K2 INC, 10-K405, 1999-03-30

K2 INC
10-K405, 1999-03-30
SPORTING & ATHLETIC GOODS, NEC

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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, 1998 Commission File No. 1-4290

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

K2 INC.

(Exact name of registrant as specified in its charter)

DELAWARE 95-2077125
(State of Incorporation) (I.R.S. Employer Identification No.)

4900 SOUTH EASTERN AVENUE 90040
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive
offices)

Registrant's telephone number, including area code (323) 724-2800

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

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- --------------------------------------------- ---------------------------------
Common Stock, par value $1 New York Stock Exchange
Pacific Exchange
Series A Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange

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/ No / /

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 $132,653,000 as of March 12, 1999.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 12, 1999.

Common Stock, par value $1 16,565,806 Shares

Documents Incorporated by Reference

Portions of the proxy statement for the Annual Meeting of Shareholders
to be held May 6, 1999 are incorporated by reference in Part III.

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<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 products, other
recreational products and selected industrial products. K2 Inc.'s sporting goods
include several name brand lines such as K2 and OLIN alpine skis, K2 snowboards,
boots and bindings, K2 in-line skates, K2 mountain bikes and BMX bikes,
SHAKESPEARE fishing rods and reels, STEARNS personal flotation devices, rainwear
and wet suits and K2 backpacks and hydration systems. The Company's other
recreational products include HILTON corporate casual apparel and PLANET EARTH
skateboards, apparel and shoes. 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, and SHAKESPEARE fiberglass and composite
marine antennas, light, transmission and distribution poles. Founded in 1946, K2
Inc. has grown to nearly $600 million in annual sales through a combination of
internal growth and strategic acquisitions. For segment and geographic
information, see Note 14 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, snowboard products and footwear and kits and combos. 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 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.

During the third quarter of 1998, the Company adopted a plan to dispose of
its Simplex building products division ("Division"). As a result, the Company
reclassified the Division as a discontinued operation in 1998 and similarly
reclassified prior years' operations (see Note 3 to Notes to Consolidated
Financial Statements for further discussion). The discussion which follows
focuses on the continuing operations of the Company.

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 PRODUCTS

Net sales for sporting goods products were $404.9 million in 1998, $410.8
million in 1997 and $368.9 million in 1996. 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
Mountain and BMX Bikes K2, Noleen
Backpacks and Hydration Systems K2, Dana Design
</TABLE>

ALPINE SKIS. The Company sells its alpine skis under the names K2 and OLIN
in the three major ski markets of the world--the United States, Europe and
Japan. K2 offers skis in a broad range of styles for a

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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 have declined in the
domestic and Japanese markets. Poor snow conditions late in 1998 further
contributed to a decline in retail sales. K2 skis have benefited from their
popularity among retail purchasers due to their high-quality, innovative
features, (such as the line of deep side-cut skis incorporating piezoelectronics
technology), attractive graphics and creative marketing.

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 day packs, high performance snowshoes integrating the
CLICKER bindings and backpacks for carrying snowboards and other gear when
hiking into the back country have been recently introduced. The snowboard
market, which is highly fragmented, is rapidly consolidating in favor of the
larger, better established brands such as K2. The Company believes that its
manufacturing capability and ability to innovate provides a competitive
advantage. Like its alpine skis, K2 snowboards are of high quality and have
innovative features and attractive graphics.

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 and licensed 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 grew dramatically as sales of K2 skates went from
$10 million to $117 million in four years. In the second half of 1997, however,
sales began to soften and in 1998, with the substantial decline of the worldwide
"aggressive" skate market, the Company believes the industry grew at only a
single digit rate. 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 and primarily
assembled by a vendor 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 1998, sales of in-line skates in Europe amounted to approximately 59% 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 twenty
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 and allowing

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the Company to introduce new products to its distribution. 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).

ACTIVE WATER SPORTS PRODUCTS. The Company sells STEARNS flotation vests,
jackets and suits ("personal flotation devices"), cold water immersion products,
wet suits, outdoor products, rainwear and towables in the United States and in
certain foreign countries. 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 most of 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.

MOUNTAIN AND BMX BIKES. K2 designs and distributes high quality
full-suspension mountain bikes, front suspension mountain bikes, comfort bikes,
and BMX bikes and components under the K2 AND NOLEEN names in the United States
and internationally. Performance and comfort are provided by mountain bikes
which have shock absorbing elements for either front and rear wheels or front
wheels only, 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. The Company believes that the market for
high-end full-suspension mountain bikes declined in 1998 due to the introduction
of lower more popularly priced models. As a result, in late 1998 the Company
introduced several new products to reposition its product line at more popular
price points. These new products include lower priced full-suspension and
single-suspension mountain bikes, BMX bikes and the Smart Fork. K2 assembles
certain components at its facility in the United States and sources the
remaining frames and 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
certain BMX professional riders.

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. The line also includes a series of "activity specific" packs
marketed by K2 ski, bike and snowboard. DANA DESIGN backpacks are primarily
manufactured to the Company's specifications by vendors in Mexico for sale by
independent sales representatives to specialty retailers in the United States.

OTHER RECREATIONAL PRODUCTS

Net sales for other recreational products were $43.7 million in 1998, $34.2
million in 1997 and $38.4 million in 1996. The following table lists the
Company's principal other recreational products and brand names under which they
are sold.

<TABLE>
<CAPTION>
PRODUCT BRAND NAME
- -------------------------------------------------- ---------------------------------------------
<S> <C>
Imprinted Corporate Casuals Hilton
Skateboard apparel Planet Earth
Snowboard Apparel Planet Earth
Casual and surf apparel Katin
Skateboard shoes Adio
</TABLE>

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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 a direct sales force and by independent
sales representatives.

SKATEBOARD, SNOWBOARD, CASUAL AND SURF APPAREL AND SKATEBOARD
SHOES. Lifestyle apparel and shoes are sold in the U.S., Europe and Japan. The
products are manufactured to the Company's specifications by suppliers,
primarily in Asia. The products are sold through independent and Company-owned
distributors in Europe and Asia and to retailers in the domestic market by
independent sales representatives.

INDUSTRIAL PRODUCTS

Net sales of industrial products were $125.9 million in 1998, $114.0 million
in 1997 and $105.9 million in 1996. The following table lists the Company's
principal industrial products, all of which are sold under the Shakespeare brand
name.

<TABLE>
<CAPTION>
PRODUCT
- --------------------------------------------------
<S> <C>
Monofilament Line
Composite Utility and Decorative Light Poles
Fiberglass Marine Radio Antennas
</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.

COMPETITION

The Company's competition varies among its business lines. The sporting
goods markets 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 relatively large number of companies compete in snowboards and active
wear. While the Company believes that its well-recognized brand

5
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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. 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.

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 season 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 October through April and in the case of in-line skates, runs primarily
from February through June. Relatively large investments in receivables are
consequently made during and shortly after such seasons. The rapid delivery
requirements of the Company's customers for its sporting goods products and
other recreational products 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 and other recreational products 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 general
economic conditions.

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 orders as of February 28, 1999 and 1998

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was approximately $36.7 million and $36.4 million, respectively. 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 1998 or 1997.

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 1998, $12.0 million in 1997 and $9.3 million in 1996 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, 1998 and 1997, the Company
accrued approximately $963,000 and $930,000, respectively, with no provision for
expected insurance recovery.

EMPLOYEES

The Company had approximately 3,200 and 3,500 employees at December 31, 1998
and 1997, 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, however, the loss of
the in-line skate patent could result in increased competition and reduced sales
and margins. 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.

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ITEM 2. PROPERTIES

The table below provides information with respect to the principal
production and distribution facilities utilized by the Company for continuing
operations as of December 31, 1998.

<TABLE>
<CAPTION>
OWNED FACILITIES LEASED FACILITIES
-------------------------- ------------------------
TYPE OF NO. OF SQUARE NO. OF SQUARE
LOCATION FACILITY LOCATIONS FOOTAGE LOCATIONS FOOTAGE
- -------------------------------------------------- ----------------- --------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
SPORTING GOODS
Minnesota....................................... Distribution
and production 2 302,000 4 145,000
South Carolina.................................. Distribution
and production 1 100,000
Washington...................................... Distribution
and production 1 160,000 2 170,000
Foreign......................................... Distribution
and production 1 15,000 19 325,000
- --
--------- ---------
5 577,000 25 640,000
- --
- --
--------- ---------
--------- ---------
OTHER RECREATIONAL PRODUCTS
Alabama......................................... Distribution
and production 1 170,000 1 15,000
California...................................... Distribution 3 59,000
Illinois........................................ Distribution 1 85,000
North Carolina.................................. Distribution 1 7,000
- --
--------- ---------
1 170,000 6 166,000
- --
- --
--------- ---------
--------- ---------
INDUSTRIAL PRODUCTS
Florida......................................... Production 2 15,000 2 41,000
South Carolina.................................. Distribution
and production 2 515,000
Foreign......................................... Distribution
and production 1 33,000
- --
--------- ---------
5 563,000 2 41,000
- --
- --
--------- ---------
--------- ---------
</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.

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

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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.

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

Not applicable.

EXECUTIVE OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
NAME POSITION AGE
- -------------------------- -------------------------------------------------------------------------------- ---
<S> <C> <C>
Richard M. Rodstein President and Chief Executive Officer 44
Robert E. Doyle Senior Vice President; President of Simplex Products 52
John J. Rangel Senior Vice President-Finance 45
Tony H. Chow Vice President and Director of Taxes 51
David G. Cook Vice President; President of Stearns 61
Timothy C. Cronin Vice President; President of Hilton Corporate Casuals 48
David H. Herzberg Vice President; President of Shakespeare Monofilament 56
J. Wayne Merck Vice President; President of Shakespeare Composites and Electronics 39
James A. Vandergrift Vice President 48
Susan E. McConnell Secretary 55
</TABLE>

Mr. Rodstein has been President of the Company for more than the past six
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
October 1996.

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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 & 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 &
Electronics for one year previous to that.

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.

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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 Stock Exchange under the symbol "KTO." At March 12, 1999 there were
1,611 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>
DIVIDENDS PER
STOCK PRICES SHARE
---------------------- -----------------
HIGH LOW CLOSE CASH
--------- --------- --------- -----
<S> <C> <C> <C> <C>
1998
Fourth.......................................... 17 7/16 7 3/4 10 5/16 $.11
Third........................................... 21 1/8 15 17 11/16 $.11
Second.......................................... 23 5/8 16 11/16 17 5/8 $.11
First........................................... 23 11/16 17 3/4 22 5/16 $.11

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
</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,
1998, $7.7 million of retained earnings were free of such restrictions. See Note
6 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

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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (A)
------------------------------------------------
1998 (B) 1997 (C) 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE FIGURES AND
PERCENTAGES)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $574,510 $559,030 $513,170 $448,575 $351,254
Cost of products sold (d)....................... 418,950 391,860 360,029 321,053 249,165
-------- -------- -------- -------- --------
Gross profit.................................... 155,560 167,170 153,141 127,522 102,089
Selling expenses................................ 87,389 79,832 67,324 54,538 43,540
General and administrative expenses (d)......... 39,030 38,303 38,490 34,758 29,748
Research and development expenses............... 12,391 11,979 9,317 6,437 5,705
-------- -------- -------- -------- --------
Operating income................................ 16,750 37,056 38,010 31,789 23,096
Interest expense................................ 12,163 10,560 9,294 9,916 7,481
Other income, net............................... (236) (619) (1,476) (1,396) (1,229)
-------- -------- -------- -------- --------
Income from continuing operations before
provision for income taxes.................... 4,823 27,115 30,192 23,269 16,844
Provision for income taxes...................... 955 7,815 9,105 6,947 6,080
-------- -------- -------- -------- --------
Income from continuing operations............... 3,868 19,300 21,087 16,322 10,764
Discontinued operations, net of taxes (e)....... 975 2,600 4,130 (1,443) 2,269
-------- -------- -------- -------- --------
Net Income...................................... $ 4,843 $ 21,900 $ 25,217 $ 14,879 $ 13,033
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic earnings per share:
Continuing operations......................... $ 0.23 $ 1.17 $ 1.27 $ 1.14 $ 0.91
Discontinued operations....................... 0.06 0.15 0.25 (0.10) 0.19
-------- -------- -------- -------- --------
Net income.................................... $ 0.29 $ 1.32 $ 1.52 $ 1.04 $ 1.10
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted earnings per share:
Continuing operations......................... $ 0.23 $ 1.15 $ 1.26 $ 1.13 $ 0.90
Discontinued operations....................... 0.06 0.16 0.25 (0.10) 0.19
-------- -------- -------- -------- --------
Net income.................................... $ 0.29 $ 1.31 $ 1.51 $ 1.03 $ 1.09
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Dividends:
Cash--per share............................... $ 0.44 $ 0.44 $ 0.44 $ 0.44 $ .425
Stock......................................... 5%
Basic shares.................................... 16,554 16,541 16,574 14,367 11,800
Diluted shares.................................. 16,637 16,713 16,734 14,498 11,919

BALANCE SHEET DATA:
Total current assets............................ $335,570 $305,048 $251,606 $278,793 $207,694
Total assets.................................... 452,995 419,413 357,006 374,373 292,608
Total current liabilities....................... 127,138 115,227 63,425 110,483 70,796
Long-term debt.................................. 110,724 88,668 89,096 75,071 109,921
Shareholders' equity............................ 202,119 202,885 188,988 175,816 98,996
</TABLE>

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

(a) Certain income statement and balance sheet accounts have been restated to
reflect the Simplex building products division as discontinued operations.
See Note 3 to Notes to Consolidated Financial Statements.

(b) Gross profit, operating income, income from continuing operations and net
income are $166,060, $31,250, $13,293 and $14,268, respectively, before
charges totaling $14,500 ($9,425 net of taxes). See Note 2 to Notes to
Consolidated Financial Statements.

12
<PAGE>
(c) Operating income, income from continuing operations and net income are
$39,456, $20,860 and $23,460, respectively, before restructuring costs of
$2,400 ($1,560 net of taxes). See Note 2 to Notes to Consolidated Financial
Statements.

(d) Gross profit includes a $10,500 charge and general and administrative
expenses includes a $4,000 charge recorded in the third quarter of 1998. See
Note 2 to Notes to Consolidated Financial Statements.

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

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 which represent $404.9 million, or 70.5% of the Company's 1998
consolidated net sales, and other recreational products, which represent $43.7
million in 1998 sales. The Company is also a manufacturer and supplier of
selected industrial products, which had sales of $125.9 million in 1998.

During the third quarter of 1998, the Company adopted a plan to dispose of
its Simplex building products division (the "Division"). This plan is consistent
with the Company's strategy to focus on its core sporting goods and other
recreational products businesses. As a result, the Company reclassified the
Division as a discontinued operation in 1998 and similarly reclassified prior
years' operations. The discussion which follows focuses on the continuing
operations of the Company.

REVIEW OF OPERATIONS: COMPARISON OF 1998 TO 1997

Net sales from continuing operations increased to $574.5 million from $559.0
million in the prior year. Income from continuing operations for 1998 was $3.9
million, or $.23 per diluted share in 1998 as compared to $19.3 million, or
$1.15 per diluted share in the prior year. Net income declined to $4.8 million,
or $.29 per diluted share, from $21.9 million, or $1.31 per diluted share in the
prior year.

NET SALES. In the sporting goods segment, net sales decreased 1.4% to
$404.9 million from $410.8 million in 1997. The decrease was primarily due to a
decline in ski and mountain bike sales. Unfavorable weather conditions in the
important fourth quarter combined with the impact of declining industry sales
worldwide resulted in lower shipments of K2 and Olin brand skis. Sales of the
bike business were down substantially due to a rapid shift in the marketplace
away from high-end, full suspension mountain bikes. Since K2 bikes were
positioned in the high-end niche, full-suspension mountain bike shipments
declined 47% for the year. More modest declines were incurred in sales of
outdoor products. K2 softboot in-line skate sales were comparable with the prior
year. A decline in sales of "aggressive" skates, due to an industry-wide
reduction in demand, was offset by the growth of K2 children's skates. Sales
increases were reported in K2 snowboard products, Shakespeare fishing tackle and
Stearns products. Although also feeling the effects of poor weather conditions
in late 1998, snowboard products benefited from strong demand for its Clicker
step-in binding, related boots and snowboards. Shipments of Shakespeare's Ugly
Stik fishing rods grew during the year in acceptance of several new models. New
kit and combo products and other new products also contributed to overall growth
in fishing tackle sales. New product introductions including inflatables, waders
and other products by Stearns also contributed to the increase in sales.

In the other recreational products segment, net sales grew 27.8% to $43.7
million from $34.2 million in the prior year. Sales growth was driven primarily
by the acceptance of skateboard shoes, snowboard apparel and other apparel sales
of the Planet Earth group, and by the inclusion for the full year of the base
business, which was acquired in 1997.

In the industrial products group, net sales increased 10.4%, to $125.9
million from $114.0 million in 1997. Improved sales were reported by the
Shakespeare Monofilament business due to new product

13
<PAGE>
introductions and increased penetration of its cutting line business. Net sales
in 1998 of fiberglass light poles and marine and military antennas were
comparable with the prior year.

GROSS PROFIT. Gross profit declined to $155.6 million, or 27.1% of sales in
1998, from $167.2 million, or 29.9% of sales in 1997. Gross profit in 1998 was
net of a $10.5 million charge (a discussion regarding an additional $4.0 million
which was charged against general and administrative expenses is included
below). Excluding the impact of the charge, gross profit as a percentage of
sales declined to 28.9%. The charge was recorded to write-down the cost of
high-end, full suspension mountain bike and "aggressive" skate inventory made
necessary by the sudden shift in market demand and subsequent repositioning of
the bike business into more popularly priced, front suspension mountain bikes,
comfort bikes and BMX bikes. The remaining reduction in the gross profit
percentage was due mainly to an unfavorable sales mix which included a larger
proportion of closeout bikes, skates and skis at reduced or no margins.

COST AND EXPENSES. Selling expenses increased 9.5% to $87.4 million from
$79.8 million in 1997. The increase was largely volume-driven and related to
launches of new products, such as skateboard shoes and apparel, and the
continued support of the Company's product lines in the marketplace.

General and administrative expenses increased 1.8% to $39.0 million from
$38.3 million in 1997, although as a percentage of sales they declined slightly
from the prior year. 1998 expense included a $4.0 million charge to write-down
equipment and other items no longer used to manufacture mountain bikes referred
to above, and for the costs related to repositioning the bike business. 1997
expense included a $2.4 million restructuring charge to consolidate the mountain
bike and outdoor equipment operations.

Research and development expense increased to $12.4 million from $12.0
million in 1997.

OPERATING INCOME. Operating income from continuing operations declined to
$16.8 million, or 2.9% of net sales, from $37.1 million, or 6.6% of net sales,
in 1997. The percentage decrease is mainly due to the charge discussed above,
which totaled $14.5 million, and to an unfavorable mix of sales which included a
greater proportion of skis, "aggressive" skates and mountain bikes sold at
discounted prices. Excluding the charge, operating income was $31.3 million, or
5.4% of net sales.

INTEREST EXPENSE. Interest expense increased by a net amount of $1.6
million in 1998. Lower interest rates resulted in a decrease of $1.1 million
while higher average borrowing balances resulted in an increase of $2.7 million.

OTHER INCOME. Other income, which includes royalties, interest income and
other miscellaneous income, decreased to $0.2 million from $0.6 million in 1997.

INCOME TAXES. The income tax rate for 1998 declined due to a reduction of
the income tax valuation reserve, as a result of further utilization of prior
year foreign net losses utilized in the current period.

SEGMENT INFORMATION. Total segment operating profit or loss (before
interest, corporate expenses and income taxes) decreased to $22.6 million from
$44.5 million in 1997. In the sporting goods segment operating profit declined
to $5.3 million from $26.3 million in 1997. The decrease was due to a wider loss
in the full-suspension mountain bike business reflecting a decline in sales due
to a shift in the market and resulting sale of inventory at reduced prices,
resulting in a $14.5 million charge, and sales of other sporting goods products
at reduced margins (such as skis and in-line skates as described above).

In the other recreational products segment, an operating loss of $1.1
million was reported in 1998 as compared with operating profit of $.7 million in
1997. The current year loss was due to start-up costs of new products for the
emerging sports market, partially offset by improved operating profits of the
activewear group.

14
<PAGE>
In the industrial products segment, operating profit increased $18.4 million
from $17.5 million in 1997. The improvement was attributable to sales related
gains in the monofilament and specialty resins businesses.

REVIEW OF OPERATIONS: COMPARISON OF 1997 TO 1996

Net sales from continuing operations advanced 8.9% to $559.0 million from
$513.2 million in 1996. Income from continuing operations was $19.3 million, or
$1.15 per diluted share as compared to $21.1 million, or $1.26 per diluted share
in 1996. Net income declined to $21.9 million, or $1.31 per diluted share from
$25.2 million, or $1.51 per diluted share in 1996.

NET SALES. In the sporting goods segment, net sales increased 11.4% to
$410.8 million from $368.9 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
due to tremendous 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 lower shipments of full-suspension mountain bikes due to
continued softness in the mountain bike market from the prior year.

In the other recreational products segment, net sales decreased 10.9% to
$34.2 million from $38.4 million in 1996. Sluggish market conditions resulted in
sales declines of Hilton Corporate Casuals. The inclusion of the skateboard
apparel and other apparel businesses, which were acquired in 1997, slightly
offset the sales decrease of this segment.

In the industrial products segment, net sales improved to $114.0 million
from $105.9 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.

GROSS PROFIT. Gross profit rose 9.2% to $167.2 million, or 29.9% of net
sales from $153.1 million, or 29.8% of net sales, in 1996. Gross profit as a
percentage of net sales was fairly consistent from year to year. The dollar
increase was primarily attributable to the sporting goods segment, offset by the
closeout of certain bike models and apparel at reduced margins. The industrial
products segment also contributed to the dollar increase.

COSTS AND EXPENSES. Selling expenses increased 18.6% to $79.8 million, or
14.3% of net sales from $67.3 million, or 13.1% 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 before a $2.4 million restructuring
charge discussed below, were consistent at $38.3 million, or 6.9% of net sales
from $38.5 million, or 7.5% of net sales in 1996. The decline as a percentage of
net sales is attributable to the effect of ongoing expense controls throughout
the Company.

Research and development expenses increased 29.0% to $12.0 million from $9.3
million in 1996 as the result of heightened new product development efforts.

A restructuring charge of $2.4 million was recorded in connection with 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.

15
<PAGE>
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
increased to $39.5 million, or 7.1% of net sales from $38.0 million, or 7.4% of
net sales, in 1996. The dollar increase is due to a higher gross profit, offset
by increased selling, general and administrative expenses. The gross profit as a
percentage of net sales was fairly consistent from year to year. Operating
income after the restructuring charge was $37.1 million, or 6.6% of net sales.

INTEREST EXPENSE. Interest expense rose $1.3 million to $10.6 million in
1997. Lower interest rates produced a benefit of $.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 $.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 8 to 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 income taxes) decreased to $44.5 million from $46.2
million in 1996. In the sporting goods segment, operating profit declined to
$26.3 million from $30.2 million in 1996. The decrease was the result of a wider
loss in the full-suspension mountain bike business reflecting increased
competition, costs to launch the 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. Partially
offsetting these reductions was a volume-related increase in in-line skate
earnings.

In the other recreational products segment, operating profit declined to $.7
million from $1.5 million in 1996. The decrease was due to lower ad specialty
earnings from a reduction in sales.

In the industrial products segment, operating profit increased to $17.5
million from $14.5 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.
For additional segment information see Note 14 to Notes to Consolidated
Financial Statements.

LIQUIDITY AND SOURCES OF CAPITAL

The Company's continuing operations used $22.7 million of cash compared to
$25.6 million of cash used in 1997. The use of cash in the current year was the
result of financing higher levels of accounts receivable and inventories and
paying down accounts payable. The increase in accounts receivable reflects
primarily higher sales volume of snowboards, fishing tackle and monofilament
products. Higher levels of inventory reflect delays in certain year-end
shipments due to a continuation in the shift in ordering patterns by retailers
to more closely match the selling season and the decline in bike sales
previously described. In late 1998, the Company acquired the remaining shares of
stock of its Japanese distributor of K2 products. The decline in accounts
payable relates mainly to payment to trade creditors subsequent to the
acquisition. Net cash used in investing activities from continuing operations
was $16.5 million, as compared to $15.7 million in 1997. The use of cash for
this activity was attributable to expenditures to

16
<PAGE>
increase manufacturing capacity in the industrial products segment and to
facilitate the manufacture of new sporting goods products. 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, 1998, $88.5 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 and Purchase Facility, the Company is subject to
an agreement which, among other things, restricts amounts available for payment
of cash dividends and stock repurchases by the Company. As of December 31, 1998,
$7.7 million of retained earnings were free of such restrictions. The Company
also had $26.7 million of 8.39% unsecured senior notes due through 2004, payable
in six 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 totaling $124.8 million. Under the Company's debt covenant restrictions
at December 31, 1998, $85.0 million was available and $64.4 million was
outstanding. For further information regarding the Company's borrowings, see
Note 6 to 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 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

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires
companies to recognize all derivatives on the balance sheet at fair value. The
Company will adopt SFAS No. 133 in 2000. The adoption of the new standard is not
expected to have a material effect on its results of operations or financial
position.

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>
YEAR 2000 ISSUE

The Company is addressing its Year 2000 issue on a decentralized basis.
Based on recent assessments, the Company determined that it will be or would
have been required to modify or replace portions of its software at locations
representing approximately 80% of its 1998 sales so that those systems will
properly utilize dates beyond December 31, 1999. The Company presently believes
that with modifications or replacements of existing software, the Year 2000
issue can be mitigated. However, if such modifications and replacements are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.

The Company's plan to resolve the Year 2000 issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that it believes could
have a material impact on the sales, liquidity or operations of the Company and
that could be significantly affected by the Year 2000 issue. The completed
assessment indicated that most of the Company's significant information
technology systems could be affected. That assessment also indicated that
certain software and hardware (embedded chips) used in production and
manufacturing systems (hereafter also referred to as operating equipment) are at
risk. Based on a review of its product line, the Company has determined that the
products it has sold and will continue to sell do not require remediation to be
Year 2000 compliant. Accordingly, the Company does not believe that the Year
2000 presents a material exposure as it relates to the Company's products. In
addition, the Company has gathered information about the Year 2000 compliance
status of its significant suppliers and subcontractors and continues to monitor
their compliance.

For its information technology exposures, to date the Company is
approximately 75% complete on the remediation phase overall. The Company expects
to complete software reprogramming and replacement no later than September 30,
1999. Once software is reprogrammed or replaced for a system, the Company begins
testing and implementation. These phases run concurrently for different systems.
To date, the Company has completed approximately 50% of its testing overall and
has implemented approximately 75% of its remediated systems where such
remediation was found to be necessary. Completion of the testing and remediation
phases for all significant systems is expected by September 30, 1999. The
Company is approximately 90% complete in the remediation phase of its operating
equipment and the Company is 100% complete with the testing of its remediated
operating equipment.

The Company's billing system interfaces directly with certain significant
customers. The Company is in the process of working with these customers to
ensure that the Company's systems that interface directly with them are Year
2000 compliant by December 31, 1999. The Company has completed its assessment
and testing phases and is approximately 75% complete with the remediation phase.

The Company has queried its significant suppliers and subcontractors that do
not share information systems with the Company (external agents). To date, the
Company is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.

COSTS. The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating equipment
for Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $1.5 million and is being funded through operating cash flows. To
date, the Company has incurred approximately $350,000 ($275,000 expensed and
$75,000 capitalized for new systems) related to all phases of the Year 2000
project. Of the total remaining project costs, approximately $760,000 is
attributable to the purchase of new software, which will be capitalized. The
remaining $740,000 relates to repair of software and will be expensed as
incurred.

18
<PAGE>
RISKS. Management of the Company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As noted above, the
Company has not yet completed all necessary phases of the Year 2000 program. In
the event that the Company does not complete any additional phases, the Company
in some cases would be unable to take customer orders, manufacture and ship
products, invoice customers or collect payments. In addition, disruptions in the
economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation should
its computer system fail, causing for example, equipment shutdown or failure to
properly date business records. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.

CONTINGENCY PLAN. The Company currently has no contingency plans in place
in the event it does not complete all phases of the Year 2000 program. The
Company plans to evaluate the status of completion in June 1999 and determine
whether such a plan is necessary.

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 sales and earnings, market
trends regarding softboot in-line skates, mountain bikes, skis and snowboards,
inventory levels at retail, product acceptance and demand, marketing efforts,
growth efforts, cost reduction efforts, margin enhancement efforts, product
development efforts, success of new product introductions, marketing
positioning, the impact of the Year 2000 on computerized information systems,
and overall market trends which involve substantial risks and uncertainties. The
Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including but not limited to, economic conditions,
product demand, competitive pricing and products, and other risks described in
the Company's filing with the Securities and Exchange Commission.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

The Company's earnings and cash flow are subject to fluctuations due to
changes in foreign currency exchange rates. The Company manages its exposures to
changes in foreign currency exchange rates on certain firm purchase commitments
and anticipated, but not yet committed purchases, by entering into foreign
currency forward contracts. The Company's risk management objective is to reduce
its exposure to the effects of changes in exchange rates on the cost of sales
over quarterly time horizons. To a certain extent, foreign currency exchange
rate movements also affect the Company's competitive position, as exchange rate
changes may affect business practices and/or pricing strategies of non-U.S.
based competitors. The Company's foreign currency risk policies entail entering
into foreign currency derivative instruments only to manage risk--not for
speculative investments.

Considering both the anticipated cash flows from firm purchase commitments
and anticipated purchase for the next quarter and the foreign currency
derivative instruments in place at year end, a hypothetical 10% weakening of the
U.S. dollar relative to all other currencies would not materially adversely
affect expected first quarter 1999 earnings or cash flows. This analysis is
dependent on actual purchases during the next quarter occurring within 90% of
budgeted forecasts. The effect of the hypothetical change in exchange rates
ignores the affect this movement may have on other variables including
competitive risk. If it were possible to quantify this competitive impact, the
results could well be different than the sensitivity effects shown above. In
addition, it is unlikely that all currencies would uniformly strengthen or
weaken relative to the U.S. dollar. In reality, some currencies may weaken while
others may strengthen.

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

K2 INC.

STATEMENTS OF CONSOLIDATED INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
FIGURES)
<S> <C> <C> <C>
Net sales.................................................................... $ 574,510 $ 559,030 $ 513,170
Cost of products sold........................................................ 418,950 391,860 360,029
---------- ---------- ----------
Gross profit............................................................... 155,560 167,170 153,141
Selling expenses............................................................. 87,389 79,832 67,324
General and administrative expenses.......................................... 39,030 38,303 38,490
Research and development expenses............................................ 12,391 11,979 9,317
---------- ---------- ----------
Operating income........................................................... 16,750 37,056 38,010
Interest expense............................................................. 12,163 10,560 9,294
Other income, net............................................................ (236) (619) (1,476)
---------- ---------- ----------
Income from continuing operations before provision for income taxes........ 4,823 27,115 30,192
Provision for income taxes................................................... 955 7,815 9,105
---------- ---------- ----------
Income from continuing operations.......................................... 3,868 19,300 21,087
Discontinued operations, net of taxes........................................ 975 2,600 4,130
---------- ---------- ----------
Net Income................................................................... $ 4,843 $ 21,900 $ 25,217
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share:
Continuing operations...................................................... $ 0.23 $ 1.17 $ 1.27
Discontinued operations.................................................... 0.06 0.15 0.25
---------- ---------- ----------
Net income................................................................. $ 0.29 $ 1.32 $ 1.52
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share:
Continuing operations...................................................... $ 0.23 $ 1.15 $ 1.26
Discontinued operations.................................................... 0.06 0.16 0.25
---------- ---------- ----------
Net income................................................................. $ 0.29 $ 1.31 $ 1.51
---------- ---------- ----------
---------- ---------- ----------
Basic shares outstanding..................................................... 16,554 16,541 16,574
Diluted shares outstanding................................................... 16,637 16,713 16,734
</TABLE>

See notes to consolidated financial statements

20
<PAGE>
K2 INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
FIGURES)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................................. $ 3,394 $ 5,706
Accounts receivable, net.................................................................. 126,011 110,091
Inventories, net.......................................................................... 188,348 175,286
Deferred taxes............................................................................ 12,780 7,884
Prepaid expenses and other current assets................................................. 5,037 6,081
--------- ---------
Total current assets.................................................................... 335,570 305,048

PROPERTY, PLANT AND EQUIPMENT
Land and land improvements................................................................ 992 2,175
Buildings and leasehold improvements...................................................... 29,814 27,969
Machinery and equipment................................................................... 111,872 99,454
Construction in progress.................................................................. 8,393 6,822
--------- ---------
151,071 136,420
Less allowance for depreciation and amortization.......................................... 84,480 74,336
--------- ---------
66,591 62,084
OTHER ASSETS
Intangibles, principally goodwill, net.................................................... 19,564 17,235
Net assets of discontinued operations..................................................... 27,511 31,894
Other..................................................................................... 3,759 3,152
--------- ---------
Total Assets............................................................................ $ 452,995 $ 419,413
--------- ---------
--------- ---------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans................................................................................ $ 64,350 $ 48,967
Accounts payable.......................................................................... 20,807 24,373
Accrued payroll and related............................................................... 15,982 16,868
Other accruals............................................................................ 21,555 20,574
Current portion of long-term debt......................................................... 4,444 4,445
--------- ---------
Total current liabilities............................................................... 127,138 115,227
Long-term Debt.............................................................................. 110,724 88,668
Deferred Taxes.............................................................................. 13,014 12,633

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--17,190,652 in
1998 and 17,160,080 in 1997............................................................. 17,191 17,160
Additional paid-in capital................................................................ 132,488 132,086
Retained earnings......................................................................... 67,227 69,668
Employee Stock Ownership Plan and stock option loans...................................... (1,981) (3,006)
Treasury shares at cost, 623,759 shares in 1998 and 1997.................................. (8,106) (8,106)
Accumulated other comprehensive income.................................................... (4,700) (4,917)
--------- ---------
Total Shareholders' Equity.............................................................. 202,119 202,885
--------- ---------
Total Liabilities and Shareholders' Equity.............................................. $ 452,995 $ 419,413
--------- ---------
--------- ---------
</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, 1998
-----------------------------------------------------------------------------------------------
EMPLOYEE STOCK ACCUMULATED
ADDITIONAL OWNERSHIP PLAN TREASURY OTHER
COMMON PAID-IN RETAINED AND STOCK SHARES, AT COMPREHENSIVE
STOCK CAPITAL EARNINGS OPTION LOANS COST INCOME TOTAL
----------- ----------- ----------- --------------- ----------- --------------- ---------
(IN THOUSANDS EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C> <C> <C>
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
Translation adjustments... (615) (615)
---------
Comprehensive income...... 24,602

Exercise of stock
options................. 68 632 (256) 444
Cash dividends, $.44 per
share................... (7,291) (7,291)
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
Translation adjustments... (3,905) (3,905)
---------
Comprehensive income...... 17,995

Exercise of stock
options................. 28 459 487
Cash dividends, $.44 per
share................... (7,279) (7,279)
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

Net income for the year
1998.................... 4,843 4,843
Translation adjustments... 217 217
---------
Comprehensive income...... 5,060

Exercise of stock
options................. 31 402 433
Cash dividends, $.44 per
share................... (7,284) (7,284)
Stock option loan
repayments.............. (96) (96)
Employee Stock Ownership
Plan, amortization, loan
and partial loan
repayment............... 1,121 1,121
----------- ----------- ----------- ------- ----------- ------- ---------
BALANCE AT DECEMBER 31,
1998...................... $ 17,191 $ 132,488 $ 67,227 $ (1,981) $ (8,106) $ (4,700) $ 202,119
----------- ----------- ----------- ------- ----------- ------- ---------
----------- ----------- ----------- ------- ----------- ------- ---------
</TABLE>

See notes to consolidated financial statements

22
<PAGE>
K2 INC.

STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations............................................... $ 3,868 $ 19,300 $ 21,087
Gain on sale of investments..................................................... (3,500)
Adjustments to reconcile income from continuing operations to net cash provided
by (used in) operating activities:
Depreciation of property, plant and equipment................................. 11,183 10,313 7,786
Amortization of intangibles................................................... 1,556 1,261 1,038
Deferred taxes................................................................ (4,515) (1,476) 1,270
Changes in operating assets and liabilities:
Accounts receivable......................................................... (13,521) (27,638) (734)
Inventories................................................................. (5,353) (31,813) (12,533)
Prepaid expenses and other current assets................................... 1,438 (1,139) 632
Accounts payable............................................................ (16,500) 4,325 (2,303)
Payrolls and other accruals................................................. (828) 4,733 (2,420)
--------- --------- ---------
Net cash (used in) provided by continuing operations............................ (22,672) (25,634) 13,823

INVESTING ACTIVITIES
Property, plant and equipment expenditures...................................... (17,257) (19,425) (13,926)
Disposals of property, plant and equipment...................................... 1,527 298 153
Purchases of businesses, net of cash acquired................................... (834) (3,315)
Proceeds on sale of investments................................................. 9,908
Other items, net................................................................ (729) (5,654) (247)
--------- --------- ---------
Net cash used in investing activities........................................... (16,459) (15,707) (17,335)

FINANCING ACTIVITIES
Borrowings under long-term debt................................................. 62,500 51,892 54,500
Payments of long-term debt...................................................... (40,444) (52,755) (40,448)
Net increase (decrease) in short-term bank loans................................ 15,383 41,658 (42,912)
Net proceeds from accounts receivable facility.................................. 3,275 46,725
Exercise of stock options....................................................... 433 487 444
Dividends paid.................................................................. (7,284) (7,279) (7,291)
Net repayments by (advances to ) ESOP........................................... 1,107 3,000 (5,000)
--------- --------- ---------
Net cash provided by financing activities....................................... 31,695 40,278 6,018
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents from continuing operations... (7,436) (1,063) 2,506

DISCONTINUED OPERATIONS
Income from discontinued operations............................................. 975 2,600 4,127
Adjustments to reconcile income from discontinued operations to net cash used in
discontinued operations:
Depreciation and amortization................................................. 2,844 2,652 2,326
Capital expenditures.......................................................... (3,442) (4,303) (4,906)
Other items, net.............................................................. 4,747 (4,734) (676)
--------- --------- ---------
Cash provided by (used in) discontinued operations................................ 5,124 (3,785) 871
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents.............................. (2,312) (4,848) 3,377
Cash and cash equivalents at beginning of year.................................... 5,706 10,554 7,177
--------- --------- ---------
Cash and cash equivalents at end of year.......................................... $ 3,394 $ 5,706 $ 10,554
--------- --------- ---------
--------- --------- ---------
</TABLE>

See notes to consolidated financial statements

23
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

The Company is a leading designer, manufacturer and marketer of brand name
sporting goods which represent $404.9 million, or 70.5% of the Company's
consolidated net sales and other recreational products which represent $43.7
million in 1998 net sales. The Company is also a manufacturer and supplier of
selected industrial products, which had sales of $125.9 million in 1998.
Information about the Company's business operating segments is presented in Note
14 to Notes to Consolidated Financial Statements.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.

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 of December 31. The years ended December 31, 1998, 1997
and 1996 consisted of 52 weeks.

REVENUE RECOGNITION

The Company recognizes revenue from product sales upon shipment to its
customers.

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.
The financial statements of foreign subsidiaries have been translated into
United States dollars in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation." Balance sheet
accounts have been translated using the exchange rate in effect at the balance
sheet date. Income statement amounts have been translated using the average
exchange rate for the year. The gains and losses resulting from the changes in
exchange rates from year to year have been reported in other comprehensive
income. 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.

24
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1998, the Company's receivables from sporting goods retailers who sell skis,
skates and snowboards amounted to 66% of total receivables. The Company
generally does not require collateral and performs periodic credit evaluations
to manage its credit risk. Accounts receivable are net of allowances for
doubtful accounts of $5,798,000 and $6,590,000 at December 31, 1998 and 1997,
respectively.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined on
the LIFO method with respect to approximately 23% of total inventories at
December 31, 1998 and 1997. Cost was 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 of the LIFO reserve, included as a
reduction of cost of products sold.

LONG-LIVED ASSETS

The Company periodically evaluates long-lived assets for impairment of
value. Intangibles resulting from business acquisitions are evaluated for
impairment, if any, by assessing current and future cash flows including the
consideration of factors such as business trends, prospects and market
conditions.

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 $5,784,000, $5,515,000 and $4,640,000 in 1998, 1997
and 1996, respectively, were expensed as incurred. In the third quarter of 1998,
the Company wrote-down certain fixed assets related to its bike product line
that were no longer in use.

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, 1998 and 1997, amounted to $7,259,000 and $5,703,000,
respectively.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising costs for the years
ended December 31, 1998, 1997 and 1996 amounted to $21,903,000, $20,548,000 and
$14,225,000, respectively.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to expense as incurred.

25
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

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

Other income includes interest income, royalties and other miscellaneous
income. 1997 includes a gain on the sale of investments, net of $3.5 million of
legal fees expensed related to the derivative lawsuit described in Note 8 to
Notes to Consolidated Financial Statements.

INCOME TAXES

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

EARNINGS PER SHARE

Basic earnings per share ("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. The dilutive effects of stock options included in the dilutive EPS
calculation at December 31, 1998, 1997 and 1996 were 83,000, 171,000 and
160,000, respectively. The computation of diluted EPS did not assume the options
to purchase 542,000 and 4,500 shares of common stock during 1998 and 1997,
respectively, because their inclusion would have been antidilutive. In 1996, all
the options were included in the computation of diluted EPS.

NEWLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires companies to recognize all derivatives on the
balance sheet at fair value. The Company will adopt SFAS No. 133 in 2000. The
adoption of the new statement is not expected to have a material effect on its
results of operations or financial position.

RECLASSIFICATIONS

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

NOTE 2--CHARGES AGAINST EARNINGS

In the third quarter of 1998, a pre-tax charge of $14.5 million was included
in earnings from continuing operations. Of this amount, $10.5 million was
charged to cost of sales and was used to write-down certain categories of bike
and skate inventories as a result of a sudden change in the market demand for
those products. The balance of the charge was recorded in general and
administrative expenses for costs associated with the changes in the bike
business and implementing planned cost reduction programs at the winter sports
operations. The charges primarily relate to non-cash items.

In 1997, a pre-tax restructuring charge of $2.4 million was recorded in
connection with 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 was completed during 1998.

26
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 3--DISCONTINUED OPERATIONS

On September 10, 1998, the Company adopted a plan to dispose of its Simplex
building products division ("Division") as part of the Company's strategic focus
on the core sporting goods group. Accordingly, the Division has been shown in
the accompanying consolidated financial statements as a discontinued operation.

Income from discontinued operations are net of taxes of $525,000, $1,400,000
and $2,220,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Net assets of discontinued operations were segregated in the
accompanying consolidated balance sheets and consisted primarily of accounts
receivable, inventories and fixed assets, offset by accounts payable, accrued
payroll and related items and other accruals. Net sales of $86,616,000,
$87,903,000 and $89,564,000 in the years ended December 31, 1998, 1997 and 1996,
respectively, were excluded from consolidated net sales in the accompanying
consolidated statements of income.

NOTE 4--ACQUISITIONS

On August 19, 1998, the Company purchased the remaining 65% of shares of K2
Japan Corporation not previously owned by the Company. K2 Japan Corporation is a
distributor of K2 branded products located in Japan. The transaction was
accounted for using the purchase method of accounting and the results of
operations from this business have been included in the consolidated statements
of income from the date of acquisition. The purchase price of the acquisition
was not material. The fair value of the liabilities of K2 Japan Corporation at
the acquisition date approximated the fair value of the assets acquired
including $2.7 million of goodwill to be amortized over 25 years.

During 1997, the Company purchased the stock of Planet Earth Skateboards,
Inc., a designer, manufacturer and marketer of skateboards and related apparel
and accessories and the net assets of Katin U.S.A., Inc. a designer,
manufacturer and marketer of surfwear apparel. The combined purchased 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.

NOTE 5--INVENTORIES

Inventories consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
(THOUSANDS)
<S> <C> <C>
Finished goods........................................................ $ 146,233 $ 132,482
Work in process....................................................... 8,078 18,872
Raw materials......................................................... 37,911 27,727
---------- ----------
Total at lower of FIFO cost or market (approximates
current cost)..................................................... 192,222 179,081
Less LIFO valuation reserve........................................... 3,874 3,795
---------- ----------
$ 188,348 $ 175,286
---------- ----------
---------- ----------
</TABLE>

27
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS

At December 31, 1998, the Company had $124.8 million under foreign and
domestic short-term lines of credit. Under the Company's debt covenant
restrictions, $85.0 million was available and $64.4 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, 1998, interest rates on short-term lines of credit
ranged from 2.0% to 12.1%. The weighted average interest rates on short-term
lines of credit as of December 31, 1998 and 1997 were 3.0% and 6.5%,
respectively.

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

<TABLE>
<CAPTION>
1998 1997
---------- ---------
(THOUSANDS)
<S> <C> <C>
Notes payable due in six equal annual principal installments through
2004 with semi-annual interest payable at 8.39%...................... $ 26,668 $ 31,112
$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 1999..................................................... 88,500 62,001
---------- ---------
115,168 93,113
Less-amounts due within one year....................................... 4,444 4,445
---------- ---------
$ 110,724 $ 88,668
---------- ---------
---------- ---------
</TABLE>

The principal amount of long-term debt maturing in each of the five years
following 1998 is:

<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
1999............................................................................ $ 4,444
2000............................................................................ 4,444
2001............................................................................ 4,444
2002............................................................................ 92,944
2003............................................................................ 4,444
Thereafter...................................................................... 4,448
------------
$ 115,168
------------
------------
</TABLE>

Interest paid on short- and long-term debt for the years ended December 31,
1998, 1997 and 1996 was $12.2 million, $10.6 million and $9.3 million,
respectively.

Under an accounts receivable arrangement, the Company can 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. Under this arrangement, $50 million of accounts receivables as of
December 31, 1998 and 1997, were sold.

The $100 million credit line and the accounts receivable arrangement, among
other things, restrict amounts available for payment of cash dividends and stock
repurchases by the Company. As of December 31, 1998, $7.7 million of retained
earnings were free of such restrictions. Interest rates on the $100 million
credit line at December 31, 1998 ranged from 5.7% to 6.6%.

28
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
The Company had $12.5 million of letters of credit outstanding as of
December 31, 1998.

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 $26.7
million 8.39% notes payable, based on quoted market price, is $26.1 million as
compared to a carrying amount of $26.7 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, 1998, the Company had foreign
exchange contracts with maturities of generally one year to exchange various
foreign currencies to dollars in the aggregate amount of $52.4 million, and with
a fair market value of approximately $51.5 million based on current market
rates. Unrealized losses of $936,000 will be recognized in earnings when
realized and when the underlying transaction occurs. The Company is exposed to
credit losses in the event of non-performance by counterparties on foreign
exchange contracts, but the Company does not anticipate non-performance.

NOTE 7--INCOME TAXES

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

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Domestic..................................................... $ (2,543) $ 22,003 $ 23,052
Foreign...................................................... 7,366 5,112 7,140
--------- --------- ---------
$ 4,823 $ 27,115 $ 30,192
--------- --------- ---------
--------- --------- ---------
</TABLE>

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

<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ------------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
----------- --------- ----------- --------- ----------- -----------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal......................... $ 1,525 $ (2,825) $ 8,140 $ (1,695) $ 6,760 $ 440
State........................... 575 70 60 470 630 20
Foreign......................... 2,115 (505) 405 435 775 480
----------- --------- ----------- --------- ----------- -----
$ 4,215 $ (3,260) $ 8,605 $ (790) $ 8,165 $ 940
----------- --------- ----------- --------- ----------- -----
----------- --------- ----------- --------- ----------- -----
</TABLE>

29
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 7--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>
1998 1997 1996
--------- --------- ---------
(PERCENT)
<S> <C> <C> <C>
Statutory federal income tax rate..................................... 35.0 35.0 35.0
State income tax effect, net of federal benefit....................... 8.7 1.3 1.4
Valuation allowance and foreign earnings.............................. (20.5) (6.1) (4.3)
Other................................................................. (3.4) (1.4) (1.9)
--------- --------- ---------
19.8 28.8 30.2
--------- --------- ---------
--------- --------- ---------
</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, 1998, foreign subsidiaries had unused
operating loss carryforwards of approximately $5.7 million of which
approximately $300,000 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, which is included in the tax effect of
foreign earnings above, was reduced by $1.6 million in 1998 and $1.4 million in
1996, due to the utilization of the related operating loss carryforwards, and
increased in 1997 by a net $4.1 million due to a previously unusable foreign
loss carryforward which became usable during that year.

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

<TABLE>
<CAPTION>
1998 1997
--------- ---------
(THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization of property,
plant and equipment................................................... $ 5,078 $ 4,148
Trademark amortization.................................................. 364 325
Other................................................................... 7,572 8,160
--------- ---------
Deferred tax liabilities.............................................. 13,014 12,633

Deferred tax assets:
Insurance accruals...................................................... 1,426 1,837
Tax effect of foreign loss carryforwards................................ 2,999 4,553
Bad debt reserve........................................................ 1,207 1,087
Inventory reserve....................................................... 2,038 628
Other................................................................... 8,109 4,332
--------- ---------
15,779 12,437
Valuation reserve....................................................... 2,999 4,553
--------- ---------
Current deferred tax assets........................................... 12,780 7,884
--------- ---------
Deferred tax liabilites, net............................................ $ 234 $ 4,749
--------- ---------
--------- ---------
</TABLE>

30
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 7--INCOME TAXES (CONTINUED)
Income taxes paid, net of refunds, in the years ended December 31, 1998,
1997 and 1996 were $5.3 million, $10.9 million and $7.3 million, respectively.

NOTE 8--COMMITMENTS AND CONTINGENCIES

Future minimum payments under noncancelable operating leases as of December
31, 1998 are as follows:

<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
1999............................................................................ $ 3,025
2000............................................................................ 1,807
2001............................................................................ 685
2002............................................................................ 190
2003............................................................................ 49
Thereafter...................................................................... 72
------
$ 5,828
------
------
</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 $4,417,000, $3,684,000 and $3,036,000
for the years ended December 31, 1998, 1997 and 1996, 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.

31
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1998 and 1997, the Company accrued approximately $963,000 and
$930,000, respectively, with no provision for expected insurance recovery.

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

The Company, together with certain of its directors, was a co-defendant in a
complaint filed in December 1995 that purported to be a derivative lawsuit
brought on behalf of the Company. The lawsuit was dismissed with prejudice and
the dismissal was affirmed by the California Court of Appeals in December 1998.
A settlement was subsequently reached which terminated all further proceedings
in the case.

NOTE 9--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. During 1998, 1997 and 1996, the Company expensed
contributions of $928,000, $753,000 and $717,000, respectively, related to these
plans.

32
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS (CONTINUED)
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>
PENSION PLAN
--------------------
1998 1997
--------- ---------
(THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year................................. $ 51,896 $ 47,956
Service cost............................................................ 1,749 1,707
Interest cost........................................................... 3,796 3,698
Amendments.............................................................. 374
Actuarial losses........................................................ 3,994 912
Benefits paid........................................................... (3,024) (2,751)
--------- ---------
Benefit obligation at end of year....................................... $ 58,411 $ 51,896
--------- ---------
--------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.......................... $ 48,432 $ 43,681
Actual return on fair value of plan assets.............................. 4,884 7,183
Employer contributions.................................................. 319 319
Benefits paid........................................................... (3,024) (2,751)
--------- ---------
Fair value of plan assets at end of year................................ 50,611 48,432
--------- ---------
Funded status of the plan............................................... (7,800) (3,464)
Unrecognized prior service cost......................................... 1,283 1,047
Unrecognized net transition asset....................................... (275) (485)
Unrecognized actuarial loss (gain)...................................... 2,666 (377)
--------- ---------
Accrued benefit cost.................................................... $ (4,126) $ (3,279)
--------- ---------
--------- ---------
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate........................................................... 6.75% 7.50%
Expected return on plan assets.......................................... 9.00% 9.00%
Rate of compensation increase........................................... 5.00% 5.00%
</TABLE>

The actuarial losses included in the benefit obligation for 1998 are
primarily the result of a decrease in the discount rate assumption made for the
year.

33
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS (CONTINUED)
Net pension cost consisted of the following for the year ended December 31:

<TABLE>
<CAPTION>
PENSION PLAN
-------------------------------
1998 1997 1996
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
NET PERIODIC COST
Service cost...................................................................... $ 1,749 $ 1,707 $ 1,779
Interest cost..................................................................... 3,796 3,698 3,420
Expected return on plan assets.................................................... (4,280) (3,857) (3,627)
Amortization of prior service cost................................................ 139 110 88
Amortization of transition asset.................................................. (210) (210) (210)
Amortization of loss.............................................................. 13 24 68
--------- --------- ---------
Net periodic cost................................................................. $ 1,207 $ 1,472 $ 1,518
--------- --------- ---------
--------- --------- ---------
</TABLE>

NOTE 10--ACCUMULATED OTHER COMPREHENSIVE INCOME

Other comprehensive income consists of currency translation adjustments as
reflected below:

<TABLE>
<S> <C>
Balance at December 31, 1995....................................... $ (397)
Currency translation adjustment.................................... (615)
---------
Balance at December 31, 1996....................................... (1,012)
Currency translation adjustment.................................... (3,905)
---------
Balance at December 31, 1997....................................... (4,917)
Currency translation adjustment.................................... 217
---------
Balance at December 31, 1998....................................... $ (4,700)
---------
</TABLE>

34
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998

NOTE 11--QUARTERLY OPERATING DATA (UNAUDITED)

The unaudited quarterly results included below have been restated to reflect
the treatment of discontinued operations and to reallocate the third quarter
1998 charge to gross profit.

<TABLE>
<CAPTION>
QUARTER
------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C>
1998
Net sales from continuing operations............................. $ 151.0 $ 156.8 $ 133.9 $ 132.8 $ 574.5
Gross profit..................................................... 41.5 47.7 29.4 37.0 155.6

Income (loss) from continuing operations......................... 2.7 7.4 (7.9) 1.6 3.8
Discontinued operations, net of taxes............................ 0.4 0.7 (0.4) 0.3 1.0
--------- --------- --------- --------- ---------
Net income (loss)................................................ $ 3.1 $ 8.1 $ (8.3) $ 1.9 $ 4.8
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Basic earnings (loss) per share
Continuing operations.......................................... $ 0.16 $ 0.45 $ (0.48) $ 0.10 $ 0.23
Discontinued operations........................................ 0.03 0.04 (0.03) 0.02 0.06
--------- --------- --------- --------- ---------
Net income (loss).............................................. $ 0.19 $ 0.49 $ (0.51) $ 0.12 $ 0.29
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Diluted earnings (loss) per share
Continuing operations.......................................... $ 0.16 $ 0.45 $ (0.48) $ 0.10 $ 0.23
Discontinued operations........................................ 0.03 0.04 (0.03) 0.02 0.06
--------- --------- --------- --------- ---------
Net income (loss).............................................. $ 0.19 $ 0.49 $ (0.51) $ 0.12 $ 0.29
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Cash dividend per share.......................................... $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.44

Stock prices:
High........................................................... $ 23.69 $ 23.63 $ 21.13 $ 17.44 $ 23.69
Low............................................................ $ 17.75 $ 16.69 $ 15.00 $ 7.75 $ 7.75
</TABLE>

35
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 11--QUARTERLY OPERATING DATA (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
QUARTER
------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C>
1997
Net sales from continuing operations............................. $ 150.6 $ 145.7 $ 121.2 $ 141.5 $ 559.0
Gross profit..................................................... 43.5 45.9 38.2 39.6 167.2

Income from continuing operations................................ 5.7 7.1 2.9 3.6 19.3
Discontinued operations, net of taxes............................ 0.2 1.6 0.1 0.7 2.6
--------- --------- --------- --------- ---------
Net income....................................................... $ 5.9 $ 8.7 $ 3.0 $ 4.3 $ 21.9
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Basic earnings per share
Continuing operations.......................................... $ 0.34 $ 0.43 $ 0.18 $ 0.21 $ 1.17
Discontinued operations........................................ 0.01 0.10 0.01 0.05 0.15
--------- --------- --------- --------- ---------
Net income..................................................... $ 0.35 $ 0.53 $ 0.19 $ 0.26 $ 1.32
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Diluted earnings per share
Continuing operations.......................................... $ 0.34 $ 0.43 $ 0.17 $ 0.21 $ 1.15
Discontinued operations........................................ 0.01 0.09 0.01 0.05 0.16
--------- --------- --------- --------- ---------
Net income..................................................... $ 0.35 $ 0.52 $ 0.18 $ 0.26 $ 1.31
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Cash dividend per share.......................................... $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.44

Stock prices:
High........................................................... $ 29.88 $ 31.88 $ 32.94 $ 29.81 $ 32.94
Low............................................................ $ 24.38 $ 24.13 $ 23.44 $ 22.44 $ 22.44
</TABLE>

NOTE 12--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 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, 1998 and 1997, there was a total of
$230,000 and $119,300, respectively, of loans and accrued interest outstanding
which are due on various dates through June 2003. The amounts of these loans are
shown as a reduction of shareholders' equity.

36
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 12--STOCK OPTIONS (CONTINUED)
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, 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
Granted................................................................ 359,500 11.25 21.50 11.38
Exercised.............................................................. (30,572) 11.11 22.88 14.15
Forfeited.............................................................. (84,058) 11.11 29.88 22.41
----------

Options outstanding at December 31, 1998................................. 1,122,661 11.11 29.88 18.33
----------
</TABLE>

At December 31, 1998, 1997 and 1996, stock options to purchase 500,711,
667,332 and 270,084, shares were exercisable at weighted average prices of
$20.02, $21.19 and $15.44, respectively. At December 31, 1998, 1,134,536 shares
of common stock were reserved for issuance under the Plans.

Under provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
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, net income and basic and diluted earnings per share
would have been $3,950,000, $.24 and $.24, respectively, for the year ended
December 31, 1998, $21,157,000, $1.28 and $1.27, respectively, for the year
ended December 31, 1997 and $24,828,000, $1.50 and $1.49, respectively, for the
year ended December 31, 1996. The proforma effect was calculated using
Black-Scholes option valuation model, and the following assumptions were
utilized.

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate........................................ 5.0% 5.0% 6.0%
Expected life.................................................. 5 years 5 years 5 years
Expected volatility............................................ .326 .225 .224
Expected dividend yield........................................ 3.9% 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

37
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 12--STOCK OPTIONS (CONTINUED)
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, 1998 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......................................... 580,561 $ 12.64 8.13 years 225,561 $ 14.84
$21.50 to $29.88......................................... 542,100 24.41 7.37 years 275,150 24.26
</TABLE>

NOTE 13--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 1998 and 1997.

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, 1998, the trust was indebted to the Company in the
aggregate amount of $565,000 in connection with stock purchases made from 1982
through 1984 of which 131,836 shares with an aggregate market value of
$1,360,000 as of December 31, 1998 remained unallocated to participants. These
loans are repayable over the next four to six years with interest at prime plus
1/2%, not to exceed 18%, and the unallocated shares will be 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 in 1998 and 1997,
were used to service these loans. Allocated shares as of December 31, 1998
totaled 1,650,557. Additionally, the trust was indebted to the Company in the
amount of $1,100,000 and $2,100,000 at December 31, 1998 and 1997, respectively,
in connection with distributions made to terminees.

Shareholders' equity has been reduced by the amounts of the loans and any
payments made by the Company on behalf of the trust. The payments, made by the
Company on behalf of the trust, which at December 31, 1998 totaled $99,000, are
being amortized to expense over the lives of the loans.

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 1998 and 1996,
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 $100,000 and
$236,000, respectively. ESOP expense, including amortization of the foregoing
payments, was $156,000 and $389,000 in 1998 and 1996, respectively. No expense
was recorded and no contributions were made in 1997.

38
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 13--SHAREHOLDERS' EQUITY (CONTINUED)
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.

NOTE 14--SEGMENT DATA

The Company classifies its business into three segments based on similar
product types consisting of sporting goods products, other recreational products
and selected industrial products. The sporting goods segment consists primarily
of sports equipment used to participate in individual sports activities that is
sold primarily through sporting goods specialty dealers, regional and national
sporting goods chains and the sporting goods department of mass merchants. The
equipment includes in-line skates, skis, snowboards, bikes, fishing tackle and
flotation vests. The other recreational products segment are primarily active
leisure apparel sold principally into the advertising specialty market through
distributors, and leisure footwear and other apparel sold through specialty
sporting goods dealers. The industrial products segment includes monofilament
line sold to the paper industry, string trimmer line sold to a variety of
distributors, retailers and equipment manufacturers, fiberglass light poles sold
to contractors, utility companies and municipalities and marine and CB radio
antennas sold to marine dealers.

The Company evaluates performance based on operating profit or loss (before
interest, corporate expenses and income taxes). The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies in Note 1 of Notes to Consolidated Financial
Statements. Intercompany profit or loss is eliminated where applicable.

39
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 14--SEGMENT DATA (CONTINUED)
The information presented below is as of December 31.

<TABLE>
<CAPTION>
NET SALES TO OPERATING PROFIT
UNAFFILIATED CUSTOMERS INTERSEGMENT SALES (LOSS)
---------------------- ------------------- -------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ----- ----- ----- ----- ----- -----
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sporting goods................ $404.9 $410.8 $368.9 $18.6 $21.2 $13.8 $ 5.3* $26.3* $30.2
Other recreational............ 43.7 34.2 38.4 0.3 -- -- (1.1) 0.7 1.5
Industrial.................... 125.9 114.0 105.9 1.4 0.9 1.3 18.4 17.5 14.5
------ ------ ------ ----- ----- ----- ----- ----- -----
Total segment data.......... $574.5 $559.0 $513.2 $20.3 $22.1 $15.1 22.6 44.5 46.2
------ ------ ------ ----- ----- ----- ----- ----- -----
------ ------ ------ ----- ----- ----- ----- ----- -----

Corporate expenses, net....... (5.6) (6.8) (6.7)
Interest expense.............. 12.2 10.6 9.3
----- ----- -----
Income from continuing
operations before provision
for income taxes............ $ 4.8 $27.1 $30.2
----- ----- -----
----- ----- -----
</TABLE>

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

* 1998 includes a $14.5 million charge and 1997 includes a $2.4 million charge

<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION
IDENTIFIABLE ASSETS CAPITAL EXPENDITURES
------------------------------- ------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sporting goods................... $ 301.3 $ 283.6 $ 217.6 $ 9.3 $ 8.1 $ 5.5 $ 6.9 $ 14.5 $ 8.8
Other recreational............... 40.4 33.9 32.3 0.8 0.6 0.6 0.6 0.4 0.9
Industrial....................... 66.8 55.7 51.1 2.5 2.8 2.6 9.8 4.5 4.2
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total segment data............. 408.5 373.2 301.0 12.6 11.5 8.7 17.3 19.4 13.9
--------- --------- --------- --------- --------- --------- --------- --------- ---------

Corporate........................ 17.0 14.3 29.4 0.1 0.1 0.1
--------- --------- --------- --------- --------- ---------

Total continuing operations.... 425.5 387.5 330.4 12.7 11.6 8.8 17.3 19.4 13.9
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Discontinued operations.......... 27.5 31.9 26.6 2.8 2.7 2.3 3.4 4.3 4.9
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total.......................... $ 453.0 $ 419.4 $ 357.0 $ 15.5 $ 14.3 $ 11.1 $ 20.7 $ 23.7 $ 18.8
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>

40
<PAGE>
K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

NOTE 14--SEGMENT DATA (CONTINUED)

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
NET SALES BY LOCATION
United States.................................................. $ 381.2 $ 406.7 $ 389.2
Europe......................................................... 153.2 125.0 102.7
Asia........................................................... 40.1 27.3 21.3
--------- --------- ---------
Total net sales.............................................. $ 574.5 $ 559.0 $ 513.2
--------- --------- ---------
--------- --------- ---------

ASSETS
United States.................................................. $ 320.9 $ 315.0 $ 278.3
Europe......................................................... 97.3 91.1 66.0
Asia........................................................... 34.8 13.3 12.7
--------- --------- ---------
Total assets................................................. $ 453.0 $ 419.4 $ 357.0
--------- --------- ---------
--------- --------- ---------

LONG-LIVED ASSETS
United States.................................................. $ 75.4 $ 69.3 $ 59.4
Europe......................................................... 8.3 7.4 7.9
Asia........................................................... 2.5 2.6 2.2
--------- --------- ---------
Total long-lived assets...................................... $ 86.2 $ 79.3 $ 69.5
--------- --------- ---------
--------- --------- ---------
</TABLE>

41
<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, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. Our audits also included the
financial statement schedule in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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, 1998 and 1997, and the consolidated results of
their operation and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

Los Angeles, California
February 17, 1999

42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART II

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, 1999,
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 the 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.

<TABLE>
<CAPTION>
(a-1) Financial Statements (for the three years ended December 31,
1998 unless otherwise stated):

PAGE
REFERENCE
FORM 10-K
-------------
Statements of consolidated income............................... 20
<S> <C> <C>
Consolidated balance sheets at December 31, 1998 and 1997....... 21
Statements of consolidated shareholders' equity................. 22
Statements of consolidated cash flows........................... 23
Notes to consolidated financial statements...................... 24-41
Report of Ernst & Young LLP, Independent Auditors............... 42

(a-2) Consolidated financial statement schedule: F-1
II-Valuation and qualifying accounts..........................
</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

(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.

43
<PAGE>
(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.

(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, 1998 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 and incorporated herein by reference.

(b) Credit Agreement dated as of May 21, 1996 among K2 Inc. (formerly
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 Exhibit 10.02 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, filed as Exhibit (10)(b)(3) to Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference.

(4) Fourth Amendment to the Credit Agreement dated as of August 21,
1998.

(c) Transfer and Administration Agreement among Enterprise Funding Corp.
as the Company, K2 Inc. (formerly 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.

(2) Second Amendment to Transfer and Administration Agreement dated
as of May 20, 1998.

(d) Executive compensation plans and arrangements

44
<PAGE>
(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.

(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, filed as Exhibit (10)(c)(6) to Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.

(7) K2 Inc. Executive Officers' Incentive Compensation Plan adopted
August 5, 1993 as amended December 17, 1996, filed as Exhibit
10(d)(7) to Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.

(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.

(9) Employment agreement dated May 8, 1998 between the Company and
Richard M. Rodstein, filed as Item 6, Exhibit 10.01 of Form 10-Q
for the quarter ended March 31, 1998 and incorporated herein by
reference.

(10) Employment agreement dated May 8, 1998 between the Company and
John J. Rangel, filed as Item 6, Exhibit 10.02 of Form 10-Q for
the quarter ended March 31, 1998 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.

45
<PAGE>
(21) Subsidiaries

(23) Consent of Independent Auditors

(27) Financial Data Schedule

(b) Reports on Form 8-K:
None

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

46
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 of the Security 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.

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

Date: March 30, 1999
--------------------------------------------
</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>
Director, President and
/s/ RICHARD M. RODSTEIN Chief Executive Officer
- ------------------------------ (Principal Executive March 30, 1999
Richard M. Rodstein Officer)

Senior Vice
/s/ JOHN J. RANGEL President--Finance
- ------------------------------ (Principal Financial and March 30, 1999
John J. Rangel Accounting Officer)

/s/ B.I. FORESTER
- ------------------------------ Director, Chairman of the March 30, 1999
B.I. Forester Board

/s/ SUSAN E. ENGEL
- ------------------------------ Director March 30, 1999
Susan E. Engel

/s/ JERRY E. GOLDRESS
- ------------------------------ Director March 30, 1999
Jerry E. Goldress

/s/ WILFORD D. GODBOLD, JR.
- ------------------------------ Director March 30, 1999
Wilford D. Godbold, Jr.

/s/ RICHARD J. HECKMANN
- ------------------------------ Director March 30, 1999
Richard J. Heckmann
</TABLE>

II-1
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ STEWART M. KASEN
- ------------------------------ Director March 30, 1999
Stewart M. Kasen

/s/ JOHN H. OFFERMANS
- ------------------------------ Director March 30, 1999
John H. Offermans

/s/ JOHN B. SIMON
- ------------------------------ Director March 30, 1999
John B. Simon
</TABLE>

II-2
<PAGE>
K2 INC

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

(THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
------------------------ DEDUCTIONS
CHARGED TO -------------
OTHER AMOUNTS
ACCOUNTS CHARGED TO
BALANCE AT CHARGED TO (PRIMARILY RESERVE NET BALANCE
BEGINNING COSTS AND GROSS OF AT END OF
DESCRIPTION OF YEAR EXPENSES SALES) REINSTATEMENTS YEAR
- ----------------------------------------------------- ----------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful items....................... $ 6,590 $ 2,061 $ -- $ 2,853 $ 5,798
Other (primarily sales discounts).................. (a) 0
----------- ----------- ----------- ------ ---------
$ 6,590 $ 2,061 $ -- $ 2,853 $ 5,798
----------- ----------- ----------- ------ ---------
----------- ----------- ----------- ------ ---------

Year ended December 31, 1997(b)
Allowance for doubtful items....................... $ 5,351 $ 2,289 $ -- $ 1,050 $ 6,590
Other (primarily sales discounts).................. 1,062 331(a) 1,393 0
----------- ----------- ----------- ------ ---------
$ 6,413 $ 2,289 $ 331 $ 2,443 $ 6,590
----------- ----------- ----------- ------ ---------
----------- ----------- ----------- ------ ---------

Year ended December 31, 1996(b)
Allowance for doubtful items....................... $ 4,652 $ 3,844 $ -- $ 3,145 $ 5,351
Other (primarily sales discounts).................. 2,937 2,494 4,369 1,062
----------- ----------- ----------- ------ ---------
$ 7,589 $ 3,844 $ 2,494 $ 7,514 $ 6,413
----------- ----------- ----------- ------ ---------
----------- ----------- ----------- ------ ---------
</TABLE>

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

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

(b) Information has been restated for operations discontinued in 1998 (for
further information see Note 3 to Notes to Consolidated Financial
Statements)

F-1

<PAGE>
EXHIBIT (10)(b)(4)

FOURTH AMENDMENT TO
CREDIT AGREEMENT

THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Fourth Amendment")
is dated August 21, 1998, 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, a Second Amendment to Credit Agreement dated as of April 18, 1997
and a Third Amendment to Credit Agreement dated as of December 15, 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. AMENDMENT TO AGREEMENT. The Borrower, the Banks, the Issuing
Bank, the Swing Line Bank and the Agent hereby agree that Section 9.14(a)(5)
of the Agreement is amended by deleting "$50,000,000" and inserting
$75,000,000" 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 Fourth Amendment.

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

3.2 BINDING OBLIGATION. This Fourth 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 Fourth 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 Fourth 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 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.

46
<PAGE>

4. MISCELLANEOUS.

4.1 EFFECTIVENESS OF AGREEMENT. Except as hereby expressly
amended, the Agreement and each other Loan Document shall 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 Fourth 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
Documents; 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 Fourth 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 Fourth 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 Fourth Amendment shall be governed by
and construed under the laws of the State of California.

<PAGE>

EXHIBIT (10)(c)(2)

May 20, 1998

Enterprise Funding Corporation
c/o Merrill Lynch Money Markets Inc.
World Financial Center - South Tower
225 Liberty Street
New York, NY 10218
Attention: Gerard Haugh

Nations Bank, N.A.
Nations Bank Corporate Center 10th Floor
Charlotte, NC 28255
Attention: Michelle M. Heath

Dear Mr. Haugh and Ms. Heath:

Reference is herein made to the Transfer and Administration
Agreement, dated as of January 24, 1996, among Enterprise Funding
Corporation, K2 Inc., formerly known as Anthony Industries, Inc., and
NationsBank N.A., as amended (the "Agreement").

The undersigned hereby desires to extend the date referred to
in clause (v) of the definition of "Termination Date" in the Agreement to May
19, 1999, subject to payment of the Annual Renewal Fee in accordance with the
Fee Letter (as defined in the Agreement).

The undersigned hereby represents and warrants to you that its
representations and warranties set forth in the Agreement are true and
correct as of the date hereof (except those representations and warranties
set forth herein which specifically relate to an earlier date) and that no
Termination Event exists on and as of the date hereof.

All other terms and conditions of the Agreement not amended by
this letter agreement shall remain unchanged and in full force and effect.

<PAGE>

Enterprise Funding Corporation
May 20, 1998
Page 2

If you are in agreement with the above, kindly sign below and
return a copy of this letter to the undersigned.

K2 INC.

By:______________________________________

Agreed, effective upon
receipt of Annual Renewal
Fee referred to above:

ENTERPRISE FUNDING
CORPORATION

By:____________________________

NATIONSBANK, N.A.

By:____________________________

<PAGE>
EXHIBIT (21)

SUBSIDIARIES OF K2 INC.

<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%
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%
K2 Japan Corporation, a Japanese 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%
K2 Bike Inc., a Delaware corporation............................................... 100%
Subsidiary of K2 Bike Inc.:
Cross Country Racing, Inc., a Delaware corporation............................. 100%
K2 Funding, Inc.................................................................... 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, 1999, 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, 1998.

ERNST & YOUNG LLP

Los Angeles, California
March 30, 1999

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

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,394
<SECURITIES> 0
<RECEIVABLES> 131,809
<ALLOWANCES> (5,798)
<INVENTORY> 188,348
<CURRENT-ASSETS> 335,570
<PP&E> 151,071
<DEPRECIATION> (84,480)
<TOTAL-ASSETS> 452,995
<CURRENT-LIABILITIES> 127,138
<BONDS> 0
0
0
<COMMON> 17,191
<OTHER-SE> 184,928
<TOTAL-LIABILITY-AND-EQUITY> 452,995
<SALES> 574,510
<TOTAL-REVENUES> 574,746
<CGS> 418,950
<TOTAL-COSTS> 418,950
<OTHER-EXPENSES> 137,138
<LOSS-PROVISION> 1,672
<INTEREST-EXPENSE> 12,163
<INCOME-PRETAX> 4,823
<INCOME-TAX> 955
<INCOME-CONTINUING> 3,868
<DISCONTINUED> 975
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,843
<EPS-PRIMARY> .29
<EPS-DILUTED> .29

</TABLE>