<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 SEPTEMBER 30, 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 November 13, 1996:

Common Stock $.01 par value                                       56,635,326
---------------------------                                   ------------------
   (Title of each class)                                      (Number of Shares)
--------------------------------------------------------------------------------
<PAGE>
 
                           RYKA Inc. and Subsidiary
         Form 10-Q for the Three-Month Period Ended September 30, 1996
                               Table of Contents
--------------------------------------------------------------------------------






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

   Item 1.     Financial Statements:
               Condensed Consolidated Balance
                    Sheets as of September 30, 1996 and December 31, 1995                           3
               Condensed Consolidated Statements of Operations for the                     
                    three-month and nine-month periods ended September 30, 1996            
                    and September 30, 1995                                                          4
               Condensed Consolidated Statements of Cash Flows for the                     
                    nine-month periods ended September 30, 1996                            
                    and September 30, 1995                                                          5
               Notes to Condensed Consolidated Financial Statements                              6 to 11
                                                                                           
   Item 2.     Management's Discussion and Analysis of Financial Condition                 
               and Results of Operations                                                        12 to 17


PART II - OTHER INFORMATION

   Item 1.     Legal Proceedings                                                                   18
   Item 2.     Changes in Securities                                                               18
   Item 3.     Defaults on Senior Securities                                                       18
   Item 4.     Submission of Matters to a Vote of Security Holders                                 18
   Item 5.     Other Information                                                                   18
   Item 6.     Exhibits and Reports on Form 8-K                                                    18
   Signatures                                                                                      19
   Exhibit Index and Exhibits                                                                      20
</TABLE> 

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

                           RYKA Inc. and Subsidiary
                     Condensed Consolidated Balance Sheets
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                                          September 30,      December 31,
                                                                                              1996               1995
                                                                                           ------------      ------------
                                                                                           (Unaudited)
                                                      ASSETS
<S>                                                                                     <C>                <C> 
   Current assets:
      Cash                                                                                  $    84,558      $     77,509
      Accounts receivable, net of allowance for doubtful
       accounts of $61,982 in 1996 and $57,573 in 1995                                        3,818,375           533,490
      Inventory                                                                               2,366,546           678,319
      Prepaid expenses and other current assets                                                 100,721           118,294
      Note receivable, officer                                                                   20,000               -
                                                                                             ----------        ---------- 

                   Total current assets                                                       6,390,200         1,407,612

   Property and equipment, at cost, net of accumulated
      depreciation                                                                              171,468           195,083

   Other assets                                                                                   8,000               500
                                                                                             ----------        ---------- 

                   Total assets                                                             $ 6,569,668       $ 1,603,195
                                                                                             ==========        ==========
<CAPTION> 

                                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

   Current liabilities:
      Note payable, bank                                                                    $ 2,958,403       $       -
      Accounts payable and accrued expenses                                                     452,174           437,324
      Due to customer                                                                           413,290           413,290
      Due to affiliate                                                                          145,952             2,043
                                                                                            -----------       -----------

                   Total current liabilities                                                  3,969,819           852,657
                                                                                            -----------       ----------- 

   Subordinated note payable, affiliate                                                         851,440           851,440

   Bridge loan payable                                                                              -             120,000
   Other liabilities                                                                            100,000           150,000

   Commitments and contingencies

   Stockholders' equity (deficiency):
      Preferred stock, $0.01 par value, 1,000,000
        shares authorized; none issued or outstanding                                               -                 -
      Common stock; $0.01 par value, 90,000,000
        shares authorized; 56,615,326  and 46,135,326 shares
        issued and outstanding at September 30, 1996 and
        December 31, 1995, respectively                                                         566,153           461,353
      Additional paid-in capital                                                             20,203,043        17,051,229
      Accumulated deficit                                                                   (19,120,787)      (17,883,484)
                                                                                            -----------       ----------- 
                                                                                  
                   Total stockholders' equity (deficiency)                                    1,648,409          (370,902)
                                                                                            -----------       ----------- 

                   Total liabilities and stockholders' equity (deficiency)                  $ 6,569,668       $ 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              Nine Months Ended
                                                                 September 30,                   September 30,
                                                              1996          1995              1996          1995
                                                          -------------------------       --------------------------
                                                                  (Unaudited)                     (Unaudited)

<S>                                                       <C>            <C>              <C>            <C> 
Net sales                                                 $4,222,641     $1,299,603       $7,176,260     $ 6,917,866

Other revenues                                                   -           53,838              -            83,773
                                                           ---------      ---------        ---------      ----------

                                                           4,222,641      1,353,441        7,176,260       7,001,639
                                                           ---------      ---------        ---------      ----------
Costs and expenses:
   Cost of goods sold                                      2,716,706        927,108        4,812,483       6,116,792
   Inventory write-down to lower of cost
       or market                                                 -              -                -           586,000
   General and administrative expenses                       359,830        353,738          848,763       1,649,843
   Sales and marketing expenses                              731,165        235,238        1,365,054       1,629,385
   Research and development expenses                         138,123         38,582          551,965         288,018
   Special charges                                           152,715        279,012          152,715         279,012
   Contingent warrant compensation                           437,184            -            511,614             -
                                                           ---------      ---------        ---------      ----------

                                                           4,535,723      1,833,678        8,242,594      10,549,050
                                                           ---------      ---------        ---------      ----------

Operating income (loss)                                     (313,082)      (480,237)      (1,066,334)     (3,547,411)
                                                           ---------      ---------        ---------      ----------


Other (income) expense:
   Interest expense                                           59,006         17,488          141,539         319,213
   Interest income                                       (     2,491)   (     4,171)     (     4,570)    (     6,328)
   Gain on disposition of property                                   
      and equipment                                              -      (    10,782)             -       (    10,782)
   Merger related costs                                       34,000            -             34,000         783,289
                                                           ---------      ---------        ---------      ----------

                                                              90,515          2,535          170,969       1,085,392
                                                           ---------      ---------        ---------      ----------

Income (loss) before extraordinary gain                  (   403,597)   (   482,772)     ( 1,237,303)    ( 4,632,803)

Extraordinary gain:
   Forgiveness of debt                                           -        1,650,256              -         1,650,256
                                                           ---------      ---------        ---------      ----------

Net income (loss)                                        ($  403,597)    $1,167,484      ($1,237,303)   ($ 2,982,547)
                                                           =========      =========        =========      ==========

Net income (loss) per share:
   Income(loss) before extraordinary gain                ($      .01)   ($      .01)     ($      .02)   ($       .16)
   Extraordinary gain                                            -              .04              -               .06
                                                           =========      =========        =========      ==========
Net income (loss) per share                              ($      .01)    $      .03      ($      .02)   ($       .10)
                                                           =========      =========        =========      ==========

Weighted average common and common
   equivalent shares outstanding                          61,523,941     43,375,492       50,552,211      30,830,241
                                                          ==========     ==========       ==========      ==========
</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> 
                                                                                         Nine Months Ended
                                                                                            September 30,
                                                                                       1996            1995
                                                                                 ------------------------------
                                                                                           (Unaudited)
<S>                                                                             <C>              <C> 
Cash flows from operating activities:
      Net loss                                                                   ($ 1,237,303)     ( $2,982,547)
      Adjustments to reconcile net (loss) to cash
        provided by (used in) operating activities:
         Extraordinary item - forgiveness of debt                                       -          (  1,650,256)
         Depreciation and amortization                                                 39,081            36,572
         Contingent warrant compensation                                              511,614             -
         Provision for allowance for doubtful accounts                          (      34,000)          367,030
         Capital contributed as services                                               75,000             -
         Gain on disposition of property and equipment                                  -          (     10,782)
      Changes in operating assets and liabilities:
         Accounts receivable                                                     (  3,250,885)        1,537,743
         Inventory                                                               (  1,688,227)        2,646,839
         Prepaid expenses and other current assets                                     17,573            84,758
         Note receivable, officer                                                (     20,000)            -
         Accounts payable and accrued expenses                                         28,012           602,688
         Due to affiliate                                                             130,747            25,640
                                                                                   ----------       -----------

           Net cash provided by (used in) operating activities                   (  5,428,388)          657,685
                                                                                    ---------        ----------

   Cash flows from investing activities:
      Purchase of property and equipment                                         (     15,466)     (     85,988)
      Other assets                                                               (      7,500)           15,753
      Proceeds from sale of equipment                                                   -                15,120
                                                                                    ---------        ----------

           Net cash (used in) investing activities                               (     22,966)     (     55,115)
                                                                                    ---------        ----------

   Cash flows from financing activities:
      Increase (decrease) in payable to lender, net                                 2,958,403      (  2,203,730)
      Proceeds from sale of common stock                                            2,500,000         1,152,863
      Advances from (repayment to) factor, net                                          -          (  1,286,237)
      Proceeds from note payable, bank                                                  -               322,000
      Proceeds from subordinated note payable                                           -               851,440
      Proceeds from exercise of warrants and stock options                              -               305,248
                                                                                    ---------        ----------

           Net cash provided by (used in) financing activities                      5,458,403      (    858,416)
                                                                                    ---------        ----------

   Net increase (decrease) in cash                                                      7,049      (    255,846)

   Cash, beginning of period                                                           77,509           296,226
                                                                                  -----------         ---------

   Cash, end of period                                                           $      84,558     $     40,380
                                                                                  ============      ===========
</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 September 30, 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 September 30, 1996 of $19,120,787.
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.

In order to meet ongoing needs and fund its operating plans, the Company
negotiated a credit facility with a new lender which became effective August 15,
1996.  As a prerequisite to closing the new credit facility, the Company was
required to raise $2,000,000 in equity.  This requirement was  satisfied with
the sale of $2,500,000 of equity securities through a Private Placement which
commenced in May, 1996 and was completed in August, 1996, (the "1996 Private
Placement").

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.  Although RYKA originally
expected the Reorganization to become effective as of December 31, 1996, the
Company has announced that the Reorganization has been postponed until mid-1997
as a result of (i) technical issues regarding the accounting treatment of the
proposed transaction and (ii) a further valuation of the proposed transaction.

There is no assurance that the Reorganization will be consummated.  In the
event that the Reorganization is not consummated, or further delayed, the
Company may 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>
 
                            RYKA Inc. and Subsidiary
              Notes to Condensed Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

NOTE A - BASIS OF PRESENTATION - CONTINUED

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.

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 and second quarters of
1996 and the recognition of contingent warrant expense. 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 and in recognizing
expense related to a contingent stock warrant. Accordingly certain revenues and
expenses were previously reported in incorrect periods. In conjunction with this
restatement, the Statement of Operations for the quarter and nine months ended
September 30, 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               Quarter Ended
                            March 31, 1996              June 30, 1996
                    ---------------------------- ----------------------------
                      As Reported   As Restated   As Reported    As Restated
                    -------------- ------------- ------------- --------------
<S>                   <C>           <C>           <C>           <C>
Sales                  $2,014,333    $1,736,354    $1,557,981      $1,217,265

Operating Expenses      2,249,547     1,938,071     1,977,276       1,768,800

Operating Loss           (235,214)     (201,717)     (419,295)       (551,535)

Other Expenses             28,392        28,392        52,062          52,062

Net Loss                 (263,606)     (230,109)     (471,357)       (603,597)
</TABLE>      

NOTE C - DEBT

On August 15, 1996, the Company entered into a $4,500,000 asset based revolving
credit facility with a new lender.  The facility contains a sub-line for the
issuance of letters of credit.   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 amount outstanding is paid monthly at the
rate of prime plus one quarter percent and the facility is due on demand.  As of
September 30, 1996, the Company had $2,958,403 outstanding under this facility.

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.

NOTE D - RELATED PARTY TRANSACTIONS

The Company conducts its operations and warehouses inventory in a facility
subleased from the KPR Companies.  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 Acquisitions, L.L.C. or its
affiliates ("MR") 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, 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, has made 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 September 30,
1996, letters of credit in the amount of $502,213 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.  In connection with its new credit
facility, the amounts outstanding under the letters of credit by KPR were paid.
RYKA's new credit facility provides for the issuance of letters of credit to
RYKA by its new lender.

                                      -7-
<PAGE>
 
                            RYKA Inc. and Subsidiary
              Notes to Condensed Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED

Included in the statement of operations are sales of $151,299 relating to
footwear sold to KPR yielding a profit of $32,046 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 nine-months ended September 30, 1996, estimated at $75,000, 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.

In June, 1996, a $20,000 loan was made to an officer of the Company.  The loan
is unsecured and is payable on demand.  Interest is paid bi-monthly at the rate
of prime plus one quarter percent.

A summary of all related party transactions with the KPR Companies for the nine
months ended September 30, 1996 are as follows:

<TABLE>
<CAPTION>
                                                                               Amount
                           Financial                          Amount          Included
 Nature of                 Statement       Transaction    Included in Due   in Additional
Transactions             Classification       Amount       To Affiliate    Paid-in Capital
------------             --------------    ------------   ---------------  ---------------
<S>                     <C>                <C>            <C>              <C>
Purchase of
Inventory from
vendors through
letter of credit
arrangement with
affiliate               Inventory            $2,236,758
 
Sale of Merchandise     Net Sales               151,299
 
Rent                    General and
                        Administrative
                        Expense                  35,625
Interest on
Subordinated Debt       Interest Expense         59,093        $13,162
 
Interest on
Letters of Credit
Advances                Interest Expense          1,779
 
Temporary Advances                              893,165        132,790

Services Contributed    General and
 to Capital             Administrative
                        Expense and
                        Additional Paid-
                        in Capital               75,000                          $75,000
                                                               -------            ------

                                                              $145,952           $75,000
                                                               =======            ======
</TABLE> 

                                      -8-
<PAGE>
 
                            RYKA Inc. and Subsidiary
              Notes to Condensed Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

NOTE E - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS

Equity transaction - Investors:

The Company offered for sale, through a Private Placement (the "1995 Private
Placement"), 4,000,000 shares of Common Stock during the third quarter of 1995
which was finalized during the first quarter of 1996 and the results of the 1995
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 1995 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 is 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, up to a maximum reduction in stock proceeds of
$100,000 and additional issuance of 800,000 shares of Common Stock.  The
registration was not accomplished within the 120 day period, however, waivers
have been received from the participants in the 1995 Private Placement related
to the provisions requiring a $5,000 per month remittance.    Two of the
remaining participants were issued warrants.  Accordingly, at March 31, 1996 and
December 31, 1995 $100,000 of the proceeds have been classified as temporary
equity.  With respect to the warrants, pursuant to the specific 1995 Private
Placement terms, through September 30, 1996, warrants are to be issued to
investors with an exercise price of $.25 which are exercisable for up to 10
years after date of issue.

From the date of closing on July 31, 1995 until completion of the 1995 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 1995 Private Placement.  At December 31, 1995, a total of $120,000
remained outstanding on such loan.  This amount has been recorded as Bridge Loan
Payable on the balance sheet at December 31, 1995.  As of December 31, 1995, a
total of 480,000 shares were yet to be sold to investors.  At March 31, 1996,
the remaining 480,000 shares had been sold and the bridge loan repaid with the
proceeds.  Originally, in the event the 1995 Private Placement was not completed
by August 26, 1995, such bridge loan was to be converted to equity based on the
same terms as the 1995 Private Placement, with the exception of the provisions
causing a contingent reduction in stock proceeds, as described above. The
conversion date was subsequently extended until March 31, 1996.

In May, 1996, the Company's Board of Directors, through a second Private
Placement (the "1996 Private Placement"), authorized the sale of 10,000,000
shares of the Company's Common Stock which were placed during the second and
third quarters of 1996.  The results of the 1996 Private Placement are as
follows:

                             Shares         Proceeds
                             Placed         Received
                           ----------      ----------
 
   June 30, 1996            4,160,000      $1,040,000
                           ==========       =========
   August 14, 1996         10,000,000      $2,500,000
                           ==========      =========

In October, 1996, the Company filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission to register the shares placed in the 1995
Private Placement, 1996 Private Placement as well as the securities held by
others who were granted piggy-back registration rights.  Such Registration
Statement is expected to become effective by the 1996 year end.

                                      -9-
<PAGE>
 
                           RYKA Inc. and Subsidiary
             Notes to Condensed Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

NOTE E - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS - CONTINUED

Stock Options:

The Company has issued options to certain employees to purchase shares of the
Company's Common Stock at prices which approximated fair market value at the
date of grant. The options vest at various times over periods ranging up to four
years and generally must be exercised within 10 years from the date of grant. A
summary of such options granted in the first nine months of 1996 is as follows:

<TABLE> 
<CAPTION> 
                                                         NUMBER OF SHARES
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                            For                  
                         Non-Plan      1987     1988     1990      1992     1993       1995     1996      Employee       Price   
                           Grants      Plan     Plan     Plan      Plan     Plan       Plan     Plan     Directors     of Shares 
---------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>        <C>      <C>      <C>       <C>      <C>      <C>           <C>      <C>         <C>         
Outstanding at                                                                                                                   
December 31,                                                                                                                     
1995                     416,321    251,746  129,851  157,000   838,560  861,500  1,200,000      -           -       $.25 - $1.31 
                                                                                                                                 
Granted during                                                                                                                   
nine months ended                                                                                                                
September 30, 1996            -      13,000   10,500    3,500    10,500   37,500    300,000   670,000      25,000    $.20 - $ .47
                                                                                                                                 
Canceled during                                                                                                                  
the nine months ended                                                                                                             
September 30, 1996            -        -        -        -         -        -        50,000      -           -              $ .47 
                         --------------------------------------------------------------------------------------------------------
                                                                                                                                 
Outstanding at                                                                                                                   
September 30, 1996       416,321    264,746  140,351  160,500   849,060  899,000  1,450,000   670,000      25,000             -  
                         ======================================================================================================== 
</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 were to be issued pursuant to the "Partners Share Success" Equity
Incentive Plan to be adopted by the Company. The purpose of the Program was 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 intended 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 Program would have been available to retail sales personnel of customers of
the Company who agreed to participate in the Program and to purchase certain
minimum quantities of the Company's products.

The Company anticipated that awards of Common Stock pursuant to the Program
would be accounted for as sales and marketing expense using the fair value of
the equity instrument issued or other consideration, as applicable.

As a result of the Reorganization between RYKA, the KPR Companies and Michael
Rubin and the subsequent filing of the Proxy Statement with the Securities and
Exchange Commission, the Company has decided to terminate the Partners Share
Success Program. As stated in Note A above, the Company has announced that the
Reorganization has been postponed until mid-1997.

Included in special charges is $152,715 of costs related to the "Partners Share
Success" Equity Incentive Plan implementation which was previously deferred.

                                      -10-
<PAGE>
 
 
                           RYKA Inc. and Subsidiary
             Notes to Condensed Consolidated Financial Statements
                                  (Unaudited)
--------------------------------------------------------------------------------

NOTE G - MERGER PROPOSAL FROM KPR SPORTS INTERNATIONAL, INC. AND AFFILIATES

On September 26, 1996, the Company entered into the Reorganization Agreement
with the KPR Companies and Michael G. Rubin, Chairman and Chief Executive
Officer of RYKA and sole stockholder of the KPR Companies, pursuant to which,
subject to the approval by the stockholders of RYKA:

  . The Company's Certificate of Incorporation would be amended and restated to
    effect, among other things, a 1-for-20 reverse stock split,

  . 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 (before giving effect to the
    1-for-20 reverse stock split) and,

  . The number of shares issuable pursuant to RYKA's 1996 Equity Incentive Plan
    would be increased.

Although RYKA had originally anticipated that the Reorganization would become
effective as of December 31, 1996, the Company has announced that the
Reorganization has been postponed (until mid-1997) as a result of (i) technical
issues regarding the accounting treatment of the proposed transaction and (ii) a
further valuation of the proposed transaction.

                                      -11-
<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 $1,237,303 during the first nine months of 1996. In addition,
the Company had an accumulated deficit of approximately $19,120,787 as of
September 30, 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 such 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 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
stockholders equity of approximately $650,000 and subordinated debt of
approximately $850,000 as compared to an equity deficiency of over $2,000,000 as
of June 30, 1995. Since July 31, 1995 operating losses have been incurred, which
have diminished stockholders equity and an additional $2,500,000 of proceeds has
been received from an equity private placement which commenced in May, 1996 and
was concluded in August, 1996 (the "1996 Private Placement"). As a result,
stockholders equity is approximately $1,648,000 and subordinated debt remains at
approximately $850,000 as of September 30, 1996.

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. 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 may incur a cumulative operating
loss for fiscal 1996.

As described in Note G to Notes to Condensed Consolidated Financial Statements,
on July 8, 1996 the Company received a merger proposal from KPR Sports
International, Inc. and certain affiliated companies (collectively, "the KPR
Companies", all of which are wholly owned by the Chairman and Chief Executive
officer of RYKA) pursuant to which the KPR Companies would be merged with RYKA.
Although RYKA originally expected the Reorganization to become effective as of
December 31, 1996, the Company has announced that the Reorganization has been
postponed until mid-1997 as a result of (i) technical issues regarding the
accounting treatment of the proposed transaction and (ii) a further valuation of
the proposed transaction. If such merger were to occur it is believed that
operating benefits would occur, however, there is no assurance that the merger
will occur or the benefits materialize.

                                      -12-
<PAGE>
 
 
Results of Operations

Three Months Ended September 30, 1996 as Compared to the Three Months Ended
---------------------------------------------------------------------------
September 30, 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 September 30,
                                                                     --------------------------------------------
                                                                             1996                    1995
                                                                     -------------------    ---------------------
                                                                           (Unaudited)             (Unaudited)

<S>                                                                  <C>          <C>        <C>        <C> 
Net sales                                                            $4,222.6     100.0%      $1,299.6       96.0%

Other revenues                                                          -          -              53.8        4.0%
                                                                      ------------------       -------------------

                                                                      4,222.6     100.0%       1,353.4      100.0%
                                                                      ------------------       -------------------
Costs and expenses:
  Cost of goods sold                                                  2,716.7      64.3%         927.1       68.5%
  General and administrative expenses                                   359.8       8.5%         353.7       26.1%
  Sales and marketing expenses                                          731.2      17.3%         235.2       17.4%
  Research and development expenses                                     138.1       3.3%          38.6        2.9%
  Special charges                                                       152.7       3.6%         279.0       20.6%
  Contingent warrant compensation                                       437.2      10.4%           -          -
                                                                      ------------------       -------------------

                                                                      4,535.7     107.4%       1,833.6      135.5%
                                                                      ------------------       -------------------

  Operating income (loss)                                             ( 313.1)      7.4%     (   480.2) (    35.5%)

  Other expense,  net                                                    90.5       2.1%           2.6         .2%
                                                                      ------------------       -------------------

  Income (loss) before extraordinary item                              (403.6)      9.5%     (   482.8) (    35.7%)

  Extraordinary item - forgiveness of debt                                -           -        1,650.3      122.0%
                                                                      ------------------       -------------------

  Net income                                                         $  403.6       9.5%     $ 1,167.5       86.3%
                                                                      ==================       ===================
</TABLE> 

Net sales increased by $2,923,038 (224.9%) from $1,299,603 for the three months
ended September 30, 1995 to $4,222,641 for the three months ended September 30,
1996. The increase in net sales was due to several factors. First, the sales
during the third quarter of 1996 represented the initial product line designed
and developed by RYKA's new management. The product line was the result of
significant resources devoted by the Company toward the line's development and
design. It was a more performance-based line than previous RYKA products with
updated cosmetics and was received favorably by the retail trade. The result was
a more than doubling of sales as compared to the third quarter of 1995, which
represented the first quarter of operations under new management. During the
third quarter of 1995, until July 31, 1995 there was significant uncertainty
surrounding the Company's future, despite the likelihood of and ultimately the
consummation of additional financing and the agreement with MR. There were many
customers who were apprehensive about the future of the Company and delayed or
canceled their planned orders or declined to place orders. This occurrence was
further exacerbated by the fact that fall goods are traditionally shipped
towards the end of June or beginning of July and were not available for delivery
to retailer until the middle of September as a result of continuing negotiations
with vendors.

Accordingly, the third quarter of 1996 are being compared to sales in the third
quarter of 1995 which were depressed by a number of unusual reasons. Finally the
women's athletic category continues to be increasingly competitive with larger
vendors increasing their focus on this portion of the market.

Cost of goods sold increased by $1,789,598 (193.0%) from $927,108 for the three
months ended September 30, 1995 to $2,716,706 for the three months ended
September 30, 1996. The overall gross profit expressed as a percentage of net
sales increased from 28.7% for the quarter ended September 30, 1995 to 35.7% for
the quarter ended September 30, 1996. The increase in gross profit reflects a
more timely delivery schedule of product to retailers, in the current quarter,
thus eliminating certain incentives which were required to be offered to
customers to accept RYKA products later than their requested delivery date in
the third quarter of 1995. Secondly, sales during the three months ended
September 30, 1996 represented all current product lines with improved profit
margins.

                                      -13-
<PAGE>
 
General and administrative expenses increased by $6,092 (1.7%) from $353,738 for
the quarter ended September 30, 1995 to $312,830 for the quarter ended September
30, 1996. The increase reflects a concerted effort to restructure the Company in
an efficient manner. This increase was due primarily to an increase in payroll
and payroll related expenses in the quarter ended September 30, 1996 due to
hiring of administrative and support personnel offset by decreases in
professional fees and travel expenses.

Sales and marketing expenses increased by $495,927 (210.8%) from $235,238 in the
quarter ended September 30, 1995 to $731,165 in the quarter ended September 30,
1996. This increase was due primarily to (i) an increase of approximately
$85,000 in advertising costs related to trade and consumer print advertising
coinciding with the introduction of the 1996 fall line, (ii) the introduction of
a special promotion program costing approximately $190,000 with a key retailer
aimed at generating higher levels of consumer awareness for RYKA products. The
program involved significant national advertising and in-store displays of RYKA
footwear, (iii) an increase of trade show expense of approximately $128,000
related primarily to RYKA's attendance at the NSGA (National Sporting Goods
Association) trade show in 1996 and (iv) an increase in commissions paid to
outside sales representatives of approximately $68,000 (178.9%) from $38,000 to
approximately $106,000 as a result of an increase in sales.

Research and development expenses increased $99,541 (258.0%) from $38,582 in the
quarter ended September 30, 1995 to $138,123 in the quarter ended September 30,
1996. The increase reflects a concerted effort by management to further develop
and improve the Company's products. The increase is primarily due to (i) an
increase in consulting fees to product designers and product developers of
approximately $42,000 and travel costs to the Orient of approximately $22,000,
(ii) and increased costs of sample merchandise and other product costs of
approximately $34,000 related to the fall 1996 product line.

Special charges decreased by approximately $126,000 from $279,012 in the quarter
ended September 30, 1995 to $152,715 in the quarter ended September 30, 1996.
Special charges in the quarter ended September 30, 1995 related to the
transaction with MR and the closing of RYKA's Massachusetts facility and the
relocation of the Company's operations to King of Prussia, Pennsylvania. In the
quarter ended September 30, 1996 the special charges result from the termination
of the Partners Share Success Equity Incentive Program.

Contingent warrant compensation of $437,184 related to a non-cash charge for the
vesting of 310,310 Contingent Stock Purchase Warrants ("Contingent Warrants")
issued to MR Acquisition, L.L.C. ("MR"). In July 1995 in connection with the
Securities Purchase Agreement (the"Agreement") between the Company and MR, the
Company issued a Contingent Warrant to purchase up to 4,000,000 shares of Common
Stock for an exercise price of $.01. Pursuant to the terms of the warrant , if
at any time within one year of the issuance of the Contingent Warrant (July 31,
1996), the Company issues a number of shares of Common Stock which results in
the Company having in excess of 50,000,000 shares of Common Stock issued and
outstanding, provided that any such shares above such 50,000,000 were issued for
the purpose of a) inducing a lender to make a loan or loans to the Company, or
b) in connection with an infusion of capital to the Company, or c) a settlement
of debts with the Company's creditors, or d) a combination thereof, then upon
the occurrence of such stock issuance, for every ten (10) additional shares of
Common Stock which are issued, four (4) of such shares shall vest under the
Contingent Warrant to MR, who upon exercise shall pay an additional one cent
($.01) per share for the issuance of such additional shares. During the quarter
ended September 30, 1996, 4,554,000 of such shares were issued thereby vesting
MR's right to purchase an additional 1,821,600 shares at $.01. Under accounting
rules governing the issuance of warrants, the charge is equal to the difference
between the strike price of $.01 and the fair market value of the stock at the
time that the contingency is met. Therefore, the Company recognized a charge of
$437,184 related to this vesting.

Other expenses, net increased $87,980 from $2,535 in the quarter ended September
30, 1995 to $90,515 in the quarter ended September 30, 1996. The increase is
primarily due to (i) $34,000 of costs related to the proposed Plan of
Reorganization between RYKA, the KPR Companies and Michael G. Rubin, and (ii) an
increase in interest expense of approximately $42,000 (237.4%) from
approximately $17,000 in the quarter ended September 30, 1995 to approximately
$59,000 for the quarter ended September 30, 1996. The increase in interest
expense reflect the increased demands for funds necessary to finance the sales
growth for the 1996 fall season.

Extraordinary item of approximately $1,650,000 related to gain on settlements
with both secured and unsecured creditors related to the transaction with MR.

                                      -14-
<PAGE>
 
 
Nine Months Ended September 30, 1996 as Compared to the Nine Months Ended
-------------------------------------------------------------------------
September 30, 1995
------------------

The following table sets forth for the periods indicated, a percentage analysis
of items included in the Condensed Consolidated Statement of Operations in
relation to net sales:

<TABLE> 
<CAPTION> 
  (In Thousands)                                                           Nine Months Ended September 30,
                                                                      -------------------------------------------
                                                                             1996                    1995
                                                                      -------------------------------------------
                                                                           (Unaudited)             (Unaudited)
<S>                                                                  <C>                      <C> 

Net sales                                                            $7,176.3     100.0%      $ 6,917.9      98.2%

Other revenues                                                            -         -              83.7       1.2%
                                                                      ------------------       -------------------
                                                                      7,176.3     100.0%        7,001.6     100.0%
                                                                      ------------------       -------------------
Costs and expenses:
  Cost of goods sold including inventory write-down
      its lower of cost or market                                     4,812.5      67.1%        6,702.8      95.7%
  General and administrative expenses                                   848.8      11.8%        1,649.8      23.6%
  Sales and marketing expenses                                        1,365.1      19.0%        1,629.4      23.3%
  Research and development expenses                                     551.9       7.7%          288.0       4.1%
  Special charges                                                       152.7       2.1%          279.0       4.0%
  Contingent warrant compensation                                       511.6       7.1%            -         -
                                                                     -------------------       -------------------

                                                                      8,242.6     114.8%       10,549.0     150.7%
                                                                      ------------------       -------------------

  Operating loss                                                     ( 1066.3)  (  14.8%)    (  3,547.4)  (  50.7%)
  Other expense, net                                                    171.0       2.4%        1,085.4      15.5%
                                                                      ------------------       -------------------

  Net loss before extraordinary item                                 ( 1237.3)   ( 17.2%)    (  4,632.8)  (  66.2%)
  Extraordinary item - forgiveness of debt                                -         -           1,650.3      23.6%
                                                                      ------------------       -------------------
  Net loss                                                          ($1,237.3)   ( 17.2%)    ($ 2,982.5)  (  42.6%)
                                                                      ==================       =================== 
</TABLE> 

Net sales increased by $258,394 (3.7%) from $6,917,866 for the nine months ended
September 30, 1995 to $7,176,260 for the nine months ended September 30, 1996.
The increase in the net sales was due primarily to, (i) sales of the 1996 fall
line in the third quarter of 1996 were strong improvements to the design and
development of the products. This line was the first developed by new
management. In order to focus on the fall 1996 season, RYKA minimized
merchandise purchases for the 1996 Spring season, which was designed prior to
the change in ownership, (ii) the Company sold a limited amount of closeout
inventory in the third quarter of 1996 as compared with the third quarter of
1995, (iii) the athletic footwear industry continued to experience sluggishness
and the volume of off-price product in the marketplace remained high and, (iv)
the womens' athletic category remained extremely competitive with larger vendors
increasing their market focus on this portion of the market.

Cost of goods sold before inventory write-down to lower of cost or market in
1995 decreased by $1,304,309 (21.3%), from $6,116,792 for the nine months ended
September 30, 1995 to $4,812,483 for the nine months ended September 30, 1996.
The overall gross margin on net sales increased by 28.7 percentage points, from
4.3% in the nine months ended September 30, 1995 to 33.0% for the comparable
period in the current year. The increase in gross profit percentage for the nine
months ended September 30, 1996 as compared to the nine months ended September
30, 1995, was due primarily to (i) the increase in gross profit reflects a more
timely delivery schedule of product to retailers, in the current quarter, thus
eliminating certain incentives which were required to be offered to customers to
accept RYKA products later than their requested delivery date in the third
quarter of 1995, (ii) sales in the quarter ended September 30, 1996 represented
all new products with improved profit margins, (iii) the financial position of
the Company greatly improved in 1996. During the first seven months of 1995,
RYKA was under extreme financial pressures. As a result, the Company was
required to sell substantial amounts of inventory at significant losses or no
profit, in order to raise cash for operations. Gross profit margins for the
third quarter of 1995, although improved greatly from the first six months of
1995, resulted from a smaller percentage of total sales for the nine month
period ended September 30, 1995. In addition, the sales for the third quarter of
1995 were substantially less than the sales for the same period of 1996,
therefore having less impact on the gross profit percentage in 1995 compared to
1996.

                                      -15-
<PAGE>
 
General and administrative expenses decreased by $801,080 (48.6%) from
$1,649,843 for the nine months ended September 30, 1995 to $848,763 for the nine
months ended September 30, 1996. The decrease over the prior year was due
primarily to (i) decrease in 1996 in the Company's provision for estimated bad
debt expenses of approximately $392,000, (ii) decrease in factoring commissions
of approximately $58,000, (iii) additional financial consulting and accounting
services in 1995 of approximately $200,000 incurred in completing the financial
statements and in filing the quarterly report on 10-Q after the resignation of
the Company's Chief Financial Officer and, (iv) other general and administrative
expenses in the nine months ended September 30, 1995 which included
approximately $40,000 in legal fees incurred in connection with a failed attempt
to raise capital from investors and approximately $33,000 in trademark and
licensing fees incurred in connection with the dissolution of RYKA GmbH in
Germany which formerly held the trademark of RYKA.

Sales and marketing expenses decreased by $264,331 (16.2%) from $1,629,385 for
the nine months ended September 30, 1995 to $1,365,054 for the nine months ended
September 30, 1996. The decrease over the prior year was primarily due to (i) a
decrease in advertising of approximately $64,000 (31.4%) from approximately
$204,000 for the nine months ended September 30, 1995 to approximately $140,000
for the nine months ended September 30, 1996; (ii) an increase in trade show
expenses of approximately $200,000, related to RYKA's attendance at the NSGA
trade show in July 1996; a show not attended by RYKA in 1995, as well as an
increase in the expenditures at the Supershow in February as compared to 1995,
(iii) a decrease in promotion expenditures of approximately $192,000 (89.2%)
from approximately $402,000 for the nine months ended September 30, 1995 to
approximately $210,000 for the nine months ended September 30, 1996; (iv) a
decrease in payroll and payroll related expenses of approximately $57,000 and,
(v) a decrease in international point of purchase promotional items of $57,000.

Research and development expenses increased by $263,947 (91.6%) from $288,018
for the nine months ended September 30, 1995 to $551,965 for the nine months
ended September 30, 1996. The increase reflects a continuing concerted effort by
management to further develop and improve the Company's product line. The
increase is comprised of approximately $166,000 in salary and consulting fees.
During the nine months ended September 30, 1996 the Company engaged the services
of several outside design groups to design and develop the fall 1996 and spring
1997 lines.

Special charges decreased by approximately $126,000 from $279,012 in the quarter
ended September 30, 1995 to $152,715 in the quarter ended September 30, 1996.
Special charges in the quarter ended September 30, 1995 related to the
transaction with MR and the closing of RYKA's Massachusetts facility and the
relocation of the Company's operations to King of Prussia, Pennsylvania. In the
quarter ended September 30, 1996 the special charges result from the termination
of the Partners Share Success Equity Incentive Program.

Contingent warrant compensation as noted in Management's Discussion and Analysis
of financial condition and results of operations for the three months ended
September 30, 1996 as compared to the three months ended during the during the
quarter ended September 30, 1996, MR vested in an additional 1,821,600 warrants.
Cumulatively for the nine months ended September 30, 1996 the following is an
analysis of contingent warrant expense related to these warrants.

<TABLE> 
<CAPTION> 
                                                               Shares             MR Shares          Amount of
                                                               Outstanding        Vesting            Contingent
                                             Shares            In excess of       Quarter/           Warrant 
Period / Quarter Ended                       Outstanding       50,000,000          Period            Expense
----------------------                       -----------       ----------         ---------          ----------
<S>                                          <C>               <C>                <C>                <C>  
March 31, 1996                                46,615,326               N/A                -                   -

June 30, 1996                                 50,775,326           775,326          310,130           $  74,431

July 31, 1006*                                55,329,326         4,554,000        1,821,600           $ 437,184
                                                                                                      ----------

                                                                                                      $  511,615
                                                                                                      ==========
</TABLE> 
 
Other expenses, net decreased by $914,423 (84.2%) from $1,085,392 for the nine
months ended September 30, 1995 to $170,969 for the nine months ended September
30, 1996. The decrease is primarily attributed to the write-off of costs
associated with the termination of the merger with L.A. Gear, Inc. of $783,289
and a decrease in interest expense of $177,675 (55.7%) from $319,213 for the
nine months ended September 30, 1995 to $141,539 for the nine months ended
September 30, 1996. The decrease in interest expense is a result of additional
capital funds infused into the Company on July 31, 1995, as well as in the
second quarter of 1996 as a result of proceeds received to date for the 1996
Private Placement. In connection with the financing transaction with MR, the
Company established a line of credit with interest at prime plus one percent.
Previously, the agreement with Pro-Specs provided for inventory financing at
effective interest rates in excess of 20%.

Extraordinary item of approximately $1,650,000 related to gain on settlements
with both secured and unsecured creditors related to the Transaction with MR.

                                    - 16 -
<PAGE>
 

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) $2,000,000
letter of credit facility from KPR, (iii) a $4,000,000 revolving credit facility
with a bank and, (iv) a $1,000,000 equity investment through the Private
Placement of Common Stock with certain investors. Prior to consummating the
financing with MR, 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 consummating the financing with MR, 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 indebtedness
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 provided for rates which were more
competitive than those the Company had previously been able to obtain. Interest
on the bank loans was at the prime rate plus 1% and letters of credit, prior to
draw, were provided at a rate of 1/4% 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 financing with MR resulted in an increase in working capital of
approximately $3,600,000, so that the Company's working capital deficiency of
approximately $2,300,000 was converted to positive working capital of
approximately $1,300,000 at July 31, 1995. As of September 30, 1996 the
Company's working capital was approximately $2,500,000 and will not be
sufficient to meet management's objectives in 1996. The increase in working
capital, in large part, relates to the receipt of $2,500,000 in proceeds from
the 1996 Private Placement which occurred between May and August of 1996. Had
such proceeds not been received, working capital would have been virtually non
existent at September 30, 1996 as a result of continuing losses between August,
1995 and September, 1996.

As of June 30, 1996 and as stated previously, the Company was in default of
certain financial covenants required by the loan agreement with its former
lending bank and had entered into a forbearance agreement through October 15,
1996 which required, among other things, the immediate reduction of the credit
facility with the bank from $4,000,000 to $2,500,000 and the further reduction,
in stages during September 1996, to $1,500,000.

On August 15, 1996, the Company completed closing on a new credit facility with
a new lender which replaced the credit facility with the bank and KPR which was
established on July 31, 1995. The new credit facility has an initial term of one
year and increases the amount that RYKA can borrow to $4,500,000 based upon
certain advance ratios with interest at prime plus 0.25%.

Concurrently with RYKA, KPR closed a new credit facility with the same 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 has satisfied 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
including, but not limited to, warehousing and office rental, KPR's ability 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 September 26, 1996, the Company entered into the Reorganization
Agreement with the KPR Companies and Michael Rubin, Chairman and Chief Executive
Officer of RYKA and, as of the date hereof, the Company has announced that the
Reorganization has been postponed until mid-1997. In order for the
Reorganization to become effective a majority vote of the stockholders of RYKA
and consent by the Company's new bank is required.

Even with its new credit facility and the additional equity raised through
August 14, 1996, RYKA may be required to raise additional equity and/or
subordinated debt within the next year to support RYKA's operations. RYKA must
obtain 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 RYKA will be successful in raising
additional capital to support future operations. Further, there can be no
assurance, assuming RYKA successfully raises additional funds and is able to use
its new credit facility that RYKA will achieve profitability or a positive cash
flow even with sufficient capital resources.

                                      -17-
<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

10.1     Amended and Restated Agreement and Plan of Reorganization, dated
         September 26, 1996, by and among RYKA, the KPR Companies and Michael G.
         Rubin.

11       Statement regarding computation of per share earnings.

                                      -18-
<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

                                    - 19 -
<PAGE>
 
                           RYKA Inc. and Subsidiary
                                 EXHIBIT INDEX

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





10.1              Amended and Restated Agreement and Plan of
                  Reorganization dated September 26, 1996, by and
                  among RYKA, the KPR Companies and
                  Michael G. Rubin.


11                Statement Regarding Computation of
                  Per Share Earnings


                                     -20-