Edgar Filing: K2 INC

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

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.)

5818 El Camino Real

Carlsbad, California

92008

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code (760) 494-1000

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report:

Not applicable

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).

Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At August 3, 2006 there were 47,099,720 shares of Common Stock ($1.00 par value) outstanding.

PART - 1 FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)

(Thousands, except per share figures)


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net sales	$	301,142		$	301,425		$	649,213		$	619,716
Cost of products sold		198,577			201,667			434,093			417,139

Gross profit		102,565			99,758			215,120			202,577

Selling expenses		57,683			54,502			119,558			113,217
General and administrative expenses		35,703			36,910			73,776			71,003

Operating income		9,179			8,346			21,786			18,357

Interest expense		6,736			7,285			14,569			14,538
Other income, net		(783	)		(1,117	)		(1,535	)		(1,838	)

Income before income taxes		3,226			2,178			8,752			5,657

Provision for income taxes		1,083			725			2,967			1,880

Net income	$	2,143		$	1,453		$	5,785		$	3,777

Basic earnings per share:
Net income	$	0.05		$	0.03		$	0.12		$	0.08

Diluted earnings per share:
Net income	$	0.05		$	0.03		$	0.12		$	0.08

Basic shares outstanding		47,016			46,216			46,916			46,196

Diluted shares outstanding		47,604			47,373			47,555			47,430

See notes to consolidated condensed financial statements

CONSOLIDATED CONDENSED BALANCE SHEETS


	June 30,			December 31,
	2006			2005
	(unaudited)
	(Thousands, except share data)
Assets
Current Assets
Cash and cash equivalents	$	11,652		$	11,797
Accounts receivable, less allowances for doubtful accounts of $17,929 (2006) and $15,922 (2005)		276,776			380,442
Inventories, net		383,264			359,028
Deferred income taxes		2,258			5,044
Prepaid expenses and other current assets		25,516			21,905

Total current assets		699,466			778,216

Property, plant and equipment		305,721			295,202
Less allowance for depreciation and amortization		164,782			151,147

		140,939			144,055
Other Assets
Goodwill		109,557			107,027
Tradenames		117,001			117,001
Other intangible assets, net		18,282			19,988
Other		23,696			24,289

Total Assets	$	1,108,941		$	1,190,576

Liabilities and Shareholders’ Equity
Current Liabilities
Bank loans	$	22,770		$	24,296
Accounts payable		72,459			93,470
Income taxes payable		27,787			31,946
Accrued payroll and related		39,434			40,555
Other accruals		82,310			85,256
Current portion of long-term debt		2,933			33,265

Total current liabilities		247,693			308,788

Long-term pension liabilities		26,758			26,758
Long-term debt		242,027			280,717
Deferred income taxes		21,286			21,286
Convertible debentures		99,237			99,003

Shareholders’ Equity
Preferred Stock, $1 par value, authorized 12,500,000 shares, none issued		—			—
Common Stock, $1 par value, authorized 110,000,000 shares in 2006 and 2005, issued shares - 47,834,342 in 2006 and 47,663,227 in 2005		47,834			47,663
Additional paid-in capital		505,527			503,624
Retained deficit		(59,218	)		(65,003	)
Treasury shares at cost, 763,140 shares in 2006 and 2005		(9,360	)		(9,360	)
Accumulated other comprehensive loss		(12,843	)		(22,900	)

Total Shareholders’ Equity		471,940			454,024

Total Liabilities and Shareholders’ Equity	$	1,108,941		$	1,190,576

See notes to consolidated condensed financial statements

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)


	Six Months Ended June 30,
	2006			2005
	(Thousands)
Operating Activities
Net Income	$	5,785		$	3,777
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of operating facility		(1,504	)		—
Depreciation and amortization		17,791			17,278
Non-cash share-based compensation charges		989			360
Deferred taxes		2,736			1,415
Changes in current assets and current liabilities		54,362			18,652

Net cash provided by operating activities		80,159			41,482

Investing Activities
Property, plant and equipment expenditures		(11,680	)		(17,308	)
Proceeds from sale of property, plant and equipment		5,386			872
Purchase of businesses, net of cash acquired		(2,813	)		(15,094	)
Other items, net		(2,391	)		3,098

Net cash used in investing activities		(11,498	)		(28,432	)

Financing Activities
Borrowings under long-term debt		530,052			548,000
Payments of long-term debt		(598,840	)		(540,525	)
Net decrease in short-term bank loans		(1,526	)		(24,473	)
Exercise of stock options		1,085			397

Net cash used in financing activities		(69,229	)		(16,601	)

Effects of foreign exchange rates on cash and cash equivalents		423			(632	)

Net decrease in cash and cash equivalents		(145	)		(4,183	)

Cash and cash equivalents at beginning of year		11,797			25,633

Cash and cash equivalents at end of period	$	11,652		$	21,450

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

June 30, 2006

NOTE 1 – Basis of Presentation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The consolidated condensed balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

K2 Inc. (“K2”) reports its financial statements using a 52/53 week year with a 13 week quarter ending on the closest Sunday to the end of March, June, September and December. Fiscal year 2006 includes 53 weeks versus 52 weeks in 2005 fiscal year, and the first quarter 2006 includes 14 weeks versus 13 weeks in the first quarter 2005. For purposes of the consolidated financial statements, the end of each quarter is stated as of March 31, June 30, September 30 and December 31, respectively.

The interim financial statements should be read in connection with the financial statements in K2 Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005.

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

NOTE 2 – Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. K2 is currently assessing the impact of this Interpretation on its financial position and results of operations.

In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125”. SFAS No. 155 permits the fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 2 – Recent Accounting Pronouncements (Continued)

and clarifies that both interest-only and principal-only strips are not subject to the provision of SFAS No. 133. Further, SFAS No. 155 establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding versus those that are embedded derivatives. Other provisions relate to matters of concentration of credit risk and application of certain provisions to special purpose entities. The effective date for the provisions of SFAS No. 155 is for those instruments acquired or issued after the beginning of our fiscal year 2007. K2 believes that SFAS No. 155 should not have a material impact on its financial position or results of operations.

NOTE 3 – Share-Based Compensation

Under K2’s 2006, 2005, 2004, 1999 and 1994 Long-Term Incentive Plans (“2006 Plan,” “2005 Plan,” “2004 Plan,” “1999 Plan” and “1994 Plan,” respectively), stock options may be granted to eligible directors and key employees of K2 and its subsidiaries at not less than 100% of the market value of the shares on the dates of grant. As defined in the 2006 Plan, 2005 Plan and 2004 Plan (collectively, “the Plans”), share-based awards include awards of shares of stock that are subject to certain restrictions (“Restricted Stock”) and a fixed or variable right to acquire stock, which may or may not be subject to restriction (“Restricted Stock Units”). These Plans also provide for the issuance of Restricted Stock, Restricted Stock Units and other share-based awards that are subject to performance objectives (“Performance Award”). The 2006, 2005, 2004, 1999 and 1994 Plans permit 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 at the dates of grant and generally vest over three years. Pursuant to the 1994 Plan document, no additional awards may be granted under the 1994 Plan after December 31, 2004.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 3 – Share-Based Compensation (Continued)

Stock Option Activity

Options granted, exercised, expired and forfeited under the 2006 Plan, 2005 Plan, 2004 Plan, 1999 Plan and 1994 Plan and options assumed from acquisitions for the first six months of fiscal year 2006 are as follows:


	Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Options outstanding at December 31, 2005	4,237,332		$	11.60	6.76
Granted	5,000			10.08
Exercised	(49,820	)		7.99
Expired	(39,046	)		14.92

Options outstanding at March 31, 2006	4,153,466		$	11.61	6.57
Granted	647,000			11.15
Exercised	(90,355	)		7.60
Forfeited	(1,500	)		11.15
Expired	(176,496	)		14.80

Options outstanding at June 30, 2006	4,532,115		$	11.50	6.93	$	5,056,584

Options vested and expected to vest at June 30, 2006	4,508,782		$	11.50	0.29	$	5,056,382

Options exercisable at June 30, 2006	3,870,615		$	11.56	6.42	$	5,049,934

The weighted-average grant-date fair value of options granted during the three months ended June 30, 2006 and 2005 was $5.17 and $6.70, respectively. The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $5.17 and $6.70, respectively. Intrinsic value is defined as the difference between the relevant current market value of the common stock and the grant price for options with exercise prices less than the market values on such dates. The total intrinsic value of options exercised during the three months ended June 30, 2006 and 2005 was approximately $419,000 and $173,000, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was approximately $595,000 and $333,000, respectively. Cash received from stock options exercised during the six months ended June 30, 2006 was $1.1 million and the actual tax benefit realized from these exercises was zero.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 3 – Share-Based Compensation (Continued)

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 June 30, 2006 is as follows:


	Options Outstanding				Options Exercisable
Price Range	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Shares	Weighted Average Exercise Price
$2.39 - $7.13	508,213	$	6.47	4.07 years	508,213	$	6.47
$7.25 - $7.30	53,322		7.28	5.09 years	53,322		7.28
$7.45 - $7.45	492,500		7.45	6.75 years	492,500		7.45
$7.50 - $10.63	343,128		8.40	3.82 years	333,128		8.35
$11.15 - $11.15	645,500		11.15	9.89 years	—		—
$11.25 - $12.50	148,600		11.29	2.71 years	148,600		11.29
$12.51 - $12.51	916,500		12.51	8.82 years	916,500		12.51
$12.82 - $13.25	119,304		13.16	5.12 years	113,304		13.16
$13.69 - $13.69	1,023,500		13.69	7.88 years	1,023,500		13.69
$13.83 - $65.00	281,548		21.15	3.07 years	281,548		21.15

Total	4,532,115	$	11.50	6.93 years	3,870,615	$	11.56

Restricted Stock

A summary of the status of the Company’s restricted stock issued under the Plans for the first six months of fiscal year 2006 is as follows:


	Shares		Weighted Average Grant Date Fair Value
Restricted stock outstanding at December 31, 2005	192,000		$	13.23
Vested	(26,668	)		13.35

Restricted stock outstanding at March 31, 2006	165,332			13.21
Vested	(4,000	)		12.51

Restricted stock outstanding at June 30, 2006	161,332		$	13.23

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 3 – Share-Based Compensation (Continued)

Restricted Stock Units

A summary of the status of the Company’s restricted stock units issued, including performance awards, under the Plans for the first six months of fiscal year 2006 is as follows:


	Shares		Weighted Average Purchase Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Restricted stock units outstanding at December 31, 2005	—		—	—
Awarded	229,122		—	—
Forfeited	(500	)	—	—

Restricted stock units outstanding at June 30, 2006	228,622		—	1.75	$	2,501,125

Restricted stock units vested and expected to vest at June 30, 2006	228,122		—	1.75	$	2,501,125

Restricted stock units exercisable (vested and deferred) at June 30, 2006	—		—	—	$	—

Adoption of SFAS No. 123 (revised 2004)

On January 1, 2006, K2 adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires K2 to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the consolidated statement of operations over the period during which an employee is required to provide service in exchange for the award—the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123R eliminates the use of Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees,” and the option for pro forma disclosure in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation.”

SFAS No. 123R permits public companies to adopt its requirements using one of the two following methods: (1) a “modified prospective” method in which compensation cost is recognized beginning with the effective date based on both (a) the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date; or (2) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits companies to restate prior periods

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 3 – Share-Based Compensation (Continued)

based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures, either (a) for all prior periods presented or (b) prior interim periods of the year of adoption. K2 adopted SFAS No. 123R using the modified-prospective method and therefore prior periods are not restated.

SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a cash flow from financing activities, rather than a cash flow from operating activities as required under previous guidance. This requirement may reduce operating cash flows and increases net financing cash flows in periods after adoption.

The Company recognized the following share-based compensation expense during the three months and six months ended June 30, 2006. (Thousands, except per share data):


	Three Months Ended June 30, 2006			Six Months Ended June 30, 2006
Stock options
General and administrative expenses	$	74		$	350
Cost of goods sold		40			40
Selling expenses		4			4
Restricted stock
General and administrative expenses		237			476
Restricted stock units
General and administrative expenses		119			119

Total		474			989
Income tax benefit		(174	)		(362	)

Share-based compensation expense, net of taxes	$	300		$	627

Effect of share-based compensation expense on net income per share:
Basic	$	(0.01	)	$	(0.01	)
Diluted	$	(0.01	)	$	(0.01	)

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 3 – Share-Based Compensation (Continued)

The following table summarizes the approximate unrecognized compensation cost for the share-based compensation awards and the weighted average remaining years over which the cost will be recognized:


	Total Unrecognized Compensation Cost		Weighted Average Remaining Years
	(thousands)
Stock options	$	3,194	2.04
Restricted stock		1,547	1.75
Restricted stock units		2,436	1.02

Total	$	7,177	1.76

Prior to the adoption of SFAS No. 123R, K2 measured compensation cost for its employee share-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25 and related interpretations and provided pro forma net income and pro forma net income per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. Compensation cost for stock options issued to employees was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.

The following table illustrates the effect on net income and net income per share as if the Company had applied the fair-value-based method as defined in SFAS No. 123 to share-based compensation during the three and six months ended June 30, 2005. (Thousands, except per share data).


	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net income as reported	$	1,453		$	3,777
Add: Total share-based compensation expense included in net income, net of taxes		277			360
Less: Total share-based compensation expense determined under fair value based method for all awards, net of taxes		(9,146	)		(9,891	)

Net income, adjusted	$	(7,416	)	$	(5,754	)

Earnings per share:
Basic - as reported	$	0.03		$	0.08
Basic - pro forma	$	(0.16	)	$	(0.12	)
Diluted - as reported	$	0.03		$	0.08
Diluted - pro forma	$	(0.16	)	$	(0.12	)

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 3 – Share-Based Compensation (Continued)

On May 17, 2005, the Compensation Committee of the Board of Directors of K2 approved the acceleration of vesting of certain unvested and “out-of-the-money” stock options previously awarded to employees and officers under the K2 stock option plans. An option was considered “out-of-the-money” if the stated exercise price was greater than $11.94 per share, the closing price of K2’s common stock on May 17, 2005, which was the last trading day before approval of the acceleration. Outstanding unvested options that had an exercise price equal to or less than $11.94 on May 17, 2005, will continue to vest under the terms of the original option agreements. As a result of this action, options to purchase approximately 2.1 million shares of K2’s common stock that would otherwise have vested over the next three years became fully vested. The options have a range of exercise prices of $12.51 to $14.30 and a weighted average exercise price of $13.14. Options held by non-employee directors were not affected. In addition, the Compensation Committee imposed a holding period that will require that all affected executive officers of the Company not sell shares acquired through the exercise of an accelerated option (other than shares needed to cover the exercise price and satisfying withholding taxes) prior to the earlier of the date on which exercise would have been permitted under the options’ original vesting terms or, if earlier, the executive officer’s last day of employment. The decision to accelerate the vesting of these options was made to reduce future compensation expense that was and is expected to be recorded in conjunction with SFAS No. 123R.

Determining Fair Value

Valuation and Amortization Method. K2 has elected to use the Black-Scholes option valuation model (single option approach) to calculate the fair value of employee stock option grants. For options with graded vesting, the option grant is treated as a single award and compensation cost is recognized on a straight-line basis over the vesting period of the entire award, ensuring that compensation cost is at least equal to the cumulative amount of vesting at the end of each reporting period.

Expected Term. The expected term of options granted represents the period of time that the option is expected to be outstanding. K2 estimates the expected term of the option grants based on historical exercise patterns that are believed to be representative of future behavior as well as other various factors. When and if applicable, K2 uses separate groups of employees that have similar historical exercise behavior for valuation purposes.

Expected Volatility. K2 estimates its volatility using its historical share price performance over the expected life of the options, which management believes is materially indicative of expectations about expected future volatility.

Risk-Free Interest Rate. K2 uses risk-free interest rates in the Black-Scholes option valuation model that are based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 3 – Share-Based Compensation (Continued)

Dividend Rate. K2 does not issue dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Therefore, K2 uses an expected dividend yield of zero in the Black-Scholes option valuation model.

Forfeitures. SFAS No. 123R requires companies to estimate forfeitures at the time of grant and revise those estimates in subsequent reporting periods if actual forfeitures differ from those estimates. K2 uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For purposes of calculating pro forma information under SFAS 123 for periods prior to the date of adoption of SFAS No. 123R, K2 accounted for forfeitures as they occurred.

The following weighted average assumptions were used to estimate the fair value of options granted during the three and six months ended June 30, 2006 and 2005:


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Risk free interest rate	4.98	%	3.60	%	4.98	%	3.60	%
Expected life of options	5 years		5 years		5 years		5 years
Expected volatility	45.5	%	40.9	%	45.5	%	40.9	%
Expected dividend yield	—		—		—		—

NOTE 4 – Inventories

The components of inventories consisted of the following:


	June 30, 2006		December 31, 2005
	(Thousands)
Finished goods	$	281,378	$	266,340
Work in process		15,124		18,796
Raw materials		86,762		73,892

	$	383,264	$	359,028

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 5 – Acquisitions

During the 2006 second quarter, K2 completed the acquisition of substantially all of the assets of both Xtools, LLC, a business engaged in the design, selling and distribution of fishing accessories and TrakSports USA Inc., a business engaged in the design, selling and distribution of skis. The purchase price for these assets was paid in cash. The results of the operations of these two companies were included in the consolidated financial statements of K2 beginning with the date of the applicable acquisition.

During the 2005 second quarter, K2 completed the acquisition of substantially all of the assets of both Hodgman, Inc., a business engaged in the design, selling and distribution of hunting and fishing waders, and the stock of JRC Products Limited, a business engaged in the design, selling and distribution of fishing tackle products. The purchase price for these assets was paid in cash. The results of the operations of these two companies were included in the consolidated financial statements of K2 beginning with the date of the applicable acquisition.

Those two transactions completed during the 2005 second quarter were accounted for under the purchase method of accounting, and accordingly the purchased assets and liabilities were recorded at their estimated fair values at the date of the acquisition. The combined purchase price allocation for the two acquisitions resulted in an excess of the purchase price over net tangible assets acquired of approximately $7.0 million.

The excess amounts of the two transactions were allocated to intangible assets with finite and indefinite lives including: customer relationships and patents of $0.1 million with an average life of 2.0 years; tradenames with an indefinite life not subject to amortization of $2.9 million; and goodwill not subject to amortization of $4.0 million.

At June 30, 2006, there was approximately $2.4 million of cash and 29,175 shares of K2 common stock held in escrow or due for payment relating to certain acquisitions. The cash and shares will be released from escrow during 2006 through 2008 subject to final agreement between K2 and the selling parties. The cash and shares in escrow as well as future cash payments due have been reflected in the purchase price of the related acquisitions. Shares held in escrow are reflected in the calculation of diluted earnings per share for the periods presented.

Pursuant to the acquisitions made by K2 during 2005, 2004 and 2003, K2 approved restructuring and exit plans related to the closure of certain facilities of the acquired companies. In accordance with Emerging Issues Task Force (“EITF”) 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” K2 established reserves for employee severance, employee relocation costs and lease termination costs totaling approximately $0.6 million, $11.0 million and $5.1 million, during 2005, 2004 and 2003, respectively. These reserves were recognized as assumed liabilities of the acquired companies. The reserves established were not individually significant to any of K2’s acquisitions during 2005, 2004 or 2003.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 5 – Acquisitions (Continued)

The following table summarizes the activity in 2005 and the first six months of 2006:


	Employee Severance			Employee Relocation			Subtotal			Lease Termination Costs			Total
	(Thousands)
Balance at December 31, 2004	$	6,990		$	368		$	7,358		$	5,197		$	12,555

Reserves established in conjunction with acquisitions		205			—			205			422			627

Adjustments to reserve estimates (reflected as an adjustment of the cost of the acquired companies)		(2,644	)		—			(2,644	)		(1,582	)		(4,226	)

Utilized in 2005:		(3,205	)		(125	)		(3,330	)		(1,906	)		(5,236	)

Balance at December 31, 2005		1,346			243			1,589			2,131			3,720

Utilized in 2006:		(1,213	)		(12	)		(1,225	)		(837	)		(2,062	)

Balance at June 30, 2006	$	133		$	231		$	364		$	1,294		$	1,658

K2 believes that the remaining reserves for restructuring are adequate to complete its restructuring and exit plans.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 6 – Intangible Assets and Goodwill

The components of intangible assets and goodwill consisted of the following:


	Weighted Average Useful Life	June 30, 2006						December 31, 2005
	Weighted Average Useful Life	Gross Amount		Accumulated Amortization		Net Book Value		Gross Amount		Accumulated Amortization		Impairment Charge (a)		Net Book Value
		(Thousands)
Intangibles subject to amortization:
Patents	7.9 years	$	16,517	$	5,682	$	10,835	$	16,164	$	4,729	$	—	$	11,435
Customer contracts/relationships	8.2 years		8,215		3,252		4,963		8,215		2,689		—		5,526
Licensing agreements	7.4 years		2,795		1,605		1,190		2,795		1,357		—		1,438
Trademarks	7.1 years		955		355		600		955		279		—		676
Non-compete agreements	4.1 years		1,572		878		694		1,574		661		—		913
Order backlog and other	0.2 years		—		—		—		1,560		1,560		—		—

			30,054		11,772		18,282		31,263		11,275		—		19,988
Intangibles not subject to amortization: (by segment)
Tradename
Marine and Outdoor			3,252		—		3,252		3,252		—		—		3,252
Action Sports			48,292		—		48,292		55,259		—		6,967		48,292
Team Sports			43,857		—		43,857		65,718		—		21,861		43,857
Apparel and Footwear			21,600		—		21,600		21,600		—		—		21,600
Goodwill
Marine and Outdoor			28,426		—		28,426		26,959		—		—		26,959
Action Sports			1,070		—		1,070		101,104		—		101,104		—
Team Sports			—		—		—		123,222		—		123,222		—
Apparel and Footwear			80,061		—		80,061		80,068		—		—		80,068

			226,558		—		226,558		477,182		—		253,154		224,028
Total intangibles and goodwill		$	256,612	$	11,772	$	244,840	$	508,445	$	11,275	$	253,154	$	244,016

(a)	Non-cash intangible impairment charges as a result of annual testing in accordance with SFAS No. 142” Goodwill and Other Intangible Assets” (“SFAS No. 142”).

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 6 – Intangible Assets and Goodwill (Continued)

The table below shows the activity in intangibles subject to and not subject to amortization for the six months ended June 30, 2006.


	December 31, 2005 Net Book Value		Purchase Price Allocations (a)			Other Activity (b)			Amortization			June 30, 2006 Net Book Value
	(Thousands)
Intangibles subject to amortization:
Patents	$	11,435	$	—		$	353		$	(953	)	$	10,835
Customer contracts/relationships		5,526		—			—			(563	)		4,963
Licensing agreements		1,438		—			—			(248	)		1,190
Trademarks		676		—			—			(76	)		600
Non-compete agreements		913		—			(2	)		(217	)		694

		19,988		—			351			(2,057	)		18,282

Intangibles not subject to amortization: (by segment)
Tradename
Marine and Outdoor		3,252		—			—			—			3,252
Action Sports		48,292		—						—			48,292
Team Sports		43,857		—			—			—			43,857
Apparel and Footwear		21,600		—			—			—			21,600
Goodwill
Marine and Outdoor		26,959		1,135			332			—			28,426
Action Sports		—		1,070			—			—			1,070
Apparel and Footwear		80,068		(7	)		—			—			80,061

		224,028		2,198			332			—			226,558

Total intangibles and goodwill	$	244,016	$	2,198		$	683		$	(2,057	)	$	244,840

(a)	Amounts in this column represent the allocation of purchase price to intangibles in accordance with SFAS No. 141 “Business Combinations” and adjustments to the preliminary purchase price allocations.

(b)	Amounts in this column represent either additions to intangibles not related to purchased intangibles or the effects of foreign currency translation.

Amortization expense for intangibles subject to amortization was approximately $2.1 million for the six months ended June 30, 2006. Amortization expense of purchased intangible assets subject to amortization is estimated to be approximately $3.5 million during the fiscal year ending December 31, 2006, $3.3 million during 2007, $3.2 million during 2008, $2.0 million during 2009 and $1.4 million during 2010.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 7– Warranties

K2 records the estimated cost of product warranties at the time sales are recognized. K2 estimates warranty obligation by reference to historical product warranty return rates, material usage and service delivery costs incurred in correcting the product. Should actual product warranty return rates, material usage or service delivery costs differ from the historical rates, revisions to the estimated warranty liability would be required.

The following activity related to product warranty liabilities:


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
(Unaudited)	(Thousands)						(Thousands)
Beginning Balance	$	9,089		$	9,324		$	9,089		$	9,691
Charged to costs and expenses		2,053			2,428			4,207			4,654
From acquisitions		300			—			300			—
Amounts charged to reserve		(1,925	)		(2,379	)		(4,079	)		(4,972	)

Ending Balance	$	9,517		$	9,373		$	9,517		$	9,373

NOTE 8 – Borrowings and Other Financial Instruments

At June 30, 2006, K2’s principal long-term borrowing facility was a $250 million revolving Credit Facility (“Facility”) expiring on February 21, 2011 with several banks and other financial institutions. The Facility is expandable to $350 million subject to certain conditions. The Facility has a $100 million limit for the issuance of letters of credit. Borrowings under the Facility are secured by all of K2’s assets in the United States, Canada and England. Actual borrowing availability under the Facility is based on K2’s trade receivable and inventory levels in the United States, Canada and England, subject to eligibility criteria and defined advance rates. Borrowings under the Facility are subject to an interest rate grid, and as of June 30, 2006 bear a rate equal to the prime rate, or a LIBOR interest rate plus 1.375%, and the Facility had an unused commitment fee of 0.25% per year. The Facility includes various covenants, including requirements that K2 maintain a minimum debt service coverage ratio if the unused availability drops below $37.5 million, as well as limiting annual capital expenditures, indebtedness, dividends and certain investment activities.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 8 – Borrowings and Other Financial Instruments (Continued)

At June 30, 2006, borrowings of $27.1 million were outstanding under the Facility bearing an average interest rate of 6.73%. At June 30, 2006, there were also letters of credit outstanding under the Facility of $11.6 million (consisting of $8.2 million of standby letters of credit and $3.4 million of trade letters of credit expiring over the next 12 months). Pursuant to the terms of the Facility, an additional $190.8 million was available for borrowing at June 30, 2006.

At June 30, 2006, K2 had $25 million of 7.25% convertible subordinated debentures (“7.25% Debentures”) due March 2010. The 7.25% Debentures are convertible into 2,097,315 shares of K2 common stock at a conversion price of $11.92 per share. Pursuant to the agreement for these debentures, the note holders received warrants to purchase 243,260 and 524,329 additional shares of K2’s common stock at exercise prices of $13.143 and $11.92 per share, respectively, exercisable within the three and five year period ended February 14, 2006 and February 14, 2008, respectively (the “Warrants”). The Warrants that were exercisable within the three year period ended February 14, 2006 expired unexercised. K2 assigned a total fair market value of $2.3 million to the Warrants. At June 30, 2006, the aggregate unamortized fair market value of $0.8 million is reflected as a reduction of the face amount of the 7.25% Debentures on K2’s balance sheet which is being amortized to interest expense using the effective interest method through the exercise periods, thereby increasing the carrying value of the debentures.

At June 30, 2006, K2 had $75 million of 5.00% convertible senior debentures (“5% Debentures”) due June 2010. The 5% Debentures are convertible into 5,706,458 shares of K2 common stock at a conversion price of $13.143 per share. The debentures are redeemable by K2 in whole or in part at K2’s option on or after June 15, 2008 at a redemption price of 101.429% beginning on June 15, 2008 and ending on June 14, 2009, and at 100.714% beginning on June 15, 2009 and ending on June 14, 2010.

At June 30, 2006, K2 also had $200 million of 7.375% senior, unsecured notes (“Senior Notes”) due July 1, 2014. The Senior Notes are redeemable by K2 in whole or in part at K2’s option at any time prior to July 1, 2009 at a price equal to 100% of the principal amount plus accrued and unpaid interest plus a make-whole premium as defined in the indenture. Thereafter, K2 may redeem all or a portion of the notes at the redemption prices set forth in the indenture. The Senior Notes include various incurrence covenants, including limitations on indebtedness, restricted payments and sales of assets.

At June 30, 2006, K2 also had $40.7 million outstanding under various foreign lending arrangements.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 9 – Pension Plans

Domestic plan

K2 sponsors a non-contributory defined benefit pension plan that covers approximately 750 of its domestic employees. Benefits are generally based on years of service and the employee’s highest average compensation for five consecutive years during the years of credited service. Benefit formulas for prior service vary for different divisions. Contributions are intended to provide for benefits attributable to service to date and service expected to be provided in the future. K2 funds this plan in accordance with the Employee Retirement Income Security Act of 1974.

Effective August 31, 2004, the “K2 Pension Plan” was amended to freeze the accrual of future benefits for almost all of the employees. This resulted in active participants no longer accruing benefits under the plan. Participants will remain eligible to receive benefits they have earned under the plan through August 31, 2004 when they retire. New employees will not be eligible to accrue any benefit under the plan. Only a small group of about 20 employees subject to a collective bargaining agreement will continue to accrue a benefit until September 16, 2006.

K2 also has a pension plan which covered certain employees of the Simplex Building Products division which K2 sold in 2000 (the “Simplex UAW Pension Plan”). This plan was merged with the K2 Pension Plan as of December 31, 2005.

The components of domestic net periodic pension cost consisted of the following:


	Domestic Plan Three Months Ended June 30,						Domestic Plan Six Months Ended June 30,
	2006			2005			2006			2005
	(Thousands)
Service cost	$	38		$	25		$	76		$	50
Interest cost		1,007			1,010			2,014			2,020
Expected return on assets		(981	)		(1,034	)		(1,962	)		(2,068	)
Actuarial loss		215			162			430			324

Total net periodic benefit cost	$	279		$	163		$	558		$	326

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 9 – Pension Plans (Continued)

The increase in the net periodic benefit cost for the three and six months ended June 30, 2006 as compared to the three and six months ended June 30, 2005 is due to lower than expected asset returns during 2005; a change in expected return on assets for 2006 from 8.25% to 7.75%; lower expected contributions in 2006 compared to 2005, and a change in discount rate from 5.75% to 5.67%. These increases were partially offset by a decrease due to demographic and miscellaneous changes. K2 estimates a required cash contribution of approximately $61,000 to the plan in 2006. During the six months ended June 30, 2006, K2 made contributions totaling approximately $37,000 to the domestic plan.

Foreign plans

In addition to the plans discussed above, K2 also had five smaller defined benefit plans in the United Kingdom and in Germany (“foreign plans”). Four of the foreign plans are in Germany and are attributable to the acquisitions of Völkl and Marker on July 7, 2004. K2 recorded pension expense for the plans in Germany beginning with the date of the acquisitions.


	Foreign Pension Plans Three Months Ended June 30,						Foreign Pension Plans Six Months Ended June 30,
	2006			2005			2006			2005
	(Thousands)
Net periodic benefit cost
Service cost	$	101		$	77		$	202		$	154
Interest cost		201			216			402			431
Expected return on plan assets		(132	)		(117	)		(264	)		(233	)
Amortization of net loss		6			—			12			—

Net periodic benefit cost	$	176		$	176		$	352		$	352

Pension expense for the three and six months ended June 30, 2006 for the foreign plans remained fairly consistent with the three months and six months ended June 30, 2005. K2 estimates a required cash contribution of approximately $1.2 million to the foreign plans in 2006. During the six months ended June 30, 2006, K2 made contributions totaling approximately $0.8 million to the foreign plans.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 10 – Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:


	Currency Translation Adjustments			Additional Minimum Pension Liability			Derivative Financial Instruments			Total
	(Thousands)
Balance at December 31, 2005	$	(9,182	)	$	(13,470	)	$	(248	)	$	(22,900	)

Currency translation adjustment		9,749			—			—			9,749

Reclassification adjustment for amounts recognized in cost of sales		—			—			497			497

Change in fair value of derivatives, net of $31 in taxes		—			—			(189	)		(189	)

Balance at June 30, 2006	$	567		$	(13,470	)	$	60		$	(12,843	)

Total comprehensive income (loss) was $10.2 million and ($5.7) million for the three months ended June 30, 2006 and 2005, respectively. Total comprehensive income (loss) was $15.8 million and ($8.0) million for the six months ended June 30, 2006 and 2005, respectively. Total comprehensive income includes the net change in accumulated other comprehensive loss for the period.

Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the foreign currency translation adjustment in the above table. The currency translation gain for the six months ended June 30, 2006 is the result of the weakening of the U.S. dollar against foreign currencies during the period, mainly the Euro.

NOTE 11 – Earnings Per Share Data

Basic earnings per share (“EPS”) is determined by dividing net income or loss by the weighted average number of shares outstanding during the period. Diluted EPS reflects the potential dilutive effects of stock options, restricted stock, restricted stock units, shares held in escrow and warrants, using the treasury stock method, and of the convertible debentures using the “if converted” method.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 11 – Earnings Per Share Data (Continued)

Options to purchase 4,532,115 and 4,450,291 shares of K2 common stock were outstanding at June 30, 2006 and 2005, respectively. At June 30, 2006, there were also 161,332 shares of nonvested restricted stock, 228,622 shares of nonvested restricted stock units and 29,175 shares held in escrow relating to certain acquisitions. At June 30, 2005, there were 230,000 shares of nonvested restricted stock and 612,466 shares held in escrow relating to certain acquisitions. At June 30, 2006 and 2005, shares of common stock issuable upon conversion of the $100 million of convertible debentures totaling 7,803,775 and warrants to purchase 524,329 and 767,589, respectively, of shares of common stock were outstanding.

For the three months ended June 30, 2006 and 2005, approximately 2,730,000 and 2,167,000 stock options, respectively, were excluded since their inclusion would have been antidilutive. For the three months ended June 30, 2006, approximately 53,000 shares of nonvested restricted stock were excluded since their inclusion would have been antidilutive. For the three months ended June 30, 2006 there were approximately 84,000 shares of nonvested restricted stock units excluded since they were contingently issuable shares whose performance condition had not been satisfied as of June 30, 2006. For the three months ended June 30, 2006, approximately 374,521 warrants were also excluded as their inclusion would have been antidilutive. For the three months ended June 30, 2006 and 2005, 29,175 and 612,466 shares of K2 common stock held in escrow, respectively, were included in the calculation of diluted earnings per share.

For the six months ended June 30, 2006 and 2005, approximately 2,638,000 and 1,500,000 stock options, respectively, were excluded since their inclusion would have been antidilutive. For the six months ended June 30, 2006, approximately 438,055 warrants were also excluded as their inclusion would have been antidilutive. For the six months ended June 30, 2006 there were approximately 40,000 shares of nonvested restricted stock units excluded since they were contingently issuable shares whose performance condition had not been satisfied as of June 30, 2006. For the six months ended June 30, 2006 and 2005, 63,214 and 616,672 shares of K2 common stock held in escrow, respectively, were included in the calculation of diluted earnings per share.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 11 – Earnings Per Share Data (Continued)

The table below outlines the determination of the number of diluted shares of common stock used in the calculation of diluted EPS as well as the calculation of diluted EPS for the periods presented:


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
	(Thousands, except per share amounts)
Determination of diluted number of shares:
Average common shares outstanding		47,016		46,216		46,916		46,196
Assumed conversion of dilutive stock options, restricted stock, restricted stock units, warrants and shares in escrow		588		1,157		639		1,234

Diluted average common shares outstanding		47,604		47,373		47,555		47,430

Calculation of diluted earnings per share:
Net income	$	2,143	$	1,453	$	5,785	$	3,777

Diluted earnings per share (a)	$	0.05	$	0.03	$	0.12	$	0.08

(a)	Diluted earnings per share is calculated by dividing net income by diluted average common shares outstanding for the respective period.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 12 – Segment Information

Under SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” (SFAS No.131”), K2 classifies its business into the following four segments based on similar product types and distribution channels: Marine and Outdoor, Team Sports, Action Sports and Apparel and Footwear.

The Marine and Outdoor segment includes Shakespeare fishing tackle and monofilament products as well as Stearns outdoor products. The Team Sports segment includes baseball and softball products, K2 Licensed Products and paintball products. The Action Sports segment includes skis, snowboards, snowshoes and in-line skates. The Apparel and Footwear segment includes Marmot and Ex Officio products as well as skateboard shoes and related apparel. During 2005, the paintball business declined significantly. In order to improve efficiency, K2 reorganized the paintball business to operate more in line with how the components of the Team Sports segment operates with increased emphasis on the mass merchant and large sporting goods retailer distribution. Upon completion of the reorganization in the first quarter of 2006, K2 has adjusted its segment reporting to include paintball products in the Team Sports segment versus the Action Sports segment where it was previously reported. The segment information for the 2005 period has been restated to reflect this reclassification.

The segment information presented below is for the three months ended June 30:


	Net Sales to Unaffiliated Customers				Intersegment Sales				Operating Profit (Loss)
	2006		2005		2006		2005		2006			2005
	(Millions)
Marine and Outdoor	$	128.8	$	130.4	$	46.2	$	36.7	$	19.6		$	20.1
Team Sports		96.5		89.3		—		0.1		4.4			0.9
Action Sports		37.5		44.1		4.8		2.3		(10.5	)		(9.9	)
Apparel and Footwear		38.3		37.6		0.8		0.2		0.4			3.0

Total segment data	$	301.1	$	301.4	$	51.8	$	39.3		13.9			14.1

Corporate expenses, net										(4.0	)		(4.6	)
Interest expense										(6.7	)		(7.3	)

Income before provision for income taxes									$	3.2		$	2.2

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 12 – Segment Information (Continued)

The segment information presented below is for the six months ended June 30:


	Net Sales to Unaffiliated Customers				Intersegment Sales				Operating Profit (Loss)
	2006		2005		2006		2005		2006			2005
	(Millions)
Marine and Outdoor	$	252.0	$	242.8	$	86.6	$	69.9	$	35.8		$	36.1
Team Sports		229.0		197.5		—		0.1		17.3			8.9
Action Sports		93.6		108.9		5.7		4.9		(21.3	)		(21.4	)
Apparel and Footwear		74.6		70.5		2.3		1.0		(1.4	)		3.9

Total segment data	$	649.2	$	619.7	$	94.6	$	75.9		30.4			27.5

Corporate expenses, net										(7.0	)		(7.3	)
Interest expense										(14.6	)		(14.5	)

Income before provision for income taxes									$	8.8		$	5.7

NOTE 13 – Contingencies

K2 has not experienced any substantial difficulty in obtaining raw materials, parts or finished goods inventory for its sporting goods or other recreational products and industrial business. Many components and finished products, however, are manufactured or assembled abroad (particularly in the People’s Republic of China) and therefore could be subject to interruption as a result of local unrest, currency exchange fluctuations, increased tariffs, trade difficulties natural disasters and other factors. A single supplier manufactures major portions of K2’s in-line skates. K2 believes alternate sources for these products could be found, although at potentially increased costs.

K2 currently is a party to various legal proceedings, including those noted below. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our business, financial position, results of operations or prospects, litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include money damages or, in cases for which injunctive relief is sought, an injunction prohibiting K2 from selling one or more products. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the business, financial position or results of operations for the period in which the ruling occurs or future periods. K2 maintains product liability, general liability and excess liability insurance coverage. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to K2 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.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 13 – Contingencies (Continued)

Environmental

K2 is one of several named potentially responsible parties (“PRP”) in three Environmental Protection Agency matters involving discharge of hazardous materials at old waste sites in South Carolina and Michigan. Although environmental laws technically impose joint and several liability upon each PRP at each site, the extent of K2’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 PRP’s and the volume and types of waste involved which might be attributable to K2.

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. K2 accrues for liabilities of this nature when it is probable a liability has been incurred and the amount can be reasonably estimated. At June 30, 2006 and December 31, 2005, K2 had recorded an estimated liability of approximately $800,000 for environmental liabilities. The estimates are based on K2’s share of the costs to remediate as provided by the PRP’s consultants and in connection with a consent decree entered into in November 2004. The ultimate outcome of these matters cannot be predicted with certainty, however, and taking into consideration the recorded reserves, management does not believe these matters will have a material adverse effect on K2’s business, financial position, results of operations or prospects.

EIFS Litigation and Claims

From 1988 through 2000, K2, through a former division, manufactured and sold an exterior wall covering product for application by contractors on commercial and residential buildings, referred to as exterior insulated finish systems (“EIFS”). In June 2000, K2 sold the assets of this division to Tyco International (US) Inc. and affiliates, including any liabilities for EIFS manufactured and installed after the sale date. K2 has not been in this building products business since June 2000. Since 1995, K2 has been a party to over 500 claims or lawsuits with a majority of the claims originating from the southeastern United States, with other claims and lawsuits from over 20 states. As of June 30, 2006, K2 continues to be a defendant or co-defendant in approximately 40 single family residential EIFS cases, the majority of which are pending in Alabama and Texas. K2 is also defending EIFS lawsuits involving commercial structures, townhouses, and condominiums. The vast majority of K2’s EIFS lawsuits seek monetary relief for water intrusion related property damages, although some claims in certain lawsuits allege personal injuries from exposure to mold.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 13 – Contingencies (Continued)

To date, all litigation costs and settlements related to the EIFS claims and lawsuits against K2 have been paid by insurers, with the exception of immaterial deductibles and one partial payment by K2, for which adequate reserves were made at the time of the sale of the EIFS business, although such insurance carriers have issued “reservation of rights” letters in respect of certain claims and lawsuits. A “reservation of rights” letter refers to the notice provided by our insurers that, while our insurers have determined that the applicable insurance policy would cover for the applicable lawsuits, the insurers preserve or “reserve” their right to withdraw from defense commitment on one or more claims if it is determined that one or more of the claims do not trigger coverage under the applicable insurance policy. Although K2’s experience with respect to EIFS claims is still evolving and it is possible that future claims and payments may vary from management’s current expectations, K2 believes that its third party insurance will be adequate to cover the anticipated costs of all remaining EIFS litigation.

In September 2000, 98 home owners filed suit in the district court Montgomery County, Texas against the builder of the homes, Life Forms Homes, Inc., the EIFS applicator, Fresh Coat, Inc., the EIFS distributor, Griesenbeck Architectural Products, and K2. The allegations included claims of misrepresentation, common law indemnity and violation of the Texas Deceptive Trade Practices Act (“DTPA”). In this litigation, Life Forms, Fresh Coat, Inc., and Griesenbeck Architectural Products, Inc. filed cross-claims against K2 under the same theories.

K2 timely tendered this case to its insurance carrier, which originally defended this lawsuit under a “reservation of rights” letter. In April 2004, K2 and its insurer negotiated an agreement which resulted in its insurer providing full indemnity up to applicable policy limits for all claims arising out of this litigation. In exchange for the indemnity, K2’s insurer assumed full control over the litigation and settlement negotiations. The claims by the 98 home owners were eventually settled by K2’s insurer. On November 4, 2005, the related claims against K2 by Life Forms, Fresh Coat, and Griesenbeck were tried and resulted in a jury verdict of approximately $42 million, of which $6.8 million was for “knowingly” and “intentionally” violating the DTPA. K2’s insurer has advised that it plans to appeal this verdict. Based on the agreement with its insurer to indemnify K2 on all claims as well as adequate insurance coverage and management’s assessments of K2’s arguments that may be made on behalf of K2 on appeal, K2 does not believe this verdict will have a material adverse effect on its business, financial condition, results of operations or prospects.

While, to date, none of these EIFS proceedings have required that K2 incur substantial costs, there can be no guarantee of insurance coverage. Current and future EIFS proceedings could result in substantial costs to K2. Although K2 carries what it believes is adequate general, product and excess liability insurance, K2 cannot assure that its insurance coverage will be adequate for all future payments, that the insured amounts will cover all future claims in excess of deductibles or that all amounts will be covered by insurance in respect of all judgments.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 13 – Contingencies (Continued)

Intellectual Property

In January 2004, Rawlings was sued by a licensee in the U.S. District Court for the District of Maine in connection with a license agreement pursuant to which the licensee was granted an exclusive license to use certain Rawlings trademarks for the manufacture and sale of team and personal sporting-equipment bags – this lawsuit was later transferred to the U.S. District Court for the Eastern District of Missouri. In February 2004, Rawlings gave the licensee notice that it was terminating the license agreement and sued the licensee in the Missouri District Court, in which Rawlings alleged, among other things, that the licensee breached the license agreement by failing to use its “best efforts”. This license agreement was in place prior to the March 26, 2003 acquisition of Rawlings by K2 Inc. Accordingly, as a pre-acquisition contingency, K2 established a $3.0 million liability as part of its purchase price allocation of Rawlings and added $0.5 million to the liability in the fourth quarter 2004 through expense to the income statement.

On April 29, 2005, a jury awarded the licensee (1) $4.1 million for a claim of lost profits for the next ten years on sales of equipment bags, plus the value of inventory of such bags (the “10-Year Lost Profits Verdict”), (2) $2.1 million for lost profits of equipment bags beginning ten years from the date of the breach of the agreement through forever (the “Speculative Profits Verdict”) and (3) $2.5 million for K2’s alleged tortious interference with the licensee’s business expectations (the “Tortious Interference Verdict”) between Rawlings and the licensee. The Missouri District Court ruled that the licensee was not permitted to bring certain claims to the jury. Following trial, the licensee was awarded approximately $0.5 million in attorney’s fees and costs pursuant to a motion. Following the verdict, K2 established in the second quarter of 2005 an additional $1.2 million in liabilities for a total of approximately $4.7 million in liabilities related to this litigation, including estimated legal fees and costs of licensee’s attorneys.

On May 19, 2005, K2 and Rawlings, as the case may be, have filed a motion for new trial with respect to the 10-Year Lost Profits Verdict and a motion for judgment notwithstanding the verdict with respect to the Speculative Profits Verdict and the Tortious Interference Verdict. On July 27, 2005, the Missouri District (1) denied Rawlings’ motion for a new trial in respect of the $4.1 million 10-Year Lost Profits Verdict, (2) granted Rawlings’ motion for judgment notwithstanding the verdict with respect to the $2.1 million Speculative Profits Verdict and (3) denied K2’s motion for judgment notwithstanding the verdict for the $2.5 million Tortious Interference Verdict. Accordingly, there is currently a judgment against K2 and Rawlings for approximately $6.8 million, including post judgment interest.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 13 – Contingencies (Continued)

K2 and Rawlings, as the case may be, intend to vigorously prosecute an appeal. K2 believes, in part based on advice and estimates from outside counsel as follows: that certain portions of the Missouri District Court’s decision are not supported by facts or law; that there are meritorious arguments to be raised during the appeals process because of, among other things, a lack of evidence to support certain aspects of the verdict; and that K2’s aggregate exposure including attorney’s fees and costs of license is approximately $4.7 million. In connection with its appeal, K2 was required by Missouri law to post bond in the amount of approximately $6.8 million. In the event that K2 and Rawlings are unsuccessful in their appeal and the amount of the judgment, including the fees and costs of attorneys for the licensee, is greater than $4.7 million, or the outcome of a total liability greater than $4.7 million becomes probable and estimable, K2 will be required to record an expense in the period in which the matter is finalized. However, this expense could be higher if the appeals court rules in favor of the licensee for certain claims on which it is expected that licensee will appeal. The appeal process is expected to be completed in the range of one to two years.

In connection with K2’s acquisition of substantially all of the assets of Miken Composites, LLC, a business engaged in the design, selling and distribution of composite softball bats and softball-related products and accessories in the fourth quarter 2004, K2 assumed the post-acquisition damages, if any, relating to a patent lawsuit in the U.S. District Court for the District of Minnesota. In this patent lawsuit, Miken Composites, L.L.C. v. Wilson Sporting Goods Co., Miken commenced an action in April 2002 seeking a declaration that a line of softball bats manufactured by Miken does not infringe a particular patent owned by Wilson. In response, Wilson counterclaimed for patent infringement seeking compensatory damages and a permanent injunction against Miken as the manufacturer and distributor of the allegedly infringing bats.

In July 2004, the Minnesota Court issued an order interpreting certain of Wilson’s claims concerning its patent. Based on this ruling, Miken moved for summary judgment. On March 17, 2005, before any ruling on the summary judgment motion, the Minnesota Court entered an order to stay the patent case pending resolution of a related appeal in federal court of Wilson Sporting Goods Co. v. Hillerich & Bradsby Co. This case involves the same Wilson patent as in Miken Composites, L.L.C. v. Wilson Sporting Goods Co.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 13 – Contingencies (Continued)

The outcome of this matter will depend primarily upon contested facts, and cannot be accurately predicted. Although each of K2 and Miken believes that Miken has meritorious defenses to Wilson’s counterclaims, in the event that Miken is unsuccessful in the declaratory judgment and counterclaim actions, it is expected that Wilson would seek to pursue K2 for alleged acts of infringement arising after the acquisition of Miken’s assets by K2. It is further expected, that Wilson would seek the same remedies against K2 that it is currently seeking against Miken, namely compensatory damages and an injunction against the manufacture and sale of allegedly infringing bats. In such event, K2 would, among other things, be required to record an expense in the period when the loss resulting from the resolution of the matter is probable and estimable. The litigation process for this case, including any appeals, is estimated to be in the range of two to three years.

NOTE 14 – Supplemental Guarantor Information

Obligations to pay principal and interest on K2’s Senior Notes are guaranteed by K2’s existing and future wholly-owned U.S. subsidiaries. Separate financial statements of the guarantors are not provided, as subsidiary guarantors are 100% owned by K2 and guarantees are full, unconditional, and joint and several. The non-guarantor subsidiaries are K2’s consolidated non-U.S. subsidiaries. Supplemental condensed consolidating financial information of the K2’s guarantors and non-guarantors is presented below.

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 14 – Supplemental Guarantor Information (Continued)


	Three Months Ended June 30, 2006
	K2 Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminating Entries			Consolidated K2 Inc.
Net sales	$	—		$	243,099		$	109,804		$	(51,761	)	$	301,142
Cost of products sold		—			161,216			86,706			(49,345	)		198,577

Gross profit		—			81,883			23,098			(2,416	)		102,565
Selling expenses		—			37,131			20,552			—			57,683
General and administrative expenses		7,377			19,144			9,182			—			35,703

Operating income (loss)		(7,377	)		25,608			(6,636	)		(2,416	)		9,179
Income in consolidated subsidiaries		15,627			—			—			(15,627	)		—
Other income, net		(6	)		(154	)		(623	)		—			(783	)
Interest expense		6,113			(54	)		677			—			6,736

Income (loss) before income taxes		2,143			25,816			(6,690	)		(18,043	)		3,226
Income taxes		—			682			401			—			1,083

Net income (loss)	$	2,143		$	25,134		$	(7,091	)	$	(18,043	)	$	2,143


	Three Months Ended June 30, 2005
	K2 Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminating Entries			Consolidated K2 Inc.
Net sales	$	—		$	243,786		$	96,935		$	(39,296	)	$	301,425
Cost of products sold		—			164,830			75,358			(38,521	)		201,667

Gross profit		—			78,956			21,577			(775	)		99,758
Selling expenses		—			38,754			15,748			—			54,502
General and administrative expenses		8,161			20,467			8,282			—			36,910

Operating income (loss)		(8,161	)		19,735			(2,453	)		(775	)		8,346
Income in consolidated subsidiaries		15,294			—			—			(15,294	)		—
Other income, net		(15	)		(765	)		(337	)		—			(1,117	)
Interest expense		5,695			49			1,541			—			7,285

Income (loss) before income taxes		1,453			20,451			(3,657	)		(16,069	)		2,178
Income taxes		—			1,762			(1,037	)		—			725

Net income (loss)	$	1,453		$	18,689		$	(2,620	)	$	(16,069	)	$	1,453

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 14 – Supplemental Guarantor Information (Continued)


	Six Months Ended June 30, 2006
	K2 Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminating Entries			Consolidated K2 Inc.
Net sales	$	—		$	534,335		$	209,500		$	(94,622	)	$	649,213
Cost of products sold		—			360,390			164,671			(90,968	)		434,093

Gross profit		—			173,945			44,829			(3,654	)		215,120
Selling expenses		—			84,328			35,230			—			119,558
General and administrative expenses		15,925			42,318			15,533			—			73,776

Operating income (loss)		(15,925	)		47,299			(5,934	)		(3,654	)		21,786
Income in consolidated subsidiaries		34,870			—			—			(34,870	)		—
Other income, net		(15	)		(582	)		(938	)		—			(1,535	)
Interest expense		13,175			2			1,392			—			14,569

Income (loss) before income taxes		5,785			47,879			(6,388	)		(38,524	)		8,752
Income taxes		—			1,686			1,281			—			2,967

Net income (loss)	$	5,785		$	46,193		$	(7,669	)	$	(38,524	)	$	5,785


	Six Months Ended June 30, 2005
	K2 Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminating Entries			Consolidated K2 Inc.
Net sales	$	—		$	492,638		$	202,997		$	(75,919	)	$	619,716
Cost of products sold		—			334,119			156,741			(73,721	)		417,139

Gross profit		—			158,519			46,256			(2,198	)		202,577
Selling expenses		—			80,590			32,627			—			113,217
General and administrative expenses		15,121			40,700			15,182			—			71,003

Operating income (loss)		(15,121	)		37,229			(1,553	)		(2,198	)		18,357
Income in consolidated subsidiaries		30,518			—			—			(30,518	)		—
Other income, net		(821	)		(564	)		(453	)		—			(1,838	)
Interest expense		12,441			202			1,895			—			14,538

Income (loss) before income taxes		3,777			37,591			(2,995	)		(32,716	)		5,657
Income taxes		—			2,451			(571	)		—			1,880

Net income (loss)	$	3,777		$	35,140		$	(2,424	)	$	(32,716	)	$	3,777

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 14 – Supplemental Guarantor Information (Continued)

Condensed Consolidating Balance Sheets (Unaudited)

(Thousands)


	As of June 30, 2006
	K2 Inc.		Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminating Entries			Consolidated K2 Inc.
Assets
Current Assets
Cash and cash equivalents	$	54	$	1,336		$	10,262	$	—		$	11,652
Accounts receivable, net		6,966		223,554			118,111		(71,855	)		276,776
Inventories, net		—		243,696			139,568		—			383,264
Deferred income taxes		2,769		(1,016	)		505		—			2,258
Prepaid expenses and other current assets		3,595		6,246			15,675		—			25,516

Total current assets		13,384		473,816			284,121		(71,855	)		699,466
Property, plant and equipment		10,472		162,975			132,274		—			305,721
Less allowance for depreciation and amortization		1,700		107,251			55,831		—			164,782

		8,772		55,724			76,443		—			140,939
Advances to affiliates		48,012		392,401			51,040		(491,453	)		—
Investment in subsidiaries		860,811		—			—		(860,811	)		—
Intangible assets, net		228,737		10,342			5,761		—			244,840
Other		18,115		2,647			2,934		—			23,696

Total Assets	$	1,177,831	$	934,930		$	420,299	$	(1,424,119	)	$	1,108,941

Liabilities and Shareholders’ Equity
Current Liabilities
Bank loans	$	—	$	—		$	22,770	$	—		$	22,770
Accounts payable		1,598		79,611			63,105		(71,855	)		72,459
Accrued liabilities		54,429		58,228			36,874		—			149,531
Current portion of long-term debt		—		—			2,933		—			2,933

Total current liabilities		56,027		137,839			125,682		(71,855	)		247,693
Long-term pension liabilities		20,381		—			6,377		—			26,758
Long-term debt		227,059		—			14,968		—			242,027
Deferred income taxes		21,286		—			—		—			21,286
Advances from affiliates		281,901		76,355			133,197		(491,453	)		—
Convertible debentures		99,237		—			—		—			99,237
Interdivisional equity		—		720,736			140,075		(860,811	)		—
Shareholders’ equity		471,940		—			—		—			471,940

Total Liabilities and Shareholders’ Equity	$	1,177,831	$	934,930		$	420,299	$	(1,424,119	)	$	1,108,941

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 14 – Supplemental Guarantor Information (Continued)

Condensed Consolidating Balance Sheets

(Thousands)


	As of December 31, 2005
	K2 Inc.		Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminating Entries			Consolidated K2 Inc.
Assets
Current Assets
Cash and cash equivalents	$	2,575	$	1,594		$	7,628	$	—		$	11,797
Accounts receivable, net		43,700		251,483			158,596		(73,337	)		380,442
Inventories, net		—		259,257			99,771		—			359,028
Deferred income taxes		4,083		—			961		—			5,044
Prepaid expenses and other current assets		3,481		4,699			13,725		—			21,905

Total current assets		53,839		517,033			280,681		(73,337	)		778,216
Property, plant and equipment		13,294		159,807			122,101		—			295,202
Less allowance for depreciation and amortization		1,478		101,820			47,849		—			151,147

		11,816		57,987			74,252		—			144,055
Advances to affiliates		1,002		380,406			73,432		(454,840	)		—
Investment in subsidiaries		841,857		—			—		(841,857	)		—
Intangible assets, net		228,581		10,265			5,170		—			244,016
Other		18,731		3,458			2,100		—			24,289

Total Assets	$	1,155,826	$	969,149		$	435,635	$	(1,370,034	)	$	1,190,576

Liabilities and Shareholders’ Equity
Current Liabilities
Bank loans	$	—	$	—		$	24,296	$	—		$	24,296
Accounts payable		33,911		85,758			47,138		(73,337	)		93,470
Accrued liabilities		58,525		55,620			43,612		—			157,757
Current portion of long-term debt		30,000		(1,830	)		5,095		—			33,265

Total current liabilities		122,436		139,548			120,141		(73,337	)		308,788
Long-term pension liabilities		20,381		—			6,377		—			26,758
Long-term debt		265,286		—			15,431		—			280,717
Deferred income taxes		21,286		—			—		—			21,286
Advances from affiliates		173,410		165,289			116,141		(454,840	)		—
Convertible debentures		99,003		—			—		—			99,003
Interdivisional equity		—		664,312			177,545		(841,857	)		—
Shareholders’ equity		454,024		—			—		—			454,024

Total Liabilities and Shareholders’ Equity	$	1,155,826	$	969,149		$	435,635	$	(1,370,034	)	$	1,190,576

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 14 – Supplemental Guarantor Information (Continued)

Condensed Consolidating Statements of Cash Flows (Unaudited)

(Thousands)


	Six Months Ended June 30, 2006
	K2 Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminating Entries			Consolidated K2 Inc.
Operating Activities
Net income (loss)	$	5,785		$	46,193		$	(7,669	)	$	(38,524	)	$	5,785
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of operating facility		—			(1,504	)		—			—			(1,504	)
Depreciation and amortization		3,441			6,991			7,359			—			17,791
Non-cash share-based compensation charges		989			—			—			—			989
Deferred taxes		1,314			966			456			—			2,736
Changes in current assets and current liabilities		211			38,622			15,529			—			54,362

Net cash provided by (used in) operating activities		11,740			91,268			15,675			(38,524	)		80,159
Investing Activities
Property, plant and equipment expenditures		(73	)		(4,590	)		(7,017	)		—			(11,680	)
Proceeds from the sale of property, plant and equipment		2,649			2,339			398			—			5,386
Purchase of businesses, net of cash acquired		—			(2,551	)		(262	)		—			(2,813	)
Other items, net		7,778			14,205			(43,944	)		19,570			(2,391	)

Net cash provided by (used in) investing activities		10,354			9,403			(50,825	)		19,570			(11,498	)
Financing Activities
Borrowings under long-term debt		530,052			—			—			—			530,052
Payments under long-term debt		(598,279	)		—			(561	)		—			(598,840	)
Net decrease in short-term bank loans		—			—			(1,526	)		—			(1,526	)
Proceeds received from exercise of stock options		1,085			—			—			—			1,085

Net cash used in financing activities		(67,142	)		—			(2,087	)		—			(69,229	)
(Increase) decrease in investment in subsidiaries		(18,954	)		—			—			18,954			—
Advances (to) from affiliates		61,481			(100,929	)		39,448			—			—

Effects of foreign exchange rates on cash and cash equivalents		—			—			423			—			423
Net increase (decrease) in cash and cash equivalents		(2,521	)		(258	)		2,634			—			(145	)
Cash and cash equivalents at beginning of year		2,575			1,594			7,628			—			11,797

Cash and cash equivalents at end of period	$	54		$	1,336		$	10,262		$	—		$	11,652

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 14 – Supplemental Guarantor Information (Continued)

Condensed Consolidating Statements of Cash Flows (Unaudited)

(Thousands)


	Six Months Ended June 30, 2005
	K2 Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminating Entries			Consolidated K2 Inc.
Operating Activities
Net income (loss)	$	3,777		$	35,140		$	(2,424	)	$	(32,716	)	$	3,777
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		3,646			7,498			6,134			—			17,278
Non-cash share-based compensation charges		360			—			—			—			360
Deferred taxes		(20,725	)		11,555			10,585			—			1,415
Changes in current assets and current liabilities		27,517			(14,752	)		5,887			—			18,652

Net cash provided by (used in) operating activities		14,575			39,441			20,182			(32,716	)		41,482

Investing Activities
Property, plant and equipment expenditures		(1,310	)		(9,147	)		(6,851	)		—			(17,308	)
Proceeds from the sale of property, plant and equipment		87			1,330			(545	)		—			872
Purchase of businesses, net of cash acquired		—			(13,385	)		(1,709	)		—			(15,094	)
Other items, net		35,048			11,785			27,619			(71,354	)		3,098

Net cash provided by (used in) investing activities		33,825			(9,417	)		18,514			(71,354	)		(28,432	)

Financing Activities
Borrowings under long-term debt		548,000			—			—			—			548,000
Payments under long-term debt		(539,047	)		2,045			(3,523	)		—			(540,525	)
Net decrease in short-term bank loans		—			—			(24,473	)		—			(24,473	)
Proceeds received from exercise of stock options		397			—			—			—			397

Net cash provided by (used in) financing activities		9,350			2,045			(27,996	)		—			(16,601	)
(Increase) decrease in investment in subsidiaries		(104,070	)		—			—			104,070			—
Advances (to) from affiliates		47,988			(35,980	)		(12,008	)		—			—

Effects of foreign exchange rates on cash and cash equivalents		—			—			(632	)		—			(632	)
Net increase (decrease) in cash and cash equivalents		1,668			(3,911	)		(1,940	)		—			(4,183	)
Cash and cash equivalents at beginning of year		3,167			5,098			17,368			—			25,633

Cash and cash equivalents at end of period	$	4,835		$	1,187		$	15,428		$	—		$	21,450

K2 INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

June 30, 2006

NOTE 15 – Related Party Transactions

In October 2003, K2 entered into a Reimbursement Agreement with its Chairman and Chief Executive Officer, Mr. Heckmann, for the reimbursement of expenses incurred by Mr. Heckmann in the operation of his private plane when used for K2 business. The Reimbursement Agreement is effective for expenses incurred by Mr. Heckmann for K2 business purposes since September 3, 2003. On July 6, 2004 the agreement was amended changing certain terms and conditions. K2 paid a total of approximately $72,000 and $158,000 during the three and six months ended June 30, 2006, respectively, and $171,000 and $627,000 during the three and six months ended June 30, 2005, respectively, pursuant to these agreements related to expenses incurred by Mr. Heckmann and other executive officers of K2.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in Management’s Discussion and Analysis are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations that are subject to risks and uncertainties. Actual results may differ materially from expectations as of the date of this filing because of the factors discussed below under the Statement Regarding Forward-Looking Disclosure section and elsewhere in this quarterly report on Form 10-Q.

K2 is a premier, branded consumer products company with a portfolio of leading brands including Shakespeare, Pflueger, Stearns, Sospenders and Hodgman in the Marine and Outdoor segment; Rawlings, Worth, Miken and Brass Eagle in the Team Sports segment; K2, Völkl, Marker and Ride and in the Action Sports segment; and Adio, Marmot and Ex Officio in the Apparel and Footwear segment. K2’s diversified mix of products is used primarily in team and individual sports activities such as fishing, water sports activities, baseball, softball, alpine skiing, snowboarding and in-line skating.

Matters Affecting Comparability

Operating Segments. Under SFAS No. 131, K2 classifies its business into the following four segments based on similar product types, distribution channels and management’s perspective in evaluating K2’s various lines of business: Marine and Outdoor, Team Sports, Action Sports and Apparel and Footwear. The Marine and Outdoor segment includes Shakespeare fishing tackle and monofilament products as well as Stearns outdoor products. The Team Sports segment includes baseball and softball products, K2 Licensed Products and paintball products. The Action Sports segment includes skis, bindings, snowboards, snowshoes and in-line skates. The Apparel and Footwear segment includes skateboard shoes and technical apparel and equipment and outdoor and adventure travel apparel. In order to improve efficiency, K2 reorganized the paintball business to operate more in line with how the components of the Team Sports segment operates with increased emphasis on the mass merchant and large sporting goods retailer distribution. Upon completion of the reorganization in the first quarter of 2006, K2 has adjusted its segment reporting to include paintball products in the Team sports segment versus the Actions Sports segment where it was previously reported. All periods presented have been recast to reflect these changes in the segments.

The Marine and Outdoor segment represented $252.0 million, or 38.8%, of K2’s 2006 six months consolidated net sales; the Team Sports segment had net sales of $229.0 million, or 35.3% of 2006 six months consolidated net sales; the Action Sports segment had net sales of $93.6 million, or 14.4% of 2006 six months consolidated net sales; and the Apparel and Footwear segment had net sales of $74.6 million, or 11.5% of 2006 six months consolidated net sales.

Fiscal Year. K2 reports its financial statements using a 52/53 week year with a 13 week quarter ending on the closest Sunday to the end of March, June, September and December. Fiscal year 2006 includes 53 weeks versus 52 weeks in 2005 fiscal year, and the first quarter 2006 includes 14 weeks versus 13 weeks in the first quarter 2005. For purposes of the consolidated financial statements, the end of each quarter is stated as of March 31, June 30, September 30 and December 31, respectively.

Consolidated Results of Operations

The following table sets forth certain ratios and relationships calculated from the Consolidated Condensed Statements of Income for the three and six months ended June 30:


	For the three months ended June 30,											For the six months ended June 30,
							Increase/Decrease											Increase/Decrease
	2006			2005			$			%		2006			2005			$		%
(In millions, except per share data)
Net sales	$	301.1		$	301.4		$	(0.3	)	(0.1	%)	$	649.2		$	619.7		$	29.5	4.8	%
Gross profit		102.6			99.8			2.8		2.8	%		215.1			202.6			12.5	6.2	%
Operating income		9.2			8.3			0.9		10.8	%		21.8			18.4			3.4	18.5	%
Net income		2.1			1.5			0.6		40.0	%		5.8			3.8			2.0	52.6	%

Diluted earnings per share	$	0.05		$	0.03		$	0.02		66.7	%	$	0.12		$	0.08		$	0.04	50.0	%

Expressed as a percentage of net sales:
Gross margin (a)		34.1	%		33.1	%							33.1	%		32.7	%
Selling, general and administrative expense		31.0	%		30.3	%							29.8	%		29.7	%
Operating margin (b)		3.0	%		2.8	%							3.4	%		3.0	%

(a)	Gross Margin is defined as gross profit divided by net sales as presented in the Consolidated Condensed Statements of Income.

(b)	Operating Margin is defined as operating income divided by net sales as presented in the Consolidated Condensed Statements of Income.

Acquisitions

During the 2005 second quarter, K2 completed the acquisition of substantially all of the assets of both Hodgman, Inc., a business engaged in the design, selling and distribution of hunting and fishing waders, and JRC Products Limited, a business engaged in the design, selling and distribution of fishing tackle products. The purchase price for these assets was paid in cash. The results of the operations of these two companies were included in the consolidated financial statements of K2 beginning with the date of the acquisition.

Downsizing and Restructuring Activities

Pursuant to acquisitions made by K2 during 2005, 2004 and 2003, K2 approved restructuring and exit plans related to the closure of certain facilities of the acquired companies. In accordance with EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” K2 established reserves for employee severance, employee relocation costs and lease termination costs totaling approximately $0.6 million, $11.0 million and $5.1 million during 2005, 2004 and 2003, respectively. These reserves were recognized as assumed liabilities of the acquired companies. The

reserves established were not individually significant to any of K2’s acquisitions during 2005, 2004 or 2003.

Comparative Second Quarter Results of Operations

Net sales of K2 for the three months ended June 30, 2006 decreased slightly to $301.1 million as compared with $301.4 million for the 2005 comparable period. Net income for the second quarter of 2006 increased to $2.1 million, or $0.05 per diluted share, as compared to $1.5 million, or $0.03 per diluted share, in the second quarter of 2005.

Net Sales. In the Marine and Outdoor segment, net sales decreased to $128.8 million in the 2006 second quarter as compared with $130.4 million in the prior year’s second quarter. The sales decrease was due to decreased sales of cutting line, marine antennas and ski vests, offset by increased sales of fishing kits and combos, children’s flotation devices and Hodgman waders (acquired in the second quarter of 2005).

Net sales of the Team Sports segment improved to $96.5 million for the 2006 second quarter as compared to $89.3 million in the prior year’s second quarter. The improvement was driven primarily by increased sales of Rawlings and Miken baseball and softball products of $5.8 million, K2 Licensed Products of $1.8 million, and paintball products of $2.0 million.

In the Action Sports segment, net sales were $37.5 million in the 2006 second quarter as compared to $44.1 million in the prior year’s second quarter. The overall sales decline was largely due to lower sales of bikes of $4.2 million. In September 2005 K2 discontinued selling bikes and entered into a license agreement with a third party to manufacture and distribute bikes under the K2 brand.

Net sales of the Apparel and Footwear segment were $38.3 million in the 2006 second quarter as compared to $37.6 million in the prior year’s second quarter. The increase was driven by growth in skateboard shoes and the Ex Officio and Marmot combination.

K2’s international operations (operating locations outside of the United States) represented $47.0 million, or 15.6% of K2’s consolidated net sales for the three months ended June 30, 2006 as compared to $54.3 million, or 18.0% of K2’s consolidated net sales for the three months ended June 30, 2005. The decrease in net sales from international operations was largely due to the lower sales of direct import fishing tackle from Hong Kong and in-line skate products in Europe.

Gross profit. Gross profits for the second quarter of 2006 increased 2.8% to $102.6 million, or 34.1% of net sales, as compared with $99.8 million, or 33.1% of net sales, in the 2005 second quarter. The improvement in gross profit dollars for the quarter was attributable to an increase in gross profit as a percentage of sales in the Marine and Outdoor and Team Sports segments.

Costs and Expenses. Selling expenses for the 2006 second quarter were $57.7 million, or 19.2% of net sales, as compared with $54.5 million, or 18.1% of net sales, in the prior year’s second quarter. General and administrative expenses for the 2006 second quarter were $35.7 million, or 11.9% of net sales, as compared with $36.9 million, or 12.2% of net sales, in the prior year’s second quarter. The increase in selling expenses was attributable to higher selling expenses in the Marine and

Outdoor, Action Sports and Apparel and Footwear segments. The decrease in general and administrative expenses was primarily attributable to a $1.5 million gain on the sale of a bat manufacturing facility in Tennessee partially offset by severance charges.

Operating Income. Operating income for the 2006 second quarter increased to $9.2 million, or 3.0% of net sales, as compared to operating income of $8.3 million, or 2.8% of net sales, for the 2005 second quarter. The increase in operating income was due to lower cost of products sold and general and administrative expenses partially offset by increased selling expenses during the second quarter of 2006.

K2’s international operations (operating locations outside of the United States) had an operating loss of $6.8 million for the three months ended June 30, 2006 as compared with $4.2 million of operating loss in the year ago quarter. The increase in operating loss from international operations resulted from a decrease in operating income largely attributable to the decrease in net sales from international operations of in-line skates and Völkl and Marker products.

Interest Expense. Interest expense was $6.7 million in the 2006 second quarter as compared to $7.3 million in the year-earlier period. The decrease in interest expense for 2006 was primarily attributable to lower average borrowing levels during the 2006 second quarter as compared to 2005. Borrowings decreased as a result of improved profitability and cash flow from operations.

Income Taxes. During the 2006 second quarter, the effective income tax rate was 33.6% as compared to 33.3% during the 2005 second quarter. The increase in the effective tax rate was primarily attributable to an estimated greater percentage of income being taxed in relatively higher tax jurisdictions during 2006 than during 2005.

Comparative Six-Month Results of Operations

Net sales of K2 for the six months ended June 30, 2006 increased to $649.2 million as compared with $619.7 million for the 2005 comparable period. Net income for the first six months of 2006 increased to $5.8 million, or $0.12 per diluted share, as compared to $3.8 million, or $0.08 per diluted share, for the first six months of 2005.

Net Sales. In the Marine and Outdoor segment, net sales increased to $252.0 million for the first six months of 2006 as compared with $242.8 million in the prior year’s first six months. The sales increase was primarily due to increased sales of fishing tackle, Hodgman waders (acquired in the second quarter of 2005) and immersion suits.

Net sales of the Team Sports segment improved to $229.0 million for the first six months of 2006 as compared to $197.5 million in the prior year’s first six months. The improvement was driven primarily by increased sales of Rawlings and Miken baseball and softball products of $15.8 million, Rawlings apparel of $6.6 million, K2 Licensed Products of $3.2 million, and paintball products of $4.4 million.

In the Action Sports segment, net sales were $93.6 million in the first six months of 2006 as compared to $108.9 million in the prior year’s first six months. The overall sales decline was

largely due to lower sales of bikes of $7.3 million and in-line skates of $4.5 million. In September 2005 K2 discontinued selling bikes and entered into a license agreement with a third party to manufacture and distribute bikes under the K2 brand.

Net sales of the Apparel and Footwear segment increased to $74.6 million for the first six months of 2006 as compared to $70.5 million in the prior year’s first six months. The increase was driven by growth in skateboard shoes and the Ex Officio and Marmot combination.

K2’s international operations (operating locations outside of the United States) represented $118.6 million, or 18.3% of K2’s consolidated net sales for the six months ended June 30, 2006 as compared to $129.8 million, or 20.9% of K2’s consolidated net sales for the six months ended June 30, 2005. The decrease in net sales from international operations was largely due to the lower sales of direct import fishing tackle from Hong Kong and in-line skate products in Europe.

Gross profit. Gross profits for the first six months of 2006 increased 6.2% to $215.1 million, or 33.1% of net sales, as compared with $202.6 million, or 32.7% of net sales, in the first six months of 2005. The improvement in gross profit dollars for the first six months was mainly attributable to the increase in sales volume.

Costs and Expenses. Selling expenses for the first six months of 2006 were $119.6 million, or 18.4% of net sales, as compared with $113.2 million, or 18.3% of net sales, in the prior year’s first six months. General and administrative expenses for the first six months of 2006 were $73.8 million, or 11.4% of net sales, as compared with $71.0 million, or 11.5% of net sales, in the prior year’s first six months. The increase in selling expenses and general and administrative expenses was mainly attributable to the increase in sales volume for the six months as compared to the prior year. General and administrative expenses included an increase of $0.6 million in share-based compensation expense and $0.5 million in severance charges related to the closing of a bat manufacturing facility in Tennessee offset by a $1.5 million gain on the sale of such bat manufacturing facility.

Operating Income. Operating income for the first six months of 2006 increased to $21.8 million, or 3.4% of net sales, as compared to operating income of $18.4 million, or 3.0% of net sales, for the fist six months of 2005. The increase in operating income was due to increased sales volume partially offset by an increase in cost of products sold, selling expenses and general and administrative expenses during the first six months of 2006.

K2’s international operations (operating locations outside of the United States) had an operating loss of $9.3 million for the six months ended June 30, 2006 as compared with $4.0 million of operating loss for the first six months of 2005. The decrease in operating income from international operations was largely attributable to the decrease in net sales from international operations of in-line skates and Völkl and Marker products.

Interest Expense. Interest expense was $14.6 million for the first six months of 2006 as compared to $14.5 million in the year-earlier period. The increase in interest expense was primarily due to higher average borrowing levels and interest rates during the 2006 first quarter as compared to the 2005 first quarter. The increase in first quarter 2006 was largely offset by a decrease in interest

expense for the second quarter 2006 which was primarily attributable to lower average borrowing levels during the 2006 second quarter as compared to 2005. Borrowings decreased as a result of improved profitability and cash flow from operations.

Income Taxes. During the first six months of 2006, the effective income tax rate was 33.9% as compared to 33.2% during the first six months of 2005. The increase in the effective tax rate was primarily attributable to an estimated greater percentage of income being taxed in relatively higher tax jurisdictions during 2006 than during 2005.

Liquidity and Capital Resources

Cash Flow Activity

K2’s operating activities provided $80.2 million of cash in the current year’s six months as compared to $41.5 million in the 2005 six months. The increase in cash from operations during 2006 was largely attributable to the increase in inventory of $20.7 million in 2006 compared to an increase in inventory of $39.2 million in 2005 and a decrease in accounts payable of $19.9 million in 2006 compared to a decrease of $33.4 million in 2005.

Net cash used in investing activities was $11.5 million in the current year’s six months, as compared to $28.4 million of cash used in investing activities in the prior year. The decrease in cash used in investing activities during 2006 was mainly attributable to a $12.3 million decrease in cash used for the purchase of businesses and a $5.6 million decrease in cash used in the purchase of property, plant and equipment in the first six months of 2006 as compared to 2005.

Net cash used in financing activities was $69.2 million in the current year’s six months as compared with $16.6 million of cash used in financing activities in the prior year period. The increase in cash used in financing activities during 2006 was due to the repayment of long-term debt.

Capital Structure and Resources

K2’s principal long-term borrowing facility is a $250 million revolving credit facility (“Facility”), secured by all of K2’s assets in the United States, Canada and England. Total availability under the Facility is determined by a borrowing formula based on eligible trade receivables and inventory and defined advance rates. The Facility is expandable to $350 million, subject to certain conditions, and has a $100 million limit for the issuance of letters of credit. On February 21, 2006, K2 amended and restated its Facility, which extends the expiration date to February 21, 2011. Additionally, the amended and restated Facility provides reduced pricing on borrowings and fees on unused commitments and provides more favorable covenants, including, among others, those relating to financial reporting, sale or disposition of assets, incurrence of other indebtedness, permitted investments and restricted payments or dividends.

At June 30, 2006, there was $27.1 million of borrowings outstanding under the Facility, $11.6 million of outstanding letter of credit issuances (consisting of $8.2 million of standby letters of credit and $3.4 million of trade letters of credit which expire over the next 12 months) and $190.8 million of available borrowing capacity. At June 30, 2006, K2 also had outstanding $25 million of 7.25% convertible subordinated debentures due March 2010, $75 million of 5.00% convertible

senior debentures due June 2010 and $200 million of 7.375% senior notes due July 2014. At June 30, 2006, K2 had $40.7 million outstanding under various foreign lending arrangements.

K2 believes that the credit available under the Facility, together with cash flow from operations, will be sufficient for K2’s business needs through June 30, 2007. K2’s ability to arrange debt financing from other sources, should such additional financing become necessary, could be limited by the fact that substantially all of K2’s assets in the United States, Canada and England are subject to security interests pursuant to the Facility. In addition, K2’s $200 million senior notes and $25 million convertible subordinated debentures place limitations on the incurrence of indebtedness by K2.

Long-term Financial Obligations and Other Commercial Commitments

The following summarizes the outstanding borrowings and long-term contractual obligations of K2 at June 30, 2006 and the effects such obligations are expected to have on liquidity and cash flow in future periods.


Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(Thousands)
Long-term debt (1)	$	344,960	$	2,919	$	5,292	$	128,602	$	208,147
Operating leases (2)		78,245		16,393		23,502		15,737		22,613
Licensing arrangements (3)		7,306		3,019		3,145		617		525
Endorsement and sponsorship arrangements (4)		6,985		4,166		2,698		121		—
Pension contributions (5)		437		437		—		—		—

Total contractual cash obligations	$	437,933	$	26,934	$	34,637	$	145,077	$	231,285

(1)	Includes principal payments contractually outstanding under K2’s lending arrangements. See Note 8 to Notes to Consolidated Condensed Financial Statements, for additional information on K2’s long-term debt obligations.

(2)	In the ordinary course of business, K2 enters into operating leases for the use of buildings, machinery and equipment. These amounts represent the contractual minimum payments due under these agreements.

(3)	In the ordinary course of business, K2 enters into licensing arrangements whereby future minimum payments are due. These amounts represent the contractual minimum payments due under these agreements.

(4)	In the ordinary course of business, K2 enters into endorsement and sponsorship contracts with athletes whereby future minimum payments are due. These amounts represent the contractual minimum payments due under these agreements.

(5)	These amounts include estimated contributions for K2’s pension plans. See Note 9 to Notes to Consolidated Condensed Financial Statements, for additional information on K2’s pension plans.

In addition to the amounts listed in the above table, K2 also has interest payment and fee obligations related to the long-term debt as follows at June 30, 2006 (see also Note 8 to Notes of Consolidated Condensed Financial Statements):

•

Outstanding borrowings of $27.1 million under its $250 million secured bank revolving credit line due February 21, 2011 with interest payments due at LIBOR plus 1.375% or at the prime rate and a commitment fee of 0.25% on the unused portion.

•

$75 million convertible debentures, due June 15, 2010 with semi-annual interest payable at 5.00%.

•

$25 million convertible subordinated debentures, due March 3, 2010 with quarterly interest payable at 7.25%.

•

$200 million senior notes, due July 1, 2014 with semi-annual interest payable at 7.375%.

•

Outstanding long-term debt of $40.7 million under various foreign lending arrangements. Interest rates on these borrowings range from approximately 1% to 7.75%.

Off-Balance Sheet Arrangements

K2 did not enter into any off-balance sheet arrangements during 2006 or 2005, nor did K2 have any off-balance sheet arrangements outstanding at June 30, 2006 or December 31, 2005.

Critical Accounting Policies

K2’s discussion and analysis of its financial condition and results of operations are based upon K2’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires K2 to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.

Discussed below are several significant accounting policies, which require the use of judgments and estimates that may materially affect the consolidated financial statements.

The estimates described below are reviewed from time to time and are subject to change if the circumstances so indicate. The effect of any such change is reflected in results of operations for the period in which the change is made. Establishment of the reserves affecting inventories and the allowance for doubtful accounts are among the most important.

Adoption of SFAS No. 123 (revised 2004)

On January 1, 2006, K2 adopted SFAS No. 123R which requires K2 to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the consolidated statement of operations over the period during which an employee is required to provide service in exchange for the award—the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123R eliminates the use of APB Opinion No. 25 and the option for pro forma disclosure in accordance with SFAS No. 123.

payments granted after the effective date and (b) the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date; and (2) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits companies to restate prior periods based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures, either (a) for all prior periods presented or (b) prior interim periods of the year of adoption. K2 adopted SFAS No. 123R using the modified-prospective method and therefore prior periods are not restated.

SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than an operating cash flow as required under previous guidance. This requirement may reduce operating cash flows and increases net financing cash flows in periods after adoption.

The decision to accelerate the vesting of these options was made to reduce future compensation expense that is expected to be recorded in conjunction with K2’s adoption of SFAS No. 123R.

Determining Fair Value under SFAS No. 123R

Valuation and Amortization Method. K2 has elected to use the Black-Scholes option valuation model (single option approach) to calculate the fair value of employee stock option grants. For

options with graded vesting, the option grant is treated as a single award and compensation cost is recognized on a straight-line basis over the vesting period of the entire award, ensuring that compensation cost is at least equal to the cumulative amount of vesting at the end of each reporting period.

Forfeitures. SFAS No. 123R requires companies to estimate forfeitures at the time of grant and revise those estimates in subsequent reporting periods if actual forfeitures differ from those estimates. K2 uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For purposes of calculating pro forma information under SFAS No. 123 for periods prior to the date of adoption of SFAS No. 123R, K2 accounted for forfeitures as they occurred.

Prior to the second quarter of 2006, K2 issued stock options and restricted stock subject to vesting conditions to employees and fully vested stock options to non-employee directors as share-based compensation. In the second quarter of 2006, K2 issued to employees a combination of stock options subject to vesting conditions only and restricted stock units that are subject to performance conditions in addition to vesting conditions as share-based compensation. If the employees do not meet their performance conditions, the restricted stock units will not continue to vest and any related share-based compensation expense recognized to date for these awards will be reversed. Also in the second quarter of 2006, K2 issued to non-employee directors a combination of fully vested stock options and restricted stock units subject to vesting conditions, but not subject to any performance objectives as share-based compensation.

Revenue Recognition

K2 recognizes revenue from product sales when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the

customer. In some instances, products are shipped directly from K2 suppliers to K2 customers and revenue is recognized when the product is delivered to and accepted by the customer or a representative of the customer. K2 revenues may fluctuate in cases when our customers delay accepting shipment of product for periods up to several weeks. Reserves for estimated returns are established based upon historical return rates and recorded as reductions of sales. Right of return is not provided to our customers at the time of sale other than for our failure to meet the terms of the customer’s order. The substantial reasons for such returns are late shipment of product unless a cancellation date was identified when the order was placed; incorrect items shipped; and defective merchandise. Return requests for late shipment or incorrect items shipped must be made within several days of receipt of the merchandise. Returns for defective merchandise are accepted based upon the specific warranty for the individual product. Returns are accepted only with preapproval from K2.

Warranty

Accounts Receivable and Allowances

Accounts receivable are the result of K2’s worldwide sales activities. Although K2’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 and with certain customers as the result of K2’s acquisition activities. K2 generally does not require collateral but performs periodic credit evaluations to manage its credit risk.

K2 evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where there is knowledge of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the net recognized receivable to the amount that is reasonably believed to be collected. For all other customers, reserves are established based on historical bad debts, customer payment patterns and current economic conditions. The establishment of these reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. If the financial condition of K2’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required resulting in an additional charge to expenses when made.

Inventories

Inventories are valued at the lower of cost or market value. Cost is substantially determined by the first-in, first-out method, including material, labor and factory overhead. K2 records adjustments to its inventory for estimated obsolescence or diminution in market value equal to the difference between the cost of inventory and the estimated market value, based on market conditions from time to time. These adjustments are estimates, which could vary significantly, either favorably or

unfavorably, from actual experience if future economic conditions, levels of consumer demand, customer inventory levels or competitive conditions differ from expectations.

Long-Lived and Finite Lived Intangible Assets

Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, ranging from one to eleven years. Long-lived assets, such as property, plant and equipment and purchased intangible assets with finite lives, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” K2 assesses the fair value of the assets based on the future cash flow the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment is identified, K2 reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, comparable market values.

K2 determined there was no material impairment of long-lived assets as of June 30, 2006. However, future indicators or impairment tests of intangible assets with finite lives could result in a charge to earnings. K2 will continue to evaluate intangible assets on an annual basis or whenever events and changes in circumstances indicate that there may be a potential impairment.

K2 has evaluated the remaining useful lives of its finite-lived purchased intangible assets to determine if any adjustments to the useful lives were necessary or if any of these assets had indefinite lives and were therefore not subject to amortization. K2 determined that no adjustments to the useful lives of its finite-lived purchased intangible assets were necessary. The finite-lived purchased intangible assets consist of patents, customer contracts and customer lists, licensing agreements, trademarks and non-compete arrangements which have weighted average useful lives of approximately 8 years, 8 years, 7 years, 7 years and 4 years, respectively.

Indefinite-Lived Intangible Assets

Goodwill and intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate that a likely impairment exists. The impairment tests for goodwill and other indefinite-lived intangible assets are assessed for impairment using fair value measurement techniques.

For indefinite-lived assets other than goodwill, the impairment test consists of a comparison of the fair value of the asset to its carrying amount. If the carrying amount of the asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. In valuing its indefinite-lived intangible assets, K2 uses the royalty savings method. Under this method, the value of the asset is a function of the projected revenues attributable to the products utilizing the asset, the royalty rate that would hypothetically be charged by a licensor of the asset to a licensee and an appropriate discount rate to reflect the inherent risk of the projected cash flows.

Goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a K2 reporting unit with the net book value (or carrying amount), including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, accordingly the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

The fair value of K2’s reporting units are determined using a combination of the income approach and the market approach. Under the income approach, the fair value of a reporting unit is calculated based on the present value of estimated future cash flows. The present value of estimated future cash flows uses K2’s estimates of revenue for the reporting units, driven by assumed market growth rates and assumed market segment share, and estimated costs as well as appropriate discount rates. These estimates are consistent with the plans and estimates that K2 uses to manage the underlying businesses. Under the market approach, fair value is estimated based on market multiples of earnings for comparable companies and similar transactions. The weighting that K2 applies to each of the income and market approaches is based on the data available and specific facts and circumstances surrounding each reporting unit.

Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the extent of such charge. K2’s estimates of fair value utilized in goodwill and other indefinite-lived intangible asset tests may be based upon a number of factors, including assumptions about the projected future cash flows, discount rate, growth rate, determination of market comparables, weighting of valuation methods, technological change, economic conditions, or changes to K2’s business operations. Such changes may result in impairment charges recorded in future periods.

Income Taxes

Income taxes are recorded using the liability method. K2 estimates actual current tax exposure together with temporary differences that result from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. In accordance with SFAS No. 109, net deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the realization of its deferred tax assets, K2 considers all available positive and negative evidence, including past operating results, the existence of cumulative losses in the most recent fiscal years

and forecasts of future taxable income. In forecasting future taxable income, K2 considers (i) taxable income in prior carryback years, (ii) future reversals of existing taxable temporary differences, (iii) tax planning strategies, and (iv) future taxable income, exclusive of reversing temporary differences and carryovers. These forecasts require significant judgment and assumptions to estimate future taxable income and are based on the plans and estimates that K2 uses to manage the underlying business. K2 has established a valuation allowance against its deferred tax assets in each jurisdiction where it cannot conclude that it is more likely than not that such assets will be realized. In the event that actual results differ from the forecasts or we adjust the forecast or assumptions in the future, the resultant change in the valuation allowance could have a significant impact on future income tax expense.

K2 is subject to income taxes in the United States and numerous foreign jurisdictions. In the ordinary course of our business there are calculations and transactions, including transfer pricing, where the ultimate tax determination is uncertain. In addition, changes in tax laws and regulations as well as adverse judicial rulings could adversely affect the income tax provision. K2 believes that it has adequately provided for income tax issues not yet resolved with federal, state, and foreign tax authorities. However, if these provided amounts prove to be more than what is necessary, the reversal of the reserves would result in tax benefits being recognized in the period in which we determine that provision for the liabilities is no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense would result.

Pensions

In addition to the plans discussed above, K2 also had five smaller defined benefit plans in the United Kingdom and in Germany (“foreign plans”).

Pension costs and liabilities are actuarially calculated. These calculations are based on assumptions related to the discount rate, projected compensation increases and expected return on assets. The discount rate assumption is based on current market interest rates of long-term bonds as of December 31, 2005. There is no salary growth assumption on the domestic plan for the future due to the freezing of the plan on August 31, 2004, whereby no additional benefits will accrue. Long-term return on plan assets is determined based on historical portfolio results and management’s future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. K2 evaluates the assumptions used on a periodic basis and makes adjustments as necessary.

For 2006, domestic plan pension expense is estimated to be approximately $1.1 million, an increase of $0.4 million from the 2005 year. This increase in expense is attributable to the following: a $0.3 million increase in expense due to worse than expected asset returns during 2005; a $0.2 million increase in expense due to a change in expected return on asset for 2006 from 8.25% to 7.75%; a $0.2 million increase for lower expected contributions in 2006; and a $0.1 million increase due to a change in discount rate from 5.75% to 5.67%, all of which are expected to be offset by a $0.4 million decrease due to demographic and miscellaneous changes. K2 estimates a required cash contribution of approximately $67,000 to the plans in 2006. For the six months ended June 30, 2006 K2 made contributions totaling approximately $37,000 to the domestic plan.

For 2006, pension expense related to the foreign plans is estimated to be approximately $0.7 million, which is consistent with the 2005 year. K2 estimates a required cash contribution of approximately $1.2 million to the foreign plans in 2006. During the six months ended June 30, 2006, K2 made contributions totaling approximately $0.8 million to the foreign plans.

Foreign Currency Translation

The functional currency for most foreign operations is the local currency. The financial statements of foreign subsidiaries have been translated into U.S. dollars. Asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Revenue and expense accounts have been translated using the average exchange rate for the period. The gains and losses associated with the translation of the financial statements resulting from the changes in exchange rates from period to period have been reported in the accumulated other comprehensive income or loss account in shareholders’ equity. To the extent assets and liabilities of the foreign operations are realized or the foreign operations pay back intercompany debt, amounts previously reported in the accumulated other comprehensive income or loss account would be included in net income or loss in the period in which the transaction occurs. Transaction gains or losses, other than those related to intercompany accounts and investments deemed to be of a long-term nature, are included in net income or loss in the period in which they occur.

Other Contingencies

In the ordinary course of business, K2 is involved in legal proceedings regarding contractual and employment relationships, product liability claims, environmental matters, intellectual property rights, and a variety of other matters. K2 records contingent liabilities resulting from claims when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Currently, K2 does not believe that any of its pending legal proceedings or claims will have a material impact on its financial position or results of operations. However, if actual or estimated probable future losses exceed K2’s recorded liability for such claims, additional charges would be recorded as an expense during the period in which the actual loss or change in estimate occurred.

Statement Regarding Forward-Looking Disclosure

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of K2 Inc. and its consolidated subsidiaries (“K2”) to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of net sales, gross margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning developments, performance or industry rankings relating to products; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include to successfully execute its acquisition plans and growth strategy, integration of acquired businesses, weather conditions, consumer spending, continued success of manufacturing in the People’s Republic of China, global economic conditions, product demand, financial market performance, foreign currency fluctuations and other risks that are described herein, including but not limited to the items described from time to time in K2’s periodic reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including K2’s Annual Report on Form 10-K for the year ended December 31, 2005. K2 cautions that the foregoing list of important factors is not exclusive, any forward-looking statements included in this report are made as of the date of filing of this report with the Securities and Exchange Commission, and K2 assumes no obligation and does not intend to update these forward-looking statements.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

K2 is exposed to a variety of risks. Two of these risks are foreign currency fluctuations and changes in interest rates that affect interest expense.

Foreign Currency

K2 is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates can have on the reported results in the consolidated financial statements due to the translation of the operating results and financial position of K2’s international subsidiaries. K2 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 some foreign currency forward contracts. K2’s risk management objective is to reduce its exposure to the effects of changes in exchange rates on the cost of products sold over annual time horizons. Foreign currency exchange rate movements also affect K2’s competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors and may affect the profitability and pricing strategies of K2 as well. K2’s foreign currency risk policies entail entering into foreign currency derivative instruments only to manage risk of currency fluctuations over a given period of time, not for speculative investments. At June 30, 2006, K2 had foreign exchange contracts with maturities of within one year to exchange various foreign currencies to dollars in the aggregate amount of $30.3 million.

A majority of K2’s products are either manufactured in K2’s China manufacturing facility or sourced from Chinese suppliers, which requires the use of Yuan as the form of payment for labor, raw materials, supplies, overhead, transportation and facilities costs. In July 2005, the Chinese government announced that it would let the Yuan’s value float relative to other currencies within a narrow band and increased the Yuan’s value versus the U.S. Dollar by two percent. Should the Yuan continue to strengthen against the U.S. dollar, this could have a negative impact on K2’s future results of operations in the event K2 is unable to pass on the impact of the rising costs to its customers.

Considering both the anticipated cash flows from firm purchase commitments and anticipated purchases for the next quarter and the foreign currency derivative instruments in place at quarter end, a hypothetical 10% weakening of the U.S. dollar relative to other currencies would not materially adversely affect expected third quarter 2006 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 effect 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 currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some currencies may weaken while others may strengthen. Moreover, any negative effect of a weakening U.S. dollar in terms of increase materials costs would likely be partially offset by a positive impact on revenues due to K2’s sales internationally and the conversion of those international sales to U.S. dollars.

Interest Rates

K2 is also exposed to interest rate risk in connection with its borrowings under the revolving bank credit facility and term loan which bear interest at floating rates based on London Inter-Bank Offered Rate (LIBOR) or the prime rate plus an applicable borrowing margin. K2 is also exposed to inherent rate risk in connection with its foreign credit lines. For the $100 million of convertible debentures, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely, for variable rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant.

As of June 30, 2006, K2 had $300 million in principal amount of fixed rate debt represented by the convertible debentures and senior notes and $67.7 million of variable rate debt represented by borrowings under the revolving credit facilities and foreign credit lines. Based on the balance outstanding under the variable rate facilities as of June 30, 2006, an immediate change of one percentage point in the applicable interest rate would have caused an increase or decrease in interest expense of approximately $0.7 million on an annual basis. At June 30, 2006, up to $190.8 million of variable rate borrowings were available under K2’s $250 million revolving bank credit facility. K2 may use derivative financial instruments, where appropriate, to manage its interest rate risks. However, as a matter of policy, K2 does not enter into derivative or other financial investments for trading or speculative purposes. As of June 30, 2006, K2 had no such derivative financial instruments outstanding.

ITEM 4.

Controls and Procedures

K2 maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation was carried out under the supervision and with the participation of K2’s management, including K2’s Chief Executive Officer (K2’s principal executive officer), Chief Financial Officer (K2’s principal financial officer) and Chief Operating Officer, of the effectiveness of the design and operation of K2’s disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer have concluded that K2’s disclosure controls and procedures were effective as of the Evaluation Date.

In addition, based on the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act, there have been no changes to K2’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, K2’s internal control over financial reporting.

While product innovation is a highly important factor and many of K2’s innovations have been patented, K2 does not believe the loss of any one patent would have a material effect on its business, financial position, results of operations or prospects. Certain of its brand names, such as Rawlings, Miken, Worth, Shakespeare, Ugly Stik, Pflueger, Stearns, Sospenders, Hodgman, Mad Dog, K2, Völkl, Marker, Madshus, Marmot, Ex Officio, Ride, Morrow, 5150, Tubbs, Atlas, Brass Eagle, Viewloader, JT, Worr Games and Adio are believed by K2 to be well-recognized by consumers and therefore important in the sales of these products. Rawlings^®, Worth^®, Miken^®, deBeer^®, Gait™, Ten™, Hilton^®, Shakespeare^®, Pflueger^®, Ugly Stik^®, All Star™, Xtools^®, Brass Eagle^®, Viewloader^®, Autococker^®, Stearns^®, Sospenders^®, Mad Dog^®, Hodgman^®, K2^®, Völkl ^®, Line^®, Marker^®, Madshus^®, Ride^®, Morrow^®, 5150^®, Marmot^®, Ex Officio^®, Planet Earth^®, Adio^®, Holden™, Tubbs^®, Atlas^®, Little Bear^®, JT^® and Worr Games^® are protected trademarks or registered trademarks of K2 or its subsidiaries in the United States and other countries worldwide. Buzz Off^® is a registered trademark owned by Buzz Off Insect Shield, LLC and Karhu^® is a registered trademark owned by Karhu Sporting Goods Oy.

Registered and other trademarks and trade names of K2’s products are italicized in this Form 10-Q.

PART II – OTHER INFORMATION

ITEM 1.

Legal Proceedings

K2 currently is a party to various legal proceedings, including those noted below. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our business, financial position, results of operations or prospects, litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include money damages or, in cases for which injunctive relief is sought, an injunction prohibiting K2 from selling one or more products. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations or prospects for the period in which the ruling occurs or future periods. K2 maintains product liability, general liability and excess liability insurance coverage. No assurances can be given such that insurance will continue to be available at an acceptable cost to K2 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.

Environmental

EIFS Litigation and Claims

installed after the sale date. K2 has not been in this building products business since June 2000. Since 1995, K2 has been a party to over 500 claims or lawsuits with a majority of the claims originating from the southeastern United States, with other claims and lawsuits from over 20 states. As of June 30, 2006, K2 continues to be a defendant or co-defendant in approximately 40 single family residential EIFS cases, the majority of which are pending in Alabama and Texas. K2 is also defending EIFS lawsuits involving commercial structures, townhouses, and condominiums. The vast majority of K2’s EIFS lawsuits seek monetary relief for water intrusion related property damages, although some claims in certain lawsuits allege personal injuries from exposure to mold.

K2 timely tendered this case to its insurance carrier, which originally defended this lawsuit under a “reservation of rights” letter. In April 2004, K2 and its insurer negotiated an agreement which resulted in its insurer providing full indemnity up to applicable policy limits for all claims arising out of this litigation. In exchange for the indemnity, K2’s insurer assumed full control over the litigation and settlement negotiations. The claims by the 98 home owners were eventually settled by K2’s insurer. On November 4, 2005, the related claims against K2 by Life Forms, Fresh Coat, and Griesenbeck were tried and resulted in a jury verdict of approximately $42 million, of which $6.8 million was for “knowingly” and “intentionally” violating the DTPA. K2’s insurer has advised that it plans to appeal this verdict. Based on the agreement with its insurer to indemnify K2 on all claims as well as adequate insurance coverage and management’s assessment of K2’s arguments that may be made on behalf of K2 on appeal, K2 does not believe this verdict will have a material adverse effect on its business, financial condition, results of operations or prospects.

payments, that the insured amounts will cover all future claims in excess of deductibles or that all amounts will be covered by insurance in respect of all judgments.

Intellectual Property

On April 29, 2005, a jury awarded the licensee (1) $4.1 million for a claim of lost profits for the next ten years on sales of equipment bags, plus the value of inventory of such bags (the “10-Year Lost Profits Verdict”), (2) $2.1 million for lost profits of equipment bags beginning ten years from the date of the breach of the agreement through forever (the “Speculative Profits Verdict”) and (3) $2.5 million for K2’s alleged tortious interference with the licensee’s business expectations (the “Tortious Interference Verdict”) between Rawlings and the licensee. The Missouri District Court ruled that the licensee was not permitted to bring certain claims to the jury. Following trial, the licensee was awarded approximately $0.5 million in attorney’s fees and costs – pursuant to a motion. Following the verdict, K2 established in the second quarter of 2005 an additional $1.2 million in liabilities for a total of approximately $4.7 million in liabilities related to this litigation, including estimated legal fees and costs of licensee’s attorneys.

Rawlings are unsuccessful in their appeal and the amount of the judgment, including the fees and costs of attorneys for the licensee, is greater than $4.7 million, or the outcome of a total liability greater than $4.7 million becomes probable and estimable, K2 will be required to record an expense in the period in which the matter is finalized. However, this expense could be higher if the appeals court rules in favor of the licensee for certain claims on which it is expected that licensee will appeal. The appeal process is expected to be completed in the range of one to two years.

In connection with K2’s acquisition of substantially all of the assets of Miken Composites, LLC, a business engaged in the design, selling and distribution of composite softball bats and softball-related products and accessories in the fourth quarter 2004, K2 assumed the post-acquisition damages, if any, relating to a patent lawsuit in the U.S. District Court for the District of Minnesota. In this patent lawsuit, Miken Composites, L.L.C. v. Wilson Sporting Goods Co., Miken commenced an action in April 2002 seeking a declaration that a line of softball bats manufactured by Miken does not infringe a particular patent owned by Wilson. In response, Wilson counterclaimed for patent infringement, seeking compensatory damages and a permanent injunction against Miken as the manufacturer and distributor of the allegedly infringing bats.

The outcome of this matter will depend primarily upon contested facts, and cannot be accurately predicted. Although each of K2 and Miken believes that Miken has meritorious defenses to Wilson’s counterclaims, in the event that Miken is unsuccessful in the declaratory judgment and counterclaim actions, it is expected that Wilson would seek the same remedies against K2 that it is currently seeking against Miken, namely compensatory damages and an injunction against the manufacture and sale of allegedly infringing bats. In such an event, K2 would, among other things, be required to record an expense in the period when the loss resulting from the resolution of the matter is probable and estimable. The litigation process for this case, including any appeals, is estimated to be in the range of two to three years.

ITEM 1A.

Risk Factors

There have been no material changes in the risk factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which Item 1A is hereby incorporated by reference.

ITEM 4

Submission of Matters to a Vote of Security Holders

At the Annual Meeting of the Stockholders of K2 held May 11, 2006, the following actions were taken:

(1)

Two directors were elected:

Richard J. Heckmann – 41,085,560 votes for and 602,074 votes withheld;

Robin E. Hernreich – 41,218,194 votes for and 469,440 votes withheld;

The following directors term in office as a director continued after the meeting:

Wilford D. Godbold, Jr.

Lou L. Holtz

Ann Meyers

Alfred E. Osborne, Jr.

Dan Quayle

(2)

The selection by the Board of Directors of Ernst & Young LLP as K2’s independent auditors for the year 2006 was ratified as follows:

43,051,144 votes for, 52,696 votes against and 7,866 votes abstained.

(3)

The approval of the K2 Inc. 2006 Long-Term Incentive Plan as follows:

30,916,205 votes for, 3,435,253 votes against and 111,055 votes abstained.

ITEM 6.

Exhibits


10.1		K2 Inc. 2006 Long-Term Incentive Plan, as approved by the stockholders on May 11, 2006, filed as Exhibit 4.1 to the Registration Statement on Form S-8 filed on June 2, 2006, and incorporated herein by reference.

10.2		K2 Inc. 2006 Long-Term Incentive Plan Awards to Named Executive Officers, filed as Exhibit 99.1 to the Current Report on Form 8-K filed on May 26, 2006, and incorporated herein by reference.

10.3		Agreements used in connection with grants to employees and non-employee directors under the K2 Inc. 2006 Long-Term Incentive Plan filed as Exhibits 99.2, 99.3, 99.4 and 99.5 to the Current Report on Form 8-K filed on May 26, 2006, and incorporated herein by reference.

10.4		Schedule of Non-Employee Director Compensation, filed as Exhibit 10.2 to the Current Report on Form 8-K filed on May 17, 2006, and incorporated herein by reference.

31.1		Certification of the Chief Executive Officer Pursuant Rule 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer Pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.3		Certification of the Chief Operating Officer Pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certifications of the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				K2 INC.
				(registrant)

Date: August 8, 2006				/s/ THOMAS R. HILLEBRANDT
				Thomas R. Hillebrandt
				Corporate Controller
				(Chief Accounting Officer)