<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 MARCH 31, 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 [ ] No [X]

           Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of July 17, 1997:

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

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



                                     - 1 -
<PAGE>
 
                            RYKA Inc. and Subsidiary
            Form 10-Q for the Three-Month Period Ended March 31, 1997
                                Table of Contents
===============================================================================

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

    Item 1.       Financial Statements:
                  Condensed Consolidated Balance
                        Sheets as of March 31, 1997 and December 31, 1996                       3
                  Condensed Consolidated Statements of Operations for the
                        three-month periods ended March 31, 1997
                        and March 31, 1996                                                      4
                  Condensed Consolidated Statements of Cash Flows for the
                        three-month periods ended March 31, 1997 and March 31, 1996             5
                  Notes to Condensed Consolidated Financial Statements                       6 to 8

    Item 2.       Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                                  9 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
                      Condensed Consolidated Balance Sheets
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                             March 31,         December 31,
                                                                                1997               1996
                                                                           -------------       -------------
                                                                            (Unaudited)
  <S>                                                                      <C>                   <C> 
                                     ASSETS                            
   Current assets:                                                     
       Cash                                                                       $3,117             $37,469
       Accounts receivable, net of allowance for doubtful              
        accounts of  $125,887 in 1997 and $65,941  in 1996                     2,188,280           1,947,036
       Inventory                                                               2,822,989           2,644,017
       Prepaid expenses and other current assets                                 221,086             149,306
       Due from Affiliate                                                         14,132                 -
       Note receivable, officer                                                   20,000              20,000
                                                                           -------------       -------------
                                                                       
                      Total current assets                                     5,269,604           4,797,828
                                                                       
   Property and equipment, at cost, net of accumulated                 
       depreciation                                                              227,812             194,815
                                                                       
   Security deposits                                                              70,000              70,000
                                                                           -------------       -------------

                      Total assets                                            $5,567,416         $ 5,062,643
                                                                           =============       =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
       Current liabilities:
       Note payable, bank                                                    $ 1,753,456         $ 1,592,453
       Accounts payable and accrued expenses                                   1,582,707           1,001,577
       Due to customer                                                           413,290             413,290
       Due to affiliate                                                              -                18,928
       Subordinated note payable                                                 851,440             851,440
                                                                           -------------       ------------- 
                      Total current liabilities                                4,600,893           3,877,688
                                                                     
   Other liabilities                                                              35,000              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, 90,000,000                     
         shares authorized; 56,635,326 shares                        
         issued and outstanding at March 31, 1997 and                
         December 31, 1996                                                       566,353             566,353
       Additional paid-in capital                                             20,336,843          20,311,843
       Accumulated deficit                                                   (19,971,673)        (19,728,241)
                                                                           -------------       ------------- 
                                                                     
                      Total stockholders' equity                                 931,523           1,149,955
                                                                     
                      Total liabilities and stockholders' equity             $ 5,567,416         $ 5,062,643
                                                                           =============       ============= 
</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,
                                                            1997                 1996
                                                        ----------------------------------
                                                                  (Unaudited)
<S>                                                     <C>                   <C> 
Net sales                                                 $2,584,098           $ 1,736,354

Costs and expenses:
   Cost of goods sold                                      1,709,795             1,170,440
   General and administrative expenses                       375,180               132,579
   Sales and marketing expenses                              504,684               403,873
   Research and development expenses                         142,062               208,407
   Special charges                                               -                  22,772
                                                        ------------           -----------

                                                           2,731,721             1,938,071
                                                        ------------           -----------

Operating loss                                          (    147,623)         (    201,717)
                                                        ------------           -----------


Other (income) expense:
   Interest expense                                           53,732                28,754
   Interest income                                            (  468)               (  362)
   Merger related costs                                       42,545                   -
                                                        ------------           -----------

                                                              95,809                28,392
                                                        ------------           -----------

Net loss                                                  ($ 243,432)         ($   230,109)
                                                        ============           ===========

Net loss per share                                        ($     -  )         ($       .01)
                                                        ============           ===========

Weighted average common and common
   equivalent shares outstanding                          59,635,326           46,615,326
                                                        ============           ===========
</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,
                                                                                   1997                1996
                                                                           ------------------------------------
                                                                                         (Unaudited)
  <S>                                                                      <C>                <C> 
   Cash flows from operating activities:
       Net loss                                                             ($  243,432)       ($     230,109)
       Adjustments to reconcile net loss to cash
         (used in) operating activities:
           Depreciation and amortization                                         16,573                13,088
           Provision for losses on accounts receivable                           59,946                16,227
           Capital contributed as services                                       25,000                25,000
       Changes in operating assets and liabilities:
             Accounts receivable                                             (  301,190)       (      752,093)
             Inventory                                                       (  178,972)       (      392,635)
             Prepaid expenses and other current assets                       (   71,780)       (      107,792)
             Accounts payable and accrued expenses                              581,130        (       99,923)
             Due to/from affiliate                                           (   33,060)              257,479
                                                                         --------------        --------------

             Net cash (used in) operating activities                         (  145,785)       (    1,270,758)
                                                                         --------------        --------------

   Cash flows from investing activities:
       Acquisitions of equipment                                             (   49,570)       (        3,531)
       Security deposits                                                          -            (           35)
                                                                         --------------        --------------

             Net cash (used in) investing activities                         (   49,570)       (        3,566)
                                                                         --------------        --------------

   Cash flows from financing activities:
       Proceeds from note payable, bank                                         161,003             1,237,000
       Repayment of bridge loan                                                   -                   120,000
       Proceeds from issuance of common stock                                     -            (      120,000)
       Deferred registration costs                                                -            (       40,000)
                                                                         --------------        --------------


             Net cash provided by financing activities                          161,003             1,197,000
                                                                         --------------        --------------

   Net decrease in cash                                                    (     34,352)       (       77,324)

   Cash, beginning of period                                                     37,469                77,509
                                                                         --------------        --------------

   Cash, end of period                                                   $        3,117        $          185
                                                                         ==============        ==============
</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, 1996 as presented in the
Company's Annual Report on Form 10-K.

The Company's financial statements for the quarter ended March 31, 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 March 31, 1997 of $19,971,673.

During 1996, the Company incurred substantial expenditures in order to meet
ongoing needs and fund its operating plans, which included the development and
marketing of new products. The Company negotiated a credit facility with a 
lender which became effective August 15, 1996 (the "Credit Facility"). As a
prerequisite to closing the new credit facility, the Company was required to
raise $2,000,000 in equity. This requirement was satisfied with the sale of
$2,500,000 of equity securities through a Private Placement which commenced in
May 1996 and was completed in August 1996 (The "1996 Private Placement").
Subsequently, the Company was informed by this new lender that the Credit
Facility was to be terminated on March 31, 1997, which was later extended to
April 18, 1997. As of June 4, 1997, the lender agreed to extend the Credit
Facility, as modified (see Note B) to November 30, 1997. If the Company is
unable to obtain alternative financing , there is no assurance that the Company
will be able to continue operations. Further, there is no assurance that the
Company will be able to obtain alternative financing, or, if obtained, such
financing will be on terms satisfactory for the Company.

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

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

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

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

                                     - 6 -
<PAGE>
 
NOTE B - DEBT

Effective as of August 15, 1996, the Company's Credit Facility consisted of a
$4,500,000 asset based revolving credit facility. 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 was
paid monthly at the rate of prime plus one percent and was due on demand. As of
March 31, 1997, the Company owed $1,753,456 under this facility. Interest
expense in connection with this facility was $33,037 for the three months ended
March 31, 1997.

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

Concurrently with RYKA, KPR closed a credit facility with the same lender. On
November 8, 1996 the bank notified KPR that it was in default of certain
financial covenants, specifically the debt to net worth ratio and required
tangible net worth, and certain provisions relating to financial information.
RYKA was in compliance with its financial covenants and is not in default of its
loan with the lender. 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.

On February 7, 1997, the Company entered into an agreement to modify the Credit
Facility in anticipation of a complete refinancing of the Company's obligation.
The terms of the modification called for an acceleration of the termination date
to March 31, 1997, which was later extended to April 18, 1997. Coincident with
the signing of this agreement, KPR entered into a Forbearance and Amendment
Agreement (the "Forebearance Agreement") with the lender. The terms of this
Forebearance Agreement place certain additional financial covenants on KPR, and
accelerated the termination of KPR's Facility to March 31, 1997, which was later
extended to April 18, 1997. The complete refinancing of the Company's
obligation 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 prime plus 3 1/2%.

On June 27, 1997, the Company received a preliminary term sheet from a
prospective lender to replace its current facility. The terms of this new
facility require the company to raise an additional $5 million in capital. There
is no assurance that the company will meet this condition to close this new
facility.

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 $11,875 for the three months ended March 31, 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 March 31, 1997, 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.

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 $19,606 and $19,420 for the three
months ended March 31, 1996 and 1997, respectively.

                                     - 7 -
<PAGE>
 
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, and as a result of the Company's
inability to register such stock with the Securities and Exchange Commission
within 120 days of the closing (by November 28, 1995), the Company will be
required to remit to the investors $5,000 and warrants to purchase 40,000 shares
for each month such registration statement does not become effective. In
connection with the above condition, the maximum reduction in stock proceeds
cannot exceed $100,000 and the maximum additional issuance of stock purchase
warrants cannot exceed 800,000 shares. The registration was not accomplished
within the 120 day period; however, waivers of such payments and warrants have
been received from certain of the participants in the 1995 Private Placement
through March 31, 1997. The remaining participants were issued warrants.
Accordingly, at March 31, 1997 and December 31, 1996, $35,000 of the proceeds of
the 1995 Private Placement have been classified as other liabilities.

With respect to said warrants, pursuant to the specific private placement terms,
through March 31, 1997, 640,000 warrants 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.


Contingent Stock Options and Warrants:

The Board of Directors of RYKA on March 9, 1997 authorized the issuance of
options to certain employees of KPR and RYKA and certain warrants to athletes
sponsoring or endorsing the Apex brand for KPR, to purchase shares of the
Company's Common Stock. The issuance of these options is contingent upon the
consummation of the Acquisition by Ryka of the KPR Companies. 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 contingent options is as follows:

<TABLE> 
<CAPTION> 
 
                              Options                  Warrants
                           ------------             -------------
   <S>                     <C>                     <C>                   
     KPR Employees              530,000                         -

     RYKA Employees             930,000                         -

     KPR Athletes                N/A                    3,200,000
                           ------------             -------------

                              1,460,000                 3,200,000
                           ============             =============
</TABLE> 

                                     - 8 -
<PAGE>
 
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
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 $243,000 during the quarter ended March 31,
1997. In addition, the Company had an accumulated deficit of approximately
$19,972,000 and stockholders' equity of approximately $932,000 at March 31,
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 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.

RECENT EVENTS. On August 15, 1996, the Company entered into a new credit
facility with a bank. Concurrently with RYKA, KPR entered into a new credit
facility with the same bank. On November 8, 1996, the bank notified KPR that KPR
was in default of certain financial 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 June 4, 1997, RYKA entered into an amended agreement, and KPR entered into a
forbearance agreement with their existing bank, that among other things,
extended the credit facilities of RYKA and KPR to the earlier of November 30,
1997 or an occurrence of an event of default (as defined). Under its amended
agreement, RYKA may borrow under its revolving credit facility up to the lesser
of $4,500,000 or its borrowing base (as defined). Interest on its borrowings is
payable at the bank's prime rate plus 3 1/2%. RYKA is also required to maintain
certain receivables turnover ratios. RYKA's revolving credit facility is
guaranteed by Michael Rubin and certain entities owned by Michael Rubin and is
cross-defaulted with KPR's agreement with the bank.

In addition to its negotiations with its existing bank, RYKA and KPR have been
in discussions with certain other banks to obtain a new credit facility and with
certain investors to obtain equity an/or subordinated debt. On April 21, 1997,
RYKA entered into an agreement with certain investors to sell 2,500,000 shares
of Common Stock for an aggregate purchase price of $750,000. The proceeds of
this sale were used by the Company to repay $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.

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 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.

                                     - 9 -
<PAGE>
 
Results of Operations

Three Months Ended March 31, 1997 as Compared to the Three Months Ended 
March 31, 1996
--------------------------------------------------------------------------------

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> 

                                                           THREE MONTHS ENDED MARCH 31,
                                                                  (In Thousands) 
                                              -----------------------------------------------------
                                        
                                                       1997                          1996
                                              ----------------------        -----------------------
                                                   (Unaudited)                  (Unaudited)
<S>                                         <C>              <C>           <C>             <C>                                   
Net sales                                     $2,584          100.0%        $1,736           100.0%
                                        
Costs and expenses:                     
   Cost of goods sold                          1,710           66.2%         1,170            67.4%
   General and administrative expenses           375           14.4%           133             7.6%
   Sales and marketing expenses                  505           19.5%           404            23.3%
   Research and development expenses             142            5.5%           208            12.0%
   Special charges                                 -             .2%            23             1.3%
                                              ----------------------        -----------------------
                                        
                                               2,732          105.7%         1,938           111.6%
                                              ----------------------        -----------------------
                                        
   Operating loss                            (   148)         ( 5.7%)        ( 202)         ( 11.6%)
                                        
   Other expense,  net                            95            3.7%            28             1.6%
                                              ----------------------        -----------------------
                                        
   Net loss                                  ($  243)        (  9.4%)     ( $  230)         ( 13.2%)
                                              ======================        =======================
</TABLE> 

Net sales increased by $847,744 (48.8%) from $1,736,354 for the three months
ended March 31, 1996 to $2,584,098 for the three months ended March 31, 1997.
This increase in sales was primarily due to (i) an improvement in design and
development of RYKA's spring 1997 product line resulting from the hiring of an
internal design and product development staff as opposed to relying on
outsourcing these activities, (ii) the hiring of manufacturers representatives
with extensive footwear industry experience to cover the entire United States,
and (iii) the continuous expansion of relationships established during the 3rd
and 4th Quarter of 1996 with major footwear retailers in the women's athletic
footwear market.

Cost of goods sold increased by $539,355 (46.1%) from $1,170,440 for the three
months ended March 31, 1996 to $1,709,795 for the three months ended March 31,
1997. This increase was primarily attributable to the increase in sales as gross
profit margins as a percentage of sales remained relatively flat increasing from
32.6% for the quarter ended March 31, 1996 to 33.8% for the quarter ended March
31, 1997.

General and administrative expenses increased by $242,601 (183.0%) from $132,579
for the quarter ended March 31, 1996 to $375,180 for the quarter ended March 31,
1997. This increase was primarily due to (i) an increase in the accounts
receivable reserve for doubtful accounts and additional bad debt writeoffs,
totaling approximately $110,000, (ii) an increase in bank fees and professional
fees of approximately $60,000 associated with negotiating and entering into the
amended Credit Facility with the Company's primary lender and amending prior
year quarterly financial statements and, (iii) increase in payroll costs of
approximately $23,000 resulting from growth in back office expenses necessary to
support the overall growth of the business.

Sales and marketing expenses increased by $100,811 (25.0%) from $403,873 for the
quarter ended March 31, 1996 to $504,684 for the quarter ended March 31, 1997.
This increase was primarily attributable to (i) an increase of approximately
$115,000 in direct selling expenses which were directly related to the 49%
increase in sales volume (ie. commissions, promotion, advertising, trade shows)
and (ii) an increase in costs of distribution and warehousing expenses of
approximately $55,000 resulting from the higher sales volume and warehousing
costs associated with inventory levels being significantly higher than the same
period of the prior year. These increases were offset by (i) a decrease in
public relations expense of approximately $23,000 resulting from termination of
the companies public relations agency and (ii) a decrease in payroll related
expenses of approximately $26,000.

                                     - 10 -
<PAGE>
 
Research and development expenses decreased $66,345 (31.8%) from $208,407 for
the quarter ended March 31, 1997 to $142,062 for the quarter ended March 31,
1996. The decrease was a result of savings obtained by employee in-house
designers during the first quarter of 1997 compared to engaging outside
consultants on a project by project basis.

Special charges consists of relocation and temporary living costs.

Other expenses, net increased $67,417 (237.4%) from $28,392 in the quarter ended
March 31, 1996 to $95,809 in the quarter ended March 31, 1997. The increase was
primarily due to (i) an increase in merger related expenses in connection with
the proposed acquisition by RYKA of the KPR Companies of approximately $42,000
in the first quarter of 1996. (ii) interest expense of $30,207 as a result of
increased borrowing requirements during the first quarter of 1997 necessary to
support higher accounts receivable and inventory levels over the same period of
the prior year.

Liquidity and Capital Resources

As of March 31, 1997, the Company's working capital is $668,711. The level of
working capital maintained during the 1st quarter ended March 31, 1997, relates
primarily to the proceeds remaining from the 1996 Private Placement which
totaled $2,500,000.

On November 8, 1996 the Company's and KPR's bank notified KPR that KPR was in
default of certain financial covenants, specifically the debt to net worth ratio
and required tangible net worth, and certain provisions relating to financial
information. RYKA was in compliance with its financial covenants and was not in
default of its loan with the bank.

On February 7, 1997, in conjunction with KPR entering into a 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) for the Company's credit facility, 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 $1,270,758 in cash flow from operating activities
for the three months ended March 31, 1996 as compared to $145,785 for the three
months ended March 31, 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
$3.0 - $5.0 million in equity and/or subordinated debt financing. The Company
believes that it is in the best interests of the Company to resolve the credit
facility and equity and/or subordinated debt needs of both the Company and KPR
so that the Company can complete the proposed acquisition of the KPR Companies.

On April 21, 1997, RYKA entered into an agreement with certain investors to sell
2,500,000 shares of Common Stock for an aggregate purchase price of $750,000.
The proceeds of this sale were used by the Company to repay $385,000 of the
$851,000 subordinated loan from KPR. The remaining proceeds from this sale were
used by the Company to open $810,000 in letters of credit for the benefit of
KPR. The Company is repaying a portion of the subordinated loan for KPR and is
opening letters of credit on behalf of KPR in order to allow KPR to obtain
sufficient financing for its operations until the proposed 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, the Company was on a wire transfer on
shipment basis with this supplier.

                                     - 11 -
<PAGE>
 
Liquidity and Capital Resources - continued

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.       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.

                                    - 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: July 17, 1997                    By: /s/ Michael G. Rubin
                                           -----------------------------------
                                                    Michael G. Rubin
                                                Chairman of the Board &
                                                Chief Executive Officer



Date: July 17, 1997                    By: /s/ Steven A. Wolf
                                           -----------------------------------
                                                    Steven A. Wolf
                                              Vice President of Finance &
                                                Chief Financial Officer

                                    - 14 -
<PAGE>
 
                            RYKA Inc. and Subsidiary
                                  EXHIBIT INDEX

<TABLE> 
<CAPTION> 

Exhibit No.                  Description                   Sequential Page No.
-------------------------------------------------------------------------------



<S>                   <C>                                          <C> 
10eee.                 Waiver letters.                              19


     11                Statement regarding computation of
                       per share earnings                           23
</TABLE> 


                                    - 15 -