<PAGE>
 
================================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549
================================================================================
 
                                   FORM 10-Q

     [X]       Quarterly Report Pursuant to Section 13 or 15 (d)
               of the Securities and Exchange Act of 1934.

               For the period ended JUNE 30, 1997
                                    -------------
                                       or
     [ ]       Transition Report Pursuant to Section 13 or 15 (d) of the
               Securities and Exchange Act of 1934.

               For the transition period from ______________ to ______________

               Commission File Number 0-16611
                                      -------

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

          Delaware                            04-2958132
--------------------------------------------------------------------------------
     (State or other jurisdiction           (I.R.S. Employer
      of incorporation or organization)      Identification Number)

      555 S. Henderson Road, Suite B,          
      King of Prussia, PA                         19406    
--------------------------------------------------------------------------------
(Address of principal executive offices)        (Zip Code)

                                 610-337-2200
 -------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes  x  No
                                     ---   ---    

     Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of August 14, 1997:

Common Stock $.01 par value                                 59,135,326
---------------------------                            ----------------------
     (Title of each class)                              (Number of Shares)

--------------------------------------------------------------------------------
 
<PAGE>
 
                                   RYKA INC.
                  FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997
                               TABLE OF CONTENTS
================================================================================

<TABLE>
<CAPTION>

                                                                                                          Page
                                                                                                          ----

PART I - FINANCIAL INFORMATION
<S>                            <C>                                                                       <C>
Item 1.                        Financial Statements:
                               Consolidated Balance
                                   Sheets as of June 30, 1997 and December 31, 1996                         3
                               Consolidated Statements of Operations for the
                                   three-month and six-month periods ended June 30, 1997
                                   and June 30, 1996                                                        4
                               Consolidated Statements of Cash Flows for the
                                   six-month periods ended June 30, 1997 and June 30, 1996                  5
                               Notes to Consolidated Financial Statements                                 6 to 8
 
 Item 2.                       Management's Discussion and Analysis of Financial Condition
                               and Results of Operations                                                  8 to 12
 
 
 
PART II - OTHER INFORMATION
 
 Item 1.                       Legal Proceedings                                                            13
 Item 2.                       Changes in Securities                                                        13
 Item 3.                       Defaults on Senior Securities                                                13
 Item 4.                       Submission of Matters to a Vote of Security Holders                          13
 Item 5.                       Other Information                                                            13
 Item 6.                       Exhibits and Reports on Form 8-K                                             13
 Signatures                                                                                                 14
 Exhibit Index and Exhibits                                                                                 15
</TABLE>

                                      -2-
<PAGE>
 
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
                           RYKA INC. AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 
 
                                                         June 30,   December 31,
                                                           1997         1996
                                                        ----------  ------------
<S>                                                     <C>         <C>
                                                        (Unaudited)
                                    ASSETS
 Current assets:
  Cash                                                  $   52,085    $   37,469
  Accounts receivable, net of allowance for doubtful
   accounts of $62,825 in 1997 and $65,941 in 1996       4,033,835     1,947,036
  Inventory                                              4,148,138     2,644,017
  Prepaid expenses and other current assets                313,684       149,306
  Note receivable, officer                                  20,000        20,000
   Due from affiliate                                       44,885             -
                                                        ----------    ----------
    Total current assets                                 8,612,627     4,797,828
 
 Property and equipment, at cost, net of accumulated
  depreciation                                             222,371       194,815
 
 Other assets                                               82,804        70,000
                                                         ---------       -------

          Total assets                                  $8,917,802    $5,062,643
                                                         =========     =========
 

                      LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
   Note payable, bank                                   $3,223,494    $1,592,453
   Accounts payable and accrued expenses                 3,197,232     1,001,577
   Due to customer                                         369,606       413,290
   Due to affiliate                                            -          18,928
   Subordinated note payable, affiliate                    466,440       851,440
                                                         ---------     ---------
          Total current liabilities                      7,256,772     3,877,688
 
   Other liabilities                                        15,000        35,000

 
Commitments and contingencies
 
Stockholders' equity:
  Preferred Stock, $0.01 par value, 1,000,000
   shares authorized; none issued or outstanding               -             -
  Common Stock; $0.01 par value, 70,000,000
   shares authorized; 59,135,326 and 56,635,326 shares
   issued and outstanding at June 30, 1997 and
   December 31, 1996, respectively                         591,353       566,353
   Additional paid-in capital                           21,106,843    20,311,843
   Accumulated deficit                                 (20,052,166)  (19,728,241)
 
          Total stockholders' equity                     1,646,030     1,149,955
 
          Total liabilities and stockholders' equity    $8,917,802    $5,062,643
                                                        ==========    ==========
</TABLE>
Please refer to the notes to consolidated financial statements.

                                      -3-
<PAGE>
 
                            RYKA INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
 
 
                                            Three Months Ended              Six Months Ended
                                                  June 30,                      June 30,
                                            1997          1996           1997              1996
                                          ----------------------       ---------------------------  
                                               (Unaudited)                     (Unaudited)
<S>                                     <C>           <C>           <C>            <C>               
 
Net sales                               $ 4,674,077   $ 1,217,265    $ 7,258,175        $ 2,953,619
Cost of goods sold                        3,395,367       925,337      5,105,162          2,095,777
                                        -----------   -----------    -----------        -----------
Gross profit                              1,278,710       291,928      2,153,013            857,842
 
 
Operating expenses
 General and administrative expenses        445,027       333,582        820,207            488,933
 Sales and marketing expenses               670,003       230,016      1,174,687            633,889
 Research and development expenses          155,750       205,435        297,812            413,842
  Contingent warrant compensation                 -        74,430              -             74,430
                                        -----------   -----------    -----------        -----------
 
                                          1,270,780       843,463      2,292,706          1,611,094
                                        -----------   -----------    -----------        -----------
 
Operating income (loss)                       7,930     ( 551,535)      (139,693)        (  753,252)
                                        -----------   -----------    -----------        -----------   
 
 
Other (income) expense:
 Interest expense                            88,537        53,779        142,269             82,533
 Interest income                        (       427)    (   1,717)    (      895)        (    2,079)
 Merger related costs                           313             -         42,858                  -
                                        -----------   -----------    -----------        -----------
 
                                             88,423        52,062        184,232             80,454
                                        -----------   -----------    -----------        -----------
 
Net loss                                ($   80,493)    ($603,597)    ($ 323,925)        ($ 833,706)
                                        ===========   ===========     ==========        ===========
Net loss per share                      ($     -   )    ($    .01)    ($     .01)        ($     .02)
                                                                            
 
Weighted average common and common
 equivalent shares outstanding           58,579,770    46,934,007     57,607,548         46,576,864
                                        ===========   ===========    ===========        ===========
 
</TABLE>



Please refer to the notes to consolidated financial statements.

                                      -4-
<PAGE>
 
                            RYKA INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
 
 
                                                                        Six Months Ended
                                                                            June 30,
                                                                     1997              1996
                                                                 ------------------------------
                                                                           (Unaudited)
<S>                                                              <C>             <C>
 Cash flows from operating activities:
   Net loss                                                      (    323,925)    ($ 833,706)
   Adjustments to reconcile net loss to cash
    provided by (used in) operating activities:
     Depreciation and amortization                                     41,592         25,362
     Contingent warrant compensation                                       -          74,430
     Provision for losses on accounts receivable                 (      3,116)        12,348
     Capital contributed as services                                   50,000         50,000
     Changes in operating assets and liabilities:
       Accounts receivable                                       (  2,083,683)    (  480,368)
       Inventory                                                 (  1,504,121)    (   93,802)
       Prepaid expenses and other current assets                 (    164,378)    (  128,237)
       Accounts payable and accrued expenses                        2,195,655     (  142,541)
       Due to customer                                           (     43,684)            -
       Due to affiliate                                          (     63,813)       309,918
                                                                 ------------     ----------
 
       Net cash (used in) operating activities                   (  1,899,473)    (1,206,596)
                                                                 ------------     ----------
 Cash flows (used in) investing activities:
   Acquisitions of equipment                                     (     62,148)    (   11,022)
   Other assets                                                  (     19,804)    (       35)
   Note receivable, officer                                                -      (   20,000)
   Licensing fees                                                          -      (   16,667)
                                                                 ------------      ---------
 
      Net cash (used in) investing activities                    (     81,952)    (   47,724)
                                                                 ------------      ---------
 
 Cash flows provided by (used in) financing activities:
   Proceeds from note payable, bank                                 1,631,041         250,000
   Deferred registration costs                                             -      (   112,500)
   Proceeds from issuance of common stock                             750,000       1,040,000
   Repayment of subordinated note payable, affiliate             (    385,000)            -
                                                                  -----------      ----------
 
      Net cash provided by financing activities                     1,996,041       1,177,500
                                                                  -----------      ----------
 
 Net increase in cash                                                  14,616     (    76,820)
 
 Cash, beginning of period                                             37,469          77,509
                                                                  -----------      ----------
 
 Cash, end of period                                              $    52,085      $      689
                                                                  ===========      ==========
</TABLE>
Please refer to the notes to consolidated financial statements.

                                      -5-
<PAGE>
 
NOTE A - BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of RYKA Inc.
("RYKA"(R) or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.

The accompanying financial information is unaudited; however, in the opinion of
Management, all adjustments (consisting solely of normal recurring accruals)
necessary for a fair presentation of the operating results of the periods
reported have been included. The results of operations for the periods reported
are not necessarily indicative of those that may be expected for a full year.

This quarterly report should be read in conjunction with the consolidated
financial statements and footnotes thereto included  in the Company's Audited
Consolidated Financial Statements as of December 31, 1996 as presented in the
Company's Annual Report on Form 10-K.

The Company's financial statements for the quarter ended June 30, 1997 have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company has incurred significant recurring losses since its
inception and had an accumulated deficit at June 30, 1997 of $20,052,166.

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

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


NOTE B - DEBT

The Company's current credit facility consists of a $4,500,000 asset based
revolving credit facility. The facility, which terminates on November 30, 1997,
makes funds available to the Company based upon a percentage of inventory and
accounts receivable, as defined in the agreement. Interest on the amounts
outstanding was paid monthly at the rate of prime plus 1% through June 3, 1997
increasing to prime plus 3 1/2% thereafter and is due on demand. As of June 30,
1997, the Company owed $3,223,494 under this facility. Interest expense in
connection with this facility was $84,365 for the six months ended June 30,
1997.

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

On February 7, 1997, the Company entered into an agreement with its existing
lender to modify the Company's credit facility (the "Credit Facility") in
anticipation of a complete refinancing of the Credit Facility.  The terms of the
modification called for an acceleration of the termination date of the Credit
Facility to March 31, 1997, which was later extended to April 18, 1997.
Coincident with the signing of this agreement, KPR Sports International, Inc.
("KPR") entered into a Forbearance and Amendment Agreement (the "Forbearance
Agreement") with the same lender. The terms of this Forbearance Agreement placed
certain additional financial covenants on KPR, and accelerated the termination
of KPR's Facility to March 31, 1997, which was also later extended to April 18,
1997.  The complete refinancing of the Company's Credit Facility was not
successfully completed by April 18, 1997.  On June 4, 1997, the Company and KPR
obtained an extension of their credit facilities to November 30, 1997 to allow
the Company and KPR to continue to attempt to obtain new financing.  The terms
of the extension modified the Credit Facility by, among other things, increasing
the interest rate to the bank's rate plus 3 1/2%.

                                      -6-
<PAGE>
 
NOTE C - RELATED PARTY TRANSACTIONS

The Company conducts its operations and warehouses inventory in a facility
subleased from KPR. Terms of the sublease require rental payments of
approximately $4,000 per month for use of these facilities and the warehousing
through July 31, 1997. Rental payments charged to operations pursuant to the
above lease were $23,750 for the six months ended June 30, 1996 and 1997,
respectively. Any other cost related to the use of the joint facility or for
other services provided by KPR or its affiliates will be charged to the Company
on an arms length basis and will be subject to approval by a special
disinterested committee of the Board of Directors.

The Chairman and Chief Executive Officer of the Company devotes a portion of his
time to the Company's operations and marketing and sales related activities for
which he does not receive any compensation. The value of these services for the
three months ended June 30, 1997, estimated at $50,000, was recorded as
compensation expense and included as part of general and administrative expenses
in the statement of operations and as a contribution to capital and included as
additional paid-in capital in the balance sheet.

KPR has advanced certain funds to the Company on a temporary basis in the
ordinary course of business (ie. payroll related expenses, other general
operating expenses), and the Company has advanced certain funds to KPR. Such
amounts are included in the balance sheet as either a current asset - due from
affiliate or a current liability - due to affiliate.

In connection with the subordinated loan provided by KPR of $851,440 during
1995, the Company recorded interest expense of $39,242 and $36,405 for the six
months ended June 30, 1996 and 1997, respectively.  On April 21, 1997, the
Company repaid $385,000 of the subordinated note payable out of proceeds from an
equity offering (see Note D) such that the balance outstanding at June 30, 1997
was $466,440.

During the quarter ended June 30, 1997, the Company opened $810,000 in letter of
credit agreements for the benefit of KPR.  At June 30, 1997, $385,000 in letter
of credit agreements remained open for the benefit of KPR.

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


NOTE D - EQUITY TRANSACTIONS, STOCK OPTIONS AND WARRANTS

Equity transactions:

The Company offered for sale, through a private placement, 4,000,000 shares of
Common Stock during the third quarter of 1995 (the "1995 Private Placement"). As
a condition of the 1995 Private Placement, the Company was required to register
such stock with the Securities and Exchange Commission within 120 days of the
closing (by November 28, 1995).  In the event that the Company did not timely
effect such registration, the Company was required to pay to the investors
$5,000 and warrants to purchase 40,000 shares for each month such registration
statement does not become effective, up to a maximum reduction in stock proceeds
of $100,000 and a maximum additional issuance of stock purchase warrants of
800,000 shares. Since the registration was not accomplished within the 120 day
period, the Company has either obtained waivers of such payments or issued
warrants to certain participants in the 1995 Private Placement.  Accordingly, at
June 30, 1997 and December 31, 1996, respectively,  $15,000 and $35,000 of the
proceeds of the 1995 Private Placement have been classified as other liabilities
related to those participants who have not provided waivers.  Through June 30,
1997, warrants to purchase 720,000 shares of Common Stock are to be issued to
investors with an exercise price of $.25 and exercisable 10 years after the date
of issue.

On April 21, 1997 the Company sold 2,500,000 shares of the Company's Common
Stock for $750,000 to certain investors. The proceeds from this sale were used
to repay $385,000 of the subordinated note payable to KPR and to enable the
Company to open $810,000 in letter of credit agreements for the benefit of KPR.

                                      -7-
<PAGE>
 
Stock Options:

The Company has issued options to certain employees to purchase shares of the
Company's Common Stock at prices which approximated fair market value at the
date of grant.  The options vest at various times over periods ranging up to
four years and generally must be exercised within 10 years from the date of
grant.  A summary of such options granted in the first six months of 1997 as
follows:

                                NUMBER OF SHARES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                   Non-Plan   1987     1988     1990     1992     1993      1995      1996       For
                   Grants     Plan     Plan     Plan     Plan     Plan      Plan      Plan    Employee      Price of
                                                                                              Directors     Shares
-------------------------------------------------------------------------------------------------------------------- 
<S>                <C>       <C>      <C>      <C>      <C>      <C>      <C>        <C>      <C>         <C>
Outstanding at
 December 31,
 1996               416,321  264,746  140,351  160,500  849,060  899,000  1,400,000  670,000      25,000  $.25 - $1.31
 
 
Granted during
 six month
 ended June 30,                                                                                   25,000  $ .20 - $.47
 1997
 
 
Canceled
during the six
 months ended
 June 30, 1997          -        -        825      -      2,500    1,000     20,000   76,667         -             -
                    -------  -------  -------  -------  -------  -------  ---------  -------      ------  ------------
 
Outstanding at
 June 30, 1997     
                    416,321  264,746  139,526  160,500  846,560  898,000  1,380,000  593,333      50,000           -
                    =======  =======  =======  =======  =======  =======  =========  =======      ======  ============
 
</TABLE>
Contingent Stock Options and Warrants:

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

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



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Forward Looking Statements

Certain information contained in this Form 10-Q contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
Company's financial condition, results of operations and liquidity and capital
resources and statements as to management's beliefs, expectations or options.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these risks,
uncertainties and other factors, as and when applicable, are discussed in the

                                      -8-
<PAGE>
 
Company's filings with the Securities and Exchange Commission, including its
most recent Form 10-K, a copy of which may be obtained from the Company upon
request and without charge (except for the exhibits thereto).

General Overview

The Company has not had a single profitable fiscal year since its inception and
incurred  losses of approximately $80,000 and $324,000 for the three months and
six months ended June 30, 1997, respectively.  In addition, the Company had an
accumulated deficit of approximately $20,052,166 and stockholders' equity of
approximately $1,646,030 at June 30, 1997.

REORGANIZATION. On September 26, 1996, the Company entered into an Agreement and
Plan of Reorganization, as amended and restated (the "Reorganization
Agreement"), with KPR Sports International, Inc. ("KPR") and certain affiliated
companies (collectively, the "KPR Companies") and Michael G. Rubin, Chairman and
Chief Executive Officer of RYKA and the sole stockholder of the KPR Companies,
pursuant to which, subject to the approval by the stockholders of RYKA and the
Company's lender, RYKA would become a holding company by transferring all of its
assets and liabilities to a newly-formed, wholly-owned subsidiary and would
acquire the KPR Companies in exchange for 163,250,000 shares of RYKA (the
"Reorganization"). Although the Reorganization was originally scheduled to close
by December 31, 1996, due to recent events discussed below, the completion of
the Reorganization has been delayed. RYKA expects the Reorganization to become
effective by the end of 1997, although there is no assurance that the
Reorganization will be consummated.  In the event that the Reorganization is not
consummated, or further delayed, the Company may be required to sell additional
equity and/or debt to continue the operations of the Company. Further, upon
completion of the Reorganization, the Company may sell additional equity and/or
debt in order to support future operations.

RECENT EVENTS. On August 15, 1996, the Company entered into a new credit
facility with a bank (the "Credit Facility").  Concurrently with RYKA, KPR
entered into a new credit facility with the same bank. On November 8, 1996, the
bank notified KPR that KPR was in default of certain financial covenants. RYKA
was in compliance with its financial covenants and was not in default of its
loan with the bank. Since November 1996, RYKA and KPR have been in negotiations
with the bank to extend their credit facilities.

On February 7, 1997, the Company entered into an agreement with its existing
lender to modify the Credit Facility in anticipation of a complete refinancing
of the Credit Facility.  The terms of the modification called for an
acceleration of the termination date of the Credit Facility to March 31, 1997,
which was also later extended to April 18, 1997. Coincident with the signing of
this agreement, KPR entered into a Forbearance and Amendment Agreement (the
"Forbearance Agreement") with the same lender. The terms of this Forbearance
Agreement placed certain additional financial covenants on KPR and accelerated
the termination of KPR's Facility to March 31, 1997, which was also later
extended to April 18, 1997.  On June 4, 1997, RYKA entered into an amended
agreement, and KPR entered into an amended forbearance agreement, with their
lender that, among other things, extended the credit facilities of  RYKA and KPR
to the earlier of November 30, 1997 or an occurrence of an event of default (as
defined). Under its amended agreement, RYKA may borrow under its revolving
credit facility up to the lesser of $4,500,000 or its borrowing base (as
defined). Interest on its borrowings is payable at the bank's prime rate plus 3
1/2%. RYKA is also required to maintain certain receivables turnover ratios.
RYKA's revolving credit facility is guaranteed by Michael Rubin and certain
entities owned by Michael Rubin and is cross-defaulted with KPR's agreement with
the bank.  Given the dependence of RYKA on certain support provided by KPR,
KPR's inability to obtain continued funding or additional funding for its
operations could adversely impact the ability of RYKA to continue in business
independent of KPR.

In addition to their negotiations with their existing bank, RYKA and KPR have
been in discussions with certain other banks to obtain a new credit facility and
with certain investors to obtain equity an/or subordinated debt.  On June 27,
1997, the Company received a preliminary term sheet from a prospective lender to
replace its Credit Facility. The terms of this new facility require the Company
to raise an additional $5,000,000 in capital.  There is no assurance that the
Company will meet this condition to close this new facility.  In addition, on
April 21, 1997, RYKA sold to certain investors 2,500,000 shares of Common Stock
for an aggregate purchase price of $750,000. The proceeds of this sale were used
by the Company to repay $385,000 of the $851,000 subordinated loan from KPR. The
remaining proceeds were used to open $810,000 letters of credit for the benefit
of KPR.  If the Company is unable to obtain alternative financing, there is no
assurance that the Company will be able to continue operations. Further, there
is no assurance that the Company will be able to obtain alternative financing,
or, if obtained, such financing will be on terms satisfactory for the Company.

As a result of the issues arising in connection with the Company's credit
facility with its existing bank, the completion of the Company's audited
financial statements for the year ended December 31, 1996 was delayed, and the
Company

                                      -9-
<PAGE>
 
was unable to file timely its Annual Report on Form 10-K for the year
ended December 31, 1996 or its Quarterly Report of Form 10-Q for the quarter
ended March 31, 1997.   The Company filed such Form 10-K and Form 10-Q on June
30, 1997 and July 17, 1997, respectively.


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
 
                                                 THREE MONTHS                 SIX MONTHS
                                                ENDED JUNE 30,               ENDED JUNE 30,
                                            ----------------------     ---------------------------
(IN THOUSANDS)                                1997          1996          1997            1996
                                            --------      --------     ---------        ----------
                                          (Unaudited)   (Unaudited)   (Unaudited)     (Unaudited)
<S>                                       <C>           <C>           <C>           <C>
Net Sales                                      100.0%        100.0%        100.0%              100%
Cost and expenses
   Cost of goods sold                           72.6%         76.0%         70.3%             70.9%
   General and Administrative expenses           9.5%         27.4%         11.3%             16.6%
   Sales and marketing expenses                 14.4%         18.9%         16.2%             21.5%
   Research and development expenses             3.3%         16.9%          4.1%             14.0%
   Contingent warrant compensation                --           6.1%           --               2.5%
                                            --------      --------     ---------        ----------
                                                99.8%        145.3%        101.9%            125.5%
   Operating loss                           (     .2%)    (   45.3%)   (     1.9%)      (     25.5%)
   Other expense, net                            1.9%          4.3%          2.5%              2.7%
                                            --------      --------     ---------        ----------
   Net loss                                 (    1.7%)    (   49.6%)   (     4.4%)      (     28.2%)
                                            ========      ========     =========        ========== 
</TABLE>

NET SALES for the three and six months periods ended June 30, 1997 increased by
$3,456,812, or 283.9%, and $4,304,556, or 145.7%, respectively, compared to the
corresponding periods in 1996.  The increases in net sales were due primarily to
(i) the shipment of the fall 1997 product line during the second quarter of 1997
as compared to the shipment of the fall 1996 product line which was not shipped
until the third quarter of 1996, as a result of improvements in the production
time table, (ii) the hiring of manufacturers representatives covering the whole
United States and (iii) the continuous expansion of relationships established
during the fall of 1996 with major footwear retailers in women's athletic
footwear market.

COST OF GOODS SOLD for the three and six month periods ended June 30, 1997
increased $2,470,030, or 266.9%, and $3,009,385, or 143.5% respectively,
compared to the corresponding periods in 1996.   Gross profit expressed as a
percentage of net sales increased from 24.0% for the three months ended June 30,
1996 to 27.4% for the three months ended June 30, 1997.  While such gross profit
margin remained relatively flat for the six months ended June 30, 1996 and 1997
at 29.1% and 29.6% respectively, this increase in gross profit margin during the
three months ended June 30, 1997 was primarily due to the renewed strength of
the RYKA brand and the Company's ability to achieve higher price points in the
marketplace. In addition, during the three months ended June 30, 1996, the
Company was forced to sell more product at closeout prices in order to raise
cash necessary to finance operations and to purchase inventory needed for the
introduction of the fall 1996 product line.  The ability of the Company to ship
fall product during the three months ended June 30, 1997 at full margins
favorably impacted the gross profit for that period compared to the
corresponding period in 1996.

GENERAL AND ADMINISTRATIVE EXPENSES for the three and six month periods ended
June 30, 1997 increased  $111,445, or 33.4%, and $331,274, or 67.8%,
respectively, compared to the corresponding periods in 1996.  These increases
were primarily due to (i) the increases in payroll costs resulting from growth
in back office expenses necessary to support the overall growth of business and
in preparation for merger with KPR, (ii) increases in bank fees and professional
fees associated with negotiating and entering into the amended Credit Facility
with the Company's existing lender and amending the Company's prior year
financial statements necessary to effect merger with KPR and (iii) an increase
in bad debt writeoffs.

SALES AND MARKETING EXPENSES for the three and six month periods ended June 30,
1997 increased $439,987, or 191.3%, and $540,798, or 85.4% respectively,
compared to the corresponding periods in 1996.  These increases were due
primarily to (i) increases in sales commissions directly related to the
increases in  sales achieved over the corresponding periods in 1996, (ii)
increases in promotion expenses, (iii) the implementation of a vendor supported
marketing (VSM) program co-sponsored by the Company and a major women's athletic
footwear retailer, (iv) increases in

                                      -10-
<PAGE>
 
sales\administrative expenses (ie. travel, sales meetings) and (v) an increase
in distribution/warehousing expenses related to the increase in sales volume and
increases in inventory levels over the corresponding periods in 1996.

RESEARCH AND DEVELOPMENT for the three and six month periods ended June 30, 1997
decreased $49,685, or 24.2% and $116,030, or 28.0%, respectively, compared to
the corresponding periods in 1996.   These decreases were primarily due to the
savings achieved by employing in-house designers during the three months ended
June 30, 1997 compared to engaging outside consultants on a project basis during
the corresponding period in 1996, offset by increases in travel and
entertainment expense related to the new employees and their travel to the Far
East to develop product and monitor their production.

CONTINGENT WARRANT COMPENSATION expense for the three and six month periods
ended June 30, 1996 of $74,430 relates to a non-cash charge for the vesting of
310,310 Contingent Stock Purchase Warrants ("Contingent Warrants") issued to MR
Acquisition, L.L.C. ("MR") in July 1995 in connection with the Securities
Purchase Agreement (the "Agreement") between the Company and MR.  Pursuant to
the Agreement, the Company issued a Contingent Warrant to purchase up to
4,000,000 shares of Common Stock at an exercise price of $.01 per share.
Pursuant to the terms of the Contingent Warrant, if at any time within one year
of the issuance of the Contingent Warrant (July 31, 1996), the Company issued a
number of shares of Common Stock which resulted in the Company having in excess
of 50,000,000 shares of Common Stock issued and outstanding, provided that any
such shares above such 50,000,000 were issued for the purpose of (a) inducing a
lender to make a loan or loans to the Company, or (b) in connection with an
infusion of capital to the Company, or (c) settlement of debts with the
Company's creditors, or (d) a combination thereof, then upon the occurrence of
such stock issuance, for every ten (10) additional shares of Common Stock which
were issued, four (4) shares would vest under the Contingent Warrant.  During
the three months ended June 30, 1996, 775,326 shares were issued by the Company,
thereby resulting in the vesting of an additional 310,310 shares under the
Contingent Warrant. Under accounting rules governing the issuance of warrants,
the charge is equal to the difference between the strike price of $.01 per share
and the fair market value of the stock at the time that the contingency is met.

OTHER EXPENSES, NET for the three and six month periods ended June 30, 1997
increased $36,361, or 69.8%, and $103,778, or 129.0%, respectively, compared to
the corresponding periods in 1996.   The increases were primarily due to
increases in interest expense as a result of increased borrowings necessary to
support higher accounts receivable and inventory levels over the corresponding
periods in 1996.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1997, the Company's working capital was $1,335,853. The level of
working capital maintained during the six months ended June 30, 1997 relates
primarily to the proceeds remaining from the 1996 Private Placement which
totaled $2,500,000.

On February 7, 1997, in conjunction with KPR entering into the Forbearance
Agreement regarding its credit facility, the Company entered into an amendment
to its Credit Facility that provided for, among other things, a termination date
of April 18, 1997 (as amended), the same termination date as KPR's amended
credit facility. As of June 4, 1997, the bank agreed to extend both the RYKA and
KPR credit facilities to November 30, 1997 or an event of default (as defined).
Under its amended agreement, RYKA may borrow under its revolving credit facility
up to the lesser of $4,500,000 or its borrowing base (as defined). Interest on
its borrowing is payable at the bank's prime rate plus 3 1/2%. RYKA is also
required to maintain certain receivables turnover ratios. RYKA's credit facility
is guaranteed by Michael Rubin and certain entities owned by Michael Rubin and
is cross-defaulted with KPR's agreement with the bank.

To date, the Company continues to produce negative cash flow from operating
activities. The Company used $1,206,596 in cash flow from operating activities
for the six months ended June 30, 1996 as compared to $1,899,473 for the six
months ended June 30, 1997.

The Company and KPR are in discussions with lenders to obtain a new credit
facility or facilities to replace their existing credit facilities upon the
expiration of such facilities. During these discussions, certain lenders have
indicated that any credit facility that they would provide to the Company and
KPR would be conditional on, among other things, KPR raising additional equity
and/or subordinated debt. The Company and KPR are seeking to raise an additional
$3,000,000 to $5,000,000 in equity and/or subordinated debt financing. The
Company believes that it is in the best interests of the Company to resolve the
credit facility and equity and/or subordinated debt needs of both the Company
and KPR so that the Company can complete the proposed acquisition of the KPR
Companies.

                                      -11-
<PAGE>
 
On June 27, 1997, the Company received a preliminary term sheet from a
prospective lender to replace its Credit Facility. The terms of this new
facility require the Company to raise an additional $5,000,000 in capital.
There is no assurance that the Company will meet this condition to close this
new facility.

On April 21, 1997, RYKA sold to certain investors 2,500,000 shares of Common
Stock for an aggregate purchase price of $750,000.  The proceeds of this sale
were used by the Company to repay $385,000 of the $851,000 subordinated loan
from KPR. The remaining proceeds from this sale were used by the Company to open
$810,000 in letters of credit for the benefit of KPR. The Company is repaying a
portion of the subordinated loan to KPR and is opening letters of credit on
behalf of KPR in order to allow KPR to obtain sufficient financing for its
operations until the proposed acquisition of the KPR Companies can be completed
and a new credit facility for the combined companies can be negotiated.

Effective April 1, 1997, the Company negotiated 60-day payment terms with two of
its major suppliers for up to an aggregate of $1,500,000 in purchases at an
annual interest rate of 12.0%. Previously, terms with these suppliers required
payment upon shipment of these goods.

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

If however, the Company is unable to obtain a new credit facility and/or
additional equity and/or subordinated debt financing, there is no assurance that
the Company will be able to continue operations. Further, there is no assurance
that if the Company is able to obtain such financing, it will be on terms
satisfactory for the Company. Moreover, given the dependence of the Company on
certain support provided by KPR, including, but not limited to, financial
support, administrative support, warehousing and office rental, KPR's ability to
obtain continued financing or additional financing for its operations could
significantly adversely impact the ability of the Company to continue in
business independent of KPR.

Even if the Company were able to obtain the financing discussed above or obtain
alternative financing, RYKA may be required to raise additional equity and/or
subordinated debt. However, no assurance can be given that RYKA will be
successful in raising additional capital, if necessary. Further, there can be no
assurance that RYKA will achieve profitability or a positive cash flow even with
sufficient capital resources.

                                      -12-
<PAGE>
 
                          PART II - OTHER INFORMATION
                          ---------------------------



ITEM 1.   LEGAL PROCEEDINGS

Not Applicable



ITEM 2.   CHANGES IN SECURITIES

Not Applicable



ITEM 3.   DEFAULTS ON SENIOR SECURITIES

Not Applicable



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

Not Applicable



ITEM 5.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable



ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits

               11. Statement regarding computation of per share earnings.
                        
               27. Financial Data Schedule.

                                      -13-
<PAGE>
 
                            RYKA INC. AND SUBSIDIARY



                                   SIGNATURES



PURSUANT TO THE REQUIREMENTS 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.



                                               RYKA INC.


DATE:   AUGUST 14, 1997          BY:    /s/  Michael G. Rubin
                                     ______________________________
                                            Michael G. Rubin
                                        Chairman of the Board &
                                        Chief Executive Officer



DATE:   AUGUST 14, 1997          BY:     /s/  Steven A. Wolf
                                     ______________________________
                                             Steven A. Wolf
                                       Vice President of Finance &
                                          Chief Financial Officer

                                      -14-