
BALANCE AT JANUARY 1,
 1994                    $11,681  $ 56,863  $30,895      $(3,361)    $(3,993)    $(3,429)  $ 88,656
 Net income for the year
  1994..................                     13,033                                          13,033
 Exercise of stock
  options...............      78       764                  (575)                               267
 Cash dividends, $.425
  per share.............                     (5,010)                                         (5,010)
 Stock dividends, 5%
  plus cash in lieu of
  fractional shares.....     562     9,348   (9,924)                                            (14)
 Translation
  adjustments...........                                                           2,261      2,261
 Repurchase of shares
  and stock option loan
  repayments............       2        (2)                  303        (196)                   107
 Employee Stock
  Ownership Plan,
  amortization and
  partial loan
  repayment.............                                    (304)                              (304)
                         -------  --------  -------      -------     -------     -------   --------
BALANCE AT DECEMBER 31,
1994                      12,323    66,973   28,994       (3,937)     (4,189)     (1,168)    98,996
 Net income for the year
  1995..................                     14,879                                          14,879
 Exercise of stock
  options...............     141     1,388                (1,274)                               255
 Cash dividends, $.44
  per share.............                     (6,752)                                         (6,752)
 Translation
  adjustments...........                                                             771        771
 Stock option loan
  repayments............                                     336                                336
 Stock offering
  proceeds..............   4,600    62,634                                                   67,234
 Employee Stock
  Ownership Plan,
  amortization and
  partial loan
  repayment.............                                      97                                 97
                         -------  --------  -------      -------     -------     -------   --------
BALANCE AT DECEMBER 31,
1995                      17,064   130,995   37,121       (4,778)     (4,189)       (397)   175,816
 Net income for the year
  1996..................                     25,217                                          25,217
 Exercise of stock
  options...............      68       632                  (256)                               444
 Cash dividends, $.44
  per share.............                     (7,291)                                         (7,291)
 Translation
  adjustments...........                                                            (615)      (615)
 Repurchase of shares
  and stock option loan
  repayments............                                   2,443      (2,530)                   (87)
 Employee Stock
  Ownership Plan,
  amortization, loan and
  partial loan
  repayment.............                                  (4,496)                            (4,496)
                         -------  --------  -------      -------     -------     -------   --------
BALANCE AT DECEMBER 31,
1996                     $17,132  $131,627  $55,047      $(7,087)    $(6,719)    $(1,012)  $188,988
                         =======  ========  =======      =======     =======     =======   ========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       20
<PAGE>
 
                                    K2 INC.
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31
                                                  ----------------------------
                                                    1996      1995      1994
                                                  --------  --------  --------
                                                          (THOUSANDS)
<S>                                               <C>       <C>       <C>
OPERATING ACTIVITIES
 Income from continuing operations............... $ 25,217  $ 19,799  $ 13,754
 Adjustments to reconcile net income to net cash
  provided by (used in) operating activities:
  Depreciation of property, plant and equipment..   10,093     9,510     7,298
  Amortization of intangibles....................    1,057       722       614
  Deferred taxes.................................      961     1,323       (17)
  Changes in operating assets and liabilities:
   Accounts receivable...........................       97   (30,569)  (20,759)
   Inventories...................................  (13,408)  (41,433)  (19,274)
   Prepaid expenses and other current assets.....     (339)   (1,610)   (1,275)
   Accounts payable..............................   (1,797)    1,446     1,918
   Payrolls and other accruals...................   (2,151)    4,554     2,770
                                                  --------  --------  --------
 Net cash provided by (used in) operating
  activities.....................................   19,730   (36,258)  (14,971)
INVESTING ACTIVITIES
 Property, plant and equipment expenditures......  (18,832)  (17,292)  (11,273)
 Disposals of property, plant and equipment......      153       101     1,468
 Purchases of businesses, net of cash acquired...   (3,315)   (2,159)
 Other items, net................................     (251)     (364)    1,459
                                                  --------  --------  --------
 Net cash used in investing activities...........  (22,245)  (19,714)   (8,346)
FINANCING ACTIVITIES
 Borrowings under long-term debt.................   54,500              22,582
 Payments of long-term debt......................  (40,448)  (33,623)   (3,738)
 Net (decrease) increase in short-term bank
  loans..........................................  (42,912)   31,878    12,053
 Proceeds from accounts receivable facility......   46,725
 Exercise of stock options.......................      444       255       267
 Dividends paid..................................   (7,291)   (6,752)   (5,010)
 Advance to ESOP.................................   (5,000)               (400)
 Net proceeds from stock offering................             67,234
                                                  --------  --------  --------
 Net cash provided by financing activities.......    6,018    58,992    25,754
                                                  --------  --------  --------
Net increase in cash and cash equivalents from
 continuing operations...........................    3,503     3,020     2,437
Cash used in discontinued operations.............             (3,363)     (597)
                                                  --------  --------  --------
Net increase (decrease) in cash and cash
 equivalents.....................................    3,503      (343)    1,840
Cash and cash equivalents at beginning of year...    7,357     7,700     5,860
                                                  --------  --------  --------
Cash and cash equivalents at end of year......... $ 10,860  $  7,357  $  7,700
                                                  ========  ========  ========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       21
<PAGE>
 
                                    K2 INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1996
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Name Change
 
  On June 3, 1996, the Company changed its name from Anthony Industries, Inc.
to K2 Inc.
 
 Principles of Consolidation
 
  The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Shakespeare Company, K-2 Corporation,
Stearns Manufacturing Company, Girvin Inc. and Dana Design, Ltd. All
significant intercompany accounts and transactions have been eliminated.
 
 Fiscal Periods
 
  The Company maintains its books using a 52/53 week year ending on the last
Sunday of December. For purposes of the consolidated financial statements, the
year-end is stated as December 31. The year ended December 31, 1996 and 1994
consisted of 52 weeks. The year ended in 1995 consisted of 53 weeks.
 
 Estimates Used
 
  The preparation of financial statements in conformity with Generally
Accepted Accounting Principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual amounts could differ from those estimates.
 
 Foreign Currency Translation
 
  The functional currency for most foreign operations is the local currency.
Foreign currency financial statements are converted into United States dollars
by translating balance sheet accounts at the current exchange rate at yearend
and income statement items at the average exchange rate for the year, with the
resulting translation adjustment made to a separate component of shareholders'
equity. Transaction gains or losses, other than those related to items deemed
to be of a long-term nature, are included in net income in the period in which
they occur.
 
 Cash Equivalents
 
  Short-term investments (including any debt securities) that are part of the
Company's cash management portfolio are classified as cash equivalents and are
carried at amortized cost. These investments are highly liquid, are of limited
credit risk and have original maturities of three months or less when
purchased. The carrying amount of cash equivalents approximates market.
 
 Accounts Receivable and Allowances
 
  Accounts receivable are the result of the Company's worldwide sales
activities. Although the Company's credit risk is spread across a large number
of customers within a wide geographic area, periodic concentrations within a
specific industry occur due to the seasonality of its businesses. At December
31, 1996, the Company's receivables from sporting goods retailers who sell
skis, skates and snowboards amounted to 47% of total receivables. The Company
performs periodic credit evaluations to manage its credit risk. Accounts
receivable are net of allowances for doubtful accounts of $6,120,000 and
$5,298,000 at December 31, 1996 and 1995, respectively.
 
                                      22
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
 
 Inventories
 
  Inventories are stated at the lower of cost or market. Cost is determined on
the LIFO method with respect to approximately 30% and 45% of total inventories
at December 31, 1996 and 1995, respectively. Cost was determined on the FIFO
method for all other inventories.
 
 Property, Plant and Equipment
 
  Property, plant and equipment is recorded at cost. Depreciation is provided
on the straight-line method based upon the estimated useful lives of the
assets. Repairs and maintenance of $6,866,000, $7,270,000 and $6,020,000 in
1996, 1995 and 1994, respectively, were expensed as incurred.
 
 Intangibles
 
  Goodwill arising from acquisitions is amortized on a straight-line basis
over a period of up to 40 years. Other intangibles are amortized on a
straight-line basis over 3 to 15 years. Accumulated amortization of
intangibles as of December 31, 1996 and 1995 amounted to $4,538,000 and
$3,481,000 respectively. The Company periodically reviews intangibles for
impairment of value.
 
 Investments
 
  Investments include a 5.6% subordinated note receivable from GAI with a face
value of $6,178,000 and 100,000 shares of common stock of GAI with a carrying
value of $1,500,000 which were received in connection with the sale of the
Division (see Note 2). The note receivable, with a maturity date of March 1,
2001, was discounted by $1,270,000 to reflect a market rate of interest of 10%
and will be amortized over the term of the note using the effective interest
method.
 
 Advertising Costs
 
  Advertising costs are expensed as incurred. Advertising costs for the years
ended December 31, 1996, 1995 and 1994 amounted to $14,723,000, $13,006,000
and $10,177,000, respectively.
 
 Research and Development
 
  Research and development costs are charged to expense as incurred. Research
and development costs for the years ended December 31, 1996, 1995 and 1994
amounted to $9,831,000, $7,132,000 and $6,255,000, respectively.
 
 Income Taxes
 
  Income taxes are provided for based upon Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" which requires that
income taxes be provided for using the liability method.
 
 Per Share Data
 
  Earnings per share were determined by dividing net income by the weighted
average number of outstanding shares, including common stock equivalents,
using the treasury stock method. Common stock equivalents include stock
options. Primary earnings per share approximate earnings per share on a fully
diluted basis.
 
 
                                      23
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
 
 Newly Issued Accounting Standards
 
  On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires that impaired assets, or assets to be disposed of, be accounted
for at the lower of the carrying amount or fair value of the assets less costs
of disposal. The adoption of the new standard did not have a material effect
on the Company's financial statements.
 
  The Company accounts for stock-based awards in accordance with Accounting
Principles Board Opinion ("APB") No. 25, which recognizes compensation expense
based on the excess of the quoted market price over the option price on the
measurement date. In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued. This statement encourages the recognition of
compensation expense for virtually all stock-based compensation arrangements
based upon the fair value of the option at the grant date, or alternatively,
pro forma footnote disclosure had compensation expense been recognized based
upon the fair value of the option at the grant date. The Company has
determined that the effect of applying SFAS No. 123's fair value method to the
Company's stock-based award method is not materially different from amounts
reported in accordance with APB No. 25.
 
 Reclassifications
 
  Certain prior year amounts have been reclassified to conform with the
current year presentation.
 
NOTE 2--DISCONTINUED OPERATIONS
 
  On March 5, 1996 the Company completed the sale of the assets and business
of its swimming pool and motorized pool cover business ("Division") to General
Aquatics. Inc. As the result of the sale, the Company reclassified the
accompanying prior years' financial statements to show the Division as a
discontinued operation. Consideration included a subordinated note and
approximately 9% of the outstanding shares of common stock of GAI, a privately
owned company. In addition, the Company received warrants to purchase
additional shares upon the occurrence of certain conditions. The exercise of
the warrants may be funded through the surrender of the unpaid portion of the
note. No value was given to the warrants. Additionally, GAI assumed certain
liabilities of the Division. The face value of the note receivable was
discounted to reflect a market rate at the date of issuance (10%) and the
common stock was valued at estimated fair value.
 
  The loss on disposal of the discontinued operations, net of tax benefit of
$3,218,000, included a provision for operating losses of $2,087,000 prior to
disposal. The tax benefit is more than the benefit computed using statutory
tax rates due to the realization of the benefit of deductions treated as
permanent differences in prior years. Net assets of discontinued operations
were segregated in the accompanying Consolidated Balance Sheets and consisted
primarily of accounts receivable, inventories, fixed assets and goodwill
offset by accounts payable, accrued payroll and related items and other
accruals (excluding the reserve for the loss on disposal and operating losses
prior to disposal). Net sales of $65,349,000 and $67,449,000 in the years
ended December 31, 1995 and 1994, respectively, were excluded from
consolidated net sales in the accompanying Consolidated Statements of Income.
 
NOTE 3--ACQUISITION OF BUSINESSES
 
  On July 23, 1996, the Company purchased the stock of Basic Designs, Inc., a
designer and distributor of outdoor and marine products for sale primarily in
the United States and Japan. The Company also purchased the assets of a small
bicycle shock absorber manufacturer, which was integrated into the full-
suspension mountain bike business. The combined purchase price of these
acquisitions was $3.3 million, net of cash acquired.
 
                                      24
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 4--INVENTORIES
 
  Inventories consisted of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                1996     1995
                                                              -------- --------
                                                                 (THOUSANDS)
<S>                                                           <C>      <C>
Finished goods............................................... $111,989 $ 97,193
Work in process..............................................   10,810    9,700
Raw materials................................................   37,041   38,668
                                                              -------- --------
Total at lower of FIFO cost or market (approximates current
 cost).......................................................  159,840  145,561
Less LIFO valuation reserve..................................    4,464    4,882
                                                              -------- --------
                                                              $155,376 $140,679
                                                              ======== ========
</TABLE>
 
NOTE 5--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS
 
  At December 31, 1996, the Company had available foreign and domestic short-
term lines of credit totaling $42.4 million, of which $7.3 million was
outstanding. The foreign subsidiaries' lines of credit generally have no
termination date but are reviewed annually for renewal and are denominated in
the subsidiaries' local currencies. At December 31, 1996, interest rates on
short-term lines of credit ranged from 7.0% to 9.7%. The weighted average
interest rates on short-term lines of credit as of December 31, 1996 and 1995
were 9.5% and 6.8%, respectively.
 
  The principal components of long-term debt at December 31 were:
 
<TABLE>
<CAPTION>
                                                                 1996    1995
                                                                ------- -------
                                                                  (THOUSANDS)
<S>                                                             <C>     <C>
Notes payable due in eight equal annual principal installments
 through 2004 with semi-annual interest payable at 8.39%......  $35,556 $40,000
$75 million five-year unsecured bank revolving credit line due
 May 20, 2001, quarterly interest payments due at LIBOR plus
 3/10% to 5/8% and a commitment fee of 1/10% to 9/40% on the
 unused portion of the line through May 1997..................   54,500
$85 million bank revolving credit line replaced by the $75
 million revolving credit line described above................           35,500
Other debt....................................................    3,922   4,426
                                                                ------- -------
                                                                 93,978  79,926
Less--amounts due within one year.............................    4,882   4,855
                                                                ------- -------
                                                                $89,096 $75,071
                                                                ======= =======
</TABLE>
 
  The principal amount of long-term debt maturing in each of the five years
following 1996 is:
 
<TABLE>
<CAPTION>
                                              (THOUSANDS)
                                              -----------
            <S>                               <C>
            1997.............................   $4,882
            1998.............................    4,912
            1999.............................    4,946
            2000.............................    4,982
            2001.............................   60,921
</TABLE>
 
  Interest paid on short- and long-term debt for the years ended December 31,
1996, 1995 and 1994 was $9.3 million, $9.9 million and $7.5 million,
respectively.
 
                                      25
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 5--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS--(CONTINUED)
 
  In May 1996, the Company entered into an agreement providing for a $75
million, five-year bank revolving credit line due May 2001. Interest rates on
borrowings under the revolving line at December 31, 1996 ranged from 6.0% to
6.3%.
 
  In May 1996, the Company entered into an agreement to sell, with limited
recourse, undivided participation interests in designated pools of accounts
receivable for a period of up to five years, in an amount not to exceed $50
million at any time. At December 31, 1996, $46.7 million of receivables were
sold under this arrangement.
 
  The borrowings under the $75 million credit line and the proceeds from the
sale of accounts receivables facility were used to retire the $85 million
credit line and a $40 million 364-day unsecured revolving short-term facility.
The $75 million credit line and the accounts receivable arrangement, among
other things, restrict amounts available for payment of cash dividends by the
Company. As of December 31, 1996, $12.2 million of retained earnings were free
of such restrictions.
 
  The Company had $18.3 million of letters of credit outstanding as of
December 31, 1996, of which $6.5 million of standby letters of credit are a
reduction of amounts available under the $75 million credit line.
 
  The carrying amounts for the short-term lines of credit and the long-term
bank revolving credit line approximate their fair value since floating
interest rates are charged, which approximate market rates. The fair value of
the $35.6 million 8.39% notes payable, based on quoted market price, is $33.0
million as compared to a carrying amount of $35.6 million.
 
  The Company, including its foreign subsidiaries, enters into forward
exchange contracts to hedge certain firm and anticipated sales and purchase
commitments which are denominated in U.S. or foreign currencies. The purpose
of the foreign currency hedging activities is to reduce the Company's risk to
fluctuating exchange rates. At December 31, 1996, the Company had foreign
exchange contracts with maturities of generally less than one year in the
aggregate amount of $27.5 million, and with net unrealized gains of $1.2
million. The unrealized gains will be recognized in earnings when realized and
when the underlying transaction occurs.
 
  The Company entered into a $20.0 million forward exchange contract to hedge
its investment in a foreign subsidiary. An $.8 million unrealized gain is
included in current liabilities offsetting the impact to the cumulative
translation adjustment in shareholders' equity.
 
NOTE 6--INCOME TAXES
 
  Pretax income from continuing operations for the years ended December 31 was
taxed under the following jurisdictions:
 
<TABLE>
<CAPTION>
                                                          1996    1995    1994
                                                         ------- ------- -------
                                                               (THOUSANDS)
<S>                                                      <C>     <C>     <C>
Domestic................................................ $29,402 $22,174 $16,353
Foreign.................................................   7,140   6,445   5,091
                                                         ------- ------- -------
                                                         $36,542 $28,619 $21,444
                                                         ======= ======= =======
</TABLE>
 
                                      26
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 6--INCOME TAXES--(CONTINUED)
 
  Components of the income tax provision applicable to continuing operations
for the three years ended December 31 are:
 
<TABLE>
<CAPTION>
                                    1996             1995             1995
                              ---------------- ---------------- ----------------
                              CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
                              ------- -------- ------- -------- ------- --------
                                                 (THOUSANDS)
<S>                           <C>     <C>      <C>     <C>      <C>     <C>
Federal...................... $ 9,230   $190   $7,625   $(405)  $5,835   $(755)
State........................     665    (15)   1,310     (40)   1,915     (85)
Foreign......................     775    480      310      20      505     275
                              -------   ----   ------   -----   ------   -----
                              $10,670   $655   $9,245   $(425)  $8,255   $(565)
                              =======   ====   ======   =====   ======   =====
</TABLE>
 
  The principal elements accounting for the difference between the statutory
federal income tax rate and the effective tax rate for the three years ended
December 31 are:
 
<TABLE>
<CAPTION>
                                                               1996  1995  1994
                                                               ----  ----  ----
                                                                 (PERCENT)
<S>                                                            <C>   <C>   <C>
Statutory federal income tax rate............................. 35.0  35.0  35.0
State income tax effect, net of federal benefit...............  1.2   2.9   5.6
U.S. tax effect of foreign earnings........................... (3.6) (6.8) (4.8)
Other......................................................... (1.6) (0.2)  0.1
                                                               ----  ----  ----
                                                               31.0  30.9  35.9
                                                               ====  ====  ====
</TABLE>
 
  No provision for United States income taxes has been made on undistributed
earnings of foreign subsidiaries, since these earnings are considered to be
permanently reinvested. At December 31, 1996, foreign subsidiaries had unused
operating loss carryforwards of approximately $1.6 million of which
approximately $1.0 million expires in 2001 and the remainder carries forward
indefinitely. Since the use of these operating loss carryforwards is limited
to future taxable earnings of the related foreign subsidiaries, a valuation
reserve has been recognized to offset the deferred tax assets arising from
such carryforwards. As a result of realizing the benefit of certain foreign
operating loss carryforwards, the valuation reserve, which is included in the
tax effect of foreign earnings above, was reduced by $1.4 million in both 1996
and 1995, and none in 1994.
 
  Deferred tax assets and liabilities are comprised of the following at
December 31:
 
<TABLE>
<CAPTION>
                                                                    1996   1995
                                                                   ------ ------
                                                                    (THOUSANDS)
<S>                                                                <C>    <C>
Deferred tax liabilities:
Depreciation and amortization of property, plant and equipment.... $5,549 $6,323
Trademark amortization............................................    285    246
Other.............................................................  9,663  6,434
                                                                   ------ ------
  Deferred tax liabilities........................................ 15,497 13,003
Deferred tax assets:
Insurance accruals................................................  1,561  2,006
Tax effect of foreign loss carryforwards..........................    487  1,863
Bad debt reserve..................................................  1,332    879
Other.............................................................  5,302  3,798
                                                                   ------ ------
                                                                    8,682  8,546
Less--valuation reserve...........................................    487  1,863
                                                                   ------ ------
  Current deferred tax assets.....................................  8,195  6,683
                                                                   ------ ------
Deferred tax liabilities, net..................................... $7,302 $6,320
                                                                   ====== ======
</TABLE>
 
  Income taxes paid, net of refunds, in the years ended December 31, 1996,
1995 and 1994 were $7.3 million, $6.8 million and $6.7 million, respectively.
 
                                      27
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 7--COMMITMENTS AND CONTINGENCIES
 
  Future minimum payments under noncancelable operating leases as of December
31, 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                       (THOUSANDS)
                                                       -----------
         <S>                                           <C>
         1997.........................................   $2,404
         1998.........................................    2,212
         1999.........................................    1,405
         2000.........................................      782
         2001.........................................      296
         Thereafter...................................      207
                                                         ------
                                                         $7,306
                                                         ======
</TABLE>
 
  Leases are primarily for rental of facilities, and about two-thirds of these
contain rights to extend the terms from one to ten years.
 
  Net rental expense, including those rents payable under noncancelable leases
and month-to-month tenancies, amounted to $3,720,000, $3,105,000 and
$2,969,000 for the years ended December 31 1996, 1995 and 1994, respectively.
 
  The Company is subject to various legal actions and proceedings in the
normal course of business. While the ultimate outcome of these matters cannot
be predicted with certainty, management does not believe these matters will
have a material adverse effect on the Company's financial statements.
 
  The Company is one of several named potentially responsible parties ("PRP")
in an Environmental Protection Agency matter involving discharge of hazardous
materials at an old waste site South Carolina. Although environmental laws
technically impose joint and several liability upon each PRP at each site, the
extent of the Company's required financial contribution to the cleanup of
these sites is expected to be limited based upon the number and financial
strength of the other named PRPs and the volume and types of waste involved
which might be attributable to the Company.
 
  Environmental and related remediation costs are difficult to quantify for a
number of reasons including the number of parties involved, the difficulty in
determining the extent of the contamination, the length of time remediation
may require, the complexity of environmental regulation and the continuing
advancement of remediation technology. The Company's environmental engineers,
consultants and legal counsel have developed estimates based upon cost
analyses and other available information for this particular site. The Company
accrues for these costs when it is probable that a liability has been incurred
and the amount can be reasonably estimated. At December 31, 1996 and 1995,
reserves of approximately $882,000 were provided with no provision for
expected insurance recovery.
 
  The ultimate outcome of this matter cannot be predicted with certainty,
however, and taking into consideration reserves provided, management currently
does not believe this matter will have a material adverse effect on the
Company's financial statements.
 
NOTE 8--PENSION PLANS AND OTHER BENEFIT PLANS
 
  The Company sponsors several trusteed noncontributory defined benefit
pension plans covering most of its employees. Benefits are generally based on
years of service and the employee's highest compensation for five consecutive
years during the years of credited service. Contributions are intended to
provide for benefits attributable to service to date and service expected to
be provided in the future. The Company funds these plans in accordance with
the Employee Retirement Income Security Act of 1974.
 
                                      28
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 8--PENSION PLANS AND OTHER BENEFIT PLANS--(CONTINUED)
 
  The Company also sponsors defined contribution pension plans covering most
of its domestic employees. Contributions by the Company for the defined
contribution plans are determined as a percent of the amounts contributed by
the respective employees.
 
  The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Company's consolidated balance sheets at December
31:
 
<TABLE>
<CAPTION>
                                     1996                        1995
                          --------------------------- ---------------------------
                          ASSETS EXCEED  ACCUMULATED  ASSETS EXCEED  ACCUMULATED
                           ACCUMULATED    BENEFITS     ACCUMULATED    BENEFITS
                            BENEFITS    EXCEED ASSETS   BENEFITS    EXCEED ASSETS
                          ------------- ------------- ------------- -------------
                                                (THOUSANDS)
<S>                       <C>           <C>           <C>           <C>
Actuarial present value
 of benefit obligations:
  Accumulated benefit
   obligations, including
   vested benefits of
   $38,306 in 1996 and
   $35,870 in 1995.......   $(36,379)      $(3,240)     $(33,505)      $(3,298)
                            ========       =======      ========       =======
Projected benefit
 obligation for service
 rendered to date........   $(44,716)      $(3,240)     $(42,140)      $(3,298)
Plan assets at fair
 value, primarily
 publicly traded stocks,
 bonds and other fixed
 income securities.......     43,681                      41,067
                            --------       -------      --------       -------
Projected benefit
 obligation in excess of
 plan assets.............     (1,035)       (3,240)       (1,073)       (3,298)
Unrecognized net loss....      1,376           609         3,050           869
Unrecognized prior
 service cost............        658           199           415           328
Unrecognized net
 transition (asset)
 obligation at January 1,
 1987, net of
 amortization............     (1,151)          458        (1,430)          523
Adjustment required to
recognize minimum
liability................                   (1,266)                     (1,720)
                            --------       -------      --------       -------
Prepaid pension cost
 (pension liability)
 recognized in the
 consolidated balance
 sheets..................   $   (152)      $(3,240)     $    962       $(3,298)
                            ========       =======      ========       =======
</TABLE>
 
  The weighted average discount rates and rates of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.5% and 4.4%, respectively, at December 31,
1996 and 7.25% and 4.4%, respectively, at December 31, 1995. The expected
long-term rates of return on plan assets were 9.0% for each of the three years
ended December 31, 1996. As a result of increasing the weighted average
discount rate from 7.25% to 7.50%, the accumulated benefit obligation and the
projected benefit obligation decreased by $.8 million and $1.3 million,
respectively.
 
  Net pension cost consisted of the following at December 31:
 
<TABLE>
<CAPTION>
                                                      1996     1995     1994
                                                     -------  -------  -------
                                                           (THOUSANDS)
<S>                                                  <C>      <C>      <C>
Service cost-benefits earned during the period...... $ 1,779  $ 1,312  $ 1,495
Interest cost on the projected benefit obligation...   3,420    3,018    2,829
Actual (gains) losses on plan assets................  (4,579)  (7,369)     360
Net amortization and deferral.......................     898    4,162   (3,802)
                                                     -------  -------  -------
Total net periodic pension cost of funded defined
 benefit plans......................................   1,518    1,123      882
Defined contribution plans..........................     796      465      435
                                                     -------  -------  -------
Total pension plan cost............................. $ 2,314  $ 1,588  $ 1,317
                                                     =======  =======  =======
</TABLE>
 
 
                                      29
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 9--QUARTERLY OPERATING DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                       QUARTER
                                             ---------------------------
                                             FIRST  SECOND THIRD  FOURTH   YEAR
                                             ------ ------ ------ ------  ------
                                             (IN MILLIONS EXCEPT FOR PER SHARE
                                                          FIGURES)
<S>                                          <C>    <C>    <C>    <C>     <C>
1996
Net sales................................... $158.9 $143.3 $147.7 $152.8  $602.7
Gross profit................................   41.4   41.2   42.8   44.6   170.0
Income from continuing operations...........    4.8    7.0    7.1    6.3    25.2
Income per share--continuing operations..... $  .29 $  .42 $  .43 $  .38  $ 1.51
Net income per share........................ $  .29 $  .42 $  .43 $  .38  $ 1.51
1995
Net sales................................... $138.0 $135.9 $134.7 $135.7  $544.3
Gross profit................................   34.3   36.2   36.3   36.6   143.4
Income from continuing operations...........    3.6    5.4    6.0    4.8    19.8
Income per share--continuing operations..... $  .30 $  .41 $  .36 $  .29  $ 1.37
Net income per share........................ $  .17 $  .48 $  .40 $ (.01) $ 1.03
</TABLE>
 
NOTE 10--STOCK OPTIONS
 
  Under the Company's 1994 and 1988 Incentive Stock Option Plans ("1994 and
1988 Plans," respectively), options may be granted to eligible directors and
key employees of the Company and its subsidiaries at not less than 100% of the
market value of the shares on the dates of grant. No further options may be
granted under the 1988 Plan.
 
  The 1994 Plan permits the granting of options for terms not to exceed ten
years from date of grant. The options are exercisable on such terms as may be
established by the Compensation Committee of the Board of Directors at the
dates of grant.
 
  The Company is authorized, at the discretion of the Compensation Committee,
to provide loans to key employees in connection with the exercise of stock
options under both the 1994 Plan and the 1988 Plan. The loans are
collateralized by the underlying shares of stock issued and bear interest at
the applicable rates published by the IRS. At December 31, 1996 and 1995,
there was a total of $1,191,000 and $3,378,000, respectively, of loans and
accrued interest outstanding which are due on various dates through November
2001. The amounts of these loans are shown as a reduction of shareholders'
equity.
 
                                      30
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 10--STOCK OPTIONS--(CONTINUED)
 
  Options granted, exercised and forfeited for the 1994 and 1988 Plans were as
follows:
 
<TABLE>
<CAPTION>
                                                              EXERCISE PRICE
                                                          ----------------------
                                                                        WEIGHTED
                                                 SHARES    LOW    HIGH  AVERAGE
                                                --------  ------ ------ --------
<S>                                             <C>       <C>    <C>    <C>
Options outstanding at December 31, 1993.......  504,995  $ 5.66 $14.52  $11.49
  Granted......................................  182,800   15.00  17.25   17.20
  Exercised....................................  (83,774)   5.66  14.52   10.41
  Forfeited....................................  (21,286)   8.85  14.52   12.25
                                                --------
Options outstanding at December 31, 1994.......  582,735    5.66  17.25   14.40
  Granted......................................  182,500   16.38  23.00   22.74
  Exercised.................................... (141,215)   5.66  17.25    9.90
  Forfeited....................................  (69,264)  11.75  17.25   15.20
                                                --------
Options outstanding at December 31, 1995.......  554,756    5.66  23.00   16.91
  Granted......................................  220,000   23.00  26.50   26.43
  Exercised....................................  (67,597)   5.66  17.25   10.35
  Forfeited....................................  (18,100)  14.52  22.88   18.32
                                                --------
Options outstanding at December 31, 1996.......  689,059   11.11  26.50   20.56
                                                ========
</TABLE>
 
  At December 31, 1996, 1995 and 1994, stock options to purchase 270,084,
205,736 and 184,071 shares were exercisable at weighted average prices of
$15.44, $12.28 and $11.20, respectively. At December 31, 1996, 1,202,084
shares of common stock were reserved for issuance under the Plans.
 
  The Company adopted the disclosure-only option under SFAS No. 123,
"Accounting for Stock-Based Compensation," as of December 31, 1996. If the
accounting provisions of the new Statement had been adopted as of the
beginning of 1996, the effect on 1996 net earnings would have been immaterial.
The effect on net income for 1996 and 1995 is not representative of the effect
on net income in future years because it does not take into consideration
compensation expense related to grants made prior to 1995.
 
  Information regarding stock options outstanding as of December 31, 1996 is
as follows:
 
<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                         ---------------------------------------- ----------------------
                                    WEIGHTED        WEIGHTED                 WEIGHTED
                                    AVERAGE     AVERAGE REMAINING            AVERAGE
PRICE RANGE              SHARES  EXERCISE PRICE CONTRACTUAL LIFE  SHARES  EXERCISE PRICE
-----------              ------- -------------- ----------------- ------- --------------
<S>                      <C>     <C>            <C>               <C>     <C>
$11.11 to $17.25........ 296,059     $14.83        2.28 years     198,834     $16.52
$22.88 to $26.50........ 393,000      24.87        6.65 years      71,250      12.43
</TABLE>
 
NOTE 11--SHAREHOLDERS' EQUITY
 
 Preferred Stock
 
  Shares are issuable in one or more series, and the Board of Directors has
authority to fix the terms and conditions of each series. No shares were
issued or outstanding during 1996 and 1995.
 
 Stock Offering
 
  On June 1, 1995, the Company completed a secondary public offering of 4.6
million new shares of its Common Stock. The net proceeds of $67.2 million were
used to reduce amounts outstanding under an $85 million credit facility during
1995.
 
                                      31
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 11--SHAREHOLDERS' EQUITY--(CONTINUED)
 
 Employee Stock Ownership Plan
 
  The Company has an Employee Stock Ownership Plan ("ESOP") which covers
substantially all of its domestic non-union employees with at least one year
of service. As of December 31, 1996, the trust was indebted to the Company in
the aggregate amount of $771,000 in connection with stock purchases made from
1982 through 1984 of which 196,016 shares with an aggregate market value of
$5,390,000 as of December 31, 1996 remained unallocated to participants. These
loans are repayable over the next six to eight years with interest at prime
plus 1/2%, not to exceed 18%, and the unallocated shares will be released to
participants proportionately as these loans are repaid. Of the total dividends
received by the ESOP on its investment in the Company's Common Stock,
dividends on allocated and unallocated shares in the amount of $168,000 and
$169,000 in 1996 and 1995, respectively, were used to service these loans.
Allocated shares as of December 31, 1996 totaled 2,044,147. Additionally, the
trust was indebted to the Company in the amount of $5,000,000 and $400,000 at
December 31, 1996 and 1995, respectively, in connection with distributions
made to terminees.
 
  Shareholders' equity has been reduced by the amounts of the loans and any
payments made by the Company on behalf of the trust. The payments, made by the
Company on behalf of the trust, which at December 31, 1996 totaled $125,000,
are being amortized to expense over the lives of the loans.
 
  The amount of the Company's annual contribution to the ESOP is at the
discretion of the Company's Board of Directors. For the three years 1996, 1995
and 1994 contributions were limited to amounts in excess of annual dividends,
net of debt service, of the ESOP necessary to fund obligations arising in each
of those years to retired and terminated employees. These amounts were
$236,000, $13,000 and $1,016,000, respectively. ESOP expense, including
amortization of the foregoing payments, was $389,000, $264,000 and $1,014,000
in 1996, 1995 and 1994, respectively.
 
 Preferred Stock Rights
 
  Rights are outstanding which entitle the holder of each share of Common
Stock of the Company to buy one one-hundredth of a share of Series A preferred
stock at an exercise price of $51.712 per one one-hundredth of a share,
subject to adjustment. The rights are not separately tradable or exercisable
until a party either acquires, or makes a tender offer that would result in
ownership of, at least 20% of the Company's common shares. If a person becomes
the owner of at least 20% of the Company's outstanding common shares (an
"Acquiring Person"), each holder of a right other than such Acquiring Person
and its affiliates is entitled, upon payment of the then-current exercise
price per right (the "Exercise Price"), to receive shares of Common Stock (or
Common Stock equivalents) having a market value of twice the Exercise Price.
If the Company subsequently engages in a merger, a business combination or an
asset sale with the Acquiring Person, each holder of a right other than the
Acquiring Person and its affiliates is thereafter entitled, upon payment of
the Exercise Price, to receive stock of the Acquiring Person having a market
value of twice the Exercise Price. At any time after any party becomes an
Acquiring Person, the Board of Directors may exchange the rights (except those
held by the Acquiring Person) at an exchange ratio of one common share per
right. Prior to a person becoming an Acquiring Person, the rights may be
redeemed at a redemption price of one cent per right, subject to adjustment.
The rights are subject to amendment by the Board.
 
NOTE 12--SEGMENT DATA
 
  The Company and its subsidiaries are organized into sporting goods and other
recreational products and industrial products segments. The sporting goods and
other recreational products segment is composed of the following lines of
business: manufacture and sale of skis and snowboards; sale of in-line skates;
manufacture
 
                                      32
<PAGE>
 
                                    K2 INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 12--SEGMENT DATA--(CONTINUED)
 
and sale of athletic jackets, imprintable shirts, and bowling shirts;
manufacture and sale of personal flotation devices, towables and rainwear;
manufacture and sale of full-suspension mountain bikes and accessories;
manufacture and sale of rods, reels and other fishing tackle items; and
manufacture and sale of backpacks and tents. The industrial products segment
consists of the manufacture and sale of extruded monofilament used by the
paperweaving industry and for cutting line, fishing line and sewing thread;
fiberglass marine antennas, communication equipment, light poles and
transmission and distribution poles; and laminated and coated paperboard
products.
 
  The following segment data is presented for continuing operations for the
three years ended December 31, 1996. "Identifiable Assets" are as of December
31.
 
<TABLE>
<CAPTION>
                                           NET SALES TO
                                           UNAFFILIATED
                                            CUSTOMERS         PRETAX INCOME
                                       -------------------- -------------------
                                        1996   1995   1994  1996   1995   1994
                                       ------ ------ ------ -----  -----  -----
                                                (MILLION OF DOLLARS)
<S>                                    <C>    <C>    <C>    <C>    <C>    <C>
Sporting goods and other recreational
 products............................  $407.3 $349.4 $264.7 $31.9  $26.9  $17.1
Industrial products..................   195.4  194.9  170.3  20.5   18.0   16.7
                                       ------ ------ ------ -----  -----  -----
                                       $602.7 $544.3 $435.0  52.4   44.9   33.8
                                       ====== ====== ======
Corporate
  Interest and other income..........                         0.3    0.3    0.4
  Interest expense...................                        (9.3)  (9.9)  (7.5)
  General expense....................                        (6.9)  (6.7)  (5.3)
                                                            -----  -----  -----
Pretax income........................                       $36.5  $28.6  $21.4
                                                            =====  =====  =====
</TABLE>
 
<TABLE>
<CAPTION>
                                                    CAPITAL
                          IDENTIFIABLE ASSETS    EXPENDITURES     DEPRECIATION    AMORTIZATION
                          -------------------- ----------------- --------------- --------------
                           1996   1995   1994  1996  1995  1994  1996  1995 1994 1996 1995 1994
                          ------ ------ ------ ----- ----- ----- ----- ---- ---- ---- ---- ----
                                                  (MILLION OF DOLLARS)
<S>                       <C>    <C>    <C>    <C>   <C>   <C>   <C>   <C>  <C>  <C>  <C>  <C>
Sporting goods and other
 recreational products..  $249.8 $269.9 $203.6 $ 9.7 $ 7.7 $ 6.7 $ 5.2 $4.9 $3.0 $1.0 $0.6 $0.5
Industrial products.....    88.6   91.3   74.8   9.1   9.6   4.6   4.9  4.5  4.2
                          ------ ------ ------ ----- ----- ----- ----- ---- ---- ---- ---- ----
  Total segment data....   338.4  361.2  278.4  18.8  17.3  11.3  10.1  9.4  7.2  1.0  0.6  0.5
Corporate...............    29.4   14.5   12.9                     0.0  0.1  0.1  0.1  0.1  0.1
                          ------ ------ ------ ----- ----- ----- ----- ---- ---- ---- ---- ----
                          $367.8 $375.7 $291.3 $18.8 $17.3 $11.3 $10.1 $9.5 $7.3 $1.1 $0.7 $0.6
                          ====== ====== ====== ===== ===== ===== ===== ==== ==== ==== ==== ====
</TABLE>
 
<TABLE>
<CAPTION>
                             UNITED STATES           FOREIGN           ELIMINATIONS         TOTAL SEGMENT DATA
                          -------------------- ------------------- ----------------------  --------------------
                           1996   1995   1994   1996   1995  1994   1996    1995    1994    1996   1995   1994
                          ------ ------ ------ ------ ------ ----- ------  ------  ------  ------ ------ ------
                                                        (MILLIONS OF DOLLARS)
<S>                       <C>    <C>    <C>    <C>    <C>    <C>   <C>     <C>     <C>     <C>    <C>    <C>
Net Sales...............  $488.0 $444.8 $354.0 $139.3 $122.0 $99.8 ($24.6) ($22.5) ($18.8) $602.7 $544.3 $435.0
Less--intergeographic
 sales..................     9.3    7.1    8.5   15.3   15.4  10.3  (24.6)  (22.5)  (18.8)
                          ------ ------ ------ ------ ------ ----- ------  ------  ------  ------ ------ ------
Net sales to
 unaffiliated customers.   478.7  437.7  345.5  124.0  106.6  89.5                          602.7  544.3  435.0
                          ------ ------ ------ ------ ------ -----                         ------ ------ ------
Operating profit........    44.7   37.9   27.2    7.7    7.0   6.6                           52.4   44.9   33.8
                          ------ ------ ------ ------ ------ -----                         ------ ------ ------
Identifiable assets.....   259.7  294.4  228.4   78.7   66.8  50.0                          338.4  361.2  278.4
                          ------ ------ ------ ------ ------ -----                         ------ ------ ------
Capital expenditures....    17.4   12.4    9.4    1.4    4.9   1.9                           18.8   17.3   11.3
                          ------ ------ ------ ------ ------ -----                         ------ ------ ------
Depreciation............     8.4    7.4    6.0    1.7    2.0   1.2                           10.1    9.4    7.2
                          ------ ------ ------ ------ ------ -----                         ------ ------ ------
Amortization............     1.0    0.5    0.6                                                1.0    0.5    0.6
                          ====== ====== ======                                             ====== ====== ======
</TABLE>
 
                                      33
<PAGE>
 
                                    K2 INC.
 
                        REPORT OF INDEPENDENT AUDITORS
 
To the Board of Directors and Shareholders
K2 Inc.
 
  We have audited the accompanying consolidated balance sheets of K2 Inc.,
formerly Anthony Industries, Inc., and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of K2 Inc. and
subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operation and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
 
                                          ERNST & YOUNG LLP
 
Los Angeles, California
February 21, 1997
 
                                      34
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
       FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
ITEM 11. EXECUTIVE COMPENSATION
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Except as noted in the following paragraph the information called for by
Items 10, 11, 12 and 13 have been omitted because on or before April 29, 1997,
Registrant will file with the Commission pursuant to Regulation 14A a
definitive proxy statement. The information called for by these items set
forth in that proxy statement is incorporated herein by reference.
 
  The information called for by Item 10 with respect to executive officers of
the Registrant appears following Item 4 under Part I of this Report.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
  The following documents are filed as part of this report.
 
  (a-1) Financial Statements (for the three years ended December 31, 1996
  unless otherwise stated):
 
<TABLE>
<CAPTION>
                                                   PAGE REFERENCE
                                                     FORM 10K
                                                   --------------
      <S>                                          <C>
      Statements of consolidated income..........          18
      Consolidated balance sheets at December 31,
       1996 and 1995.............................          19
      Statements of consolidated shareholders' 
       equity....................................          20
      Statements of consolidated cash flows......          21
      Notes to consolidated financial statements.       22-33
      Report of Ernst & Young LLP, Independent
       Auditors..................................          34
 
  (a-2) Consolidated financial statement schedule
 
      II-Valuation and qualifying accounts.......         F-1
</TABLE>
 
  All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes.
 
  (a-3)Exhibits
 
     (3)(a)(i) Restated Certificate of Incorporation dated May 4, 1989,
               filed as Exhibit (3)(a) to Form 10-K for the year ended
               December 31, 1989 and incorporated herein by reference.
 
     (a)(ii)  Certificate of Amendment of Restated Certificate of
              Incorporation dated May 31, 1995, filed as Exhibit 3(a)(ii) to
              Form 10-K for the year ended December 31, 1995 and
              incorporated herein by reference.
 
     (a)(iii) Certificate of Amendment of Restated Certificate of
              Incorporation, filed as Exhibit (3)(I) to Form 10-Q for the
              quarter ended June 30, 1996 and incorporated herein by
              reference.
 
 
                                      35
<PAGE>
 
     (b)      By-Laws of Anthony Industries, Inc., as amended, filed as Item
              7(c), Exhibit 3.1 to Form 8-K dated November 20, 1995 and
              incorporated herein by reference.
 
     (4)(a)   Rights Agreement dated August 10, 1989 between the Company and
              Harris Trust Company, filed as Item 6, Exhibit (a) to Form 10-
              Q for the quarter ended September 30, 1989 and incorporated
              herein by reference.
 
     (10)Material contracts
 
     (a)      Note Agreement Re: $40,000,000 8.39% Senior Notes due November
              20, 2004 dated as of October 15, 1992, filed as Exhibit
              (10)(b) to Form 10-K for the year ended December 31, 1992 and
              incorporated herein by reference.
 
                 (1) First Amendment to the Note Agreement, dated May 1, 1996,
                   filed as Exhibit 10.04 for the quarter ended June 30, 1996
                   and incorporated herein by reference.
 
     (b)      Credit Agreement dated as of May 21, 1996 among Anthony
              Industries, Inc., Bank of America National Trust and Savings
              Association as Agent, Swing Line Bank and Issuing Bank and the
              Other Financial Institutions Party Hereto, filed as Exhibit
              10.02 for the quarter ended June 30, 1996 and incorporated
              herein by reference.
 
                 (1) First Amendment to the Credit Agreement dated as of March
                   17, 1997.
 
     (c)      Transfer and Administrative Agreement among Enterprise Funding
              Corp. as the Company, Anthony Industries, Inc. as the
              Transferor and Master Servicer, and NationsBank, N.A. as the
              Administrative Agent and the Collateral Agent effective May
              21, 1996, filed as Exhibit 10.03 for the quarter ended June
              30, 1996 and incorporated herein by reference.
 
     (d)      Executive compensations plans and arrangements
 
                 (1) (i) Retirement agreement dated November 20, 1995 between
                         the Company and B.I. Forester, filed as Exhibit
                         (10)(d)(1)(i) for the year ended December 31, 1995
                         and incorporated herein by reference.
 
                     (ii) Trust for Anthony Industries, Inc. Supplemental
                          Employee Retirement Plan for the Benefit of B.I.
                          Forester between the Company and Wells Fargo Bank
                          N.A., as Trustee, dated November 20, 1995, filed as
                          Exhibit (10)(d)(1)(ii) for the year ended December
                          31, 1995 and incorporated herein by reference.
 
                 (2) (i) Special Supplemental Benefit Agreement between the
                         Company and Bernard I. Forester dated December 9,
                         1986, filed as Exhibit (10)(g) to Form 10-K for the
                         year ended December 31, 1986 and incorporated herein
                         by reference.
 
                 (3) 1988 Incentive Stock Option Plan, filed as Exhibit A to
                   the Proxy Statement for the Annual Meeting of Shareholders
                   held on May 5, 1988 and incorporated herein by reference.
 
                 (4) Anthony Industries, Inc. Non-Employee Directors' Benefit
                   Plan effective May 1, 1992, filed as Item 6, Exhibit
                   (a)(28) of Form 10-Q for the quarter ended March 31, 1992
                   and incorporated herein by reference.
 
                 (5) Anthony Industries, Inc. Corporate Officers' Medical
                   Expense Reimbursement Plan, as amended through October 22,
                   1993, effective August 15, 1974, filed as Exhibit
                   (10)(c)(5) to Form 10-K for the year ended December 31,
                   1993 and incorporated herein by reference.
 
                 (6) Anthony Industries, Inc. Directors' Medical Expense
                   Reimbursement Plan, as amended through October 22, 1993,
                   effective January 1, 1993 and incorporated herein by
                   reference.
 
                                      36
<PAGE>
 
                 (7) K2 Inc. Executive Officers' Incentive Compensation Plan
                   adopted August 5, 1993 as amended December 17, 1996.
 
                 (8) 1994 Incentive Stock Option Plan, filed as Exhibit A to
                   the Proxy Statement for the Annual Meeting of Shareholders
                   held on May 5, 1994 and incorporated herein by reference.
 
     (e)(1) Asset Purchase Agreement dated February 16, 1996 among General
                 Aquatics, Inc., KDI Sylvan Pools, Inc., as Buyer, and
                 Anthony Industries, Inc., as Seller, filed as Item 7
                 Exhibit 99(A) to Form 8-K filed March 21, 1996 and
                 incorporated herein by reference.
 
                 (2) 5.61% Subordinated Note Due March 4, 2001, filed as Item
                   7 Exhibit 99(B) to Form 8-K filed March 21, 1996 and
                   incorporated herein by reference.
 
                 (3) General Aquatics, Inc. Warrant to Purchase Common Stock,
                   filed as Item 7 Exhibit 99(C) to Form 8-K filed March 21,
                   1996 and incorporated herein by reference.
 
     (11)Computation of earnings per share for three years ended December
              31, 1996.
 
     (21)Subsidiaries
 
     (23)Consent of Independent Auditors
 
     (27)Financial Data Schedule
 
  (b)Reports on Form 8-K:
 
  None
 
                                      37
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
                                          K2 INC.
                                          (Registrant)
 
                                          By   /s/  Richard M. Rodstein
                                          _____________________________________
                                                   (Richard M. Rodstein)
                                                    President and Chief
                                                     Executive Officer
 
                                          Date        March 27, 1997
                                          _____________________________________
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
<S>                                  <C>                           <C>
     /s/ Richard M. Rodstein         Director, President and         March 27, 1997
____________________________________ Chief Executive Officer
       (Richard M. Rodstein)         (Principal Executive
                                     Officer)
         /s/ John J. Rangel          Senior Vice President--         March 27, 1997
____________________________________ Finance (Principal Financial
          (John J. Rangel)           and Accounting Officer)
         /s/ B.I. Forester           Director, Chairman of the       March 27, 1997
____________________________________ Board
           (B.I. Forester)
                                     Director                        March  , 1997
____________________________________
        (Robert T. Anthony)
        /s/ Susan E. Engel           Director                        March 27, 1997
____________________________________
          (Susan E. Engel)
                                     Director                        March  , 1997
____________________________________
       (Richard L. Goldberg)
      /s/ Jerry E. Goldress          Director                        March 27, 1997
____________________________________
         (Jerry E. Goldress)
       /s/ Abraham L. Gray           Director                        March 27, 1997
____________________________________
         (Abraham L. Gray)
        /s/ Hugh V. Hunter           Director                        March 27, 1997
____________________________________
           (Hugh V. Hunter)
      /s/ John H. Offermans          Director                        March 27, 1997
____________________________________
        (John H. Offermans)
     /s/ Richard M. Rosenberg        Director                        March 27, 1997
____________________________________
       (Richard M. Rosenberg)
        /s/ John B. Simon            Director                        March 27, 1997
____________________________________
          (John B. Simon)
</TABLE>
 
 
                                      38
<PAGE>
 
                                    K2 INC.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
                                  (THOUSANDS)
 
<TABLE>
<CAPTION>
                                          ADDITIONS         DEDUCTIONS
                                    --------------------- --------------
                                              CHARGED TO     AMOUNTS
                                    CHARGED     OTHER        CHARGED
                         BALANCE AT TO COSTS   ACCOUNTS     TO RESERVE   BALANCE
                         BEGINNING    AND     (PRIMARILY      NET OF     AT END
      DESCRIPTION         OF YEAR   EXPENSES GROSS SALES) REINSTATEMENTS OF YEAR
      -----------        ---------- -------- ------------ -------------- -------
<S>                      <C>        <C>      <C>          <C>            <C>
Year ended December 31,
 1996
  Allowance for doubtful
   items................   $5,298    $3,994     $  --         $3,172     $6,120
  Other (primarily sales
   discounts)...........    2,937                2,494(a)      4,369      1,062
                           ------    ------     ------        ------     ------
                           $8,235    $3,994     $2,494        $7,541     $7,182
                           ======    ======     ======        ======     ======
Year ended December 31,
 1995
  Allowance for doubtful
   items................   $4,404    $2,093     $  --         $1,199     $5,298
  Other (primarily sales
   discounts)...........    3,018                4,194         4,275      2,937
                           ------    ------     ------        ------     ------
                           $7,422    $2,093     $4,194        $5,474     $8,235
                           ======    ======     ======        ======     ======
Year ended December 31,
 1994
  Allowance for doubtful
   items................   $3,677    $1,509     $  --         $  782     $4,404
  Other (primarily sales
   discounts)...........    2,712                5,430         5,124      3,018
                           ------    ------     ------        ------     ------
                           $6,389    $1,509     $5,430        $5,906     $7,422
                           ======    ======     ======        ======     ======
</TABLE>
--------
(a) Decline reflects a change in billing practices to net discounts against
    selling prices in certain divisions.