<PAGE>
 
================================================================================

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549
================================================================================

                                  FORM 10-Q A

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

               For the period ended MARCH 31, 1996
                                    --------------
                                      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 May 3, 1996:

Common Stock $.01 par value                                 46,615,326
---------------------------                            --------------------
     (Title of each class)                              (Number of Shares)

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

                                      -1-
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
           FORM 10-Q FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1996
                               TABLE OF CONTENTS
================================================================================

<TABLE> 
<CAPTION> 
                                                                                    Page
                                                                                    ----
<S>                                                                              <C>  
PART I - FINANCIAL INFORMATION

 Item 1.  Financial Statements:
          Condensed Consolidated Balance
              Sheets as of March 31, 1996 and December 31, 1995                      3
          Condensed Consolidated Statements of Operations for the
              three-month periods ended March 31, 1996
              and March 31, 1995                                                     4
          Condensed Consolidated Statements of Cash Flows for the
              three-month periods ended March 31, 1996 and March 31, 1995            5
          Notes to Condensed Consolidated Financial Statements                    6 to 10

 Item 2.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                              11 to 15

PART II - OTHER INFORMATION

 Item 1.  Legal Proceedings                                                         16
 Item 2.  Changes in Securities                                                     16
 Item 3.  Defaults on Senior Securities                                             16
 Item 4.  Submission of Matters to a Vote of Security Holders                       16
 Item 5.  Other Information                                                         16
 Item 6.  Exhibits and Reports on Form 8-K                                          16
 Signatures                                                                         17
 Exhibit Index and Exhibits                                                         18
</TABLE>

                                      -2-
<PAGE>
 
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS

                            RYKA INC. AND SUBSIDIARY
                     CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                         March 31,   December 31,
                                                           1996          1995
                                                        -----------  ------------
<S>                                                    <C>           <C>
                                                        (Unaudited)
                               ASSETS
 Current assets:
   Cash                                                $        185    $     77,509
  Accounts receivable, net of allowance for doubtful
   accounts of $73,800 in 1996 and $57,573 in 1995        1,269,356         533,490
  Inventory                                               1,070,954         678,319
  Prepaid expenses and other current assets                 226,086         118,294
                                                       ------------    ------------

          Total current assets                            2,566,581       1,407,612

 Property and equipment, at cost, net of accumulated
   depreciation                                             185,526         195,083

 Deferred registration costs                                 40,000               -

 Security deposits                                              535             500
                                                       ------------    ------------

          Total assets                                 $  2,792,642    $  1,603,195
                                                       ============    ============

                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

   Current liabilities:
   Note payable, bank                                  $  1,237,000    $          -
   Accounts payable and accrued expenses                    337,401         437,324
   Due to customer                                          413,290         413,290 
   Due to affiliate                                         259,522           2,043
                                                       ------------    ------------

          Total current liabilities                       2,247,213         852,657
                                                       ------------    ------------

 Subordinated note payable, affiliate                       851,440         851,440
                                                       ------------    ------------

 Bridge loan payable                                              -         120,000
 Other liabilities                                          150,000         150,000

 Commitments and contingencies

 Stockholders' deficiency:
   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; 46,615,326 and 46,135,326 shares
    issued and outstanding at March 31, 1996 and
    December 31, 1995, respectively                         466,153         461,353
   Additional paid-in capital                            17,191,429      17,051,229
   Accumulated deficit                                  (18,113,593)    (17,883,484)
                                                        ------------   ------------

       Total stockholders' deficiency                   (   456,011)   (    370,902)
                                                       --------------  ------------

       Total liabilities and stockholders' deficiency  $    2,792,642  $  1,603,195
                                                       ==============  ============
</TABLE>

Please refer to the notes to condensed consolidated financial statements.

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

<TABLE>
<CAPTION>
                                                             Three Months Ended
                                                                 March 31,
                                                     1996                      1995
                                                    -----------------------------------
                                                               (Unaudited)
<S>                                                <C>                     <C>   
Net sales                                           $ 1,736,354             $4,134,650  
                                                                                        
Other revenues                                                -                 29,263  
                                                    -----------             ----------  
                                                                                        
                                                      1,736,354              4,163,913  
                                                    -----------             ----------  
Costs and expenses:                                                                     
 Cost of goods sold                                   1,170,440              3,449,778  
 Inventory write-down to lower of cost or market              -                526,000  
 General and administrative expenses                    132,579                608,938  
 Sales and marketing expenses                           403,873                795,914  
 Research and development expenses                      208,407                113,572  
 Special charges                                         22,772                      -  
                                                    -----------             ----------  
                                                                                        
                                                      1,938,071              5,494,202  
                                                    -----------             ----------  
                                                                                        
Operating loss                                     (    201,717)          (  1,330,289) 
                                                    -----------            -----------  
                                                                                        
Other (income) expense:                                                                 
 Interest expense                                        28,754                227,779  
 Interest income                                   (        362)          (      1,200) 
 Merger related costs                                         -                683,460  
                                                    -----------            -----------  

                                                         28,392                910,039  
                                                    -----------            -----------  
                                                                                        
Net loss                                           ($   230,109)          ($ 2,240,328)
                                                    ===========            ===========   
 
Net loss per share                                 ($       .01)          ($       .08)
                                                    ===========            ===========
Weighted average common and common
 equivalent shares outstanding                       46,615,326             26,474,326
                                                    ===========            ===========
</TABLE>

Please refer to the notes to condensed consolidated financial statements.

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

<TABLE>
<CAPTION>
                                                                      Three Months Ended           
                                                                           March 31,               
                                                                      1996           1995      
                                                                 ----------------------------
                                                                          (Unaudited)               
 <S>                                                             <C>             <C>            
 Cash flows from operating activities:
   Net loss                                                      (  $ 230,109)   ($2,240,328)
   Adjustments to reconcile net loss to cash
     (used in) operating activities:
     Depreciation and amortization                                     13,088         15,000
     Provision for losses on accounts receivable                       16,227         51,211
     Capital contributed as services                                   25,000              -
     Reserve for inventory writedown to lower of cost or market             -        526,000
     Changes in operating assets and liabilities:
      Accounts receivable                                        (    752,093)    (  769,461)
      Inventory                                                  (    392,635)     1,281,565
      Prepaid expenses and other current assets                  (    107,792)       (30,569)
      Accounts payable and accrued expenses                      (     99,923)       338,006
      Due to affiliate                                                257,479              -
                                                                  -----------      ---------
 
      Net cash (used in) operating activities                    (  1,270,758)    (  828,576)
                                                                  -----------
  Cash flows from investing activities:
   Acquisitions of equipment                                     (      3,531)       (17,506)
   Security deposits                                             (         35)             -
                                                                  -----------      --------- 
 
      Net cash (used in) investing activities                    (      3,566)    (   17,506)
                                                                  -----------      --------- 
 
 Cash flows from financing activities:
   Proceeds from note payable, bank                                 1,237,000              -
   Repayment of bridge loan                                           120,000              -
   Proceeds from issuance of common stock                        (    120,000)             -
   Deferred registration costs                                   (     40,000)             -
   Principal payments under payable to lender, net                          -     (  294,096)
   Advances from factor, net                                                -        878,778
                                                                  -----------      ---------
 
      Net cash provided by financing activities                     1,197,000        584,682
                                                                  -----------      ---------
 
 Net decrease in cash                                            (     77,324)  (    261,400)
 
 Cash, beginning of period                                             77,509        296,226
                                                                   ----------      ---------
 
 Cash, end of period                                              $       185   $     34,826
                                                                   ==========    ===========
</TABLE>

Please refer to the notes to condensed consolidated financial statements.

                                      -5-
<PAGE>
 
                            RYKA INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
--------------------------------------------------------------------------------

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, 1995 as presented in the
Company's Annual Report on Form 10-K.

The Company's financial statements for the quarter ended March 31, 1996 have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. The Company has incurred significant recurring losses since its
inception and had an accumulated deficit at March 31, 1996 of $18,113,593. The
Company was involved in several significant transactions during 1995, which
included the sale of securities, a change in key management, the establishment
of a new loan and security agreement with a bank, the settlement of debts with
secured and unsecured creditors and moving the Company's principal offices.
Without the occurrence of these transactions or other strategic arrangements,
there was substantial doubt that the Company would have been able to remain in
business through the third quarter of 1995. Having accomplished such
transactions, management plans to develop and acquire new merchandise, market
and promote the Company's product and expand the workforce in support of the
Company's current plans. To accomplish these goals, the Company will have to
incur substantial expenditures and expects to incur continuing operating losses
during 1996. The Company's working capital at March 31, 1996 will not be
sufficient to meet management's objectives in 1996.

Additionally, the Company was in violation of certain financial covenants
required by the loan and security agreement with the Company's principal lender
at March 31, 1996, although a waiver of these defaults was obtained from the
lender through May 31, 1996. Defaults had existed at December 31, 1995 and
previous waivers had been obtained. Based on the covenant violations covered by
the waiver, it is unlikely that the violations will be cured by May 31, 1996.
Accordingly, unless an additional waiver is obtained, the availability of these
funds is uncertain. The Company's goals were to be funded, in part, through the
financing facility provided by the Company's principal lender. Management is
currently in discussions with another lender to pursue other financing on terms
acceptable to the Company. Based on current discussions with another lender the
Company believes it possible for alternate financing to be obtained although 1)
no definitive agreement has been reached to date, 2) additional equity or
subordinated debt funding would be required as a prerequisite to such lender
financing and 3) there is no assurance that the equity or subordinated debt
funding will be obtained or that the new loan will be finalized. In connection
with the foregoing, and the Company's requirements from time to time, management
plans the sale of additional equity securities and/or the issuance of
subordinated notes in order to generate sufficient capital resources to assure
continuation of the Company's operations. Management recognizes that the Company
must obtain these or similar additional resources or consider modifications to
its operating plans including reductions in operating costs to enable it to
continue operations. However, no assurance can be given that the Company will be
successful in raising additional capital to support future operations. Further,
there can be no assurance, assuming the Company successfully raises additional
funds and is able to utilize its existing credit facility or establish a new
facility that the Company will achieve profitability or a positive cash flow.

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

Net loss per share is based on the weighted average number of Common Stock and
dilutive Common Stock equivalents outstanding during the period. Common stock
equivalents are comprised, when dilutive, of stock options and Common Stock
warrants.

                                      -6-
<PAGE>
 
   
NOTE B - RESTATEMENT OF PRIOR QUARTERS

The Company has restated certain revenues and expenses related to the 
recognition of revenue and related expenses for the first quarter of 1996. This 
restatement was required due to an error by the Company in following the 
Company's procedures relating to cut-off of revenues and expenses at Quarter 
ends. Accordingly certain revenues and expenses were previously reported in 
incorrect periods. In conjunction with this restatement, the Statement of 
Operations for the quarter ended March 31, 1996 presented herein reflect the 
cumulative effect of the restatement for the first two quarters of 1996. The 
Company will file Form 10Q-A for these quarters.

<TABLE> 
<CAPTION> 

                                                          Quarter Ended
                                                          March 31, 1996
                                                   -----------------------------
                                                    As Reported     As Restated
                                                   -----------------------------
<S>                                                <C>             <C>
Sales                                              $2,014,333      $1,736,354
                                                                             
Operating Expenses                                  2,249,547       1,938,071
                                                                             
Operating Loss                                       (235,214)       (201,717)
                                                                             
Other Expenses                                         28,392          28,392
                                                                             
Net Loss                                             (263,606)       (230,109)
</TABLE>      
    
NOTE C - DEBT
     
The Company has a $4,000,000 asset based revolving credit facility with its
principal lender. The facility 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 is paid monthly at the rate of prime plus
one percent and is due on demand. As of March 31, 1996, the Company owed
$1,237,000 under this facility. Interest expense in connection with this
facility was $5,614 for the three months ended March 31, 1996.

The loan and security agreement with the Company's principal lender requires the
Company to observe certain covenants and maintain certain minimum levels of
tangible net worth and leverage. Further, there is a requirement for additional
subordinated loans or equity infusions in the event that losses occur subsequent
to July 31, 1995 which would cause capital funds to decrease below $2,000,000,
as defined. Such $2,000,000 minimum required the infusion of additional equity
or subordinated loans of approximately $1,600,000 by March 31, 1996, and, as
described below, such infusion had not been made.

At March 31, 1996, the Company was in default of certain provisions of the loan
and security agreement requiring certain credit insurance to be obtained within
prescribed timeframes, losses incurred by the Company subsequent to July 31,
1995 to be funded by MR Acquisitions L.L.C. ("MR") making subordinated loans or
capital infusions, or causing the same to occur (the "Funding Requirement"), and
the covenants requiring establishment and maintenance of certain minimum
tangible net worth and leverage.

The principal lender has waived the defaults, extended the time for the credit
insurance to be obtained and postponed the Funding Requirement, minimum tangible
net worth and leverage requirements through May 31, 1996.

    
NOTE D - RELATED PARTY TRANSACTIONS
    
The Company conducts its operations and warehouses inventory in a facility
subleased from an affiliate of MR. 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. Any other cost related to the use of the
joint facility or for other services provided by MR or its affiliates will be
charged to the Company on an arms length basis and will be subject to approval
by a special disinterested committee of the Board of Directors.

KPR Sports International, Inc. ("KPR"), an affiliate of MR, has advanced certain
funds to the Company on a temporary basis. Such amounts are included in the
balance sheet under current liabilities as due to affiliate.

MR, through KPR, continues to make available to the Company a letter of credit
facility in the amount of $2,000,000. This facility is used by the Company to
finance the purchase of manufactured inventory with overseas vendors. At March
31, 1996, letters of credit in the amount of $134,374 were issued by KPR on
behalf of the Company. Merchandise inventory received under the terms of the
facility is recorded in the financial statements upon transfer of title to the
Company which, generally, occurs upon payment to KPR.

Included in the statement of operations are sales of $149,886 relating to
footwear sold to KPR yielding a profit of $31,621 to the Company. These goods
were prior season's merchandise which was sold at negotiated terms on an arms-
length basis.

The Chairman and Chief Executive Officer of the Company devotes a portion of his
time to the Company's operations and marketing and sales related activities for
which he does not receive any compensation. The value of these services for the
three months ended March 31, 1996, estimated at $25,000, 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.

                                      -7-
<PAGE>
 
     
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
     
A summary of all related party transactions with MR or its affiliates for the
quarter ended March 31, 1996 are as follows:

<TABLE>
<CAPTION>
                                                                                                         Amount
                              Financial                            Amount                               Included
  Nature of                   Statement        Transaction     Included in Due  Amount Included in   in Additional
Transactions               Classification        Amount         To Affiliate     Accrued Expenses   Paid-in Capital
------------               --------------      -----------     ---------------  ------------------  ---------------
<S>                        <C>                 <C>             <C>              <C>                 <C>
Purchase of
Inventory                  Inventory             $1,340,198           $177,691

Sale of Merchandise        Net Sales                149,886

Rent                       General and
                           Administrative
                           Expense                   11,875              7,917

Interest on
Subordinated Debt          Interest Expense          19,606                                $12,737

Interest on
Letters of Credit
Advances                   Interest Expense           1,779                                  1,779

Temporary Advances                                  107,097             73,914

Services Contributed       General and
 to Capital                Administration
                           Expense and
                           Additional Paid-
                           in Capital                25,000                                                $25,000
                                                                       -------              ------         -------

                                                                      $259,522             $14,516         $25,000
                                                                       =======              ======         =======
</TABLE>
    
NOTE E - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS
     
Equity transaction - Investors:

The Company offered for sale, through a private placement, 4,000,000 shares of
Common Stock during the third quarter to 1995 and the results of the private
placement were as follows:

<TABLE>
<CAPTION>
                          Shares Placed  Proceeds Received
                          -------------  -----------------
     <S>                  <C>            <C>
     July 31, 1995          3,020,000         $  255,000
                            =========         ==========
     December 31, 1995      3,520,000         $  880,000
                            =========         ==========
     March 31, 1996         4,000,000         $1,000,000
                            =========         ==========
</TABLE>

 As a condition of the private placement, in the event the Company is unable to
 register such securities with the Securities and Exchange Commission in a
 filing which is effective within 120 days of the actual Closing (by November
 28, 1995), the Company will be required to remit to the investors $7,500 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
 $150,000 and additional issuance of 400,000 shares of Common Stock.  The
 registration was not accomplished within the 120 day period, however, waivers
 have been received from the participants in the private placement through March
 31, 1996 related to the provisions requiring a $7,500 per month remittance. One
 of the remaining participants was issued warrants.  Accordingly, at March 31,
 1996 and December 31, 1995 $150,000 of the proceeds have been classified as
 temporary equity.

                                      -8-
<PAGE>
 
     
NOTE E - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS - CONTINUED
     
Equity transaction - Investors - continued:

With respect to the warrants, pursuant to the specific private placement terms,
through March 31, 1996, 80,000 warrants are to be issued to investors with an
exercise price of $.25 and exercisable 10 years after the date of issue.

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

Stock Options:

Pursuant to option grant letters, 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 quarter of 1996 is as follows:

<TABLE>
<CAPTION>
         Plan Year From                     Number of
       Which Stock Option                     Shares   Option
      Shares Were Granted                    Granted    Price
      -------------------                   ---------  ------
      <S>                                   <C>        <C>
              1987                             13,000    $.49
              1988                             10,000    $.39
              1992                             10,000    $.39
              1993                             37,000    $.49
              1995                            285,000    $.20
      Non Employee Directors                   25,000    $.20
                                              -------
                                              380,000
                                              =======
</TABLE> 
    
NOTE F - REGISTRATION STATEMENT - EQUITY INCENTIVE PLAN
     
During January 1996, the Board of Directors of the Company approved the filing
of a registration statement with the Securities and Exchange Commission for the
offering of approximately 4.2 million shares of Common Stock.

The shares will be issued pursuant to the "Partners Share Success" Equity
Incentive Plan to be adopted by the Company. The purpose of the Program is to
provide an ownership interest in the Company, through equity incentives, to
retail sales personnel and store management personnel of the Company's customers
to educate consumers about the Company's products and to increase the sale of
the Company's products to consumers.

Under the Program, the Company currently intends to grant retail sales personnel
one share of the Company common stock for each pair of Company footwear sold and
to grant store management personnel approximately 4 shares of Company common
stock for every 10 pairs of Company footwear sold by retail sales personnel
under their supervision. The Company currently expects that the Program will
remain in effect through the Spring of 2000.

The Program will be available to retail sales personnel of customers of the
Company who agree to participate in the Program and to purchase certain minimum
quantities of Company's products.

                                      -9-
<PAGE>
 
     
NOTE F - REGISTRATION STATEMENT - EQUITY INCENTIVE PLAN - CONTINUED
     
The Company anticipates that awards of common stock pursuant to the Program will
be accounted for as sales and marketing expense using the fair value of the
equity instrument issued or other consideration, as applicable.

Included in deferred registration costs at March 31, 1996 are approximately
$40,000 in professional fees incurred in conjunction with the contemplated
registration statement. All costs will be charged to sales and marketing expense
during the term of the Program. If the offering is not consummated, the deferred
registration costs will be charged to expense.

                                      -10-
<PAGE>
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

FORWARD LOOKING STATEMENTS

The 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
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 a loss of approximately $230,000 during the quarter ended March 31,
1996. In addition, the Company had an accumulated deficit of approximately
$18,114,000 and a stockholders' deficiency of approximately $460,000 at March
31, 1996.

Through July 31, 1995, the Company was in default on several occasions under its
agreements with Pro-Specs America Corporation ("Pro-Specs") to provide
production financing. In May 1995, Pro-Specs notified the Company of its
intention to terminate financing arrangements. During 1995, the Company reviewed
several financing proposals, and on July 31, 1995 the Company consummated the
financing arrangement with MR Acquisitions L.L.C. ("MR") to enable the Company
to continue in existence. Without this financing arrangement, management
believed there was substantial doubt that the Company would be able to remain in
business.

The financing arrangement (the "Agreement") with MR provided the Company with
cash proceeds from the sale of equity and subordinated debt and the ability to
obtain funds and letters of credit through new financing facilities. As part of
the financing, the Company negotiated substantial debt forgiveness with both
secured and unsecured creditors and established a new management team to operate
the restructured Company. Upon closing of the transaction with MR, the Company
had capital funds comprised of a net worth and subordinated debt in excess of
$1,500,000 as compared to an equity deficiency over $2,000,000 at June 30, 1995.
At March 31, 1996 capital funds have been reduced through operating losses to
approximately $400,000.
    
During the first half of 1995 and until the financing with MR was consummated,
staff reductions occurred on both a voluntary and involuntary basis and
temporary employees were required to handle daily operations. Sales efforts were
limited for a variety of reasons, including the inability to obtain product from
the Company's overseas production sources. Once the financing with MR was
consummated, new management began to reposition the Company by, among other
things, relocating the Company from Norwood, Massachusetts to King of Prussia,
Pennsylvania, terminating remaining employees in the Massachusetts location,
hiring and training new employees in key management positions, including a new
President and a new Chief Financial Officer, filling of other necessary
positions within the Company, and beginning to develop new products and build or
rebuild customer and supplier relationships. While management believes that
these activities will have a long-term beneficial impact, they had significant
negative impact on the Company's sales and operations. As a result, the Company
is unlikely to generate positive operating results in the near future. To
accomplish its goals, to develop and acquire new merchandise, market and promote
the Company's product and expand the workforce in support of the Company's
current plans, the Company will have to incur substantial expenditures and
expects to incur continuing operating losses during 1996. The Company's working
capital at March 31, 1996 will not be sufficient to meet management's objectives
in 1996. Accordingly, the Company will be required to obtain additional
financing from its current lender or from a new lender and/or raise additional
funds through the sale of equity or debt. See "Liquidity and Capital Resources"
and Notes A and C to the Company's Condensed Consolidated Financial Statements.
    

                                      -11-
<PAGE>
 
RESULTS OF OPERATIONS

Three Months Ended March 31, 1996 as Compared to the Three Months Ended March
-----------------------------------------------------------------------------
31, 1995
--------

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

<TABLE> 
<CAPTION> 
   (In Thousands)                                                THREE MONTHS ENDED MARCH 31,
                                                        --------------------------------------------

                                                                 1996                   1995
                                                        ----------------------  --------------------
                                                          (Unaudited)             (Unaudited)
<S>                                                     <C>          <C>        <C>        <C>
 
Net sales                                                  $ 1,736     100.0%   $  4,135     100.0%
 
Other revenues                                                   -                    29
                                                           -------              --------
 
                                                             1,736                 4,164
                                                           -------              --------
 
Costs and expenses:
 Cost of goods sold (includes inventory writedown to
   lower of cost or market)                                  1,170      67.4%      3,976      96.2%
 General and administrative expenses                           133       7.6%        609      14.7%
 Sales and marketing expenses                                  404      23.3%        796      19.3%
 Research and development expenses                             208      12.0%        113       2.7%
 Special charges                                                23       1.3%          -         -
                                                            ----------------    ------------------ 

                                                             1,938     111.6%      5,494     132.9%
                                                            ----------------    ------------------ 

 Operating loss                                            (   202)    ( 11.6%) (  1,330)   ( 32.9%)
 
 Other expense,  net                                            28       1.6%        910      22.0%
                                                            ----------------    ------------------
 
 Net loss                                                  ($  230)    (13.2%) ($ 2,240)   ( 54.9%)
                                                            ================    ==================
</TABLE>

NET SALES decreased by $2,398,296 (58.0%) from $4,134,650 for the three months
ended March 31, 1995 to $1,736,354 for the three months ended March 31, 1996.
The decrease in net sales was due primarily to several factors as follows:

 . The Company purchased a limited quantity of spring merchandise for shipment in
  the first quarter of 1996. This merchandise was designed by L.A. Gear
  designers. Current management made a conscious decision to minimize the
  purchase for spring and commit additional resources towards developing a more
  performance based line with updated cosmetics to better meet the needs of the
  marketplace for the fall 1996 product line.

 . As a result of the failed merger with L.A. Gear and the resulting critical
  cash shortage during the first quarter of 1995, the Company was forced to
  liquidate a large quantity of inventory at low profit margins, or even below
  cost, in an effort to raise cash to meet operating expenses.

 . The athletic footwear industry continues to experience sluggishness and the
  volume of off-price product has continued at high levels. At the same time,
  the retail industry has just experienced poor results for the holiday season.

 . The women's athletic footwear category has become increasingly competitive
  with large vendors with considerably more resources than the Company
  increasing their focus in this segment of the market.

OTHER REVENUES of $29,263 for the three months ended March 31, 1995 is comprised
of royalty income resulting from international distributors purchasing the
Company's products directly from its vendors. For the three months ended March
31, 1996 all income from international business was reported in the statement of
operations as sales and cost of goods sold in as much as the Company directly
sold any such merchandise to its international distributors.

                                      -12-
<PAGE>
 
COST OF GOODS SOLD decreased by $2,805,338 (70.6%) from $3,975,778 for the three
months ended March 31, 1995 to $1,170,440 for the three months ended March 31,
1996. The overall gross profit expressed as a percentage of net sales increased
from 3.8% for the quarter ended March 31, 1995 to 32.6% for the quarter ended
March 31, 1996.

During the quarter ended March 31, 1996 approximately seventy-five percent of
sales represented spring sales at full margins.

Cost of sales for the quarter ended March 31, 1995 includes a write-down of
inventory to the lower of cost or market of $526,000. As discussed in net sales
above, in the quarter ended March 31, 1995, as a result of the extreme financial
pressures, the Company was required to sell substantial amounts of inventory at
little or no profit to raise cash for operations. This adversely affected the
gross profit for the quarter ended March 31, 1995.

GENERAL AND ADMINISTRATIVE EXPENSES decreased by $476,359 (78.2%) from $608,938
for the quarter ended March 31, 1995 to $132,579 for the quarter ended March 31,
1996. The decrease reflects a concerted effort to restructure the Company in a
cost efficient manner with reduced overhead expenses. This decrease was due
primarily to:

 . The elimination of approximately $150,000 of credit and collection expenses
  incurred in the quarter ended March 31, 1995 of which approximately $50,000
  related to costs associated with collection fees and commissions in connection
  with a previously existing factoring agreement with Heller Financial. The
  remaining amount represents a decrease of approximately $100,000 in additional
  bad debt expense during the quarter ended March 31, 1995, compared with the
  quarter ended March 31, 1996.

 . Additional legal, consulting and auditing costs aggregating to approximately
  $165,000 in the quarter ended March 31, 1995, were incurred in completing the
  December 31, 1994 financial statements and in filing the Annual Report and
  Form 10-K.

 . Other general and administrative expenses in the quarter ended March 31, 1995
  included approximately $40,000 in legal fees incurred in connection with a
  failed attempt to raise capital from investors.

 . Reduction in administrative staffing levels amounting to approximately
  $40,000.

SALES AND MARKETING EXPENSES decreased by $392,041 (49.3%) from $795,914 in the
quarter ended March 31, 1995 to $403,873 in the quarter ended March 31, 1996.
This decrease was due primarily to:

 . A decrease in sales representatives commission expense of approximately
  $113,000. The decrease in commissions is due to decreased sales and a decrease
  in the effective rate paid to outside sales representatives:

<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED
                                         MARCH 31,
                                  -----------------------
          <S>                     <C>          <C>
                                     1996         1995
                                  ----------   ----------
 
          Commissions             $   44,766   $  157,354
                                  ==========   ==========
 
          Sales                   $1,746,354   $4,134,650
                                  ==========   ==========
 
          Effective percentage           2.6%         3.8%
                                  ==========   ==========
</TABLE>

 . Reduction in promotion expense of approximately $206,000 is due to a reduction
  in customers marketing allowances.

 . Decrease in salary and related expenses of $26,384 (21.1%) from $124,890 in
  the quarter ended March 31, 1995 to $98,506 for the quarter ended March 31,
  1996.

                                      -13-
<PAGE>
 
RESEARCH AND DEVELOPMENT expenses increased $94,835 (83.5%) from $113,572 in the
quarter ended March 31, 1995 to $208,407 in the quarter ended March 31, 1996.
The increase reflects a concerted effort by management to further develop and
improve the Company's products. The increase is primarily due to:

 . An increase of approximately $72,000 in salaries and consulting fees. During
  the quarter ended March 31, 1996, at a cost of approximately $125,000, the
  Company engaged the services of two outside design groups to design and
  develop the fall 1996 line. In addition, the former VP of Sourcing and
  Production and one other person were retained on a consulting basis to oversee
  the manufacturing process.

SPECIAL CHARGES consists of relocation and temporary living costs.

OTHER EXPENSES, NET decreased $881,647 (96.9%) from $910,039 in the quarter
ended March 31, 1995 to $28,392 in the quarter ended March 31, 1996.  The
decrease is primarily due to:

 . The write-off of approximately $683,000 in costs associated with the
  termination of the Agreement and Plan of Merger with L.A. Gear, Inc. in the
  first quarter of 1995.

 . Interest expense decreased by $199,025 (87.4%) from $227,779 for the three
  months ended March 31, 1995 to 28,754 for the quarter ended March 31, 1996.
  This decrease is a result of additional funds infused into the Company on July
  31, 1995 as equity as well as reduced requirements for borrowings and
  substantially reduced interest rates on borrowing. In connection with this
  transaction with MR, the Company established a line of credit with a bank
  providing the Company with financing at prime plus one percent. Previously the
  agreement with Pro-Specs provided for inventory financing at effective
  interest rates in excess of 20%.

LIQUIDITY AND CAPITAL RESOURCES

Through July 31, 1995, RYKA continued to experience a critical shortage of cash.
On July 31, 1995, the Company consummated a financing agreement with MR,
pursuant to which MR provided or arranged to provide the Company with up to
$8,000,000 of new financing in the form of (i) a $1,000,000 equity and
subordinated debt investment by MR and KPR, an affiliate of MR, (ii) a
$2,000,000 letter of credit facility from KPR, (iii) a $4,000,000 revolving
credit facility with a bank, and (iv) a $1,000,000 equity investment through the
private placement of Common Stock with certain investors. Prior to consummating
the Agreement with MR on July 31, 1995, the Company had a nominal cash balance
and a working capital deficiency of approximately $2,300,000. Without this
financing, management believed there was a substantial doubt that the Company
would be able to remain in business.

As a result of consumating the Agreement with MR on July 31, 1995, the Company
received proceeds from the sale of Common Stock and warrants and proceeds from
subordinated notes payable, aggregating approximately $1,750,000 net of
transaction related costs. Additionally, secured and unsecured creditors forgave
certain debt resulting in a gain of approximately $1,650,000. The Company
established a new $4,000,000 asset based revolving credit facility with a bank
and established a $2,000,000 letter of credit facility with an affiliate of MR.
Both the bank facility and the letter of credit facility provide for rates which
are more competitive in today's lending environment. Interest on the bank loans
are at the prime rate plus 1% and letters of credit, prior to draw, are provided
at a rate of 1% of the sum of the face amount plus any underlying bank fees and
opening charges (approximately an additional 1-1/2% to 2% per annum).

The bank credit facility includes certain restrictive covenants which, among
other things, require the Company to maintain certain financial ratios and
capital funds (tangible stockholders' equity and subordinated notes payable) of
$2,000,000 by August 30, 1995. The bank credit facility also requires MR or its
affiliates to make additional loans or otherwise cause capital funds of the
Company to be maintained at no less than $2,000,000. These provisions
effectively require the Company to raise capital through equity offerings,
proceeds from the exercise of stock options or warrants or through additional
subordinated borrowings or from MR or its affiliates, to finance any operating
losses.

                                      -14-
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED

The Agreement and financing resulted in an increase in working capital of
approximately $3,600,000, so that the Company's working capital deficiency of
approximately $2,300,000 was converted to positive working capital of
approximately $1,300,000 at July 31, 1995. At March 31, 1996 the Company's
working capital was approximately $319,368 and will not be sufficient to meet
management's objectives in 1996. The Company does not anticipate making
significant capital expenditures during the foreseeable future. In addition, the
Company plans the sale of additional equity securities and/or the issuance of
subordinated notes, in order to generate sufficient capital resources to assure
continuation of the Company's operations. The Company must obtain these or
similar additional resources or consider modifications to its operating plans
including reductions in operating costs to enable it to continue operations.
However, no assurance can be given that the Company will be successful in
raising additional capital to support future operations. Further, there can be
no assurance, assuming the Company successfully raises additional funds and is
able to utilize its existing credit facility or establish a new facility that
the Company will achieve profitability or a positive cash flow.

As of March 31, 1996 and as stated previously, the Company was in default of
certain financial covenants required by the loan agreement with its bank,
although the Company's bank has waived such defaults in the past and most
recently through May 31, 1996. As of December 31, 1995, no amounts were
outstanding under the bank facility, although as of March 31, 1996, there was
$1,237,000 outstanding under this facility. Further, in connection with
production of the Company's Fall 1996 line, additional financing and letters of
credit will be required during the second and third quarters of 1996. In order
for the Company to fund its operating plans, the Company must either renegotiate
the terms of the financing facility provided by the Company's bank, obtain
additional waivers of defaults past May 31, 1996 or cure such defaults, or
arrange a new facility suitable to the Company's needs with a different lender.
The Company has negotiated a credit facility with a new lender to replace its
existing facility, which new facility requiring this Company to raise an
additional $2,000,000 in equity as a condition to obtaining such facility. The
Company is currently in the process of raising $2,000,000 in equity to satisfy
this requirement. In addition, the Company may be required to raise additional
funds to support the Company's operations through the sale of additional equity
securities and/or the issuance of subordinated notes. The Company must obtain
these or similar additional resources or consider modifications to its operating
plans, including reductions in operating costs to enable it to continue
operations. However, no assurance can be given that the Company will be
successful in raising additional capital to support future operations. Further,
there can be no assurance, assuming the Company successfully raises additional
funds and is able to use its existing credit facility or establish a new
facility that the Company will achieve profitability or a positive cash flow.

                                      -15-
<PAGE>
 
 
                          PART II - OTHER INFORMATION



ITEM 1.   LEGAL PROCEEDINGS

Not Applicable


ITEM 2.   CHANGES IN SECURITIES

Not Applicable


ITEM 3.   DEFAULTS ON SENIOR SECURITIES

          At March 31, 1996, the Company was in default of certain provisions of
          the Loan and Security Agreement regarding certain credit insurance to
          be established within prescribed timeframe, funding requirements for
          the infusion of subordinated loans or capital infusions by MR
          Acquisitions, L.L.C. ("MR"), or by MR causing the same to occur, and
          the covenant requiring establishment and maintenance of certain
          tangible net worth and leverage. The difference between the actual
          amount and the required amount was approximately $1,475,000, at March
          31, 1996. The principal lender has waived the aforementioned defaults
          and extended the time for credit insurance to be established to May
          31, 1996.

          At March 31, 1996, the Company was in default of certain provisions of
          the Loan and Security Agreement with KPR Sports International, Inc.
          relating to a tangible net worth and leverage requirement which is
          identical to the covenant of the Company's principal lender. KPR
          Sports International, Inc. has waived the aforementioned default
          through May 31, 1996.


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

Not Applicable


ITEM 5.   OTHER INFORMATION

Not Applicable


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10eee.    Waiver letters.

   11.    Statement regarding computation of per share earnings.

                                      -16-
<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: June 26, 1997         By: /s/ Michael G. Rubin                  
                                ------------------------------------
                                        Michael G. Rubin            
                                    Chairman of the Board &         
                                    Chief Executive Officer         
                                                                    
                                                                    
                                                                    
Date: June 26, 1997         By: /s/Steven A. Wolf                   
                                ------------------------------------
                                         Steven A. Wolf             
                                  Vice President of Finance &       
                                    Chief Financial Officer          

                                      -17-
<PAGE>
 
                           RYKA INC. AND SUBSIDIARY
                                 EXHIBIT INDEX

EXHIBIT NO.                    DESCRIPTION                   SEQUENTIAL PAGE NO.
--------------------------------------------------------------------------------


10eee.                 Waiver letters.                              19


    11                 Statement regarding computation of
                       per share earnings                           23

                                     -18-