K2 INC, 10-K405, 1998-03-30

K2 INC
10-K405, 1998-03-30
SPORTING & ATHLETIC GOODS, NEC

Previous: AMP INC, 10-K, 1998-03-30

Next: APACHE CORP, DEF 14A, 1998-03-30

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

ANNUAL REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 1-4290
------------------------

K2 INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 95-2077125
(State of Incorporation) (I.R.S. Employer
Identification
No.)
4900 SOUTH EASTERN AVENUE
LOS ANGELES, CALIFORNIA 90040
(Address of principal (Zip Code)
executive offices)
</TABLE>

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

Registrant's telephone number, including area code (213) 724-2800

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
TILE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
Common Stock, par value $1 New York Stock Exchange
Pacific Exchange
Series A Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
</TABLE>

Securities registered pursuant to Section 12(g) of the Act: None
------------------------

Indicate by an "X" whether the registrant 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, and has been subject to such filing requirements for
the past 90 days. Yes __X__

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

The aggregate market value of the voting stock of the registrants held by
nonaffiliates was approximately $279,883,800 as of March 16, 1998.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 16, 1998.

Common Stock, par value $1 16,538,321 Shares

Documents Incorporated by Reference

Portions of the proxy statement for the Annual Meeting of Shareholders
to be held May 7, 1998 are incorporated by reference in Part III.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FORM 10-K ANNUAL REPORT
PART I

ITEM 1. BUSINESS:

GENERAL

K2 Inc. ("K2 Inc.," or the "Company") is a premier, branded consumer
products company with a portfolio of diversified sporting goods and other
recreational products. The Company is also a supplier of selected industrial
products. K2 Inc.'s sporting goods and other recreational products include
several name brand lines such as K2 and OLIN alpine skis, K2 snowboards, boots
and bindings, K2 in-line skates, K2 full-suspension mountain bikes, SHAKESPEARE
fishing rods and reels, STEARNS personal flotation devices, rainwear and wet
suits and DANA DESIGN and K2 backpacks and hydration systems. The Company also
produces and markets HILTON corporate casual apparel and K2 ski apparel. K2
Inc.'s industrial products consist primarily of SHAKESPEARE monofilament line
which is used, among others, in weed trimmers, in paper mills and as fishing
line; SHAKESPEARE fiberglass and composite marine antennas, light, transmission
and distribution poles and SIMPLEX coated and laminated products. Founded in
1946, K2 Inc. has grown to nearly $650 million in annual sales through a
combination of internal growth and strategic acquisitions. For segment and
geographic information, see Note 12 of Notes to Consolidated Financial
Statements.

In recent years, the Company has aggressively expanded into several new
sporting goods markets in the United States, Europe and Japan, including in-line
skates, snowboards and full-suspension mountain bikes. Management believes these
newer products have benefited from the market share positions of other Company
products, several of which are now among the top brands in their respective
markets. For example, in the United States, K2 has the #2 market position in
alpine skis, snowboards, boots and bindings, and management believes that
STEARNS has the #1 market position in personal flotation devices and that
Shakespeare's UGLY STIK is the top selling line of moderately-priced fishing
rods.

The Company's common stock was first offered to the public in 1959 and is
currently traded on the New York and Pacific Stock Exchanges (symbol: KTO).

SPORTING GOODS AND OTHER RECREATION PRODUCTS

Net sales for sporting goods and other recreational products were $445.0
million in 1997, $407.3 million in 1996 and $349.4 million in 1995. The
following table lists the Company's principal sporting good products and the
brand names under which they are sold.

<TABLE>
<CAPTION>
PRODUCT BRAND NAME
- ------------------------------------------------------- -------------------------------------
<S> <C>
Alpine Skis............................................ K2, Olin
Snowboards and Accessories............................. K2
In-line Skates......................................... K2
Fishing Rods and Reels................................. Shakespeare, Ugly Stik, Pfleuger
Active Water Sports Products........................... Stearns
Full-Suspension Mountain Bikes......................... K2, Girvin, Noleen
Backpacks and Hydration Systems........................ Dana Design, K2
Imprinted Corporate Casuals............................ Hilton, USA
Ski and Snowboard Apparel.............................. K2
</TABLE>

ALPINE SKIS. The Company sells its alpine skis under the names K2 and OLIN
in the 3 major ski markets of the world--the United States, Europe and Japan. K2
offers skis in a broad range of styles for a variety of conditions and types of
skiing at mid to upper price points. While participation rates for alpine skiing
have been relatively flat during the past few years, the Company believes that
industry retail sales declined in the domestic market in 1997. Over the past few
years the market share of K2 skis have

2
<PAGE>
benefited from their popularity among retail purchasers, resulting from their
high-quality, innovative features, (such as its line of deep side-cut skis
incorporating piezoelectronics technology), attractive graphics, creative
marketing and their U.S. production.

K2 and OLIN skis are manufactured by the Company in the United States and
Norway. They are sold to specialty retail shops and sporting goods chains in the
U.S. by independent sales representatives and in Europe and Japan through
independent and Company-owned distributors. K2 alpine skis are marketed to
skiers ranging from beginners to top racers using youthful and often irreverent
advertising. OLIN skis are marketed toward more mature and affluent purchasers.
To assist in its marketing efforts, the Company sponsors amateur and
professional skiers including the well-known extreme skier, Glen Plake and
Olympic gold-medalist Jonny Moseley.

SNOWBOARDS. The Company sells snowboards under the K2 brand and snowboard
bindings and snowboard boots under the K2 CLICKER brand. Back country
accessories, including packs and high performance snowshoes integrating the
CLICKER bindings and backpacks for carrying snowboards and other gear when
hiking into the backcountry were introduced in 1996. The snowboard market, which
is highly fragmented, is gradually consolidating in favor of the larger, better
established brands. K2, one of the larger brands, is one of the few companies
which manufactures its own snowboards (most of its competitors source their
products from others). The Company believes that its manufacturing capability
and ability to innovate provide a competitive advantage. Like its alpine skis,
K2 snowboards are of high quality, have innovative features and attractive
graphics and are creatively marketed.

The Company's innovations in its snowboarding line include the CLICKER, a
revolutionary step-in binding system for snowboards jointly developed with
Shimano Inc. and sourced from them under a distribution agreement, and the
Electra, a snowboard which utilizes piezoelectronics technology. The CLICKER is
among the first commercially available step-in binding systems for snowboards.

K2 snowboards are manufactured by the Company in the United States. They are
sold to specialty retail shops and sporting goods chains in the U.S. by
independent sales representatives and in Europe and Japan through independent
and Company-owned distributors. Like K2 skis, K2 snowboards are marketed using
youthful and irreverent advertising, and the Company sponsors professional and
amateur snowboarders.

IN-LINE SKATES. The Company introduced its K2 soft boot in-line skates in
1994. The in-line skate market had grown dramatically since then, however,
industry sales began to soften in 1997, becoming more pronounced in the second
half of the year. K2's in-line skates target the enthusiast and are priced at
the mid to upper end of the industry's price points. K2 skates are attractive
and of high quality and have innovative features such as a soft mesh and leather
upper designed for improved comfort, with a rigid plastic cuff for support. The
Company's in-line skates also offer high quality in-line skate components, which
are manufactured by others.

K2 in-line skates are manufactured to Company specifications primarily by
vendors in Korea and China. They are sold to specialty retail shops and sporting
goods chains in the U.S. by independent sales representatives and in Europe and
Japan through independent and Company-owned distributors. During 1997, sales of
in-line skates in Europe amounted to approximately 60% of total in-line skate
sales.

FISHING RODS AND REELS. The Company sells fishing rods, reels and fishing
line in most of the world. The Company believes that Shakespeare's UGLY STIK
models have been the best selling fishing rods in the U.S. over the past 20
years. The success of these fishing rods has allowed the Company to establish a
strong position with retailers, thereby increasing sales of new rods, reels and
kits and combos. SHAKESPEARE rods and reels are manufactured principally in the
People's Republic of China, although blanks for the UGLY STIK fishing rod are
made by the Company in the United States. SHAKESPEARE products are sold directly
by the Company and through independent sales representatives to mass
merchandisers (two of which in the aggregate purchase more than one-third of the
Company's fishing rods and reels).

3
<PAGE>
ACTIVE WATER SPORTS PRODUCTS. The Company sells STEARNS flotation vests,
jackets and suits ("personal flotation devices"), cold water immersion products,
wet suits, outdoor products and rainwear in the United States and in certain
foreign countries. Stearns has recently introduced towables, which are
inflatable flotation products towed behind waterski boats. In the United States,
occupants of boats are required by law either to wear or have available personal
flotation devices meeting Coast Guard standards. STEARNS personal flotation
devices are manufactured to such standards and are subject to rigorous testing
for certification by Underwriters Laboratories. Stearns manufactures its
personal flotation devices in the U.S. and sources its other products from Asia.
Stearns products are sold principally through an in-house marketing staff and
independent sales representatives to mass merchandisers, specialty shops and
chain stores and to the off-shore oil industry, commercial fishermen and other
commercial users through independent sales representatives.

FULL-SUSPENSION MOUNTAIN BIKES. K2 designs and distributes high quality
full-suspension mountain bikes and components under the K2, NOLEEN and FLEXSTEM
names in the United States and internationally. Performance and comfort are
provided by these bikes, which have shock absorbing elements for both front and
rear wheels, thereby improving climbing ability and decreasing rider fatigue and
off-road vibration. K2 entered the full-suspension mountain bike business in
1993 through its acquisition of Girvin, and continues to market bikes under the
ProFlex brand name. During 1997, the Company changed the name of its mountain
bikes to K2 in conjunction with the introduction of several innovative products,
including the SMART SHOCK and a carbon fiber frame. Although the Company
believes that the growth of the market for mountain bikes has declined, it
believes that growth could be obtained through market share gains by providing
innovative, quality products delivered on a timely basis. K2, through its
acquired company, is a pioneer of full-suspension mountain bikes, and the
Company believes it is one of the largest wholesale distributors of such bikes
in the United States. K2 manufactures certain components, including its SMART
SHOCK and carbon fiber frames, at its facility in the United States and sources
the remaining components from vendors worldwide. The bikes are manufactured and
assembled to K2'S specifications by vendors and are distributed through an
in-house marketing staff and by independent sales representatives to independent
bicycle dealers in the U.S. and through distributors internationally. As part of
its promotional and marketing efforts, K2 sponsors the K2 mountain bike racing
team.

BACKPACKS. Dana Design, which was acquired by the Company in 1995,
manufactures and distributes high-end backpacks in the U.S. DANA DESIGN products
are known for their comfort, high quality and innovative features, such as
custom fitting. In 1996 the line was extended to include a line of external
frame mid-priced backpacks with a patented fiberglass wand fitting system and a
hydration system with a patented bite valve. The line also includes a series of
"activity specific" packs marketed by K2 ski, mountain bike and snowboard. DANA
DESIGN and K2 backpacks are primarily manufactured to the Company's
specifications by vendors in Asia for sale by independent sales representatives
to specialty retailers in the United States.

CORPORATE CASUALS. The Company manufactures and distributes jackets,
shirts, fleece tops and other active wear under the HILTON and USA brand names.
The products are sold in the United States to advertising specialty customers,
embroiderers and screen printers who in turn sell imprinted items, including
garments, principally to corporate buyers. HILTON and USA apparel, which are
both manufactured by the Company in the United States and sourced from offshore
vendors, are sold through catalogs by direct sales force and by independent
sales representatives.

SKI AND SNOWBOARD APPAREL. K2 ski apparel, sold exclusively in Europe, is
manufactured to the Company's specifications by various suppliers located in
Europe and Asia. K2 snowboard apparel, sold in the US and Europe, is
manufactured to the Company's specifications by suppliers in the United States.
The apparel is sold in Germany through a Company-owned distributor and through
the remainder of Europe through independent distributors from whom the Company
receives a royalty and in the U.S. by sales representatives in the case of
snowboard apparel.

4
<PAGE>
INDUSTRIAL PRODUCTS

Net sales of industrial products were $201.9 million in 1997, $195.4 million
in 1996 and $194.9 million in 1995. The following table lists the Company's
principal industrial products and the brand names under which they are sold.

<TABLE>
<CAPTION>
PRODUCT BRAND NAME
- ----------------------------------------------------------------------- ---------------------
<S> <C>
Monofilament Line...................................................... Shakespeare
Composite Utility and Decorative Light Poles........................... Shakespeare
Fiberglass Marine Radio Antennas....................................... Shakespeare
Coated and Laminated Paperboard Products............................... Thermo-ply
Protective Building Wrap............................................... Barricade, R-Wrap
Synthetic Commercial Building Coatings................................. Finestone
</TABLE>

MONOFILAMENT LINE. Nylon and polyester monofilament line is domestically
manufactured by the Company in a variety of diameters, tensile strengths and
softness. Monofilament is used in various applications including the manufacture
of woven mats for use by paper producers in the United States, Europe and South
America and for use as line in weed trimmers in the United States. Monofilament
sold in Europe for woven mats is manufactured primarily in the Company's U.K.
facility. Shakespeare monofilament also manufactures fishing line domestically,
which is marketed by Shakespeare's fishing tackle division to retailers and mass
merchandisers.

COMPOSITE UTILITY AND DECORATIVE LIGHT POLES. The Company produces and
sells composite utility and decorative light poles under the SHAKESPEARE name in
the United States principally to public and private utilities and developers for
specialty and unique applications. The Company believes that a large majority of
major utility companies in the United States have approved the use of composites
for its light and utility poles.

MARINE RADIO ANTENNAS. The Company manufactures fiberglass radio antennas
in the United States for marine, citizen band and military application under the
SHAKESPEARE name. The products are sold primarily in the United States. The
Company also distributes marine radios and other marine electronics under the
SHAKESPEARE name which are manufactured in Asia to the Company's specifications.
The antennas, radios and other marine electronics are sold by an in-house sales
department and independent sales representatives to specialty marine dealers.

COATED AND LAMINATED PAPERBOARD PRODUCTS. K2's Simplex business
manufactures a wide range of coated and laminated paperboard products, which
include insulative sheathing marketed under the trademark THERMO-PLY and
flexible packaging paperboard products. The products are manufactured in the
United States and are sold to a large number of customers in the domestic
residential and manufactured housing, container and industrial packaging
industries, and in the case of THERMO-PLY, to the Japanese residential housing
industry. The Company also operates a paper recycling mill which produces chip
paperboard used primarily in the manufacture of THERMO-PLY and sold secondarily
to other markets.

PROTECTIVE BUILDING WRAP. The Company manufactures and sells protective
building wrap in the United States under the names R-WRAP and BARRICADE to the
domestic residential and manufactured housing industries. The products are
generally sold through distributors to home builders.

SYNTHETIC COMMERCIAL BUILDING COATINGS. The Company manufactures and sells
synthetic commercial building coatings in the United States under the name
FINESTONE to the domestic commercial construction industry. The products are
marketed primarily to architects and builders.

5
<PAGE>
COMPETITION

The Company's competition varies among its business lines. The sporting
goods and recreational products markets are generally highly competitive, with
competition centering on product innovation, performance and styling, price,
marketing and delivery. Competition in these products (other than snowboards and
active wear) consists of a relatively small number of large producers, some of
whom have greater financial and other resources than the Company. A large number
of companies compete in snowboards and active wear. While the Company believes
that its well-recognized brand names, established distribution networks and
reputation for developing and introducing innovative products have been key
factors in the successful introduction of its sporting goods products, there are
no significant technological or capital barriers to entry into the markets for
many sporting goods and recreational products. These markets face competition
from other leisure activities, and sales of leisure products are affected by
changes in consumer tastes, which are difficult to predict.

The Company believes that its industrial products segment competes based on
product quality, service and delivery, however, the Company's industrial
products are, in most instances, subject to price competition, ranging from
moderate in marine antennas and monofilament line to intense for commodity-type
products such as paperboard container components. Insulative sheathing products
compete with substitute products and materials, such as Oriented Strand Board.
Composite utility and light poles compete with products made of other materials,
such as wood and aluminum. Certain industrial competitors have greater financial
and other resources than the Company.

FOREIGN SOURCING AND RAW MATERIALS

The Company has not experienced any substantial difficulty in obtaining raw
materials, parts or finished goods inventory for its sporting goods and other
recreational products businesses. Certain components and finished products,
however, are manufactured or assembled abroad and therefore could be subject to
interruption as a result of local unrest, currency exchange fluctuations,
increased tariffs, trade difficulties and other factors. A major portion of the
Company's fishing rods, including its UGLY STIK models, and reels and certain
in-line skate components are currently manufactured in the People's Republic of
China which trades with the United States under a Most Favored Nation ("MFN")
trade status. While the Company believes that alternative sources for these
products produced in China could be found, maintaining its existing costs of
such products will depend on China's continuing to be treated under MFN tariff
rates, which the United States from time to time has threatened to rescind.

The Company has not experienced any substantial difficulty in obtaining raw
materials for its industrial products segment, although the cost of recycled
corrugated scrap paper, a raw material used in the production of the Company's
insulative sheathing, has fluctuated significantly over the past three years.
The variation in cost has had a significant impact on the profitability of the
insulative sheathing line. No assurances can be given that the Company will be
able to adjust its insulative sheathing prices to offset the cost of this raw
material. The Company has recently expanded its recycling capabilities to lessen
its reliance on recycled corrugated scrap paper.

SEASONALITY AND CYCLICALITY; BACKLOG

Sales of the Company's sporting goods are generally highly seasonal and in
many instances are dependent on weather conditions. The Company's industrial
products are mildly seasonal. This seasonality causes the Company's financial
results to vary from quarter to quarter, and the Company's sales and earnings
are usually weakest in the first quarter. In addition, the nature of the
Company's ski, snowboard, mountain bike and in-line skate businesses requires
that in anticipation of the selling seasons for these products, it make
relatively large investments in inventory, which, in the case of skis and
snowboards runs from August through December, in the case of mountain bikes,
runs from September through December and in the case of in-line skates, runs
primarily from February through July. Relatively large investments in
receivables are consequently made during and shortly after such seasons. The
rapid delivery requirements

6
<PAGE>
of the Company's customers for its sporting goods products and active wear also
result in investment in significant amounts of inventory. The Company believes
that another factor in its level of inventory investment is the shift by certain
of its sporting goods customers from substantial purchases of pre-season
inventories to deferral of deliveries until the products' retail seasons and
ordering based on rates of sale.

Sales of sporting goods depend to a large extent on general economic
conditions including the amount of discretionary income available for leisure
activities and consumer confidence. Sales of the Company's industrial products
are dependent to varying degrees upon economic conditions in the domestic
housing, container and paper industries.

As a result of the nature of many of the Company's businesses, backlog is
generally not significant, except for the in-line skate business. The backlog of
in-line skate sales as of February 28, 1998 and 1997 was approximately $36.4
million and $61.3 million, respectively. Management believes that the current
backlog demonstrates a shift in demand for in-line skates, as retailers reduce
their levels of inventories and place orders closer to their selling season due
to uncertainty in the marketplace. The backlog may be subject to cancellation or
other adjustments and is not necessarily indicative of future sales.

CUSTOMERS

The Company believes that its customer relationships are excellent, and no
one customer of the Company accounted for ten percent or more of its
consolidated annual net sales or 5% of its operating income in 1997 or 1996.

RESEARCH AND DEVELOPMENT

Consistent with the Company's business strategy of continuing to develop
innovative brand name products and improving the quality, cost and delivery of
products, the Company maintains decentralized research and development
departments at several of its manufacturing centers which are engaged in product
development and the search for new applications and manufacturing processes.
Expenditures for research and development activities totaled approximately $12.4
million in 1997, $9.9 million in 1996 and $7.1 million in 1995 and were expensed
as a part of general and administrative expenses in the year incurred.

ENVIRONMENTAL FACTORS

The Company is one of several potentially responsible parties ("PRP") named
in an Environmental Protection Agency matter involving discharge of hazardous
materials at an old waste site in South Carolina. Although environmental laws
technically impose joint and several liability upon each PRP at each site, the
extent of the Company's required financial contribution to the cleanup of these
sites is expected to be limited based on the number and financial strength of
the other named PRPs and the volume and types of waste involved which might be
attributable to the Company.

Environmental and related remediation costs are difficult to quantify for a
number of reasons including the number of parties involved, the difficulty in
determining the extent of the contamination, the length of time remediation may
require, the complexity of environmental regulation and the continuing
advancement of remediation technology. The Company's environmental engineers,
consultants and legal counsel have developed estimates based upon cost analyses
and other available information for this particular site. The Company accrues
for these costs when it is probable that a liability has been incurred and the
amount can be reasonably estimated. At December 31, 1997 and 1996, reserves of
approximately $930,000 and $882,000, respectively, were provided, with no
provision for expected insurance recovery.

7
<PAGE>
EMPLOYEES

The Company had approximately 3,800 and 4,000 employees at December 31, 1997
and 1996, respectively. The Company believes that its relations with employees
generally have been good. The decline was generally due to a shutdown of certain
domestic manufacturing plants.

PATENTS AND INTELLECTUAL PROPERTY RIGHTS

While product innovation is a highly important factor in the Company's
sporting goods and other recreational products segments and many of the
Company's innovations have been patented, the Company does not believe that the
loss of any one patent would have a material effect on it. Certain of its brand
names, such as K2, OLIN, SHAKESPEARE, UGLY STIK, PFLEUGER, STEARNS, HILTON and
DANA DESIGN are believed by the Company to be well-recognized by consumers and
therefore important in the sales of these products. Registered and other
trademarks and tradenames of Company products are italicized in this Form 10-K.

ITEM 2. PROPERTIES

The table below provides information with respect to the principal
production and distribution facilities utilized by the Company as of December
31, 1997.

<TABLE>
<CAPTION>
OWNED FACILITIES LEASED FACILITIES
---------------------- ----------------------
NO. OF SQUARE NO. OF SQUARE
LOCATION TYPE OF FACILITY LOCATIONS FOOTAGE LOCATIONS FOOTAGE
- ------------------------------------------ ----------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
SPORTING GOODS AND OTHER
RECREATIONAL PRODUCTS

Alabama................................. Distribution and
production 1 170,000 1 15,000
California.............................. Distribution 3 17,000
Illinois................................ Distribution 1 85,000
Minnesota............................... Distribution and
production 2 302,000 5 208,000
South Carolina.......................... Distribution and
production 1 100,000
Washington.............................. Distribution and
production 1 160,000 2 170,000
Foreign................................. Distribution and
production 2 35,000 17 313,000
----- --------- ----- ---------
7 767,000 29 808,000
----- --------- ----- ---------
----- --------- ----- ---------
INDUSTRIAL PRODUCTS

Florida................................. Production 2 77,000 2 41,000
Michigan................................ Production 2 298,000 1 21,000
South Carolina.......................... Distribution and
production 2 515,000
Texas................................... Distribution 1 10,000
Foreign................................. Distribution and
production 1 33,000
----- --------- ----- ---------
7 923,000 4 72,000
----- --------- ----- ---------
----- --------- ----- ---------
</TABLE>

The corporate headquarters of the Company is located in 15,000 square feet
of leased office space in Los Angeles, California. The terms of the Company's
leases range from one to eight years, and many are renewable for additional
periods. The termination of any lease expiring during 1998 or 1999 would not
have a material adverse effect on the Company's operations.

8
<PAGE>
The Company believes that, in general, its plants and equipment are
adequately maintained, in good operating condition and are adequate for the
Company's present needs. The Company regularly upgrades and modernizes its
facilities and equipment and expands its facilities to meet production and
distribution requirements.

ITEM 3. LEGAL PROCEEDINGS

Certain of the Company's products are used in relatively high risk
recreational settings and from time to time the Company is named as a defendant
in lawsuits asserting product liability claims relating to its sporting goods
products. To date none of these lawsuits has had a material effect on the
Company, and the Company does not believe that any lawsuit now pending could
reasonably be expected to have such an effect. The Company maintains product
liability, general liability and excess liability insurance coverages. No
assurances can be given that such insurance will continue to be available at an
acceptable cost to the Company or that such coverage will be sufficient to cover
one or more large claims, or that the insurers will not successfully disclaim
coverage as to a pending or future claim.

The Company is a nominal defendant in a complaint that purports to be a
derivative complaint brought on behalf of the Company against two of its
directors. The lawsuit has been dismissed with prejudice, however it is
currently on appeal under ANTHONY ET. AL. v. SIMON AND HUNTER ET. AL.,
California Superior Court for Los Angeles (No. BC 140251).

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

Not applicable.

9
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
NAME POSITION AGE
- ---------------------------- ------------------------------------------------------------------- ---
<S> <C> <C>
Richard M. Rodstein......... President and Chief Executive Officer 43
Robert E. Doyle............. Senior Vice President; President of Simplex Products 51
John J. Rangel.............. Senior Vice President-Finance 44
Tony H. Chow................ Vice President and Director of Taxes 50
David G. Cook............... Vice President; President of Stearns 60
Timothy C. Cronin........... Vice President; President of Hilton Corporate Casuals 47
Woodrow P. Greene........... Vice President--Quality and Process Improvement 53
David H. Herzberg........... Vice President; President of Shakespeare Monofilament 55
J. Wayne Merck.............. Vice President; President of Shakespeare Composites and Electronics 38
Harry Miller................ Vice President 39
James A. Vandergrift........ Vice President 47
Susan E. McConnell.......... Secretary 54
</TABLE>

Mr. Rodstein has been President of the Company for more than the past five
years and Chief Executive Officer since January 1, 1996.

Mr. Doyle has been a Senior Vice President of the Company and president of
Simplex Products for more than the past five years.

Mr. Rangel, a CPA, has been Senior Vice President-Finance for more than the
past five years.

Mr. Chow has been a Vice President of the Company for more than the past
five years.

Mr. Cook has been a Vice President of the Company and president of Stearns
for more than the past five years.

Mr. Cronin has been a Vice President of the Company since January 1, 1996
and president of Hilton Corporate Casuals since November 1996. Mr. Cronin was
Executive Vice President of Hilton Corporate Casuals from October 1992 to
December 1995. From February to October 1992 Mr. Cronin was a design and
sourcing executive with Odyssey International Ltd.

Mr. Greene has been Vice President-Quality and Process Improvement of the
Company since January 1, 1993. From June 1995 to June 1996 Mr. Greene was
president of Shakespeare Composites and Electronics, and for more than three
years previous to that he was Director of Quality and Process Improvement of the
Company.

Mr. Herzberg has been a Vice President of the Company and president of
Shakespeare Monofilament for more than the past five years.

Mr. Merck has been a Vice President of the Company since January 1, 1996 and
president of Shakespeare Composites and Electronics since June 1996. Mr. Merck
was president of the Company's former Anthony Pools business from February 1994
to June 1996, manager of quality and process improvement of the Company from
August 1992 to February 1994, and director of manufacturing of Shakespeare
Composites and Electronics for one year previous to that.

Mr. Miller has been a Vice President of the Company since January 1, 1996.
From June 1992 to December 1995 Mr. Miller was director of business development
of the Company, and for more than one year previous to that he was a vice
president of Omega Corporation.

10
<PAGE>
Mr. Vandergrift has been a Vice President of the Company since January 1,
1996 and vice president of product development of K-2 Corporation for more than
the past five years.

Mrs. McConnell, a California attorney, has been Secretary of the Company for
more than the past five years.

Officers of the Company are elected for one year by the directors at their
first meeting after the annual meeting of shareholders and hold office until
their successors are elected and qualified.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

PRINCIPAL MARKETS

The Company's Common Stock is listed on the New York Stock Exchange and the
Pacific Exchange under the symbol "KTO." At March 16, 1998 there were 1,662
holders of record of Common Stock of the Company.

COMMON STOCK PRICES AND DIVIDENDS

The following table sets forth, for the quarters indicated, the reported
high, low, and closing sales prices of the Company's Common Stock, as reported
by the New York Stock Exchange during the Company's two most recent fiscal
years:

<TABLE>
<CAPTION>
STOCK PRICES DIVIDENDS PER SHARE
----------------------------- ---------------------
HIGH LOW CLOSE CASH
------- ------- ------- ---------------------
<S> <C> <C> <C> <C>
1997
Fourth.................................... 29 13/16 22 7/16 23 $ .11
Third..................................... 32 15/16 23 7/16 25 1/8 $ .11
Second.................................... 31 7/8 24 1/8 31 11/16 $ .11
First..................................... 29 7/8 24 3/8 24 7/8 $ .11

1996
Fourth.................................... 27 1/2 21 1/4 27 1/2 $ .11
Third..................................... 27 1/4 23 3/8 26 1/8 $ .11
Second.................................... 30 1/8 23 7/8 27 1/8 $ .11
First..................................... 26 7/8 20 3/8 26 1/2 $ .11
</TABLE>

DIVIDENDS

The Company has paid a cash dividend on the Common Stock since 1978. The
timing and amounts of dividends depend on, among other things, the Company's
results of operations, financial condition, cash requirements and other factors
deemed relevant by the Board of Directors. The Company is subject to credit
agreements which limit its ability to pay cash dividends. As of December 31,
1997, $16.3 million of retained earnings were free of such restrictions. See
Note 5 of Notes to Consolidated Financial Statements for further description of
the Company's credit facilities.

TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT FOR COMMON STOCK

Harris Trust Company of California
601 South Figueroa Street, Suite 4900
Los Angeles, California 90017

11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------
1997(C) 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE FIGURES AND PERCENTAGES)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................. $ 646,933 $ 602,734 $ 544,268 $ 434,995 $ 373,712
Cost of products sold..................................... 465,585 432,775 400,840 319,021 276,759
---------- ---------- ---------- ---------- ----------
Gross profit.............................................. 181,348 169,959 143,428 115,974 96,953
Selling expenses.......................................... 86,702 73,844 61,256 49,575 41,519
General and administrative expenses....................... 38,757 41,878 37,954 32,458 27,488
Research and development expenses......................... 12,444 9,881 7,132 6,255 4,271
Restructuring costs (a)................................... 2,400
---------- ---------- ---------- ---------- ----------
Operating income.......................................... 41,045 44,356 37,086 27,686 23,675
Interest expense.......................................... 10,560 9,294 9,916 7,481 5,759
Other income, net......................................... (630) (1,480) (1,449) (1,239) (903)
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes.................. 31,115 36,542 28,619 21,444 18,819
Provision for income taxes................................ 9,215 11,325 8,820 7,690 6,455
---------- ---------- ---------- ---------- ----------
Income from continuing operations......................... 21,900 25,217 19,799 13,754 12,364
Discontinued operations, net of taxes (b)................. (4,920) (721) (1,243)
---------- ---------- ---------- ---------- ----------
Net income................................................ $ 21,900 $ 25,217 $ 14,879 $ 13,033 $ 11,121
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings per share:
Continuing operations..................................... $ 1.32 $ 1.52 $ 1.38 $ 1.17 $ 1.06
Discontinued operations................................... (.34) (.06) (.11)
---------- ---------- ---------- ---------- ----------
Net income................................................ $ 1.32 $ 1.52 $ 1.04 $ 1.10 $ 0.95
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted earnings per share:
Continuing operations..................................... $ 1.31 $ 1.51 $ 1.37 $ 1.15 $ 1.05
Discontinued operations................................... (.34) (.06) (.11)
---------- ---------- ---------- ---------- ----------
Net income................................................ $ 1.31 $ 1.51 $ 1.03 $ 1.09 $ 0.94
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Dividends:
Cash-per share $ .44 $ .44 $ .44 $ .425 $ .405
Stock..................................................... 5% 5%
Basic shares................................................ 16,541 16,574 14,367 11,800 11,703
Diluted shares.............................................. 16,713 16,734 14,498 11,919 11,798
BALANCE SHEET DATA:
Total current assets...................................... $ 330,168 $ 274,409 $ 300,455 $ 226,474 $ 181,790
Total assets.............................................. 428,928 367,831 384,423 301,536 254,093
Total current liabilities................................. 122,553 74,250 120,533 79,724 66,790
Long-term debt............................................ 88,668 89,096 75,071 109,921 87,271
Shareholders' equity...................................... 202,885 188,988 175,816 98,996 88,656
</TABLE>

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

(a) See Note 2 to Notes to Consolidated Financial Statements.

(b) See Note 3 to Notes to Consolidated Financial Statements.

(c) Operating income, net income, basic earnings per share and diluted earnings
per share are $43,445, $23,460, $1.42 and $1.40, respectively, before
restructuring costs of $2,400 ($1,560 net of taxes).

12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

K2 Inc. is a leading designer, manufacturer and marketer of brand name
sporting goods and other recreational products which represents $445.0 million,
or 69% of the Company's 1997 consolidated net sales. The Company is also a
manufacturer and supplier of selected industrial products, which had sales of
$201.9 million in 1997.

The Company maintains its books using a 52/53-week year, ending on the last
Sunday of December. The years ended December 31, 1997 and 1996, consisted of 52
weeks. The year ended in 1995 consisted of 53 weeks. The Company believes that
the impact on the financial statements of the additional week in 1995 was not
significant.

REVIEW OF OPERATIONS: COMPARISON OF 1997 TO 1996

Net sales advanced 7.3% to $646.9 million from $602.7 million in 1996. Net
income declined to $21.9 million, or $1.31 per diluted shares from $25.2
million, or $1.51 per diluted share in 1996.

NET SALES. In the sporting goods and other recreational products group, net
sales increased 9.3% to $445.0 million from $407.3 million in 1996. The increase
was driven by K2 in-line skate sales primarily in the first half of the year.
Sales slowed in the second half of the year due to declining consumer demand and
significant discounting by competitors. Worldwide sales of snowboards improved
for the year reflecting market acceptance of the Clicker step-in bindings and
innovative K2 snowboards. Although ski sales increased modestly worldwide, a
strengthening dollar against most European currencies had an unfavorable impact
on translated sales of our German subsidiary. Shipments of Shakespeare's Ugly
Stik fishing rods grew due to the acceptance of new models of the rods. Sales of
core reels, and kits and combos also grew during the year, however, overall
fishing tackle sales declined due to the end of a one-time promotional program
in effect a year ago. New product introductions of inflatables, towables and
other active water gear by Stearns also contributed to the increase in sales.
Partially offsetting these gains were sales declines of Hilton Corporate
Casuals, due to sluggish market conditions and the impact of poor prior year
delivery, and lower shipments of full-suspension mountain bikes due to continued
softness in the mountain bike market from the prior year.

In the industrial products group, net sales improved to $201.9 million from
$195.4 million in 1996. The increase was due to the growth in sales of
Shakespeare composite poles and marine antennas, which benefited from a
centennial year promotional program, and from new paperweaving products and
specialty resins which helped support the sales growth at the Shakespeare
Monofilament business. Soft demand for building products and pricing pressures
from competing materials lowered sales at the Simplex business.

GROSS PROFIT. Gross profit rose 6.6% to $181.3 million, or 28.0% of net
sales from $170.0 million, or 28.2% of net sales, in 1996. The slight decline in
the gross profit as a percentage of sales was attributable to the 1997 mix of
sales which included a larger proportion of shipments to distributors overseas,
an increase in manufacturing and sourcing costs and the closeout of certain bike
models and apparel at reduced margins.

COSTS AND EXPENSES. Selling expenses increased 17.5% to $86.7 million, or
13.4% of net sales from $73.8 million, or 12.2% of net sales, in 1996. The
increase was due to expanded marketing of the K2 brand and the promotion of the
centennial anniversary of Shakespeare fishing tackle products.

General and administrative expenses declined to $38.8 million, or 6.0% of
net sales from $41.9 million, or 7.0% of net sales in 1996. The decline in
spending is attributable to the effect of ongoing expense controls throughout
the Company. Research and development expenses increased 25.3% to $12.4 million
from $9.9 million in 1996 as the result of heightened new product development
efforts.

13
<PAGE>
RESTRUCTURING CHARGE. A restructuring charge of $2.4 million ($1.6 million,
or $.09 per diluted share, after-tax) was recorded subsequent to the
announcement of the Company's plan to consolidate its mountain bike and outdoor
equipment operations into its existing facility on Vashon Island, Washington,
and to move its production of outdoor products to outside sources. The
restructuring charge includes approximately $1.0 million in expected cash
outlays primarily related to severance benefits and shutdown of the facilities.
The balance of the restructuring charge relates to the divestiture of the
remaining assets. The Company plans to complete the restructuring by the end of
the first quarter of 1998.

OPERATING INCOME. Operating income before the restructuring charge declined
to $43.4 million, or 6.7% of net sales from $44.4 million, or 7.4% of net sales,
in 1996. The decline is due to a slight decrease in the gross profit percentage
coupled with higher selling expenses. Operating income after the restructuring
charge was $41.0 million, or 6.3% of net sales.

INTEREST EXPENSE. Interest expense rose $1.3 million to $10.6 million in
1997. Lower interest rates produced a benefit of $0.7 million, which was offset
by $2.0 million of additional interest as a result of higher average borrowings
of $29.2 million, incurred to support the growth of the in-line skates,
snowboards and fishing tackle product lines.

OTHER INCOME. Other income of $0.6 million includes royalties, interest
income, gain on sale of investments and other miscellaneous income, net of $3.5
million of legal fees expensed related to the derivative lawsuit described in
Note 7 of Notes to Consolidated Financial Statements.

INCOME TAXES. The income tax rate for 1997 remained comparable to 1996 from
the continued reduction of the income tax valuation reserve, as a result of the
continued utilization of prior years' foreign net losses utilized in the current
period.

SEGMENT INFORMATION. Total segment operating profit (before interest,
corporate expenses and taxes) decreased to $48.3 million from $52.4 million in
1996. In the sporting goods product group, operating profit declined 14.7% to
$27.2 million from $31.9 million in 1996. The decrease was the result of a
widening loss in the full-suspension mountain bike business reflecting increased
competition, costs to launch a new bike line, the $2.4 million restructuring
charge and sales of other discontinued recreational products at reduced margins.
Additional factors were the decline in the fishing tackle business reflecting
the end of a one-year promotional program in effect in the prior year and lower
ad specialty earnings from a reduction in sales. Partially offsetting these
reductions was a volume-related increase in in-line skate earnings.

In the industrial products group, operating profit increased to $21.1
million from $20.5 million in 1996. The improvement was mainly due to a more
profitable sales mix, manufacturing efficiencies and sales growth at the
Shakespeare Monofilament and Shakespeare Composites and Electronics businesses.
Partially offsetting these gains was a decline in sales of building products and
its resulting impact on costs. For additional segment information see Note 12 of
Notes to Consolidated Financial Statements.

REVIEW OF OPERATIONS: COMPARISON OF 1996 TO 1995

In October 1995, the Company signed a letter of intent to sell the assets
and business of its swimming pool and motorized pool cover business (the
"Division"). As a result, the Company reclassified the Division as discontinued
operations in 1995. On March 5, 1996, the Company completed the sale of
substantially all of the assets of the Division to General Aquatics, Inc. (see
Note 3 of Notes to Consolidated Financial Statements). The discussion which
follows focuses on the continuing operations of the Company.

Net sales from continuing operations increased 10.7% to $602.7 million from
$544.3 million in 1995. Income from continuing operations grew 27.3% to $25.2
million from $19.8 million in 1995. Earnings per share from continuing
operations, reflecting the completion on June 1, 1995 of the Company's public

14
<PAGE>
offering of 4.6 million shares, was $1.51 per diluted share, as compared with
$1.37 per diluted share a year ago. Net income totaled $25.2 million, or $1.51
per diluted share, as compared to $14.9 million, or $1.03 per diluted share in
1995, which included a loss of $4.9 million related to the disposition of the
Division.

NET SALES. In the sporting goods and other recreational products group, net
sales increased 16.6% to $407.3 million from $349.4 million in 1995. While the
increase was broad based, the largest share was attributable to the growth of K2
in-line skates, primarily in the European and domestic markets, and to K2
snowboards, bindings and original equipment manufacturer snowboard sales. The
improvement in domestic sales of Shakespeare fishing tackle products benefited
from a one year promotional program entered into earlier in the year. Stearns
wetsuits, raingear and other new products, as well as Hilton's apparel sales to
the ad specialty market, also contributed to the improvement. Partially
offsetting these gains were lower sales of full-suspension mountain bikes due to
increased competition and softness in the mountain bike market.

In the industrial products group, net sales increased modestly to $195.4
million from $194.9 million in 1995. Improved sales were reported by the
Shakespeare Monofilament business through new product introductions. Offsetting
the sales increase was a decline in Thermo-ply insulative sheathing and
paperboard product sales due to increased competition, adverse weather
conditions and a reduction in selling prices. Sales of fiberglass light and
utility poles ended up comparable to the prior year as utilities reevaluated all
their pole programs in light of the deregulation of the utility industry.

GROSS PROFIT. Gross profit advanced 18.5% to $170.0 million, or 28.2% of
net sales from $143.4 million, or 26.3% of net sales, in 1995. The improvement
in gross profit as a percentage of net sales resulted from the sales mix which
included a larger proportion of higher margin products and gains in efficiency,
particularly at K2 and Stearns. Volume related gains from K2 in-line skates as
well as the return to more normal costs of recycled corrugated scrap paper, as
compared with the prior year, also contributed to the increase. The improvement
in gross profit was partially diminished by higher costs incurred to manufacture
active apparel and backpacks and lower prices on sales of full-suspension
mountain bikes.

COSTS AND EXPENSES. Selling expenses increased 20.4% to $73.8 million from
$61.3 million in 1995. The increase was volume driven, especially by new
products in the in-line skate, mountain bike, snowboard, ski and backpack
businesses. Higher expenses were also incurred to further promote these products
and support them in the marketplace.

General and administrative expenses increased 10.3% to $41.9 million from
$38.0 million in 1995, although as a percentage of net sales they were
comparable to the prior year. The dollar increase is attributable to spending on
investment in systems and personnel in various divisions to support growth and
the inclusion of acquired product lines. Research and development expenses
increased 39.4% to $9.9 million from $7.1 million in 1995. The increase is due
to a focus on new product development.

OPERATING INCOME. Operating income increased by 19.7% to $44.4 million, or
7.4% of net sales from $37.1 million, or 6.8% of net sales, in 1995. The
percentage increase is due to the higher gross profit percentage partially
offset by slightly higher selling expenses as a percentage of net sales.

INTEREST EXPENSE. Interest expense declined by a net amount of $0.6 million
in 1996. Lower interest rates resulted in a decrease of $1.0 million, which were
offset by an increase of $0.4 million due to higher average borrowings to
support the growth of several product lines.

OTHER INCOME. Other income of $1.5 million includes royalties, interest
income and other miscellaneous income.

INCOME TAXES. The income tax rate for 1996 remained comparable with 1995 as
a result of the continuation of the utilization of prior years' foreign net
losses in the current period.

15
<PAGE>
SEGMENT INFORMATION. Total segment operating profit (before interest,
corporate expenses and taxes) increased 16.7% to $52.4 million from $44.9
million in 1995. In the sporting goods product group, operating profit rose
18.6% to $31.9 million from $26.9 million in 1995. The increase was fueled by
sales related gains of in-line skates, improved margin on new skis and higher
sales and lower costs of Stearns new water products. The worldwide fishing
tackle business, reflecting the impact of the one-year promotional program also
contributed to the improvement. Partially offsetting these profit gains was a
loss in the full-suspension mountain bike business reflecting increased
competition and softness in the worldwide mountain bike market.

In the industrial products group, operating profits increased 13.9% to $20.5
million in 1996 from $18.0 million in 1995. The improvement was mainly due to
sales-related gains at the Shakespeare Monofilament business and increased cost
efficiencies in the Shakespeare Electronics and Fiberglass and Simplex
businesses. For additional information regarding the segment information, see
Note 12 of Notes to Consolidated Financial Statements.

LIQUIDITY AND SOURCES OF CAPITAL

The Company's operations used $25.2 million of cash compared to $19.7
million of cash provided in 1996. The use of cash in the current year was the
result of financing higher levels of accounts receivable and inventories arising
from sales growth of in-line skates, snowboard products and fishing tackle. A
slowdown in in-line skate orders in the second half of the year, together with a
continuation in the shift in ordering patterns by retailers to more closely
match the selling season also contributed to the higher levels of inventory. Net
cash used in investing activities was $20.0 million, as compared to $22.2
million in 1996. The use of cash for this activity was attributable to
expenditures to increase manufacturing capacity in the recreational products
group and to improve manufacturing efficiencies, principally in the industrial
products group, reduced by the proceeds from sale of investments. No material
commitments for capital expenditures existed at year end.

The Company's principal long-term borrowing facility is a $100 million
Credit Line ("Credit Line") which becomes due on May 20, 2002. Additionally, the
Company has a $50 million accounts receivable purchase facility ("Purchase
Facility"). At December 31, 1997, $62.0 million was outstanding under the Credit
Line and $50.0 million of accounts receivable had been sold under the Purchase
Facility. Under the Credit Line, the Company is subject to an agreement which,
among other things, restricts amounts available for payment of cash dividends by
the Company. As of December 31, 1997, $16.3 million of retained earnings were
free of such restrictions. The Company also has $31.1 million of 8.39% unsecured
senior notes due through 2004, payable in seven equal principal payments. The
notes are subject to agreements which are generally less restrictive than the
long-term borrowing facilities. Additionally, the Company has several foreign
and domestic short-term lines of credit available totaling $91.8 million, of
which $49.0 million was outstanding at December 31, 1997. For further
information regarding the Company's borrowings, see Note 5 of Notes to
Consolidated Financial Statements.

The Company anticipates its cash needs in 1998 will be provided from
operations and from borrowings, principally under its Credit Line and Purchase
Facility and, to a lesser extent, other existing credit lines.

ENVIRONMENTAL MATTERS

The Company is one of several named potentially responsible parties ("PRP")
in an Environmental Protection Agency matter involving discharge of hazardous
materials at an old waste site in South Carolina. Although environmental laws
technically impose joint and several liability upon each PRP at each site, the
extent of the Company's required financial contribution to the cleanup of these
sites is expected to be limited based on the number and financial strength of
the other named PRPs and the volume and types of waste involved which might be
attributable to the Company.

16
<PAGE>
Environmental and related remediation costs are difficult to quantify for a
number of reasons including the number of parties involved, the difficulty in
determining the extent of the contamination, the length of time remediation may
require, the complexity of environmental regulation and the continuing
advancement of remediation technology. The Company's environmental engineers,
consultants and legal counsel have developed estimates based upon cost analyses
and other available information for this particular site. The Company accrues
for these costs when it is probable that a liability has been incurred and the
amount can be reasonably estimated. At December 31, 1997 and 1996, reserves of
$930,000 and $882,000, respectively, were provided.

The ultimate outcome of this matter cannot be predicted with certainty,
however, and taking into consideration reserves provided, management does not
believe this matter will have a material adverse effect on the Company's
financial statements.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

On December 31, 1997, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 128, "Earnings Per Share." The standard requires new
earnings per share calculations and dual presentation of "basic" and "diluted"
earnings per share which simplifies existing computational guidelines, revises
disclosure requirements and increases the comparability of earnings per share on
an international basis. The adoption of the new standard did not have a material
effect on the Company's financial statements.

On December 31, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." In accordance with SFAS No. 123, the Company applies
Accounting Principles Board Opinion No. 25 to account for its stock option
plans, and accordingly, does not record compensation costs. The required pro
forma information under SFAS No. 123 is disclosed in Note 10 in Notes to
Consolidated Financial Statements.

On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires that impaired assets or assets to be disposed of be accounted for
at the lower of the carrying amount or fair value of the assets less costs of
disposal. The adoption of the new standard did not have a material effect on the
Company's financial statements.

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company will adopt SFAS No. 130 in
1998.

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers and the material countries in which
the entity holds assets and reports revenue. The Company will adopt SFAS No. 131
in 1998.

IMPACT OF INFLATION AND CHANGING PRICES

The inflation rate, as measured by the Consumer Price Index, has been
relatively low in the last few years, and therefore, pricing decisions by the
Company have largely been influenced by competitive market conditions.
Depreciation expense is based on the historical cost to the Company of its fixed
assets, and therefore, is considerably less than it would be if it were based on
current replacement cost. While buildings, machinery and equipment acquired in
prior years will ultimately have to be replaced at significantly higher prices,
it is expected that this will be a gradual process over many years.

17
<PAGE>
OTHER MATTERS

The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculation or system failures. Based on
preliminary information, costs of addressing potential problems are currently
not expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if the
Company, its customers or vendors are unable to resolve such processing issues
in a timely manner, it could result in a material financial risk. Accordingly,
the Company plans to devote the necessary resources to resolve all significant
year 2000 issues in a timely manner.

STATEMENT REGARDING FORWARD LOOKING DISCLOSURE

This Annual Report on Form 10-K contains certain "forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
the Company's expectations or beliefs concerning future events, including, but
not limited to, the following: statements regarding benefits of market positions
on newer products; statements regarding market positions of several product
lines; statements regarding trends in industry retail sales of skis; statements
regarding benefits of features, graphics, marketing and production on market
share of skis; statements regarding consolidation of snowboard market and trends
favoring larger, established brands; statements regarding competitive advantage
provided by the Company's manufacturing capability and ability to innovate;
statements regarding sales trends of in-line skates in the second half of 1997;
statements regarding benefits of Ugly Stik sales on the Company's position with
retailers and on sales of other fishing tackle; statements regarding the
Company's ability to grow its mountain bike business; statements regarding
approval of composite light and utility poles by major utility companies;
statements regarding the impact of the Company's brands, distribution,
reputation and innovative products on the successful introduction of new
products; statements regarding competition; statements regarding the Company's
ability to find alternative sources for fishing tackle products; statements
regarding the Company's ability to raise insulative sheathing prices to offset
raw material cost increases; statements regarding the seasonality of the
Company's business; statements regarding expected remediation and other costs
relating to an environmental condition; statements regarding the merits and
effect of pending lawsuits on the Company; statements regarding trends of the
in-line skate market and its impact on the Company's sales and earnings;
statements regarding expected cash outlays related to the restructuring charge
and expected completion date of the restructuring; statements regarding the
Company's expected cash needs and sources of cash to fund such needs; statements
regarding inventory levels at retail; statements regarding the impact of the
year 2000 on computerized information systems; statements regarding overall
market trends; and statements regarding the consistency of the Company's
industrial products, segment's earnings and cash flow. Such statements are based
upon the facts presently known to the Company and assumptions as to important
future events, many of which are beyond the control of the Company. Among the
more important factors which could adversely affect actual results of operations
are the following:

The Company's ability to return to the growth pattern that characterized its
operations in recent years is dependent, to a significant degree, on its ability
to successfully introduce a continuing flow of new products. The Company has
made substantial investments in new product development projects, certain of
which have resulted in products now being introduced to the market, and certain
of which are expected to result in new product introductions during 1998 and
1999. The Company's ability to recover its new product investments and earn a
satisfactory profit thereon will be dependent on its ability to successfully
produce the new products at acceptable cost levels and satisfactory resolution
of numerous design and manufacturing issues, as well as market acceptance of the
new products.

18
<PAGE>
Results of operations in the latter part of 1997 were adversely affected by
overproduction and discounting by competitors in the in-line skate, ski and
bicycle markets. Such adverse market conditions have persisted into early 1998;
and the resumption of growth in sales in these sectors will be dependent on
improvement in present industry-wide excess inventory and discounting
conditions.

A substantial portion of the Company's sales are in overseas markets.
Results of operations in these markets may be adversely affected by changes in
the exchange ratio between local currencies and the U.S. dollar.

Sales of the Company's recreational products are made, to a substantial
extent, through specialty retail shops, many of which are small businesses with
limited capital. The Company's credit policies are designed to minimize the
risks associated with business failures among such customers. Nevertheless, such
unpredictable matters as a poor ski season could have a serious impact on
important segments of the Company's customer base.

The Company's business is dependent, to a material extent, on a relatively
few key personnel comprising its senior management. The loss of any of such
persons could cause material disruption or delays in operations, and could
adversely affect the Company's competitive position.

In addition to the foregoing, the Company is subject to general risks
associated with the economy and the particular markets in which it operates.
Adverse changes in consumer spending for recreational products, industry-wide
competitive conditions, the popularity of recreational activities such as
skiing, skating and snowboarding, new product developments by competitors, the
cost of key raw materials, and many other factors beyond the Company's control
could adversely affect the competitive position of the Company's products and
results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

K2 INC.
STATEMENTS OF CONSOLIDATED INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
FIGURES)
Net sales............................................................. $ 646,933 $ 602,734 $ 544,268
Cost of products sold................................................. 465,585 432,775 400,840
---------- ---------- ----------
Gross profit...................................................... 181,348 169,959 143,428
Selling expenses...................................................... 86,702 73,844 61,256
General and administrative expenses................................... 38,757 41,878 37,954
Research and development expenses..................................... 12,444 9,881 7,132
Restructuring costs................................................... 2,400
---------- ---------- ----------
Operating income.................................................. 41,045 44,356 37,086
Interest expense...................................................... 10,560 9,294 9,916
Other income, net..................................................... (630) (1,480) (1,449)
---------- ---------- ----------
Income before provision for income taxes.......................... 31,115 36,542 28,619
Provision for income taxes............................................ 9,215 11,325 8,820
---------- ---------- ----------
Income from continuing operations................................. 21,900 25,217 19,799
Discontinued operations, net of taxes................................. (4,920)
---------- ---------- ----------
Net income............................................................ $ 21,900 $ 25,217 $ 14,879
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share:
Continuing operations............................................... $ 1.32 $ 1.52 $ 1.38
Discontinued operations............................................. (.34)
---------- ---------- ----------
Net income.......................................................... $ 1.32 $ 1.52 $ 1.04
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share:
Continuing operations............................................... $ 1.31 $ 1.51 $ 1.37
Discontinued operations............................................. (.34)
---------- ---------- ----------
Net income.......................................................... $ 1.31 $ 1.51 $ 1.03
---------- ---------- ----------
---------- ---------- ----------
Basic shares outstanding.............................................. 16,541 16,574 14,367
Diluted shares outstanding............................................ 16,713 16,734 14,498
</TABLE>

See notes to consolidated financial statements

20
<PAGE>
K2 INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1997 1996
--------- ---------

<CAPTION>
(IN THOUSANDS,
EXCEPT
PER SHARE FIGURES)
<S> <C> <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents................................................................ $ 5,914 $ 10,860
Accounts receivable, net................................................................. 118,579 94,079
Inventories, net......................................................................... 189,368 155,376
Deferred taxes........................................................................... 9,236 8,195
Prepaid expenses and other current assets................................................ 7,071 5,899
--------- ---------
Total current assets................................................................... 330,168 274,409
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements............................................................... 2,665 2,629
Buildings and leasehold improvements..................................................... 33,310 30,303
Machinery and equipment.................................................................. 136,765 115,190
Construction in progress................................................................. 6,822 9,249
--------- ---------
179,562 157,371
Less allowance for depreciation and amortization......................................... 101,774 89,848
--------- ---------
77,788 67,523
OTHER ASSETS
Intangibles, principally goodwill, net................................................... 17,561 16,346
Investments.............................................................................. 6,408
Other.................................................................................... 3,411 3,145
--------- ---------
Total Assets........................................................................... $ 428,928 $ 367,831
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans............................................................................... $ 48,967 $ 7,307
Accounts payable......................................................................... 29,607 26,639
Accrued payroll and related.............................................................. 17,740 20,410
Other accruals........................................................................... 21,794 15,012
Current portion of long-term debt........................................................ 4,445 4,882
--------- ---------
Total current liabilities.............................................................. 122,553 74,250
Long-term Debt............................................................................. 88,668 89,096
Deferred Taxes............................................................................. 14,822 15,497
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock, $1 par value, authorized 12,500,000 shares, none issued
Common Stock, $1 par value, authorized 40,000,000 shares, issued
shares 17,160,080 in 1997 and 17,131,662 in 1996....................................... 17,160 17,132
Additional paid-in capital............................................................... 132,086 131,627
Retained earnings........................................................................ 69,668 55,047
Employee Stock Ownership Plan and stock option loans..................................... (3,006) (7,087)
Treasury shares at cost, 623,759 shares in 1997 and 575,928 shares in 1996............... (8,106) (6,719)
Cumulative translation adjustments....................................................... (4,917) (1,012)
--------- ---------
Total Shareholders' Equity............................................................. 202,885 188,988
--------- ---------
Total Liabilities and Shareholders' Equity............................................. $ 428,928 $ 367,831
--------- ---------
--------- ---------
</TABLE>

See notes to consolidated financial statements

21
<PAGE>
K2 INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
EMPLOYEE
STOCK
OWNERSHIP
PLAN AND
ADDITIONAL STOCK TREASURY CUMULATIVE
COMMON PAID-IN RETAINED OPTION SHARES, AT TRANSLATION
STOCK CAPITAL EARNINGS LOANS COST ADJUSTMENTS TOTAL
----------- ----------- ----------- ----------- ----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994...... $ 12,323 $ 66,973 $ 28,994 $ (3,937) $ (4,189) $ (1,168) $ 98,996
Net income for the year 1995...... 14,879 14,879
Exercise of stock options......... 141 1,388 (1,274) 255
Cash dividends, $.44 per share.... (6,752) (6,752)
Translation adjustments........... 771 771
Stock option loan repayments...... 336 336
Stock offering proceeds........... 4,600 62,634 67,234
Employee Stock Ownership Plan,
amortization and partial loan
repayment....................... 97 97
----------- ----------- ----------- ----------- ----------- ------------- ---------
BALANCE AT DECEMBER 31, 1995...... 17,064 130,995 37,121 (4,778) (4,189) (397) 175,816
Net income for the year 1996...... 25,217 25,217
Exercise of stock options......... 68 632 (256) 444
Cash dividends, $.44 per share.... (7,291) (7,291)
Translation adjustments........... (615) (615)
Repurchase of shares and stock
option loan repayments.......... 2,443 (2,530) (87)
Employee Stock Ownership Plan,
amortization, loan and partial
loan repayment.................. (4,496) (4,496)
----------- ----------- ----------- ----------- ----------- ------------- ---------
BALANCE AT DECEMBER 31, 1996...... 17,132 131,627 55,047 (7,087) (6,719) (1,012) 188,988
Net income for the year 1997...... 21,900 21,900
Exercise of stock options......... 28 459 487
Cash dividends, $.44 per share.... (7,279) (7,279)
Translation adjustments........... (3,905) (3,905)
Repurchase of shares and stock
option loan repayments.......... 1,070 (1,387) (317)
Employee Stock Ownership Plan,
amortization, loan and partial
loan repayment.................. 3,011 3,011
----------- ----------- ----------- ----------- ----------- ------------- ---------
BALANCE AT DECEMBER 31, 1997...... $ 17,160 $ 132,086 $ 69,668 $ (3,006) $ (8,106) $ (4,917) $ 202,885
----------- ----------- ----------- ----------- ----------- ------------- ---------
----------- ----------- ----------- ----------- ----------- ------------- ---------
</TABLE>

See notes to consolidated financial statements

22
<PAGE>
K2 INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1997 1996 1995
---------- ---------- -----------
(THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations............................................ $ 21,900 $ 25,217 $ 19,799
Gain on sale of investments.................................................. (3,500)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation of property, plant and equipment................................ 12,945 10,093 9,510
Amortization of intangibles.................................................. 1,281 1,057 722
Deferred taxes............................................................... (1,716) 961 1,323
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (27,318) 97 (30,569)
Inventories.................................................................. (33,200) (13,408) (41,433)
Prepaid expenses and other current assets.................................... (1,143) (339) (1,610)
Accounts payable............................................................. 1,634 (1,797) 1,446
Payrolls and other accruals.................................................. 3,925 (2,151) 4,554
---------- ---------- -----------
Net cash (used in) provided by operating activities.......................... (25,192) 19,730 (36,258)

INVESTING ACTIVITIES
Property, plant and equipment expenditures................................... (23,728) (18,832) (17,292)
Disposals of property, plant and equipment................................... 298 153 101
Purchases of businesses, net of cash acquired................................ (834) (3,315) (2,159)
Proceeds on sale of investments.............................................. 9,908
Other items, net............................................................. (5,676) (251) (364)
---------- ---------- -----------
Net cash used in investing activities........................................ (20,032) (22,245) (19,714)

FINANCING ACTIVITIES
Borrowings under long-term debt.............................................. 51,892 54,500
Payments of long-term debt................................................... (52,755) (40,448) (33,623)
Net increase (decrease)in short-term bank loans.............................. 41,658 (42,912) 31,878
Proceeds from accounts receivable facility................................... 3,275 46,725
Exercise of stock options.................................................... 487 444 255
Dividends paid............................................................... (7,279) (7,291) (6,752)
Net repayments by (advances to ) ESOP........................................ 3,000 (5,000)
Net proceeds from stock offering............................................. 67,234
---------- ---------- -----------
Net cash provided by financing activities.................................... 40,278 6,018 58,992
---------- ---------- -----------
Net (decrease) increase in cash and cash equivalents from continuing
operations................................................................. (4,946) 3,503 3,020
---------- ---------- -----------
Cash used in discontinued operations......................................... (3,363)
---------- ---------- -----------
Net (decrease) increase in cash and cash equivalents......................... (4,946) 3,503 (343)
Cash and cash equivalents at beginning of year............................... 10,860 7,357 7,700
---------- ---------- -----------
Cash and cash equivalents at end of year..................................... $ 5,914 $ 10,860 $ 7,357
---------- ---------- -----------
---------- ---------- -----------
</TABLE>

See notes to consolidated financial statements

23
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, including Shakespeare Company, K-2
Corporation, Stearns Inc. and K2 Bike Inc. All significant intercompany accounts
and transactions have been eliminated.

FISCAL PERIODS

The Company maintains its books using a 52/53 week year ending on the last
Sunday of December. For purposes of the consolidated financial statements, the
year-end is stated as December 31. The years ended December 31, 1997 and 1996,
consisted of 52 weeks. The year ended in 1995 consisted of 53 weeks.

ESTIMATES USED

The preparation of financial statements in conformity with Generally
Accepted Accounting Principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual amounts could differ from those estimates.

FOREIGN CURRENCY TRANSLATION

The functional currency for most foreign operations is the local currency.
Foreign currency financial statements are converted into United States dollars
by translating balance sheet accounts at the current exchange rate at year-end
and income statement items at the average exchange rate for the year, with the
resulting translation adjustment made to a separate component of shareholders'
equity. Transaction gains or losses, other than intercompany debt deemed to be
of a long-term nature, are included in net income in the period in which they
occur.

CASH EQUIVALENTS

Short-term investments (including any debt securities) that are part of the
Company's cash management portfolio are classified as cash equivalents and are
carried at amortized cost. These investments are highly liquid, are of limited
credit risk and have original maturities of three months or less when purchased.
The carrying amount of cash equivalents approximates market.

ACCOUNTS RECEIVABLE AND ALLOWANCES

Accounts receivable are the result of the Company's worldwide sales
activities. Although the Company's credit risk is spread across a large number
of customers within a wide geographic area, periodic concentrations within a
specific industry occur due to the seasonality of its businesses. At December
31, 1997, the Company's receivables from sporting goods retailers who sell skis,
skates and snowboards amounted to 52% of total receivables. The Company performs
periodic credit evaluations to manage its credit risk. Accounts receivable are
net of allowances for doubtful accounts of $7,418,000 and $6,120,000 at December
31, 1997 and 1996, respectively.

24
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined on
the LIFO method with respect to approximately 20% and 30% of total inventories
at December 31, 1997 and 1996, respectively. Cost is determined on the FIFO
method for all other inventories. During 1997, one of the subsidiaries of the
Company changed its method of accounting for inventories from the LIFO method to
the FIFO method, resulting in a $1.4 million reduction in the LIFO reserve and
in cost of products sold.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is recorded at cost. Depreciation is provided
on the straight-line method based upon the estimated useful lives of the assets.
Repairs and maintenance of $7,816,000, $6,866,000 and $7,270,000 in 1997, 1996
and 1995, respectively, were expensed as incurred.

INTANGIBLES

Goodwill arising from acquisitions is amortized on a straight-line basis
over a period of up to 40 years. Other intangibles are amortized on a
straight-line basis over 3 to 15 years. Accumulated amortization of intangibles
as of December 31, 1997 and 1996, amounted to $5,819,000 and $4,538,000,
respectively. The Company periodically reviews intangibles for impairment of
value.

INVESTMENTS

The investments received in connection with the sale of the Company's
swimming pool and motorized pool cover business were sold during 1997. The
amount of the net gain realized on the sale of the investments was $3.5 million
and is included in other income.

The investments included a 5.6% subordinated note receivable from GAI with a
face value of $6,178,000 and 100,000 shares of common stock of GAI with a
carrying value of $1,500,000, which were received in connection with the sale of
the Company's swimming pool and motorized pool cover business (see Note 3). The
note receivable, with a maturity date of March 1, 2001, was discounted by
$1,270,000 to reflect a market rate.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising costs for the years
ended December 31, 1997, 1996 and 1995 amounted to $21,351,000, $14,723,000 and
$13,006,000, respectively.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to expense as incurred.

OTHER INCOME

Other income includes royalties, interest income, gain on sale of
investments and other miscellaneous income, net of $3.5 million of legal fees
expensed related to the derivative lawsuit described in Note 7.

25
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES

Income taxes are provided for based upon Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" which requires that
income taxes be provided for using the liability method.

PER SHARE DATA

On December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share," which specified the computation, presentation and disclosure
requirements for earnings per share ("EPS"). It replaces the presentation of
primary and fully diluted EPS with basic and diluted EPS. Basic EPS is
determined by dividing net income by the weighted average number of shares
outstanding during the period. Diluted EPS reflects the potential dilutive
effects of stock options, using the treasury stock method. Stock options
outstanding at December 31, 1997, 1996 and 1995 were 171,000, 160,000 and
131,000, respectively. Options to purchase 4,500 shares of common stock at
$29.88 per share were outstanding during 1997 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common stock and, therefore, the effect would be
antidilutive.

NEWLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company will adopt SFAS No. 130 in
1998.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the
current year presentation.

NOTE 2--RESTRUCTURING CHARGE

A restructuring charge of $2.4 million ($1.6 million, or $.09 per share,
after-tax) was recorded during the year. The restructuring charge was recorded
subsequent to the announcement of the Company's plan to consolidate its mountain
bike and outdoor equipment operations into its existing facility on Vashon
Island, Washington, and to move its production of outdoor products to outside
sources. The restructuring charge includes approximately $1.0 million in
expected cash outlays primarily related to severance benefits and shutdown of
the facilities. The balance of the restructuring charge relates to the
divestiture of the remaining assets. The Company plans to complete the
restructuring by the end of the first quarter of 1998.

26
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 3--ACQUISITIONS AND DISPOSITION

On October 1, 1997, the Company purchased the stock of Planet Earth
Skateboards, Inc., a designer, manufacturer and marketer of skateboards and
related apparel and accessories. The Company also purchased, on October 20,
1997, the net assets of Katin U.S.A., Inc. a designer, manufacturer and marketer
of surfwear apparel. The combined purchase price of the acquisitions was not
material. These transactions were accounted for using the purchase method of
accounting and the results of operations from these businesses have been
included in the consolidated statement of income from the date of acquisition.

On March 5, 1996, the Company completed the sale of the assets and business
of its swimming pool and motorized pool cover business ("Division") to General
Aquatics, Inc. ("GAI"). As the result of the sale, the Company reclassified the
accompanying prior years' financial statements to show the Division as a
discontinued operation. Consideration included a subordinated note and
approximately 9% of the outstanding shares of common stock of GAI, a privately
owned company. In addition, the Company received warrants to purchase additional
shares upon the occurrence of certain conditions. The exercise of the warrants
may be funded through the surrender of the unpaid portion of the note. No value
was given to the warrants. Additionally, GAI assumed certain liabilities of the
Division. The face value of the note receivable was discounted to reflect a
market rate at the date of issuance (10%) and the common stock was valued at
estimated fair value. These investments were sold during 1997. See Note 1.

The loss on disposal of the discontinued operations, net of a tax benefit of
$3,218,000, included a provision for operating losses of $2,087,000 prior to
disposal. The tax benefit is more than the benefit computed using statutory tax
rates due to the realization of the benefit of deductions treated as permanent
differences in prior years. Net assets of discontinued operations were
segregated in the accompanying Consolidated Balance Sheets and consisted
primarily of accounts receivable, inventories, fixed assets and goodwill offset
by accounts payable, accrued payroll and related items and other accruals
(excluding the reserve for the loss on disposal and operating losses prior to
disposal). Net sales of $65,349,000 in the year ended December 31, 1995 were
excluded from consolidated net sales in the accompanying Consolidated Statements
of Income.

NOTE 4--INVENTORIES

Inventories consisted of the following at December 31:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
(THOUSANDS)
Finished goods........................................................ $ 137,123 $ 111,989
Work in process....................................................... 20,802 10,810
Raw materials......................................................... 35,238 37,041
---------- ----------
Total at lower of FIFO cost or market (approximates
current cost)....................................................... 193,163 159,840
Less LIFO valuation reserve........................................... 3,795 4,464
---------- ----------
$ 189,368 $ 155,376
---------- ----------
---------- ----------
</TABLE>

27
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 5--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS

At December 31, 1997, the Company had $91.8 million available under foreign
and domestic short-term lines of credit, of which $49.0 million was outstanding.
The foreign subsidiaries' lines of credit generally have no termination date but
are reviewed annually for renewal and are denominated in the subsidiaries' local
currencies. At December 31, 1997, interest rates on short-term lines of credit
ranged from 6.0% to 9.5%. The weighted average interest rates on short-term
lines of credit as of December 31, 1997 and 1996 were 6.5% and 9.5%,
respectively.

The principal components of long-term debt at December 31 were:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(THOUSANDS)
Notes payable due in seven equal annual principal installments through
2004 with semi-annual interest payable at 8.39%....................... $ 31,112 $ 35,556

$100 million five-year unsecured bank revolving credit line due May 20,
2002, quarterly interest payments due at LIBOR plus 3/10% to 5/8% and
a commitment fee of 1/10% to 9/40% on the unused portion of the line
through May 1998...................................................... 62,001 54,500

Other debt.............................................................. 3,922
--------- ---------

93,113 93,978

Less-amounts due within one year........................................ 4,445 4,882
--------- ---------

$ 88,668 $ 89,096
--------- ---------
--------- ---------
</TABLE>

The principal amount of long-term debt maturing in each of the five years
following 1997 is:

<TABLE>
<CAPTION>
(THOUSANDS)
------------
<S> <C>
1998............................................................ $ 4,445
1999............................................................ 4,444
2000............................................................ 4,444
2001............................................................ 4,444
2002............................................................ $ 66,445
</TABLE>

Interest paid on short- and long-term debt for the years ended December 31,
1997, 1996 and 1995 was $10.6 million, $9.3 million and $9.9 million,
respectively.

In May 1996, the Company entered into an agreement to sell, with limited
recourse, undivided participation interests in designated pools of accounts
receivable for a period of up to five years, in an amount not to exceed $50
million at any time. At December 31, 1997 and 1996, $50.0 million and $46.7
million, respectively, of receivables were sold under this arrangement.

The $100 million credit line and the accounts receivable arrangement, among
other things, restrict amounts available for payment of cash dividends by the
Company. As of December 31, 1997, $16.3 million

28
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 5--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
of retained earnings were free of such restrictions. Interest rates on the $100
million credit line at December 31, 1997, ranged from 5.8% to 6.6%.

The Company had $17.3 million of letters of credit outstanding as of
December 31, 1997.

The carrying amounts for the short-term lines of credit and the long-term
bank revolving credit line approximate their fair value since floating interest
rates are charged, which approximate market rates. The fair value of the $31.1
million 8.39% notes payable, based on quoted market price, is $29.6 million as
compared to a carrying amount of $31.1 million.

The Company, including its foreign subsidiaries, enters into forward
exchange contracts to hedge certain firm and anticipated sales and purchase
commitments which are denominated in U.S. or foreign currencies. The purpose of
the foreign currency hedging activities is to reduce the Company's risk of
fluctuating exchange rates. At December 31, 1997, the Company had foreign
exchange contracts with maturities of generally one year in the aggregate amount
of $48.0 million, and with net unrealized gains of $3.2 million. The unrealized
gains will be recognized in earnings when realized and when the underlying
transaction occurs.

NOTE 6--INCOME TAXES

Pretax income from continuing operations for the years ended December 31 was
taxed under the following jurisdictions:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Domestic..................................................... $ 26,003 $ 29,402 $ 22,174
Foreign...................................................... 5,112 7,140 6,445
--------- --------- ---------
$ 31,115 $ 36,542 $ 28,619
--------- --------- ---------
--------- --------- ---------
</TABLE>

Components of the income tax provision applicable to continuing operations
for the three years ended December 31 are:

<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
--------- --------- --------- --------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal..................... $ 9,645 $ (1,800) $ 9,230 $ 190 $ 7,625 $ (405)
State....................... 195 335 665 (15) 1,310 (40)
Foreign..................... 405 435 775 480 310 20
--------- --------- --------- --------- --------- ---------
$ 10,245 $ (1,030) $ 10,670 $ 655 $ 9,245 $ (425)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>

29
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 6--INCOME TAXES (CONTINUED)

The principal elements accounting for the difference between the statutory
federal income tax rate and the effective tax rate for the three years ended
December 31 are:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(PERCENT)
<S> <C> <C> <C>
Statutory federal income tax rate....................................... 35.0 35.0 35.0
State income tax effect, net of federal benefit......................... 1.1 1.2 2.9
U.S. tax effect of foreign earnings..................................... (5.3) (3.6) (6.8)
Other................................................................... (1.2) (1.6) (0.2)
--- --- ---
29.6 31.0 30.9
--- --- ---
--- --- ---
</TABLE>

No provision for United States income taxes has been made on undistributed
earnings of foreign subsidiaries, since these earnings are considered to be
permanently reinvested. At December 31, 1997, foreign subsidiaries had unused
operating loss carryforwards of approximately $9.1 million of which
approximately $1.0 million expires in 2001 and the remainder carries forward
indefinitely. Since the use of these operating loss carryforwards is limited to
future taxable earnings of the related foreign subsidiaries, a valuation reserve
has been recognized to offset the deferred tax assets arising from such
carryforwards. The valuation reserve in 1997 increased by a net $4.1 million due
to a previously unusable foreign loss carryforward which became usable during
the current year. In both 1996 and 1995, the valuation reserve, which is
included in the tax effect of foreign earnings above, was reduced by $1.4
million due to the utilization of the related operating loss carryforwards.

Deferred tax assets and liabilities are comprised of the following at
December 31:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
(THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization of property, plant and equipment........ $ 5,807 $ 5,549
Trademark amortization................................................ 325 285
Other................................................................. 8,690 9,663
--------- ---------
Deferred tax liabilities............................................ 14,822 15,497
Deferred tax assets:
Insurance accruals.................................................... 1,837 1,561
Tax effect of foreign loss carryforwards.............................. 4,553 487
Bad debt reserve...................................................... 1,377 1,332
Other................................................................. 6,022 5,302
--------- ---------
13,789 8,682
Valuation reserve..................................................... 4,553 487
--------- ---------
Current deferred tax assets......................................... 9,236 8,195
--------- ---------
Deferred tax liabilites, net............................................ $ 5,586 $ 7,302
--------- ---------
--------- ---------
</TABLE>

Income taxes paid, net of refunds, in the years ended December 31, 1997,
1996 and 1995 were $10.9 million, $7.3 million and $6.8 million, respectively.

30
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 7--COMMITMENTS AND CONTINGENCIES

Future minimum payments under noncancelable operating leases as of December
31, 1997 are as follows:

<TABLE>
<CAPTION>
(THOUSANDS)
-------------
<S> <C>
1998............................................................................ $ 2,948
1999............................................................................ 2,021
2000............................................................................ 1,243
2001............................................................................ 761
2002............................................................................ 298
Thereafter...................................................................... 792
------
$ 8,063
------
------
</TABLE>

Leases are primarily for rental of facilities, and about two-thirds of these
contain rights to extend the terms from one to ten years.

Net rental expense, including those rents payable under noncancelable leases
and month-to-month tenancies, amounted to $4,620,000, $3,720,000 and $3,105,000
for the years ended December 31, 1997, 1996 and 1995, respectively.

The Company is subject to various legal actions and proceedings in the
normal course of business. While the ultimate outcome of these matters cannot be
predicted with certainty, management does not believe these matters will have a
material adverse effect on the Company's financial statements.

The Company is one of several named potentially responsible parties ("PRP")
in an Environmental Protection Agency matter involving discharge of hazardous
materials at an old waste site in South Carolina. Although environmental laws
technically impose joint and several liability upon each PRP at each site, the
extent of the Company's required financial contribution to the cleanup of these
sites is expected to be limited based upon the number and financial strength of
the other named PRPs and the volume and types of waste involved which might be
attributable to the Company.

The Company is a nominal defendant in a complaint that purports to be a
derivative lawsuit brought on behalf of the Company against two of its
directors. The lawsuit has been dismissed with prejudice, however, it is
currently on appeal.

The ultimate outcome of the matters described above cannot be predicted with
certainty, however, management does not believe these matters will have a
material adverse effect on the Company's financial statements.

31
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 8--PENSION PLANS AND OTHER BENEFIT PLANS

The Company sponsors several trusteed noncontributory defined benefit
pension plans covering most of its employees. Benefits are generally based on
years of service and the employee's highest compensation for five consecutive
years during the years of credited service. Contributions are intended to
provide for benefits attributable to service to date and service expected to be
provided in the future. The Company funds these plans in accordance with the
Employee Retirement Income Security Act of 1974.

The Company also sponsors defined contribution pension plans covering most
of its domestic employees. Contributions by the Company for the defined
contribution plans are determined as a percent of the amounts contributed by the
respective employees.

The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Company's consolidated balance sheets at December 31:

<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
(THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligations, including
vested benefits of $41,543 in 1997 and
$38,306 in 1996......................... $ (39,809) $ (3,082) $ (36,379) $ (3,240)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Projected benefit obligation for service
rendered to date.......................... $ (48,814) $ (3,082) $ (44,716) $ (3,240)
Plan assets at fair value, primarily
publicly traded stocks, bonds and other
fixed income securities................... 48,432 43,681
------------- ------------- ------------- -------------
Projected benefit obligation in excess of
plan assets............................... (382) (3,082) (1,035) (3,240)
Unrecognized net (gain) loss................ (875) 498 1,376 609
Unrecognized prior service cost............. 880 167 658 199
Unrecognized net transition (asset)
obligation at January 1, 1987, net of
amortization.............................. (878) 393 (1,151) 458
Adjustment required to recognize minimum
liability................................. (1,111) (1,266)
------------- ------------- ------------- -------------
Prepaid pension liability recognized in the
consolidated balance sheets............... $ (1,255) $ (3,135) $ (152) $ (3,240)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

The weighted average discount rates and rates of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 7.5% and 4.5% at December 31, 1997 and 7.5% and
4.4%, respectively, at December 31, 1996. The expected long-term rates of return
on plan assets were 9.0% for each of the two years ended December 31, 1997.

32
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 8--PENSION PLANS AND OTHER BENEFIT PLANS (CONTINUED)

Net pension cost consisted of the following at December 31:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period................ $ 1,707 $ 1,779 $ 1,312
Interest cost on the projected benefit obligation............. 3,698 3,420 3,018
Actual gains on plan assets................................... (7,182) (4,579) (7,369)
Net amortization and deferral................................. 3,249 898 4,162
--------- --------- ---------
Total net periodic pension cost of funded defined benefit
plans....................................................... 1,472 1,518 1,123
Defined contribution plans.................................... 906 796 465
--------- --------- ---------
Total pension plan cost....................................... $ 2,378 $ 2,314 $ 1,588
--------- --------- ---------
--------- --------- ---------
</TABLE>

NOTE 9--QUARTERLY OPERATING DATA (UNAUDITED)

<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C>
1997
Net sales.............................................. $ 171.5 $ 171.5 $ 142.4 $ 161.5 $ 646.9
Gross profit........................................... 46.4 51.1 41.0 42.8 181.3
Net income............................................. 5.8 8.7 3.1 4.3 21.9
Basic earnings per share............................... $ .35 $ .53 $ .19 $ .26 $ 1.32
Diluted earnings per share............................. $ .35 $ .52 $ .18 $ .26 $ 1.31
Cash dividend per share................................ $ .11 $ .11 $ .11 $ .11 $ .44
Stock prices:
High................................................. $ 29.88 $ 31.88 $ 32.94 $ 29.81 $ 32.94
Low.................................................. $ 24.38 $ 24.13 $ 23.44 $ 22.44 $ 22.44

1996
Net sales.............................................. $ 158.9 $ 143.3 $ 147.7 $ 152.8 $ 602.7
Gross profit........................................... 41.4 41.2 42.8 44.6 170.0
Net income............................................. 4.8 7.0 7.1 6.3 25.2
Basic earnings per share............................... $ .29 $ .42 $ .43 $ .38 $ 1.52
Diluted earnings per share............................. $ .29 $ .42 $ .43 $ .38 $ 1.51
Cash dividend per share................................ $ .11 $ .11 $ .11 $ .11 $ .44
Stock prices:
High................................................. $ 26.88 $ 30.13 $ 27.25 $ 27.50 $ 30.13
Low.................................................. $ 20.38 $ 23.88 $ 23.38 $ 21.25 $ 20.38
</TABLE>

NOTE 10--STOCK OPTIONS

Under the Company's 1994 and 1988 Incentive Stock Option Plans ("1994 Plan"
and "1988 Plan," respectively), options may be granted to eligible directors and
key employees of the Company and its

33
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 10--STOCK OPTIONS (CONTINUED)
subsidiaries at not less than 100% of the market value of the shares on the
dates of grant. No further options may be granted under the 1988 Plan.

The 1994 Plan permits the granting of options for terms not to exceed ten
years from date of grant. The options are exercisable on such terms as may be
established by the Compensation Committee of the Board of Directors at the dates
of grant.

The Company is authorized, at the discretion of the Compensation Committee,
to provide loans to key employees in connection with the exercise of stock
options under both the 1994 Plan and the 1988 Plan. The loans are collateralized
by the underlying shares of stock issued and bear interest at the applicable
rates published by the IRS. At December 31, 1997 and 1996, there was a total of
$119,300 and $1,191,000, respectively, of loans and accrued interest outstanding
which are due on various dates through October, 1999. The amounts of these loans
are shown as a reduction of shareholders' equity.

Options granted, exercised and forfeited for the 1994 Plan and 1988 Plan
were as follows:

<TABLE>
<CAPTION>
EXERCISE PRICE
-------------------------------- WEIGHTED
SHARES LOW HIGH AVERAGE
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Options outstanding at December 31, 1994...................... 582,735 $ 5.66 $ 17.25 $ 14.40
Granted..................................................... 182,500 15.00 23.00 22.74
Exercised................................................... (141,215) 5.66 17.25 9.90
Forfeited................................................... (69,264) 11.75 17.25 15.20
----------
Options outstanding at December 31, 1995...................... 554,756 5.66 23.00 16.91
Granted..................................................... 220,000 23.00 26.50 26.43
Exercised................................................... (67,597) 5.66 17.25 10.35
Forfeited................................................... (18,100) 14.52 22.88 18.32
----------
Options outstanding at December 31, 1996...................... 689,059 11.11 26.50 20.56
Granted..................................................... 234,000 23.50 29.88 23.68
Exercised................................................... (28,418) 11.11 23.00 17.13
Forfeited................................................... (16,850) 16.38 29.88 24.33
----------
Options outstanding at December 31, 1997...................... 877,791 11.11 29.88 21.43
----------
----------
</TABLE>

At December 31, 1997, 1996 and 1995, stock options to purchase 667,332,
270,084 and 205,736, shares were exercisable at weighted average prices of
$21.19, $15.44 and $12.28, respectively. At December 31, 1997, 1,173,666 shares
of common stock were reserved for issuance under the Plans.

The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
as of December 31, 1996. Under provisions of the standard, the Company has
elected to continue using the intrinsic-value method of accounting for
stock-based awards granted to employees in accordance with APB No. 25.
Accordingly, the Company has not recognized compensation expense for its
stock-based awards to employees. Had the Company elected to adopt the fair value
approach of SFAS No. 123, the proforma effect on net income and basic and
diluted earnings per share would have been $21,157,000, $1.28 and $1.27,
respectively, at December 31, 1997 and $24,848,000, $1.50 and $1.49,
respectively, at December 31,

34
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 10--STOCK OPTIONS (CONTINUED)
1996. The proforma effect was calculated using Black-Scholes option valuation
model, and the following assumptions were utilized.

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Risk free interest rate.................................................. 5.0% 6.0%
Expected life............................................................ 5 years 5 years
Expected volatility...................................................... .255 .224
Expected dividend yield.................................................. 2.2% 1.5%
</TABLE>

The proforma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years. Since
changes in the subjective assumptions used in the Black-Scholes model can
materially affect the fair value estimate, management believes the model does
not provide a reliable measure of the fair value of its options.

Options are granted at an exercise price equal to the fair market value at
the date of grant. Information regarding stock options outstanding as of
December 31, 1997 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
PRICE RANGE SHARES PRICE LIFE SHARES PRICE
- ------------------ --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$11.11 to $17.25 271,691 $ 14.76 6.27 years 269,691 $ 14.74
$22.88 to $29.88 606,100 24.42 9.10 years 127,950 24.18
</TABLE>

NOTE 11--SHAREHOLDERS' EQUITY

PREFERRED STOCK

Shares are issuable in one or more series, and the Board of Directors has
authority to fix the terms and conditions of each series. No shares were issued
or outstanding during 1997 and 1996.

STOCK OFFERING

On June 1, 1995, the Company completed a secondary public offering of 4.6
million new shares of its Common Stock. The net proceeds of $67.2 million were
used to reduce amounts outstanding under an $85 million credit facility during
1995.

EMPLOYEE STOCK OWNERSHIP PLAN

The Company has an Employee Stock Ownership Plan ("ESOP") which covers
substantially all of its domestic non-union employees with at least one year of
service. As of December 31, 1997, the trust was indebted to the Company in the
aggregate amount of $672,000 in connection with stock purchases made from 1982
through 1984 of which 163,882 shares with an aggregate market value of
$3,769,000 as of December 31, 1997 remained unallocated to participants. These
loans are repayable over the next five to seven years with interest at prime
plus 1/2 %, not to exceed 18%, and the unallocated shares will be

35
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 11--SHAREHOLDERS' EQUITY (CONTINUED)
released to participants proportionately as these loans are repaid. Of the total
dividends received by the ESOP on its investment in the Company's Common Stock,
dividends on allocated and unallocated shares in the amount of $167,000 and
$168,000 in 1997 and 1996, respectively, were used to service these loans.
Allocated shares as of December 31, 1997 totaled 1,852,941. Additionally, the
trust was indebted to the Company in the amount of $2,100,000 and $5,000,000 at
December 31, 1997 and 1996, respectively, in connection with distributions made
to terminees.

The amount of the Company's annual contribution to the ESOP is at the
discretion of the Company's Board of Directors. For the two years 1996 and 1995,
contributions were limited to amounts in excess of annual dividends, net of debt
service, of the ESOP necessary to fund obligations arising in each of those
years to retired and terminated employees. These amounts were $236,000 and
$13,000, respectively. No expense was recorded and no contributions were made in
1997. ESOP expense, including amortization of the foregoing payments, was
$389,000 and $264,000 in 1996 and 1995, respectively.

PREFERRED STOCK RIGHTS

Rights are outstanding which entitle the holder of each share of Common
Stock of the Company to buy one one-hundredth of a share of Series A preferred
stock at an exercise price of $51.712 per one one-hundredth of a share, subject
to adjustment. The rights are not separately tradable or exercisable until a
party either acquires, or makes a tender offer that would result in ownership
of, at least 15% of the Company's common shares. If a person becomes the owner
of at least 15% of the Company's outstanding common shares (an "Acquiring
Person"), each holder of a right other than such Acquiring Person and its
affiliates is entitled, upon payment of the then-current exercise price per
right (the "Exercise Price"), to receive shares of Common Stock (or Common Stock
equivalents) having a market value of twice the Exercise Price. If the Company
subsequently engages in a merger, a business combination or an asset sale with
the Acquiring Person, each holder of a right other than the Acquiring Person and
its affiliates is thereafter entitled, upon payment of the Exercise Price, to
receive stock of the Acquiring Person having a market value of twice the
Exercise Price. At any time after any party becomes an Acquiring Person, the
Board of Directors may exchange the rights (except those held by the Acquiring
Person) at an exchange ratio of one common share per right. Prior to a person
becoming an Acquiring Person, the rights may be redeemed at a redemption price
of one cent per right, subject to adjustment. The rights are subject to
amendment by the Board.

36
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 12--SEGMENT DATA

The Company and its subsidiaries are organized into sporting goods and other
recreational products and industrial products segments.

<TABLE>
<CAPTION>
NET SALES TO UNAFFILIATED
CUSTOMERS PRETAX INCOME
------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Sporting goods and other recreational
products...................................... $ 445.0 $ 407.3 $ 349.4 $ 27.2* $ 31.9 $ 26.9
Industrial products............................. 201.9 195.4 194.9 21.1 20.5 18.0
--------- --------- --------- --------- --------- ---------
Net sales and operating profits................. $ 646.9 $ 602.7 $ 544.3 48.3 52.4 44.9
--------- --------- ---------
--------- --------- ---------
Corporate
Interest and other income..................... .1 .3 .3
Interest expense.............................. (10.6) (9.3) (9.9)
General expense............................... (6.7) (6.9) (6.7)
--------- --------- ---------
Pretax income................................... $ 31.1 $ 36.5 $ 28.6
--------- --------- ---------
--------- --------- ---------
</TABLE>

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

* Includes $2.4 million restructuring charge.

37
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 12--SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES
IDENTIFIABLE ASSETS DEPRECIATION
------------------------------- ------------------------------- --------------------
1997 1996 1995 1997 1996 1995 1997 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sporting goods and other
recreational products............ $ 317.5 $ 249.8 $ 269.9 $ 14.9 $ 9.7 $ 7.7 $ 7.5 $ 5.2
Industrial products................ 95.8 88.6 91.3 8.8 9.1 9.6 5.4 4.9
--------- --------- --------- --------- --------- --------- --------- ---------
Total segment data............... 413.3 338.4 361.2 23.7 18.8 17.3 12.9 10.1
Corporate.......................... 15.6 29.4 14.5
--------- --------- --------- --------- --------- --------- --------- ---------
$ 428.9 $ 367.8 $ 375.7 $ 23.7 $ 18.8 $ 17.3 $ 12.9 $ 10.1
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------

UNITED STATES FOREIGN ELIMINATIONS
------------------------------- ------------------------------- --------------------
1997 1996 1995 1997 1996 1995 1997 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales.......................... $ 502.5 $ 488.0 $ 444.8 $ 171.7 $ 139.3 $ 122.0 ($ 27.3) ($ 24.6)
Less-intergeographic sales......... 8.0 9.3 7.1 19.3 15.3 15.4 (27.3) (24.6)
--------- --------- --------- --------- --------- --------- --------- ---------
Net sales to unaffiliated
customers........................ 494.5 478.7 437.7 152.4 124.0 106.6
--------- --------- --------- --------- --------- ---------
Operating profit................... 40.6 44.7 37.9 7.7 7.7 7.0
--------- --------- --------- --------- --------- ---------
Identifiable assets................ 305.5 259.7 294.4 107.8 78.7 66.8
--------- --------- --------- --------- --------- ---------
Capital expenditures............... 21.6 17.4 12.4 2.1 1.4 4.9
--------- --------- --------- --------- --------- ---------
Depreciation....................... 11.1 8.4 7.4 1.8 1.7 2.0
--------- --------- --------- --------- --------- ---------
Amortization....................... 1.2 1.0 .6
--------- --------- ---------

AMORTIZATION
-------------------------------
1995 1997 1996 1995
--------- --------- --------- ---------

<S> <C> <C> <C> <C>
Sporting goods and other
recreational products............ $ 4.9 $ 1.2 $ 1.0 $ .6
Industrial products................ 4.5
--------- --------- --------- ---------
Total segment data............... 9.4 1.2 1.0 .6
Corporate.......................... .1 .1 .1 .1
--------- --------- --------- ---------
$ 9.5 $ 1.3 $ 1.1 $ .7
--------- --------- --------- ---------
--------- --------- --------- ---------
TOTAL SEGMENT DATA
-------------------------------
1995 1997 1996 1995
--------- --------- --------- ---------

<S> <C> <C> <C> <C>
Net Sales.......................... ($ 22.5) $ 646.9 $ 602.7 $ 544.3
Less-intergeographic sales......... (22.5)
--------- --------- --------- ---------
Net sales to unaffiliated
customers........................ 646.9 602.7 544.3
--------- --------- ---------
Operating profit................... 48.3 52.4 44.9
--------- --------- ---------
Identifiable assets................ 413.3 338.4 361.2
--------- --------- ---------
Capital expenditures............... 23.7 18.8 17.3
--------- --------- ---------
Depreciation....................... 12.9 10.1 9.4
--------- --------- ---------
Amortization....................... 1.2 1.0 .6
--------- --------- ---------
</TABLE>

38
<PAGE>
K2 INC.
REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders:

K2 Inc.

We have audited the accompanying consolidated balance sheets of K2 Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of K2 Inc. and
subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operation and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

Los Angeles, California
February 17, 1998

39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except as noted in the following paragraph the information called for by
Items 10, 11, 12 and 13 have been omitted because on or before April 30, 1998,
Registrant will file with the Commission pursuant to Regulation 14A a definitive
proxy statement. The information called for by these items set forth in that
proxy statement is incorporated herein by reference.

The information called for by Item 10 with respect to executive officers of
the Registrant appears following Item 4 under Part I of this Report.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The following documents are filed as part of this report.

(a-1) Financial Statements (for the three years ended December 31, 1997 unless
otherwise stated):

<TABLE>
<CAPTION>
PAGE REFERENCE
FORM 10K
---------------
<S> <C>
Statements of consolidated income............................................. 20
Consolidated balance sheets at December 31, 1997 and 1996..................... 21
Statements of consolidated shareholders' equity............................... 22
Statements of consolidated cash flows......................................... 23
Notes to consolidated financial statements.................................... 24-38
Report of Ernst & Young LLP, Independent Auditors............................. 39
</TABLE>

(a-2) Consolidated financial statement schedule:

<TABLE>
<S> <C>
II-Valuation and qualifying accounts........................... F-1
</TABLE>

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes.

(a-3) Exhibits

<TABLE>
<S> <C> <C>
(3) (a)(i) Restated Certificate of Incorporation dated May 4, 1989, filed as
Exhibit (3)(a)to Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference.

(a)(ii) Certificate of Amendment of Restated Certificate of Incorporation dated
May 31, 1995, filed as Exhibit 3(a)(ii) to Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.

(a)(iii) Certificate of Amendment of Restated Certificate of Incorporation, filed
as Exhibit (3)(I) to Form 10-Q for the quarter ended June 30, 1996 and
incorporated herein by reference.

(b) By-Laws of K2 Inc., as amended and restated, filed as Exhibit 3 to Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference.
</TABLE>

40
<PAGE>
<TABLE>
<S> <C> <C>
(4) (a) Rights Agreement dated August 10, 1989 between the Company and Harris
Trust Company, filed as Item 6, Exhibit (a) to Form 10-Q for the
quarter ended September 30, 1989 and incorporated herein by reference.

(b) Amendment No. 1 to the Rights Agreement dated as of December 18, 1997
between K2 Inc. (formerly known as Anthony Industries, Inc.) and
Harris Trust Company of New York, filed as Exhibit 2 to Form 8-A/A
dated January 20, 1997 and incorporated herein by reference.

(10) Material contracts

(a) Note Agreement Re: $40,000,000 8.39% Senior Notes due November 20, 2004
dated as of October 15, 1992, filed as Exhibit (10)(b) to Form 10-K
for the year ended December 31, 1992 and incorporated herein by
reference.
(1) First Amendment to the Note Agreement, dated May 1, 1996, and
filed as Exhibit 10.04 to Form 10-Q for the quarter ended June 30,
1996 incorporated herein by reference.

(b) Credit Agreement dated as of May 21, 1996 among Anthony Industries,
Inc., Bank of America National Trust and Savings Association as Agent,
Swing Line Bank and Issuing Bank and the Other Financial Institutions
Party Hereto filed as Exhibit 10.02 to Form 10-Q for the quarter ended
June 30, 1996, and incorporated herein by reference.
(1) First Amendment to the Credit Agreement dated as of March 17,
1996, filed as Exhibit 10(b)(2) to Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
(2) Second Amendment to the Credit Agreement dated as of April 18,
1997, filed as Exhibit10.02 to Form 10-Q for the quarter ended March
31, 1997, and incorporated herein by reference.
(3) Third Amendment to the Credit Agreement dated as of December 15,
1997.

(c) Transfer and Administration Agreement among Enterprise Funding Corp. as
the Company, Anthony Industries, Inc. as the Transferor and Master
Servicer, and NationsBank, N. A. as the Administrative Agent and the
Collateral Agent effective May 21, 1996, filed as Exhibit 10.03 to
Form 10-Q for the quarter ended June 30, 1996 and incorporated herein
by reference.
(1) First Amendment to Receivables Purchase Agreements and Transfer
and Administration Agreement dated as of March 15, 1997 filed as
Exhibit 10.01 to Form 10-Q for the quarter ended March 31, 1997
and incorporated herein by reference.

(d) Executive compensations plans and arrangements
(1)(i)Retirement agreement dated November 20, 1995 between the Company
and B. I. Forester, filed as Exhibit (10)(d)(1)(i) to Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference.
(ii) Trust for Anthony Industries, Inc. Supplemental Employee
Retirement Plan for the Benefit of B. I. Forester between the Company
and Wells Fargo Bank N.A., as Trustee, dated November 20, 1995,
filed as Exhibit (10)(d)(1)(ii) to Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.
(2)(i)Special Supplemental Benefit Agreement between the Company and
Bernard I. Forester dated December 9, 1986, filed as Exhibit
(10)(g) to Form 10-K for the year ended December 31, 1986 and
incorporated herein by reference.
(3) 1988 Incentive Stock Option Plan, filed as Exhibit A to the Proxy
Statement for the Annual Meeting of Shareholders held on May 5,
1988 and incorporated herein by reference.
</TABLE>

41
<PAGE>
<TABLE>
<S> <C> <C>
(4) Anthony Industries, Inc. Non-Employee Directors' Benefit Plan
effective May 1, 1992, filed as Item 6, Exhibit (a)(28) of Form 10-Q
for the quarter ended March 31, 1992 and incorporated herein by
reference.
(5) Anthony Industries, Inc. Corporate Officers' Medical Expense
Reimbursement Plan, as amended through October 22, 1993,
effective August 15, 1974, filed as Exhibit (10)(c)(5) to Form
10-K for the year ended December 31, 1993 and incorporated herein
by reference.
(6) Anthony Industries, Inc. Directors' Medical Expense Reimbursement
Plan, as amended through October 22, 1993, effective January 1,
1993 and incorporated herein by reference.
(7) K2 Inc. Executive Officers' Incentive Compensation Plan adopted
August 5, 1993 as amended December 17, 1996.
(8) 1994 Incentive Stock Option Plan, filed as Exhibit A to the Proxy
Statement for the Annual Meeting of Shareholders held on May 5,
1994 and incorporated herein by reference.

(e) (1) Asset Purchase Agreement dated February 16, 1996 among General
Aquatics, Inc., KDI Sylvan Pools, Inc., as Buyer, and Anthony
Industries, Inc., as Seller, filed as Item 7 Exhibit 99(A) to Form
8-K filed March 21, 1996 and incorporated herein by reference.

(2) 5.61% Subordinated Note Due March 4, 2001, filed as Item 7 Exhibit
99(B) to Form 8-K filed March 21, 1996 and incorporated herein by
reference.

(3) General Aquatics, Inc. Warrant to Purchase Common Stock, filed as
Item 7 Exhibit 99(C) to Form 8-K filed March 21, 1996 and
incorporated herein by reference.

(11) Computation of earnings per share for three years ended December 31, 1997.

(21) Subsidiaries

(23) Consent of Independent Auditors

(27) Financial Data Schedule--1997

(27.1) Restated Financial Data Schedule--1995, 1996 and 3 quarters of 1996

(27.2) Restated Financial Data Schedule--3 quarters 1997
</TABLE>

(b) Reports on Form 8-K:

None

(d) Refer to (a-2) above.

42
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 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.

<TABLE>
<S> <C> <C>
K2 INC.
(REGISTRANT)

By: /s/ RICHARD M. RODSTEIN
----------------------------------------
Richard M. Rodstein
PRESIDENT AND
CHIEF EXECUTIVE OFFICER

Date: March 30, 1998
----------------------------------------
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------

<C> <S> <C>
/s/ RICHARD M. RODSTEIN Director, President and Chief
------------------------------------------- Executive Officer (Principal March 30, 1998
(Richard M. Rodstein) Executive Officer)

/s/ JOHN J. RANGEL Senior Vice President-- Finance
------------------------------------------- (Principal Financial and March 30, 1998
(John J. Rangel) Accounting Officer)

/s/ B.I. FORESTER
------------------------------------------- Director, Chairman of the Board March 30, 1998
(B.I. Forester)

/s/ SUSAN E. ENGEL
------------------------------------------- Director March 30, 1998
(Susan E. Engel)

/s/ JERRY E. GOLDRESS
------------------------------------------- Director March 30, 1998
(Jerry E. Goldress)

/s/ HUGH V. HUNTER
------------------------------------------- Director March 30, 1998
(Hugh V. Hunter)
</TABLE>

43
<PAGE>

SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

/s/ STEWART M. KASEN
- ------------------------------ Director March 30, 1998
(Stewart M. Kasen)

/s/ JOHN H. OFFERMANS
- ------------------------------ Director March 30, 1998
(John H. Offermans)

44
<PAGE>
K2 INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS)

<TABLE>
<CAPTION>
DEDUCTIONS
ADDITIONS -------------
--------------------------- AMOUNTS
CHARGED TO CHARGED TO
BALANCE AT CHARGED TO OTHER ACCOUNTS RESERVE NET BALANCE
BEGINNING COSTS AND (PRIMARILY OF AT END OF
DESCRIPTION OF YEAR EXPENSES GROSS SALES) REINSTATEMENTS YEAR
- -------------------------------------------------- ----------- ----------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful items.................... $ 6,120 $ 2,399 $ -- $ 1,101 $ 7,418
Other (primarily sales discounts)............... 1,062 331(a) 1,393 0
----------- ----------- ------ ------ ---------
$ 7,182 $ 2,399 $ 331 $ 2,494 $ 7,418
----------- ----------- ------ ------ ---------
----------- ----------- ------ ------ ---------
Year ended December 31, 1996
Allowance for doubtful items.................... $ 5,298 $ 3,994 $ -- $ 3,172 $ 6,120
Other (primarily sales discounts)............... 2,937 2,494(a) 4,369 1,062
----------- ----------- ------ ------ ---------
$ 8,235 $ 3,994 $ 2,494 $ 7,541 $ 7,182
----------- ----------- ------ ------ ---------
----------- ----------- ------ ------ ---------
Year ended December 31, 1995
Allowance for doubtful items.................... $ 4,404 $ 2,093 $ -- $ 1,199 $ 5,298
Other (primarily sales discounts)............... 3,018 4,194 4,275 2,937
----------- ----------- ------ ------ ---------
$ 7,422 $ 2,093 $ 4,194 $ 5,474 $ 8,235
----------- ----------- ------ ------ ---------
----------- ----------- ------ ------ ---------
</TABLE>

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

(a) Decline reflects a change in billing practices to net discounts against
selling prices in certain divisions.

<PAGE>
EXHIBIT (10)(B)(3)

THIRD AMENDMENT TO
CREDIT AGREEMENT

THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Third Amendment") is dated
as of December 15, 1997, and is entered into by and among K2 Inc., a Delaware
corporation (the "Borrower"), the financial institutions listed on the signature
pages hereto (the "Banks"), Bank of America National Trust and Savings
Association, as Issuing Bank (in such capacity, the "Issuing Bank"), Bank of
America National Trust and Savings Association, as Swing Line Bank (in such
capacity, the "Swing Line Bank"), and Bank of America National Trust and Savings
Association, as the agent for the Banks (in such capacity, the "Agent") and
amends that certain Credit Agreement dated as of May 21, 1996 among the
Borrower, the Banks, the Issuing Bank, the Swing Line Bank and the Agent, as
amended by a First Amendment to Credit Agreement dated as of March 10, 1997 and
a Second Amendment to Credit Agreement dated as of April 18, 1997 (as so
amended, the "Agreement").

RECITAL

The Borrower has requested, and the Banks, the Issuing Bank, the Swing Line
Bank and the Agent are willing, to amend the Agreement on the terms and
conditions set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:

1. TERMS. All terms used herein shall have the same meanings as in the
Agreement unless otherwise defined herein. All references to the Agreement shall
mean the Agreement as hereby amended.

2. AMENDMENTS TO AGREEMENT. The Borrower, the Banks, the Issuing Bank, the
Swing Line Bank and the Agent hereby agree that the Agreement is amended as
follows:

2.1 Section 9.14(a)(5) of the Agreement is amended by deleting "$30,000,000"
and inserting "$50,000,000" in lieu thereof.

2.2 Section 9.12 of the Agreement is amended by deleting ".50 to 1.00" and
inserting ".55 to $1.00" in lieu thereof.

3. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to
Banks, the Issuing Bank, the Swing Line Bank and Agent that, on and as of the
date hereof, after giving effect to this Third amendment.

3.1 AUTHORIZATION. The execution, delivery and performance of this Third
Amendment have been duly authorized by all necessary corporate action by the
Borrower and this Third Amendment has been duly executed and delivered by the
Borrower.

3.2 BINDING OBLIGATION. This Third Amendment is the legal, valid and
binding obligation of Borrower, enforceable against the Borrower in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.

3.3 NO LEGAL OBSTACLE TO AMENDMENT. The execution, delivery and
performance of this Third Amendment will not (a) contravene the terms of the
Borrower's certificate of incorporation, by-laws or other organization document;
(b) conflict with or result in any breach or contravention of the provisions of
any contract to which the Borrower is a party, or the violation of any law,
judgment, decree or governmental order, rule or regulation applicable to
Borrower, or result in the creation under any agreement or instrument of any
security interest, lien, charge, or encumbrance upon any of the assets of the
Borrower. No approval or authorization of any governmental authority is required
to permit the execution, delivery or performance by the Borrower of this Third
Amendment, or the transactions contemplated hereby.

3.4 INCORPORATION OF CERTAIN REPRESENTATIONS. The representations and
warranties of the Borrower set forth in Section 7 of the Agreement are true and
correct in all respects on and as of the date hereof as
<PAGE>
though made on and as of the date hereof, except as to such representations made
as of an earlier specified date.

3.5 DEFAULT. No default or Event of Default under the Agreement has
occurred and is continuing.

4. MISCELLANEOUS.

4.1 EFFECTIVENESS OF AGREEMENT. Except as hereby expressly amended, the
Agreement and each other Loan Document shall each remain in full force and
effect, and are hereby ratified and confirmed in all respects on and as of the
date hereof.

4.2 WAIVERS. This Third Amendment is specific in time and in intent and
does not constitute, nor should it be construed as, a waiver of any other right,
power or privilege under the Loan Documents, or under any agreement, contract,
indenture, document or instrument mentioned in the Loan Document; nor does it
preclude any exercise thereof or the exercise of any other right, power or
privilege, nor shall any future waiver of any right, power, privilege or default
hereunder, or under any agreement, contract, indenture, document or instrument
mentioned in the Loan Documents, constitute a waiver of any other default of the
same or of any other term or provision.

4.3 COUNTERPARTS. This Third Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument. This Third Amendment shall not become
effective until the Borrower, the Banks, the Issuing Bank, the Swing Line Bank
and the Agent shall have signed a copy hereof, whether the same or counterparts,
and the same shall have been delivered to the Agent.

4.4 JURISDICTION. This Third Amendment shall be governed by and construed
under the laws of the State of California.

IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be duly executed and delivered as of the date first written above.

K2 INC.

/s/ JOHN J. RANGEL
--------------------------------------
By John J. Rangel
Senior Vice President-Finance

BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
as Agent

BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
as Swing Line Bank, Issuing Bank and
Bank

/s/ THERESE FONTAINE
--------------------------------------
Therese Fontaine
Vice President

NATIONSBANK OF TEXAS, N.A.

<PAGE>
EXHIBIT (11)

K2 INC.

COMPUTATION OF EARNINGS PER SHARE

FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(THOUSANDS, EXCEPT PER SHARE FIGURES)

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations................................................ $ 21,900 $ 25,217 $ 19,799
Loss from discontinued operations................................................ (4,920)
--------- --------- ---------
Net income....................................................................... $ 21,900 $ 25,217 $ 14,879
--------- --------- ---------
--------- --------- ---------
Basic:
Average shares outstanding..................................................... 16,541 16,574 14,367
--------- --------- ---------
--------- --------- ---------
Per share amounts:
Continuing operations........................................................ $ 1.32 $ 1.52 $ 1.38
Discontinued operations...................................................... $ (.34)
Net income................................................................... $ 1.32 $ 1.52 $ 1.04

Diluted:
Average shares outstanding..................................................... 16,541 16,574 14,367
Net effect of dilutive stock options under the treasury stock method using the
average market price......................................................... 172 160 131
--------- --------- ---------
Total...................................................................... 16,713 16,734 14,498
--------- --------- ---------
--------- --------- ---------
Per share amounts:
Continuing operations........................................................ $ 1.31 $ 1.51 $ 1.37
Discontinued operations...................................................... $ (.34)
Net income................................................................... $ 1.31 $ 1.51 $ 1.03
</TABLE>

<PAGE>
EXHIBIT (21)

SUBSIDIARIES

<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
SECURITIES OWNED OR
SUBJECT TO VOTING CONTROL
BY
--------------------------
COMPANY OTHER
------------- -----------
<S> <C> <C>
Shakespeare Company, a Delaware corporation................................................. 100%
Subsidiaries of Shakespeare Company:
Shakespeare (Hong Kong) Ltd., a Hong Kong corporation..................................... 100%
Subsidiary of Shakespeare (Hong Kong) Ltd.:
Pacific Rim Metallic Products Ltd., a Hong Kong corporation............................. 100%
Shakespeare International Ltd., a British corporation..................................... 100%
Subsidiaries of Shakespeare International Ltd.:
Shakespeare Company (UK) Ltd., a British corporation.................................... 100%
Shakespeare Monofilament U.K. Ltd., a British corporation............................... 100%
K2 (U.K.) Ltd., a British corporation................................................... 100%
Shakespeare Hengelsport, B.V., a Dutch corporation........................................ 100%
Shakespeare (Australia) Pty. Ltd., an Australian corporation.............................. 100%
K2 Ski Sport und Mode GmbH, a German corporation.......................................... 100%
Sitca Corporation, a Washington corporation................................................. 100%
Subsidiaries of Sitca Corporation:
K-2 Corporation, an Indiana corporation................................................... 100%
Subsidiaries of K-2 Corporation:
Katin, Inc. a Delaware corporation...................................................... 100%
Planet Earth Skateboards, Inc., a California corporation................................ 100%
K-2 International, Inc., an Indiana corporation......................................... 100%
Madshus A.S., a Norwegian corporation................................................... 100%
SMCA, Inc., a Minnesota corporation......................................................... 100%
Subsidiary of SMCA, Inc.:
Stearns Inc., a Minnesota corporation..................................................... 100%
Dana Design Ltd., a Montana corporation..................................................... 100%
K2 Bike Inc., a Delaware corporation........................................................ 100%
Subsidiary of K2 Bike Inc.:
Cross Country Racing, Inc., a Delaware corporation........................................ 100%
K2 Funding, Inc............................................................................. 100%
Noleen, Inc., a Delaware corporation........................................................ 100%
Anthony Sales (Barbados), Ltd., a Barbados corporation...................................... 100%
</TABLE>

<PAGE>
EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement
(Form S-8 dated October 14, 1988 and Form S-8 dated December 28, 1994)
pertaining to the 1988 Incentive Stock Option Plan and the 1994 Incentive Stock
Option Plan of K2 Inc. of our report dated February 17, 1998, with respect to
the consolidated financial statements of K2 Inc. included in the Annual Report
on Form 10-K for the year ended December 31, 1997.

Our audits also included the financial statement schedule of K2 Inc. listed
in Item 14(a). This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

ERNST & YOUNG LLP

Los Angeles, California
March 30, 1998

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,914
<SECURITIES> 0
<RECEIVABLES> 125,997
<ALLOWANCES> (7,418)
<INVENTORY> 189,368
<CURRENT-ASSETS> 330,168
<PP&E> 179,562
<DEPRECIATION> (101,774)
<TOTAL-ASSETS> 428,928
<CURRENT-LIABILITIES> 122,553
<BONDS> 0
17,160
0
<COMMON> 0
<OTHER-SE> 185,725
<TOTAL-LIABILITY-AND-EQUITY> 428,928
<SALES> 646,933
<TOTAL-REVENUES> 647,563
<CGS> 465,585
<TOTAL-COSTS> 465,585
<OTHER-EXPENSES> 137,904
<LOSS-PROVISION> 2,399
<INTEREST-EXPENSE> 10,560
<INCOME-PRETAX> 31,115
<INCOME-TAX> 9,215
<INCOME-CONTINUING> 21,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,900
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.31

</TABLE>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1995 SEP-30-1996
<CASH> 7,357 10,860 5,294 5,640 6,127
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 148,437 101,261 158,160 100,186 118,768
<ALLOWANCES> (8,235) (7,182) (6,353) (6,040) (6,329)
<INVENTORY> 140,679 155,376 132,076 130,532 136,971
<CURRENT-ASSETS> 300,455 274,409 300,712 239,294 269,519
<PP&E> 139,706 157,371 144,305 147,375 152,516
<DEPRECIATION> (82,599) (89,848) (83,789) (86,214) (88,336)
<TOTAL-ASSETS> 384,423 367,831 383,863 324,297 359,400
<CURRENT-LIABILITIES> 120,533 74,250 110,798 58,685 69,663
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 17,064 17,132 17,080 17,093 17,095
<OTHER-SE> 158,752 171,856 161,519 166,163 171,485
<TOTAL-LIABILITY-AND-EQUITY> 384,423 367,831 383,863 324,297 359,400
<SALES> 544,268 602,734 158,853 302,226 449,890
<TOTAL-REVENUES> 545,717 604,214 159,150 302,858 450,955
<CGS> 400,840 432,775 117,470 219,627 324,457
<TOTAL-COSTS> 400,840 432,775 117,470 219,627 324,457
<OTHER-EXPENSES> 104,249 121,607 31,809 60,162 89,766
<LOSS-PROVISION> 2,093 3,996 397 1,041 2,141
<INTEREST-EXPENSE> 9,916 9,294 2,432 4,729 6,805
<INCOME-PRETAX> 28,619 36,542 7,042 17,299 27,786
<INCOME-TAX> 8,820 11,325 2,255 2,535 8,890
<INCOME-CONTINUING> 19,799 25,217 4,787 11,764 18,896
<DISCONTINUED> (4,920) 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 14,879 25,217 4,787 11,764 18,896
<EPS-PRIMARY> 1.04 1.52 0.29 0.71 1.14
<EPS-DILUTED> 1.03 1.51 0.29 0.70 1.13

</TABLE>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 5,559 4,527 6,237
<SECURITIES> 0 0 0
<RECEIVABLES> 120,532 113,410 113,661
<ALLOWANCES> (6,247) (5,646) (5,592)
<INVENTORY> 151,941 159,315 180,696
<CURRENT-ASSETS> 284,389 285,469 311,725
<PP&E> 162,845 168,163 172,477
<DEPRECIATION> (92,386) (94,872) (98,169)
<TOTAL-ASSETS> 380,958 378,045 405,244
<CURRENT-LIABILITIES> 72,722 80,746 102,898
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 17,149 17,156 17,158
<OTHER-SE> 174,610 184,537 182,579
<TOTAL-LIABILITY-AND-EQUITY> 380,958 378,045 405,244
<SALES> 171,541 343,063 485,398
<TOTAL-REVENUES> 171,832 343,291 485,510
<CGS> 125,160 245,536 346,863
<TOTAL-COSTS> 125,160 245,536 346,863
<OTHER-EXPENSES> 35,121 70,437 103,911
<LOSS-PROVISION> 540 1,041 1,573
<INTEREST-EXPENSE> 2,519 5,198 7,772
<INCOME-PRETAX> 8,492 21,079 25,391
<INCOME-TAX> 2,630 6,530 7,775
<INCOME-CONTINUING> 5,862 14,549 17,616
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,862 14,549 17,616
<EPS-PRIMARY> 0.35 0.88 1.06
<EPS-DILUTED> 0.35 0.87 1.05

</TABLE>