<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 JUNE 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 August 14, 1996:

Common Stock $.01 par value                                   55,615,326
---------------------------                              --------------------
     (Title of each class)                               (Number of Shares)

 
--------------------------------------------------------------------------------
<PAGE>
 
                            RYKA Inc. and Subsidiary
            Form 10-Q for the Three-Month Period Ended June 30, 1996
                               Table of Contents
================================================================================

<TABLE> 
<CAPTION> 
                                                                                   Page
                                                                                   ----
<S>                                                                               <C> 
PART I - FINANCIAL INFORMATION
 
  Item 1.   Financial Statements:
            Condensed Consolidated Balance 
                Sheets as of June 30, 1996 and December 31, 1995                     3
            Condensed Consolidated Statements of Operations for the
                three-month and six-month periods ended June 30, 1996
                and June 30, 1995                                                    4
            Condensed Consolidated Statements of Cash Flows for the
                six-month periods ended June 30, 1996 and June 30, 1995              5
            Notes to Condensed Consolidated Financial Statements                  6 to 10
 
  Item 2.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                            11 to 17
<CAPTION>  

PART II - OTHER INFORMATION
  <S>                                                                               <C>  
  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

<TABLE> 
<CAPTION> 
                           RYKA Inc. and Subsidiary
                     Condensed Consolidated Balance Sheets
--------------------------------------------------------------------------------
                                                       June 30,    December 31,
                                                         1996          1995
                                                     ------------  ------------
                                                     (Unaudited)
<S>                                                  <C>           <C>
                                    ASSETS          
Current assets:                                     
  Cash                                               $        689  $     77,509
  Accounts receivable, net of allowance for         
   doubtful accounts of $69,921 in 1996 and         
   $57,573 in 1995                                      1,001,510       533,490
  Inventory                                               772,121       678,319
  Prepaid expenses and other current assets               246,531       118,294
  Note receivable, officer                                 20,000          -
                                                     ------------  ------------ 
                                                    
        Total current assets                            2,040,851     1,407,612
                                                    
Property and equipment, at cost, net of accumulated 
  depreciation                                            180,743       195,083
                                                    
Deferred registration costs                               112,500          -
                                                    
Other assets                                               17,202           500
                                                     ------------  ------------
                                                    
        Total assets                                 $  2,351,296  $  1,603,195
                                                     ============  ============

<CAPTION> 
               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
 
<S>                                                  <C>           <C>    
Current liabilities:
  Note payable, bank                                 $    250,000  $       -
  Accounts payable and accrued expenses                   294,783       437,324
  Due to customer                                         413,290       413,290
  Due to affiliate                                        311,961         2,043
                                                     ------------  ------------
                                                    
        Total current liabilities                       1,270,034       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, 70,000,000
  shares authorized; 50,775,326 and 46,135,326 shares
  issued and outstanding at June 30, 1996 and
  December 31, 1995, respectively                         507,753       461,353
 Additional paid-in capital                            18,339,259    17,051,229
 Accumulated deficit                                  (18,717,190)   17,883,484)
                                                     ------------  ------------
        Total stockholders' equity (deficiency)           129,822      (370,902)
                                                     ------------  ------------
 
        Total liabilities and stockholders' 
         equity (deficiency)                         $  2,351,296  $  1,603,195
                                                     ============  ============
</TABLE>

Please refer to the notes to condensed consolidated financial statements.

                                      -3-
<PAGE>
 
<TABLE> 
<CAPTION> 

                                RYKA Inc. and Subsidiary
                     Condensed Consolidated Statements of Operations
---------------------------------------------------------------------------------------------
 
                                              Three Months Ended         Six Months Ended
                                                    June 30,                  June 30,
                                              1996         1995          1996         1995
                                          ------------------------   ------------------------
                                                 (Unaudited)             (Unaudited)
<S>                                       <C>          <C>           <C>          <C>
Net sales                                 $ 1,217,265  $ 1,483,613   $ 2,953,619  $ 5,618,263
                                                                   
Other revenues                                    -            672           -         29,935
                                          -----------  -----------   -----------  ----------- 
                                                                   
                                            1,217,265    1,484,285     2,953,619    5,648,198
                                          -----------  -----------   -----------  ----------- 
Costs and expenses:                                                
 Cost of goods sold                           925,337    1,739,908     2,095,777    5,189,684
 Inventory write-down to lower of cost                                           
    or market                                     -         60,000           -        586,000
 General and administrative expenses          333,582      687,167       488,933    1,296,105
 Sales and marketing expenses                 230,016      598,233       633,889    1,394,147
 Research and development expenses            205,435      135,863       413,842      249,436
 Contingent warrant compensation               74,430          -          74,430          -
                                           ----------   ----------    ----------   ---------- 
                                                                   
                                            1,768,800    3,221,171     3,706,871    8,715,372
                                           ----------   ----------    ----------   ---------- 
                                                                   
Operating loss                            (   551,535) ( 1,736,886)  (   753,252) ( 3,067,174)
                                           ----------   ----------    ----------   ---------- 

Other (income) expense:
 Interest expense                              53,779       73,946        82,533      301,725
 Interest income                          (     1,717) (       958)       (2,079)      (2,157)
 Merger related costs                             -         99,828           -        783,289
                                           ----------   ----------    ----------   ---------- 
                                                                   
                                               52,062      172,816        80,454    1,082,857
                                           ----------   ----------    ----------   ----------  
                                                                   
Net loss                                   ($ 603,597)($ 1,909,702)   ($ 833,706)($ 4,150,031)
                                           ==========   ==========    ==========   ==========
Net loss per share                         ($     .01)($       .07)   ($     .02)($       .16)
                                           ==========   ==========    ==========   ==========
Weighted average common and common                                 
 equivalent shares outstanding             46,934,007   26,474,959    46,576,864   26,474,673
                                           ==========   ==========    ==========   ==========
</TABLE>



Please refer to the notes to condensed consolidated financial statements.


                                      -4-
<PAGE>
 
<TABLE> 
<CAPTION> 

                            RYKA Inc. and Subsidiary
                Condensed Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------
 
                                                        Six Months Ended
                                                            June 30,
                                                     1996              1995
                                                   -------------------------- 
                                                           (Unaudited)
<S>                                              <C>              <C> 
Cash flows from operating activities:
  Net loss                                       ($ 833,706)      ($4,150,031)
  Adjustments to reconcile net loss to cash
   provided by (used in) operating activities:
    Depreciation and amortization                    25,362            24,376
    Contingent warrant compensation                  74,430               -
    Provision for losses on accounts receivable      12,348           367,030
    Capital contributed as services                  50,000               -
    Reserve for inventory writedown to lower of 
     cost or market                                     -             586,000
    Changes in operating assets and liabilities:
     Accounts receivable                         (  480,368)        1,913,245
     Inventory                                   (   93,802)        2,879,745
     Prepaid expenses and other current assets   (  128,237)           92,862
     Accounts payable and accrued expenses       (  142,541)          734,969
     Due to affiliate                               309,918               -
     Payable to factories                               -         (   390,113)
                                                  ---------         --------- 
     Net cash provided by (used in) operating 
      activities                                 (1,206,596)        2,058,083
                                                  ---------         ---------  
Cash flows from investing activities:
  Acquisitions of equipment                     (    11,022)      (    17,507)
  Security deposits                             (        35)           15,753
  Note receivable, officer                      (    20,000)              -
  Licensing fees                                (    16,667)              -
                                                  ---------         --------- 
 
     Net cash (used in) investing activities    (    47,724)      (     1,754)
                                                  ---------         --------- 
 
Cash flows from financing activities:
  Proceeds from note payable, bank                  250,000               -
  Deferred registration costs                   (   112,500)              -
  Proceeds from issuance of common stock          1,040,000
  Proceeds from exercise of warrants and 
   stock options                                        -               7,123
  Principal payments under payable to lender, 
   net                                                  -            (978,730)
  Payments to factor, net                               -         ( 1,254,035)
                                                  ---------         --------- 
 
     Net cash provided by (used in) financing 
      activities                                  1,177,500       ( 2,225,642)
                                                  ---------         --------- 
 
Net decrease in cash                            (    76,820)      (   169,313)
 
Cash, beginning of period                            77,509           296,226
                                                  ---------         --------- 
 
Cash, end of period                             $       689       $   126,913
                                                  =========         ========= 
</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 June 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 June 30, 1996 of $18,717,190.  The
Company was involved in several significant transactions during 1995, which
included the sale of securities, a change in key management, the establishment
of a new loan and security agreement with a bank, the settlement of debts with
secured and unsecured creditors and moving the Company's principal offices.
Without the occurrence of these transactions or other strategic arrangements,
there was substantial doubt that the Company would have been able to remain in
business through the third quarter of 1995.  Having accomplished such
transactions, management plans to develop and acquire new merchandise, market
and promote the Company's product and expand the workforce in support of the
Company's current plans.   To accomplish these goals, the Company will have to
incur substantial expenditures and expects to incur continuing operating losses
during 1996.  The Company's working capital at June 30, 1996 will not be
sufficient to meet management's objectives in 1996.

The Company was in violation of certain financial covenants required by the loan
and security agreement with the Company's principal lender at June 30, 1996, and
has entered into a forebearance agreement through October 15, 1996 which
requires, among other things, the immediate reduction of the present 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 (See Note B).  Accordingly,
unless a new arrangement is negotiated with the lender, the availability of
these funds is uncertain.  The Company's goals were to be funded, in part,
through the financing facility provided by the Company's principal lender.
Management is currently in discussions with another lender to pursue other
financing on terms acceptable to the Company.  Based on current discussions with
another lender the Company believes it possible for alternate financing to be
obtained although 1) no definitive agreement has been reached to date,  2)
additional equity or subordinated debt funding was required as a prerequisite to
such lender financing and $2,500,000 has been raised by the Company through July
14, 1996 as part of an equity Private Placement which commenced in May 1996 (the
"1996 Private Placement"), and 3) although the equity requirement has been met,
there is no assurance that the new loan will be finalized.  In connection with
the foregoing, and the Company's requirements from time to time, management may
sell additional equity securities in order to generate sufficient capital
resources to assure continuation of the Company's operations.  Management
recognizes that the Company must obtain these or similar additional resources or
consider modifications to its operating plans including reductions in operating
costs to enable it to continue operations.  However, no assurance can be given
that the Company will be successful in raising sufficient additional capital to
support future operations.  Further, there can be no assurance, assuming the
Company successfully raises additional funds and is able to utilize its existing
credit facility or establish a new facility that the Company will achieve
profitability or a positive cash flow.

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

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


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

The Company has restated certain revenues and expenses related to the
recognition of revenue and related expenses for the first 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 three and six months ended June
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
     
The Company has a $4,000,000 asset based revolving credit facility with its
principal lender.  The facility makes funds available to the Company based upon
a percentage of inventory and accounts receivable, as defined in the agreement.
Interest on the amounts outstanding is paid monthly at the rate of prime plus
one percent and is due on demand.  As of June 30, 1996, the Company owed
$250,000 under this facility.  Interest expense in connection with this facility
was $38,687 for the six-months ended June 30, 1996.

The loan and security agreement with the Company's principal lender requires the
Company to observe certain covenants and maintain certain minimum levels of
tangible net worth and leverage.  Further, there is a requirement for additional
subordinated loans or equity infusions in the event that losses occur subsequent
to July 31, 1995 which would cause capital funds to decrease below $2,000,000,
as defined.  Such $2,000,000 minimum required the infusion of additional equity
or subordinated loans of approximately $1,000,000 by June 30, 1996, and, as
described below, such infusion had not been made as of that date.  Subsequently,
as a result of the 1996 Private Placement proceeds received between July 1, 1996
and August 14, 1996 an additional $1,460,000 of capital has been raised.

At June 30, 1996, the Company was in default of certain provisions of the loan
and security agreement requiring certain credit insurance to be obtained within
prescribed timeframes, losses incurred by the Company subsequent to July 31,
1995 to be funded by MR Acquisitions L.L.C. ("MR") making subordinated loans or
capital infusions, or causing the same to occur (the "Funding Requirement"), and
the covenants requiring establishment and maintenance of certain minimum
tangible net worth and leverage.

The principal lender has waived the defaults, extended the time for the credit
insurance to be obtained and postponed the Funding Requirement, minimum tangible
net worth and leverage requirements through July 15, 1996 and subsequently as a
result of continuing defaults entered into a forbearance agreement through
October 15, 1996 which requires, among other things, the immediate reduction of
the present 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, as well as an
increase in the interest rate from prime to prime plus one half percent.

    
NOTE D - RELATED PARTY TRANSACTIONS
     
The Company conducts its operations and warehouses inventory in a facility
subleased from an affiliate of MR.  Terms of the sublease require rental
payments of approximately $4,000 per month for use of these facilities and the
warehousing through July 31, 1997.  Any other cost related to the use of the
joint facility or for other services provided by MR or its affiliates will be
charged to the Company on an arms length basis and will be subject to approval
by a special disinterested committee of the Board of Directors.

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

MR, through KPR, 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 June 30, 1996,
letters of credit in the amount of $792,204 were issued by KPR on behalf of the
Company.  Merchandise inventory received under the terms of the facility is
recorded in the financial statements upon transfer of title to the Company
which, generally, occurs upon payment to KPR.

Included in the statement of operations are sales of $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
six-months ended June 30, 1996, estimated at $50,000, was recorded as
compensation expense and included as part of general and administrative expenses
in the statement of operations and as a contribution to capital and included as
additional paid-in capital in the balance sheet.

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.


                                      -7-
<PAGE>
     
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
     
A summary of all related party transactions with MR or its affiliates for the
six months ended June 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                 $1,834,147                  $297,144

Sale of Merchandise              Net Sales                    151,299

Rent                             General and
                                 Administrative
                                 Expense                       23,750                     3,958

Interest on
Subordinated Debt                Interest Expense              39,242                     6,473

Interest on
Letters of Credit
Advances                         Interest Expense               1,779

Temporary Advances                                            149,475                     4,386

Services Contributed             General and
to Capital                       Administration
                                 Expense and
                                 Additional Paid-
                                 in Capital                    50,000                                         $50,000
                                                                                    ----------                 ------

                                                                                       $311,961               $50,000
                                                                                        =======                ======
</TABLE>      
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 June 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.

                                      -8-

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

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 during the second and third quarter of
1996. The result of the 1996 Private Placement is as follows:

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

Stock Options:

The Company has issued options to certain employees to purchase shares of the
Company's Common Stock at prices which approximated fair market value at the
date of grant.  The options vest at various times over periods ranging up to
four years and generally must be exercised within 10 years from the date of
grant.  A summary of such options granted in the first six months of 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                                                                                          
six months ended                                                                                        
June 30, 1996               -     13,000   10,500    3,500   10,500   37,500    300,000   20,000    25,000       $.20 - $ .47
                                                                                                        
Cancelled during                                                                                        
the six months ended                                                                                    
June 30, 1996               -        -        -        -        -        -        50,000       -       -         $        .47
                        -----------------------------------------------------------------------------------------------------
                                                                                                        
Outstanding at                                                                                          
June 30, 1996           416,321  264,746  140,351  160,500  849,060  899,000   1,450,000  20,000    25,000                -
                        =====================================================================================================
</TABLE>

                                      -9-
<PAGE>
     
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 managment 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.

Included in deferred registration cost at June 30, 1996 are $112,500 in
professional fees incurred in conjunction with the contemplated registration
statement.  All costs will be charged to sales and marketing expense during the
term of the program.

As a result of the proposed merger transaction, as discussed in Note F, the
Company decided to postpone, and may ultimately terminate the offering in
connection with the "Partners Share Success Program".  If this offering is not
consummated, the deferred registration cost will be charged to expense.

    
NOTE G - SUBSEQUENT EVENTS
     
On July 8, 1996, the Company received a merger proposal from KPR Sports
International, Inc. and certain affiliated companies ("KPR") pursuant to which
KPR would be merged with RYKA.  KPR and its affiliates are wholly - owned by the
Chairman and Chief Executive Officer of RYKA.  The proposal would require RYKA
to issue approximately 140,000,000 shares of common stock to the shareholders of
KPR, in addition to any shares they currently hold or have rights to through
existing warrants.  RYKA would be the surving Company in the merger.  The merger
proposal also provides that RYKA would effect a 1 for 20 reverse stock split.

The consummation of the contemplated merger agreement, including the
authorization of additional shares of RYKA's Common Stock and the reverse stock
split, is subject to approval by RYKA's Board of Directors and Shareholders.

                                      -10-
<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 $834,000 during the first six months of 1996.
In addition, the Company had an accumulated deficit of approximately $18,717,190
at June 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 financing arrangements.  During 1995, the Company
reviewed several financing proposals, and on July 31, 1995 the Company
consummated the financing arrangement with MR Acquisitions L.L.C. ("MR") to
enable the Company to continue in existence.  Without this financing
arrangement, management believed there was substantial doubt that the Company
would be able to remain in business.

The financing arrangement (the "Agreement") with MR provided the Company with
cash proceeds from the sale of equity and subordinated debt and the ability to
obtain funds and letters of credit through new financing facilities.  As part of
the financing, the Company negotiated substantial debt forgiveness with both
secured and unsecured creditors and established a new management team to operate
the restructured Company.  Upon closing of the transaction with MR, the Company
had capital funds comprised of a net worth and subordinated debt in excess of
$1,500,000 as compared to an equity deficiency over $2,000,000 at June 30, 1995.
Such funds have diminished as a result of continuing operating losses and at
June 30, 1996, prior to giving effect to the $1,040,000 proceeds received
through June 30, 1996 from a $2,500,000 equity Private Placement which commenced
in May 1996 (the "1996 Private Placement"), would have been $65,575. Actual
capital funds at June 30, 1996, considering the $1,040,000 of proceeds from the
1996 Private Placement, were approximately $1,100,000.

During the first half of 1995 and until the financing with MR was consummated,
staff reductions occurred on both a voluntary and involuntary basis and
temporary employees were required to handle daily operations.  Sales efforts
were limited for a variety of reasons, including the inability to obtain product
from the Company's overseas production sources. Once the financing with MR was
consummated, new management began to reposition the Company by, among other
things, relocating the Company from Norwood, Massachusetts to King of Prussia,
Pennsylvania, terminating remaining employees in the Massachusetts location,
hiring and training new employees in key management positions, including a new
President and a new Chief Financial Officer, filling of other necessary
positions within the Company, and beginning to develop new products and build or
rebuild customer and supplier relationships.  While management believes that
these activities will have a long-term beneficial impact, they had significant
negative impact on the Company's sales and operations.   To accomplish its
goals, to develop and acquire new merchandise, market and promote the Company's
product and expand the workforce in support of the Company's current plans, the
Company will have to incur substantial expenditures and expects to incur
continuing operating losses during 1996.
   
The Company's working capital at June 30, 1996 will not be sufficient to meet
management's objectives in 1996.  Further, the Company has been in default of
certain provisions of it's new financing facilities and has entered into a
forbearance agreement through October 15, 1996 which requires among other
things, the immediate reduction of the present 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.  Accordingly, the Company will be required, in
the near future, to obtain additional financing from its current lender or from
a new lender and/or raise additional funds through the sale of equity or debt.
To this end, the Company, as described above, has received an additional
$2,500,000 in proceeds from the 1996 Private Placement through August 14, 1996
of which $1,040,000 was received by June 30, 1996.  In addition, the Company has
continued its negotiations with a new lender and anticipates the closing of a
new credit facility during August 1996, although there can be no assurance that
such closing will occur.  See "Liquidity and Capital Resources" and Notes A and
C to the Company's Condensed Consolidated Financial Statements.
    
                                      -11-
<PAGE>
 

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

General Overview - continued

As described in Note F to the Company's condensed consolidated financial
statements, on July 8, 1996 the Company received a merger proposal from KPR
Sports International, Inc. and certain affiliated companies ("KPR") pursuant to
which KPR would be merged with RYKA.  KPR is a related party which is wholly
owned by the Chairman and Chief Executive Officer of RYKA and KPR is
substantially larger than RYKA.  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.

Results of Operations

Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 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 JUNE 30,
                                   -----------------------------------

                                         1996               1995
                                   -----------------    --------------  
                                      (Unaudited)         (Unaudited)
<S>                              <C>         <C>        <C>        <C>

Net sales                          $ 1,217     100.0%   $ 1,483  100.0%
 
Other revenues                         -                      1
                                   -------              -------
 
                                     1,217                1,484
                                   --------             -------
 
Costs and expenses:
Cost of goods sold (includes
 inventory writedown to
    lower of cost or market of
     $60,000 in 1995)                  925      76.0%     1,800  121.3%
General and administrative                                
 expenses                              334      27.4%       687   46.3%
Sales and marketing expenses           230      18.9%       598   40.3%
Research and development                                  
 expenses                              206      16.9%       136    9.2%
Contingent warrant                                       
 compensation                           74       6.1%        -      -
                                   -----------------    --------------  
 
                                     1,769     145.3%     3,221  217.1%
                                   =================    ==============  
 
Operating loss                    (    552)   ( 45.3%)   (1,737)(117.1%)
 
Other expense, net                      52       4.3%       173   11.6%
                                   =================    ==============  
 
Net loss                          ($   604)   ( 49.6%)  ($1,910)(128.7%)
                                   =================    ==============  
</TABLE>

Net sales decreased by $266,348 (18.0%) from $1,483,613 for the three-months
ended June 30, 1995 to $1,217,265 for the three months ended June 30, 1996.  The
decrease in net sales was due primarily to several factors as follows:

 .  Managements decision to commit the Company's resources towards developing a
   more performance based product line with updated cosmetics to better meet the
   needs of the fall 1996 marketplace. In order to focus on the fall 1996 season
   the Company minimized merchandise purchases for the spring 1996 season. The
   Company purchased a limited quantity of merchandise for the spring season
   which was designed by a third party prior to the agreement with MR. Net sales
   for the three months ended June 30, 1996 represented shipments of this
   merchandise to customers and closeout orders for the spring 1996 season.

 .  The athletic footwear industry continues to experience sluggishness and the
   volume of off-price product has continued at high levels.

                                      -12-
<PAGE>
 
Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 30,
-------------------------------------------------------------------------------
1995 - Continued
----------------

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

 .  As a result of a critical cash shortage during the second quarter of 1995;
   the Company was forced to continue to liquidate a large quantity of inventory
   at low profit margins, or even below cost, in an effort to raise cash to meet
   operating expenses, while the Company completed negotiations for a new
   financing agreement with MR Acquisitions.

Cost of goods sold decreased by $814,571 (46.8%) from $1,739,908 for the three
months ended June 30, 1995 to $925,337 for the three months ended June 30, 1996.
The overall gross profit expressed as a percentage of net sales increased from
(21.3%) for the quarter ended June 30, 1995 to 24.0% for the quarter ended June
30, 1996.

The gross profit percentage of 24.0% for the quarter ended June 30, 1996 was a
result of "fill-in" and "close-out" orders of the 1996 spring line.  The
increase in gross profit percentage for the three months ended June 30, 1996 as
compared to the three months ended June 30, 1995 was due primarily to the
Company's improved financial position.  During the second quarter ended June 30,
1995 the Company was under extreme financial pressures.  As a result of these
pressures the Company was required to sell substantial amounts of inventory at
significant losses or not profit in order to raise cash for operations.  This
adversely affected the gross profit for the quarter ended June 30, 1995.

General and administrative expenses decreased by $353,585 (51.5%) from $687,167
for the quarter ended June 30, 1995 to $333,582 for the quarter ended June 30,
1996.  The decrease reflects a concerted effort to restructure the Company in a
cost efficient manner with reduced overhead expenses.  This decrease was due
primarily to:

 .  The elimination of approximately $320,000 of credit and collection expenses
   incurred in the quarter ended June 30, 1995 of which approximately $13,000
   related to costs associated with collection fees and commissions with a
   previously existing factoring agreement with Heller Financial and
   approximately $288,000 related to bad debt expense.

 .  Additional legal, consulting and auditing costs aggregating approximately
   $34,000 in the quarter ended June 30, 1995, were incurred in completing the
   December 31, 1994 financial statements and in filing the Annual Report and
   Form 10-K.

 .  Other general and administrative expenses in the quarter ended June 30, 1995
   included approximately $32,000 in trademark and license fees incurred in
   connection with the dissolution of RYKA GmbH in Germany.


Sales and marketing expenses decreased by $368,217 (61.6%) from $598,233 in the
quarter ended June 30, 1995 to $230,016 in the quarter ended June 30, 1996. This
decrease was due primarily to:

 .  Reduction in promotion expense of approximately $70,000 due to a reduction of
   point of purchase and promotional materials supplied to customers.

 .  Decrease in trade advertising of approximately $118,000 from $156,000 in the
   quarter ended June 30, 1995 to $38,000 in the quarter ended June 30, 1996.
   The Company has planned an extensive consumer ad campaign for the third
   quarter in conjunction with the introduction of the 1996 fall line.

 .  Decrease in salary and related expenses of approximately $37,000 (28.0%) from
   $129,000 in the quarter ended June 30, 1995 to $92,000 in the quarter ended
   June 30, 1996.

 .  Decrease in trade show related expenses by $36,000 (88%) from approximately
   $41,000 in the quarters ended June 30, 1995 to approximately $5,000 for the
   quarter ended June 30, 1996, as a result of the restructuring of the Company
   in 1995.

                                      -13-
<PAGE>
 
Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 30,
-------------------------------------------------------------------------------
1995 - Continued
----------------

Research and development expenses increased $69,572 (51.2%) from $135,863 in the
quarter ended June 30, 1995 to $205,435 in the quarter ended June 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:

 .  An increase of approximately $51,000 in salaries and consulting fees. During
   the quarter ended June 30, 1996, at a cost of approximately $39,000, the
   Company engaged the services of two outside design groups to design and
   develop the fall 1996 line. In addition, the former VP of Sourcing and
   Production and one other person were retained on a consulting basis to
   oversee the manufacturing process.

Contingent warrant compensation of $74,430 relates to a non-cash charge for the
vesting of 310,310 Contingent Stock Purchase Warrants ("Contingent Warrants")
issued to MR Acquisition, L.L.C. ("MR").  In July 1995 in connection with the
Securities Purchase Agreement (the "Agreement") between the Company and MR, 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 June 30, 1996, 775,326 of such shares were issued thereby vesting MR's
right to purchase an additional 310,310 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
$74,430 related to this vesting.

Other expenses, net decreased $120,754 (69.9%) from $172,816 in the quarter
ended June 30, 1995 to $52,062 in the quarter ended June 30, 1996.  The decrease
is primarily due to:

 .  Costs of approximately $100,000 associated with the failed merger with L.A.
   Gear, Inc. in the second quarter of 1995.

 .  A decrease in interest expense of approximately $20,000 (27.3%) from
   approximately $74,000 for the three months ended June 30, 1995 to
   approximately $54,000 for the quarter ended June 30, 1996. This reduction in
   interest expense was due in part to the proceeds of the 1996 Private
   Placement beginning in May 1996. As of June 30, 1996, the Company received
   proceeds from this Private Placement of $1,040,000 which reduced the
   Company's borrowing with the bank.

                                      -14-
<PAGE>
 

Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 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)                           SIX MONTHS ENDED JUNE 30,
                                   -------------------------------------------
 
                                            1996                 1995
                                   -------------------  ----------------------
                                   (Unaudited)            (Unaudited)
<S>                                <C>        <C>       <C>        <C>
 
Net sales                           $ 2,954     100.0%  $  5,618        100.0%
 
Other revenues                         -                      30
                                    -------              -------
 
                                      2,954     100.0%     5,648        100.0%
                                    -------             --------
Costs and expenses:
Cost of goods sold (includes
 inventory writedown to
    lower of cost or market of
     $586,000 in 1995)                2,096      70.9%     5,776        102.8%
General and administrative
 expenses                               489      16.6%     1,296         23.1%
Sales and marketing expenses            634      21.5%     1,394         24.8%
Research and development expenses       414      14.0%       249          4.4%
 Contingent warrant compensation         74       2.5%       -             -
                                    -----------------   ---------------------
 
                                      3,707     125.5%     8,715        155.1%
                                    -----------------   ---------------------
 
Operating (loss)                    (   753)     25.5%    (3,067)      ( 54.6%)
 
Other expense, net                       81       2.7%     1,083         19.4%
                                    -----------------   ---------------------
 
Net (loss)                           ($ 834)   ( 28.2%)  ($4,150)      ( 73.9%)
                                    =================   =====================
 
</TABLE>

Net sales decreased by $2,664,644 (47.4%) from $5,618,263 for the six months
ended June 30, 1995 to $2,953,619 for the six months ended June 30, 1996.  The
decrease in the net sales was due primarily to several factors as follows:

 .  As previously discussed, management's decision to commit the Company's
   resources towards developing a more performance based product line with
   updated cosmetics to better meet the needs of the fall 1996 marketplace. In
   order to focus on the fall 1996 season the Company minimized merchandise
   purchases for the spring season which was designed by a third party prior to
   the agreement with MR. Net sales for the six months ended June 30, 1996
   represented shipments of this merchandise to customers and closeout orders
   for the spring 1996 season.

 .  The athletic footwear industry is experiencing sluggishness and the volume of
   off price product in the market place has increased so that inventory is
   being sold at lower margins.

 .  The women's athletic footwear category has become increasingly competitive
   with larger vendors increasing their market focus in this area, thereby
   increasing the need to sell inventory for less than normal prices.

Cost of goods sold before inventory write-down to lower of cost or market in
1995 decreased by $3,093,907 (59.6%), from $5,189,684 for the six months ended
June 30, 1995 to $2,095,777 for the six months ended June 30, 1996.  The overall
gross margin on net sales increased by 25 percentage points, from (-2.8%) in the
six months ended June 30, 1995 to 22.2% for the comparable period in the current
year. The increase in gross profit percentage for the six months ended June 30,
1996 as compared to the six months ended June 30, 1995, as previously discussed,
was due primarily to the Company's improved financial position.  During the six
months ended June 30, 1995 the Company was under extreme financial pressures.
As a result of these pressures the Company was required to sell substantial
amounts of inventory at significant losses or no profit in order to raise cash
for operations.  This adversely affected the gross profit for the six months
ended June 30, 1995.

                                      -15-
<PAGE>
 

Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30, 1995
--------------------------------------------------------------------------------
- Continued
-----------

General and administrative expenses decreased by $807,172 (62.3%) from
$1,296,105 for the six months ended June 30, 1995 to $488,933 for the six months
ended June 30, 1996.  The decrease over the prior year was due primarily to:

 .  A decrease in the Company's provision for estimated bad debt expenses of
   approximately $360,000.

 .  A decrease in office expense, bank fees and payroll of approximately $60,000.

 .  Additional financial consulting and accounting services 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 in February, 1995. Other general and administrative
   expenses in the six months ended June 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 $760,258 (54.5%) from $1,394,147 for
the six months ended June 30, 1995 to $633,889 for the six months ended June 30,
1996.  The decrease over the prior year was primarily due to:

 .  Decrease in advertising of approximately $150,000 (73.1%) from approximately
   $205,000 for the six months ended June 30, 1995 to approximately $55,000 for
   the six months ended June 30, 1996. The decrease is due to the Company's plan
   for an extensive consumer ad campaign during the third quarter for the 1996
   fall line.

 .  Decrease in commissions paid to outside sales representatives of $135,574
   (54.2%) from $205,246 for the six months ended June 30, 1995 to $69,672 for
   the six months ended June 30, 1996:

<TABLE>
<CAPTION>
 
                         Six Months Ended
                             June 30,
                        1996         1995
                     -----------------------
<S>                  <C>          <C>
 
      Commissions    $   69,672   $  205,246
                     =======================
 
      Net sales      $2,953,619   $5,618,263
                     =======================
 
      Percentage            2.4%         3.7%
                     =======================
</TABLE>

   The decrease in commissions is the result of a decrease in sales and a
   decrease in the effective commission rate. The decrease in the effective
   commission rate reflects a lower commission rate structure and greater
   proportion of in-house accounts.

 .  Decrease in promotion of approximately $273,000 (89.2%) from approximately
   $306,000 for the six months ended June 30, 1995 to approximately $33,000 for
   the six months ended June 30, 1996.

 .  Decrease in payroll and payroll related expenses of approximately $63,000 for
   the six months ended June 30, 1996 compared with the same period last year.

 .  Decrease in freight out of $33,000 for the six months ended June 30, 1996
   compared with the same period last year.

Research and development expenses increased by $164,406 (65.9%) from $249,436
for the six months ended June 30, 1995 to $413,842 for the six months ended June
30, 1996.

The increase reflects a continuing concerted effort by management to further
develop and improve the Company's product line.  The increase is due to an
increase of approximately $123,000 in salary and consulting fees.  During the
six months ended June 30, 1996 the Company engaged the services of two outside
design groups to design and develop the fall 1996 and spring 1997 lines.

                                      -16-
<PAGE>
 
 
Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30, 1995
--------------------------------------------------------------------------------
- Continued
-----------

Other expenses net, decreased by $1,002,403 (92.6%) from $1,082,857 for the six
months ended June 30, 1995 to $80,454 for the six months ended June 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 $219,192 (72.6%) from $301,725 for the six months ended June
30, 1995 to $82,533 for the six months ended June 30, 1996.  This 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%.

Contingent Warrant Compensation - refer to Management's Discussion and Analysis
for the three months ended June 30, 1996 as compared to the three months ended
June 30, 1995.

Liquidity and Capital Resources

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

As a result of consumating the Agreement with MR on July 31, 1995, the Company
received proceeds from the sale of Common Stock and warrants and proceeds from
subordinated notes payable, aggregating approximately $1,750,000 net of
transaction related costs.  Additionally, secured and unsecured creditors
forgave certain debt resulting in a gain of approximately $1,650,000.  The
Company established a new $4,000,000 asset based revolving credit facility with
a bank and established a $2,000,000 letter of credit facility with an affiliate
of MR.  Both the bank facility and the letter of credit facility provide for
rates which are more competitive in today's lending environment.  Interest on
the bank loans are at the prime rate plus 1% and letters of credit, prior to
draw, are provided at a rate of 1/4% 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 bank credit facility includes certain restrictive covenants which, among
other things, require the Company to maintain certain financial ratios and
capital funds (tangible stockholders' equity and subordinated notes payable) of
$2,000,000 by August 30, 1995.  The bank credit facility also requires MR or its
affiliates to make additional loans or otherwise cause capital funds of the
Company to be maintained at no less than $2,000,000.  These provisions
effectively require the Company to raise capital through equity offerings,
proceeds from the exercise of stock options or warrants or through additional
subordinated borrowings or from MR or its affiliates, to finance any operating
losses.

The Agreement and financing resulted in an increase in working capital of
approximately $3,600,000, so that the Company's working capital deficiency of
approximately $2,300,000 was converted to positive working capital of
approximately $1,300,000 at July 31, 1995.  At June 30, 1996 the Company's
working capital was approximately $800,000 and will not be sufficient to meet
management's objectives in 1996.  The Company does not anticipate making
significant capital expenditures during the foreseeable future.  In addition,
the Company plans the sale of additional equity securities and/or the issuance
of subordinated notes, in order to generate sufficient capital resources to
assure continuation of the Company's operations.  To this end, the Company, as
stated previously, has received an additional $2,500,000 in proceeds from the
1996 Private Placement through August 14, 1996 of which $1,040,000 was received
by June 30, 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 bank and has
entered into a forbearance agreement through October 15, 1996 which requires,
among other things, the immediate reduction of the present 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.  Further, in connection with production of
the Company's Fall 1996 line, additional financing and letters of credit will be
required during the second and third quarters of 1996.  In order for the Company
to fund its operating plans, the Company must either renegotiate the terms of
the financing facility provided by the Company's bank, or arrange a new facility
suitable to the Company's needs with a different lender.  The Company has
negotiated a credit facility with a new lender to replace its existing facility,
which new facility requires the Company to raise an additional $2,000,000 in
equity as a condition to obtaining such facility.

                                      -17-
<PAGE>
 
Liquidity and Capital Resources - Continued

The Company has raised $2,500,000 in equity to satisfy this requirement through
August 14, 1996.  Although presently, a closing with the new lender is scheduled
during August 1996, there can be no assurance that the closing will occur. In
addition, the Company may be required to raise additional funds to support the
Company's operations through the sale of additional equity securities and/or the
issuance of subordinated notes.  The Company must obtain these or similar
additional resources or consider modifications to its operating plans, including
reductions in operating costs to enable it to continue operations.  However, no
assurance can be given that the Company will be successful in raising additional
capital to support future operations.  Further, there can be no assurance,
assuming the Company successfully raises additional funds and is able to use its
existing credit facility or establish a new facility that the Company will
achieve profitability or a positive cash flow.

                                      -18-
<PAGE>
 
                          PART II - OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS

Not Applicable


ITEM 2.  CHANGES IN SECURITIES

Not Applicable


ITEM 3.  DEFAULTS ON SENIOR SECURITIES

         At June 30, 1996, the Company was in default of certain provisions of
         the Loan and Security Agreement with its principal lender regarding
         certain credit insurance to be established within prescribed timeframe,
         funding requirements for the infusion of subordinated loans or capital
         infusions by MR Acquisitions, L.L.C. ("MR"), or by MR causing the same
         to occur, and the covenant requiring establishment and maintenance of
         certain tangible net worth and leverage. The lender agreed to wait
         until July 15, 1996 to demand payment and subsequently entered into an
         interim forebearance agreement through July 31, 1996 which reduced the
         loan limit to $1,500,000. Further, on July 31, 1996 the Company has
         entered into a forebearance agreement through October 15, 1996 which
         requires, among other things, the immediate reduction to the present
         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.

         At June 30, 1996, the Company was in default of certain provisions of
         the Loan and Security Agreement with KPR Sports International, Inc.
         relating to a tangible net worth and leverage requirement which is
         identical to the covenant of the Company's principal lender. KPR Sports
         International, Inc. has waived the aforementioned default through
         October 15, 1996.



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

Not Applicable


ITEM 5.  OTHER INFORMATION

Not Applicable


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1  Waiver letter dated August 15, 1996 between RYKA Inc. and KPR Sports
      International.

10.2  Waiver letter dated June 29, 1996 between RYKA Inc. and Midlantic Bank.

10.3  Forebearance letter dated July 31, 1996 between RYKA Inc. and Midlantic
      Bank.

10.4  Guaranty and Surety Agreement between Michael G. Rubin and Midlantic Bank

                                      -19-
<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

                                      -20-
<PAGE>
 
                           RYKA Inc. and Subsidiary
                                 EXHIBIT INDEX

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


10                   Waiver letter dated August, 15, 1996
                       between RYKA Inc. and KPR Sports
                       International, Inc.
            
                     Waiver letter dated June 29, 1996
                       between RYKA Inc. and Midlantic Bank.
            
                     Forebearance letter dated July 31, 1996
                       between RYKA Inc. and Midlantic Bank.
            
                     Guaranty and Surety Agreement between
                       Michael G. Rubin and Midlantic Bank.


                                     -21-