10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 2005

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

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

Title of each class	Name of each exchange on which registered
Common Stock, par value $1	New York Stock Exchange Pacific Exchange
Series A Preferred Stock Purchase Rights	New York Stock Exchange Pacific Exchange

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes ¨    No x

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

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.

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

The aggregate market value of the voting stock of the registrants held by nonaffiliates was approximately $594,021,329 based on the closing price of such voting stock on June 30, 2005, of $12.68.

At February 28, 2006 there were 47,687,819 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for its Annual Meeting of Shareholders to be held May 11, 2006 are incorporated by reference in Part III.

K2 INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2005

INDEX

PART I
Item 1.	Business	3
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	19
Item 3.	Legal Proceedings	20
Item 4.	Submission of Matters to a Vote of Security Holders	23
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	98
Item 9A.	Controls and Procedures	98
Item 9B.	Other Information	99
PART III
Item 10.	Directors and Executive Officers of the Registrant	100
Item 11.	Executive Compensation	100
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	100
Item 13.	Certain Relationships and Related Transactions	100
Item 14.	Principal Accounting Fees and Services	100
PART IV
Item 15.	Exhibits and Financial Statement Schedules	101
Signatures		105

2

FORM 10-K ANNUAL REPORT

PART I

ITEM 1. BUSINESS:

General

K2 Inc. 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, Miken and Worth in the Team Sports segment; K2, Völkl, Marker, Ride and Brass Eagle 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 and hunting, outdoor water sports activities, baseball, softball, alpine skiing, snowboarding and in-line skating. Among K2’s other branded products are Tubbs, Atlas and Little Bear snowshoes, Madshus nordic skis, JT and Worr Games paintball products and Planet Earth apparel. Founded in 1946, K2 has grown to $1.3 billion in 2005 annual sales through a combination of internal growth and strategic acquisitions. For segment and geographic information, see Note 14, Segment Data, in the Notes to Consolidated Financial Statements.

K2 has expanded its presence in several sporting goods markets in the U.S., Europe and Japan, including skateboard shoes, fishing tackle reels and kits and combos, outdoor marine accessories, hunting accessories, outdoor apparel, ski accessories, paintball products, baseball and softball bats and All-Terrain Vehicle (“ATV”) accessories. Management believes its products have benefited from the brand strength, reputation, distribution, and the market share positions of other K2 products, several of which are now among the top brands in their respective markets. K2’s product portfolio contains some of the most widely recognized brands in their respective market segments. K2 believes it has leading market positions with many of our branded products based on revenue or unit sales as follows:

Product	Brand	Ranking
Alpine skis	K2 and Völkl	#1
Alpine ski bindings	Marker	#1
Snowboards	K2, Ride, Liquid, Morrow and 5150	#2
Snowboard bindings	K2, Ride, Liquid, Morrow and 5150	#2
Snowshoes	TUBBS and Atlas	#1
Paintball products	Brass Eagle, JT, Viewloader and Worr Games	#1
Baseballs and gloves	Rawlings	#1
Softballs	Worth	#1
Fishing kits and combos	Shakespeare	#1
Fishing rods	Shakespeare and Ugly Stik	#1
Personal Flotation Devices	Stearns	#1

In order to implement its strategy for growth, K2 has embarked upon a program to leverage its existing operations and to complement and diversify its product offerings within the sporting goods and recreational products. K2 intends to implement its internal growth strategy by continuing to improve operating efficiencies, extending its product offerings through new product launches and maximizing its extensive distribution channels. In addition, K2 will seek strategic acquisitions of other sporting goods companies with well-established brands and with complementary distribution channels. K2 believes that the growing influence of large format sporting goods retailers and retailer buying groups, as well as the consolidation of certain sporting goods retailers worldwide, is leading to a consolidation of sporting goods suppliers. K2 also believes that the most successful sporting goods suppliers will be those with greater financial and other resources, including those with the ability to produce or source high-quality, low cost products and deliver these products on a timely basis, to invest in product development projects and to access distribution channels with a broad array of products and brands. In addition, as the influence of large sporting goods retailers grows, K2 believes these retailers will prefer to rely on fewer and larger sporting goods suppliers to help them manage the supply of products and the allocation of shelf space.

3

K2’s common stock was first offered to the public in 1959 and is currently traded on the New York and Pacific Stock Exchanges (symbol: KTO).

2005 Acquisitions

On April 22, 2005, K2 completed the acquisition of substantially all of the assets of Hodgman, Inc., a business engaged in the design, selling and distribution of hunting and fishing waders. The transaction consideration consisted of cash. Hodgman, Inc. is included in K2’s Marine and Outdoor segment.

On April 18, 2005, K2 completed the acquisition of JRC Products Limited, a business engaged in the design, selling and distribution of carp fishing tackle products. The transaction consideration consisted of cash. JRC Products Limited is included in K2’s Marine and Outdoor segment.

2004 Acquisitions

On January 23, 2004, K2 completed the acquisition of Fotoball USA, Inc. (“Fotoball”), a marketer and manufacturer of souvenir and promotional products, principally for team sports, in a stock-for-stock exchange offer/merger transaction. Subsequent to the completion of the merger, K2 changed the name of Fotoball to K2 Licensed Products, Inc. K2 Licensed Products, Inc. is included in K2’s Team Sports segment.

On April 19, 2004, K2 completed the acquisition of substantially all of the assets of Worr Game Products, Inc. and All-Cad Manufacturing, Inc. (collectively, “Worr Games”), businesses engaged in the design, manufacturing, selling and distribution of paintball markers and paintball-related products and accessories. The transaction consideration consisted of cash and the issuance of shares of K2 Inc. common stock. Worr Games is included in K2’s Action Sports segment.

Also on April 19, 2004, K2 completed the acquisition of substantially all of the assets of IPI Innovations, Inc. (“IPI”), a business engaged in the design, manufacturing, selling and distribution of gun and bow mounting systems, and other products and accessories for all-terrain vehicles. The transaction consideration consisted of cash and the issuance of shares of K2 Inc. common stock. IPI is included in K2’s Marine and Outdoor segment.

On May 12, 2004, K2 also completed the acquisition of substantially all of the assets of Ex Officio, a leader in the design and manufacture of men and women’s apparel for the outdoor and adventure travel markets, in an all cash transaction. Ex Officio’s products are characterized by technical features, performance fabrics and outdoor styles, and are used in a variety of activities including fishing, kayaking, trekking, exploring and other leisure activities. Ex Officio also markets a line of insect repellent clothing under the Buzz Off brand. Ex Officio is included in K2’s Apparel and Footwear segment.

On June 30, 2004, K2 completed the acquisition of Marmot Mountain Ltd. (“Marmot”). Marmot, founded in 1971, is a leader in the premium technical outdoor apparel and equipment market. Marmot’s product lines include performance jackets, technical rainwear, expedition garments, fleeces, softshells, skiwear outerwear and accessories, gloves, and expedition quality tents, packs and sleeping bags. The transaction consideration consisted of cash and the issuance of shares of K2 Inc. common stock. Marmot is included in K2’s Apparel and Footwear segment.

On July 7, 2004, K2 completed the acquisitions of Völkl Sports Holding AG (“Völkl”) and The CT Sports Holding AG (“Marker”). Founded in 1889, Völkl is a well established and recognized brand in the worldwide alpine ski market. Marker was founded in 1952 and has gained worldwide recognition for its patented ski-bindings. The transaction consideration consisted of cash and the issuance of shares of K2’s common stock. Völkl and Marker are included in K2’s Action Sports segment.

During 2004, K2 also completed three smaller acquisitions. Two of these acquisitions are reported within the Marine and Outdoor segment and one within the Team Sports segment.

4

For additional information on these acquisitions see Note 2 to Notes to Consolidated Financial Statements.

K2 classifies its business into the following four segments based on similar product types and distribution channels: Marine and Outdoor, Action Sports, Team Sports and Apparel and Footwear. The Marine and Outdoor segment includes Shakespeare fishing tackle and monofilament products as well as Stearns outdoor products. The Action Sports segment includes skis, bindings, snowboards, snowshoes, in-line skates and paintball products. The Team Sports segment includes baseball and softball products and K2 Licensed Products merchandise. The Apparel and Footwear segment includes skateboard shoes and apparel, technical apparel and equipment and outdoor and adventure travel apparel.

Marine and Outdoor

Net sales for the Marine and Outdoor segment were $392.2 million in 2005, $336.9 million in 2004 and $324.0 million in 2003. The following table lists K2’s principal Marine and Outdoor products and the brand names under which they are sold.

Product	Brand Name
Fishing rods, reels and fishing kits and combos	Shakespeare, Ugly Stik, All Star and Pflueger
Active water and outdoor sports products	Stearns, Mad Dog, Hodgman and Sospenders
Monofilament line	Shakespeare
Marine and military radio antennas	Shakespeare

Fishing rods, reels and fishing kits and combos.    K2 sells fishing rods, reels and fishing kits and combos throughout the world. K2 believes Shakespeare’s Ugly Stik models have been the best selling fishing rods in the U.S. for over 20 years. The success of these fishing rods has allowed K2 to establish a strong position with retailers and mass merchandisers, thereby increasing sales of new rods, reels and kits and combos and allowing K2 to introduce new products such as the expansion of its Pflueger product line and licensed children’s kits and combos. K2’s rods and reels are manufactured principally in China. Shakespeare products are sold directly by K2 and through independent sales representatives to mass merchandisers and sporting goods retailers in the U.S., Europe and Australia and through independent and K2-owned distributors in Europe and Australia.

Active water and outdoor sports products.    K2 sells Stearns and Sospenders flotation vests, jackets and suits (“personal flotation devices”), cold water immersion products, wet suits, Hodgman waders, outdoor products, rainwear and inflatable and towable water products and Mad Dog hunting and ATV accessories in the U.S. and in certain foreign countries. In the U.S., occupants of boats are required by law either to wear or have available personal flotation devices meeting U.S. Coast Guard standards. Stearns and Sospenders personal flotation devices are manufactured to such standards and are subject to rigorous testing for certification by Underwriters Laboratories, an independent, not-for-profit product-safety testing and certifying organization. K2 manufactures most of its personal flotation devices in the U.S., manufactures certain components in China and sources its other products from Asia. Stearns, Sospenders, Hodgman and Mad Dog products are sold principally through an in-house sales department and independent sales representatives to mass merchandisers, specialty shops and chain stores and to the off-shore oil industry, commercial fishermen and other commercial users through independent sales representatives.

Monofilament line.    Nylon and polyester monofilament line is manufactured in the U.S. and the U.K. and sold by K2 in a variety of diameters, tensile strengths and softness. Monofilament is used in various applications including the manufacture of woven mats for use by paper producers in the U.S., Europe and South America, as fishline and for use as line in weed trimmers in the U.S. and is sold directly to paperweavers, directly to retailers of fishline and distributors of cutting line and to others through independent sales representatives. Monofilament sold in Europe for woven mats is manufactured primarily in K2’s U.K. facility. Shakespeare monofilament also manufactures various products for industrial applications.

5

Marine and military radio antennas.    K2 manufactures fiberglass radio antennas in the U.S. and in China for marine, citizen band and military application under the Shakespeare name. The products are sold primarily in the U.S. K2 also distributes marine accessories under the Shakespeare name that are manufactured in Asia to K2’s specifications. An in-house sales department and independent sales representatives sell the antennas, radios and other marine accessories to specialty marine dealers.

During 2005, one customer accounted for more than 10% of the net sales of the Marine and Outdoor segment. The loss of this customer could have a material adverse affect on the Marine and Outdoor segment.

Action Sports

Net sales for Action Sports products were $482.5 million in 2005, $502.7 million in 2004 and $247.0 million in 2003. The following table lists K2’s principal Action Sports products and brand names under which they are sold.

Product	Brand Name
Alpine skis	K2, and Völkl
Alpine ski bindings	Marker
Snowboards and accessories	K2, Ride, Morrow, 5150, and Liquid
Snowshoes and accessories	TUBBS, Atlas and Little Bear
In-line skates	K2
Paintball markers, paintballs and accessories	Brass Eagle, Viewloader, JT, Worr Games     and Autococker
Nordic skis	Madshus

Alpine and nordic skis and bindings.    K2 sells its alpine skis under the names K2 and Völkl and its alpine ski bindings under the name Marker in the three major ski markets of the world—the U.S., Europe and Japan. K2 believes that participation rates for alpine skiing have been relatively flat in Europe and the U.S., but have been declining in Japan over the last several years. K2 believes that industry retail sales have in general mirrored these participation trends in the worldwide market during the same period. K2 believes that participation rates, together with the impact of the weather conditions, the high cost of skiing, the opportunity to participate in alternative activities such as snowboarding, the increased use of rental or demo skis and general economic conditions all have an impact on retail sales of alpine ski equipment. K2 skis, however, have benefited from their increasing popularity among retail purchasers, resulting from growing market acceptance of K2’s women’s ski line, positioning at popular price points and from attractive graphics and creative marketing. Völkl has benefited, principally in the U.S. and Europe, from its positioning as a premium-priced, highly innovative producer of well-engineered, high quality skis with a well-respected race program. Each brand is also benefiting from exclusive integrated bindings and systems developed exclusively with Marker bindings. K2 sells Nordic skis and boots under the Madshus name, which has been in existence since 1906.

K2 skis are manufactured by K2 primarily in its facility in China. Völkl skis are manufactured primarily by K2 in its facility in Germany. Madshus skis are manufactured in Norway. Marker bindings are manufactured by K2 primarily in its facility in the Czech Republic. The skis, bindings and accessories, including helmets and ski poles, are sold to specialty retail shops and sporting goods chains in the U.S. by independent sales representatives and in Europe and Japan through independent and K2-owned distributors. K2 and Völkl alpine skis are marketed to skiers ranging from beginners to top racers to meet the performance, usage and terrain requirements of the particular consumer.

From a pricing perspective, K2 positions the K2 brand in the mid-level and higher price points, and positions the Völkl brand at generally higher price points reflecting the quality of materials used in construction, the continual incorporation of technological innovations and the type of skiing it is intended for. To assist in its marketing efforts, K2 sponsors mainly freestyle skiers while Völkl sponsors primarily well-known professional and amateur race-oriented skiers.

6

Snowboards and accessories.    K2 sells snowboards, boots, bindings and snowboard outerwear under the K2, Ride, Morrow, 5150 and Liquid brands. Accessories, including backpacks for carrying snowboards and other gear when hiking into the back country and snowboard apparel are being marketed under the K2 and Ride brands. Growth in retail sales in the snowboard market has slowed, resulting in fewer, larger, better capitalized brands. K2 manufactures most of its own snowboards in its manufacturing facility in China. K2 believes its manufacturing capability and ability to innovate provide it a competitive advantage. Like its alpine skis, K2 and Ride snowboards are of high quality and have innovative features.

K2’s snowboard brands are sold to specialty retail shops and sporting goods chains in the U.S. by independent sales representatives and in Europe and Japan through independent and K2-owned distributors. Like K2 skis, K2, Ride, Morrow, 5150 and Liquid snowboard products are marketed using youthful and energetic advertising, and K2 sponsors well-known professional and amateur snowboarders.

In-line skates.    K2 introduced its K2 soft boot in-line skates in 1994. Although the worldwide market underwent several years of growth, it has declined in recent years with the sharpest decline occurring in 2001, resulting in a consolidation of brands.

K2’s in-line skates target the enthusiast and are priced at the mid to upper end of the industry’s price points. K2 skates are attractive and of high quality and have innovative features such as a soft mesh and leather upper designed for improved comfort, with a rigid plastic cuff for support. K2’s skates incorporate several innovations, including K2’s soft boot skate with no laces. The patented product line is designed for performance as well as superior comfort and support. K2 also sells women’s-specific skates and adjustable-size, soft boot skates for children.

K2 in-line skates are manufactured to its specifications and are primarily assembled by a third party vendor in China. They are sold to specialty retail shops and sporting goods chains in the U.S. by independent sales representatives and in Europe and Japan through independent and K2-owned distributors.

Paintball products.    Brass Eagle designs and distributes throughout the world a full line of paintball markers with a variety of performance characteristics. There are three primary classifications of paintball markers: pump action, semi-automatic and ultra high performance paintball markers. Brass Eagle currently offers all three types of paintball markers under its Brass Eagle, JT, Worr Games Products, Autococker and Viewloader brand names to the mass merchant, sporting goods and specialty markets, as appropriate. To assist in its marketing efforts, Brass Eagle, JT and Worr Games Products sponsor key professional paintball teams. Paintball markers are generally sourced by Brass Eagle in Asia from third party suppliers, while the ultra high performance markers, such as the Autococker brand, are machined and assembled at the Worr Games Products facility in Corona, California. Brass Eagle, JT, Worr Games and Viewloader products are sold directly by Brass Eagle and through independent sales representatives to mass merchandisers, sporting goods retailers and to specialty shops and paintball venues in North America, as well as through independent distributors in Europe, and to other customers around the world. During 2005 the paintball market experienced a significant decline. The decline in sales of paintball products reflects soft consumer demand in the industry.

Paintballs are made of a gelatinous material: the paint is non-toxic, biodegradable and washable. Paintballs are manufactured using an encapsulation process principally in Brass Eagle’s manufacturing facilities in the U.S., requiring special equipment and certain technical knowledge. Brass Eagle sells its paintballs in multiple colors and packages.

Brass Eagle markets a broad product line of paintball accessories complementary to its paintball markers and paintballs. These accessory products include goggle systems, paintball loaders, cleaning squeegees and refillable CO2 tanks. Goggle systems, a requirement for safe paintball play, are a primary component of Brass Eagle’s accessory product line. The goggle systems are designed to provide full face, eye and ear protection.

7

Team Sports

Net sales for Team Sports products were $265.2 million in 2005, $250.4 million in 2004 and $116.9 million in 2003. The following table lists K2’s principal Team Sports products and brand names under which they are sold.

Product	Brand Name
Baseballs, softballs, bats, gloves, softballs, basketballs, footballs, soccer balls, volleyballs, team sports apparel and accessories	Rawlings, Worth and Miken
Lacrosse	deBeer and Gait by deBeer

Baseball and softball.    K2 believes that Rawlings is a leading supplier of baseball equipment in North America and, through its licensee, in Japan. Rawlings’ products in this area include baseball gloves, baseballs, softballs, batters’ helmets, catchers’ and umpires’ protective equipment, aluminum, composite and wood baseball bats, batters’ gloves and miscellaneous accessories. Rawlings is a major supplier to professional, collegiate, interscholastic and amateur organizations worldwide and is also the official baseball supplier to Major League Baseball (“MLB”), Minor League Baseball and National Collegiate Athletic Association (“NCAA”), as well as the official helmet supplier to Major League Baseball. In addition, Rawlings’ products are endorsed by college coaches, sports organizations and numerous athletes, including more than 275 Major League Baseball players. Rawlings products are manufactured principally in Asia and Costa Rica. Our marketing efforts are supported by endorsements from several major professional athletes, including Álex Rodríguez, Derek Jeter, Albert Pujols and Michael Vick.

Worth and Miken are leading suppliers of softball products with market leading positions in collegiate and amateur slow pitch and fast pitch softball. Worth products are widely used in NCAA Division I fast pitch softball programs. Worth is the official softball of all Canadian major associations and the official softball and softball bat of the U.S. Specialty Sports Association. Worth and Miken products include aluminum, exterior shell technology and 100% composite softball bats, softballs, softball gloves and miscellaneous accessories. Worth products are manufactured principally in China and Miken products are manufactured principally in the U.S.

Rawlings, Worth and Miken products are sold directly by K2 and through independent sales representatives to mass merchandisers and sporting goods retailers in the U.S. as well as through independent distributors in Europe and Japan.

Basketball, football, soccer and volleyball.    Rawlings sells 30 different models of basketballs, including full-grain, composite and synthetic leather and rubber basketballs for men and women in both the youth and adult markets. Rawlings is the official supplier of basketballs to the National Association of Intercollegiate Athletics and the National Junior College Athletic Association Championships. Worth is the official softball of the National Collegiate Athletic Association. Rawlings sells stock and custom team uniforms for baseball, football and basketball.

Team sports apparel.    Rawlings has been selling team uniforms for approximately 100 years. Rawlings believes it has growth opportunities in its current team apparel business.

Souvenir and promotional products.    K2 Licensed Products manufactures and markets souvenir and promotional products to national and regional retailers; professional sports franchises and concessionaires across the nation; and entertainment destinations such as theme parks, resorts and restaurants. The Company currently holds several sports licenses including MLB, the National Football League (“NFL”), over a hundred NCAA colleges and universities and various entertainment properties.

During 2005, one customer accounted for more than 10% of the net sales of the Team Sports segment. The loss of this customer could have a material adverse affect on the Team Sports segment.

8

Apparel and Footwear

Following the 2004 acquisitions of Marmot and Ex Officio, K2 created a new Apparel and Footwear segment consisting of the Marmot, Marker, Ex Officio, Adio and Planet Earth product lines. The year ended 2003 reflects the operations of the Adio and Planet Earth product lines.

Net sales for Apparel and Footwear products were $173.7 million in 2005, $110.7 million in 2004 and $30.6 million in 2003. The following table lists K2’s principal Apparel and Footwear products and the brand names under which they are sold.

Product	Brand Name
Technical apparel and equipment	Marmot and Marker
Outdoor and adventure travel apparel	Ex Officio
Skateboard shoes	Adio
Skateboard apparel	Adio and Planet Earth
Snowboard apparel	Planet Earth and Holden

Marmot.    Marmot, founded in 1971, is a leader in the premium-priced, high performance technical outdoor apparel and equipment market. Marmot designs, manufactures, markets and distributes performance jackets, technical rainwear, expedition garments, fleeces, softshells, skiwear outerwear and accessories, gloves, and expedition quality tents, packs and sleeping bags and related accessories sold under the Marmot brand name and apparel sold under the Marker brand name. Outdoor professionals and enthusiasts associate the Marmot brand with high-performance, high-technology apparel and equipment. Marmot has been the gear of choice on thousands of the most challenging expeditions and pursuits, including numerous treks to the highest summits on all seven continents. Marmot has continued to strengthen its brand image by heavily investing in product development, which has produced a steady stream of new and innovative products. Marmot products are sold to specialty retail shops and sporting goods chains in the U.S., Canada and Europe by independent sales representatives and elsewhere through independent distributors. Marmot products are manufactured to its specifications by third party vendors in Asia.

Ex Officio.    Ex Officio is a leader in the design, manufacture, sale and distribution of men and women’s apparel for the outdoor and adventure travel apparel for men and women. Ex Officio’s products are characterized by technical features, performance fabrics, and outdoor styles, and are used in a variety of activities including fishing, kayaking, trekking, exploring, and other leisure activities. Ex Officio products include the only Environmental Protection Agency -approved line of insect-repellent clothing, which are sold in conjunction with Buzz Off brand insect repellent under a licensing agreement. Ex Officio products are sold to specialty sporting goods chains in the U.S. by independent sales representatives and in Europe and elsewhere through independent distributors. Ex Officio products are also sold via the internet and a retail store in the Seattle-Tacoma airport. Ex Officio products are manufactured to its specifications by third-party vendors in Asia.

Skateboard and snowboard apparel and skateboard shoes.    Skateboard and snowboard apparel and skateboard shoes are sold to specialty retailers in the U.S., Canada, Europe and Japan. Suppliers, primarily located in Asia, manufacture these products to K2’s specifications. Independent sales representatives sell the products to retailers in the U.S. and Canadian markets and through K2-owned and independent distributors in Europe and Asia. K2’s skateboard shoes are designed with significant assistance from a group of well-known professional skateboarders. Skateboard shoes are marketed under the Adio brand names, and models are named after the specific skateboarder who aided in the design.

During 2005, two customers each accounted for more than 10% of the net sales of the Apparel and Footwear segment. The loss of one or both of these customers could have a material adverse affect on the Apparel and Footwear segment.

9

Competition

K2’s competition varies among its business lines. The sporting goods products, recreational products, apparel and footwear markets are generally highly competitive, with competition centering on product innovation, performance and styling, price, marketing and delivery. Competition in these products (other than for active wear) consists of a relatively small number of large producers, some of whom have greater financial and other resources than K2. A relatively large number of companies compete for sales of active wear. While K2 believes its well-recognized brand names, low cost China manufacturing and sourcing base, established distribution channels and reputation for developing and introducing innovative products have been key factors in the successful introduction and growth of its sporting goods and other recreational products, there are no significant technological or capital barriers to entry into the markets for many sporting goods, recreational products, apparel and footwear. These markets face competition from other leisure activities, and sales of leisure products are affected by economic conditions, weather patterns and changes in consumer tastes, which are difficult to accurately predict.

K2 believes certain of its marine and outdoor products compete based on product quality, service and delivery, however, certain of K2’s marine and outdoor products are, in most instances, subject to price competition, ranging from moderate in marine antennas and monofilament line to intense for commodity-type products. Certain industrial competitors have greater financial and other resources than K2.

Manufacturing, Foreign Sourcing and Raw Materials

K2 believes that, for the products within its core categories, it is of strategic importance for it to develop the capability to source and manufacture high-quality, low cost products. As a result, K2 currently manufactures products in the People’s Republic of China, including most of its fishing rods and reels, snowboards, skis, shells for flotation devices, bats, batting helmets and certain marine antennas. K2 manufactures Völkl skis and Marker bindings in Europe. Additionally, K2 currently purchases in-line skates, baseball gloves, paintball markers and other products in accordance with K2 specifications from a few vendors in China. Certain other products are sourced from various vendors in Asia, Latin America and Europe. The remaining products are manufactured by K2 in the United States and Costa Rica.

K2 has not experienced any substantial difficulty in obtaining raw materials, parts or finished goods inventory for its businesses, although the cost of certain raw materials has fluctuated. Certain components and finished products, however, are manufactured or assembled abroad and therefore could be subject to interruption as a result of local unrest, currency exchange fluctuations, increased tariffs, trade difficulties and other factors. Timely supply of sporting goods products from K2’s factories and suppliers in the People’s Republic of China is dependent on uninterrupted trade with China. Should there be an interruption in trade with or imposition of taxes and duties by China, it could have a significant adverse impact on K2’s business, results of operations or financial position. Additionally, the gross margins on K2’s products manufactured or sourced in the U.S., Europe or in Asia and distributed in the U.S. and Europe will depend on the relative exchange rates between the U.S. dollar, the Yuan and the euro.

Seasonality and Cyclicality; Backlog

Sales of K2’s sporting goods are generally highly seasonal and in many instances are dependent on weather conditions. This seasonality causes K2’s financial results to vary from quarter to quarter, and K2’s sales and earnings are usually lower in the first and second quarters. In addition, the nature of K2’s baseball, softball, paintball, ski, snowboard, in-line skate, apparel, fishing and water sports products businesses requires that, in anticipation of the selling season for these products, it make relatively large investments in inventory. The primary selling season, in the case of baseball and softball, runs from January through April, paintball runs from September through November, skis, snowboards and winter apparel runs from July through December, in-line skates runs primarily from October through May and fishing tackle and water sports products runs primarily from

10

January through June. Relatively large investments in receivables consequently exist during and after such seasons. The rapid delivery requirements of K2’s customers for its sporting goods products and other recreational products also result in investment in significant amounts of inventory. K2 believes another factor in its level of inventory investment is the shift by certain of its sporting goods customers from substantial purchases of pre-season inventories to deferral of deliveries until the products’ retail seasons and ordering based on rates of sale.

Sales of sporting goods and other recreational products depend largely on general economic conditions including the amount of discretionary income available for leisure activities, consumer confidence and favorable weather conditions. Sales of apparel and footwear often depend on fashion trends that can be difficult to predict. Sales of K2’s monofilament products are dependent to varying degrees upon economic conditions in the paper industry and lawn and garden market.

Because of the nature of many of K2’s businesses, backlog is generally not significant.

Customers

K2 believes that its customer relationships are excellent. Net sales to Wal-Mart Stores, Inc. and its affiliates accounted for approximately 15% of K2’s consolidated net sales for 2005, compared to 16% in 2004 and 15% in 2003.

Research and Development

Consistent with K2’s business strategy of continuing to develop innovative brand name products and improving the quality, cost and delivery of products, K2 maintains decentralized research and development departments at several of its manufacturing centers, which are engaged in product development and the search for new applications and manufacturing processes. Expenditures for research and development activities totaled approximately $20.7 million in 2005, $14.5 million in 2004 and $9.6 million in 2003.

Environmental Factors

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 December 31, 2005 and 2004, 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 financial statements or its operations going forward.

Employees

K2 had approximately 4,700 employees at December 31, 2005 and 2004.

11

Patents and Intellectual Property Rights

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, Liquid, 5150, Tubbs, Atlas, Little Bear, 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^™, Brass Eagle^®, Viewloader^®, Autococker^®, Stearns^®, Sospenders^®, Mad Dog^®, Hodgman^®, K2^®, Völkl ^®, Marker^®, Madshus^®, Ride^®, Morrow^®, 5150^®, Liquid^®, 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.

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

Executive Officers of K2

Name	Position	Age
Richard J. Heckmann	Chairman of the Board and Chief Executive Officer	62
J. Wayne Merck	President and Chief Operating Officer	45
John J. Rangel	President – K2 Inc. European Operations	51
Dudley W. Mendenhall	Senior Vice President and Chief Financial Officer	51
Monte H. Baier	Vice President, General Counsel and Secretary	37
David Y. Satoda	Vice President and Director of Taxes	40
Brian R. Anderson	Director of Business Development	52
Thomas R. Hillebrandt	Corporate Controller and Chief Accounting Officer	44

Mr. Heckmann has been Chief Executive Officer of K2 since October 2002 and Chairman of the Board of Directors of K2 since April 2000. Mr. Heckmann served as a director of MPS Group, Inc. from April 2003 to March 2004, Philadelphia Suburban Corporation from August 2000 through February 2002, United Rentals, Inc. from October 1997 through May 2002, Waste Management Inc. from January 1994 through January 1999 and Station Casinos, Inc. from April 1999 through March 2001. Mr. Heckmann retired as Chairman of Vivendi Water, an international water products group of Vivendi S.A., a worldwide utility and communications company with headquarters in France, in June 2001. Mr. Heckmann was Chairman, President and Chief Executive Officer of U.S. Filter Corporation, a worldwide provider of water and wastewater treatment systems and services, from 1990 to 1999. Vivendi acquired US Filter on April 29, 1999. He has served as the associate administrator for finance and investment of the Small Business Administration in Washington, DC and was the founder and Chairman of the Board of Tower Scientific Corporation.

Mr. Merck has been President and Chief Operating Officer of K2 since November 2003. Prior to that, he was Executive Vice President and Chief Operating Officer of K2 from October 2002. He served as Executive Vice President of Operations of K2 from July 2000, Vice President of K2 from January 1996 and President of Shakespeare Composites & Electronics, a division of Shakespeare, a wholly-owned subsidiary of K2 from June 1996. Mr. Merck served as President of K2’s former business, Anthony Pools, from February 1994 to June 1996.

Mr. Rangel, has been President – K2 Inc. European Operations of K2 since August 2004. Prior to that, he served as Senior Vice President – Finance and Chief Financial Officer since April 2003, Senior Vice President – Finance of K2 since 1988 and Corporate Controller from 1985 to 1988.

Mr. Mendenhall is Senior Vice President and Chief Financial Officer of K2. Prior to joining K2 in April 2003, he was Managing Director of Ernst & Young’s west coast Corporate Finance Group from March 2001.

12

From January 1990 through March 2001, Mr. Mendenhall held a number of executive positions at Bank of America: from January 1996 to March 2001, as Managing Director and Group Head of the entertainment and media industry group in Los Angeles and New York; from June 1993 to December 1995, as Managing Director of the Corporate Finance Group; and from January 1990 to June 1993, as Managing Director of the Leveraged Finance Group.

Mr. Baier is Vice President, General Counsel and Secretary of K2. Prior to joining K2 in April 2003, he was Associate General Counsel at Asia Global Crossing from April 2000. From 1995 through April 2000, Mr. Baier was as an Associate in the New York law firm of Simpson Thacher & Bartlett. Mr. Baier received a juris doctor degree from the New York University School of Law.

Mr. Satoda has been a Vice President of K2 Inc. since May 2001 and Director of Taxes since joining K2 in August 2000. Prior to that time, Mr. Satoda was a Senior Manager with Ernst & Young LLP, an international auditing and tax consulting firm for more than five years.

Mr. Anderson has been Director of Business Development since February 2005. Prior to holding that position, Mr. Anderson was the Director of Financial Accounting for K2 since he joined the company in March 2003. Prior to that, Mr. Anderson served as the Corporate Controller of US Filter Corporation, a provider of water and waste treatment systems and services since May 2000 and served as Assistant Corporate Controller from January 1997 through May 2000.

Mr. Hillebrandt has been Corporate Controller and Chief Accounting Officer of K2 since May 2004. Prior to joining K2, he was Senior Vice President and Chief Financial Officer of Fotoball USA, a publicly held souvenir and promotional products company, since July 2001 and was Vice President and Chief Financial Officer of Fotoball from July 2000 through May 2001. Fotoball was acquired by K2 in January 2004. From August 1998 through July 2000, Mr. Hillebrandt served as the Vice President and Chief Financial Officer of ChatSpace, Inc., a privately held Internet software and services company.

Officers of K2 are elected for one year by the directors at their first meeting after the annual meeting of shareholders and hold office until their successors are elected and qualified.

Available Information

K2’s website is http://www.k2inc.net. K2 makes available, free of charge, on or through the website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing such reports to, the Securities and Exchange Commission. In addition, copies of the written charters for the committees of the Board of Directors, K2’s Principles of Corporate Governance, K2’s Code of Business Conduct and Ethics are also available on this website and can be found under the Investor Information and Corporate Governance links. Copies are also available in print, free of charge, by writing to Investor Relations, K2 Inc., 5818 El Camino Real, Carlsbad, California 92008. This website address is intended to be an inactive textual reference only, and none of the information contained on the website is part of this report or is incorporated in this report by reference.

ITEM 1A.     RISK FACTORS

K2’s strategic plan, involving growth through the acquisition of other companies, may not succeed.

K2’s strategic plan involves growth through the acquisition of other companies. Such growth involves a number of risks, including:

• the difficulties related to combining previously separate businesses into a single unit;

• the substantial diversion of management’s attention from day-to-day operations;

• the assumption of liabilities of an acquired business, including unforeseen liabilities;

13

• the failure to realize anticipated benefits, such as cost savings and revenue enhancements;

• the dilution of existing stockholders and convertible note holders due to the issuance of equity securities, utilization of cash reserves, or incurrence of debt in order to fund the acquisitions;

• the potentially substantial transaction costs associated with acquisitions;

• the difficulties related to assimilating the products, personnel and systems of an acquired business and to integrating distribution and other operational capabilities; and

• the difficulties in applying K2’s internal controls to an acquired business.

Current and future financings may place a significant debt burden on K2.

K2 has incurred substantial indebtedness. At December 31, 2005, K2 had $437.3 million of outstanding debt, including $95.3 million of borrowings outstanding under its $250.0 million revolving credit facility, $43.0 million outstanding under various foreign lending arrangements, outstanding convertible debentures of $100.0 million in the aggregate less $1.0 million of unamortized value associated with warrants and $200.0 million outstanding in senior notes. In addition, as of December 31, 2005 K2 had available borrowings under its revolving credit facility of $145.3 million. K2’s substantial indebtedness, as well as potential future financings, could, among other things:

• adversely affect K2’s ability to expand its business, market its products and make investments and capital expenditures;

• adversely affect the cost and availability of funds from commercial lenders, debt financing transactions and other sources;

• adversely affect the ability of K2 to pursue its acquisition strategy; and

• create competitive disadvantages compared to other companies with lower debt levels.

K2 faces intense competition and potential competition from companies with greater resources, and, if it is unable to compete effectively with these companies, its business could be harmed.

The markets for sporting goods and recreational products in which K2 competes are generally highly competitive, especially as to product innovation, performance and styling, price, marketing and delivery. Competition regarding these products, other than active wear, consists of a relatively small number of large producers, some of whom have greater financial and other resources than K2. In addition, many of K2’s competitors offer sports and recreational equipment not currently sold by K2 and may be able to leverage these broader product offerings to adversely affect K2’s competitive market position. Further, there are no significant technological or capital barriers to entry into the markets for many sporting goods and recreational products. The sales of leisure products are also affected by changes in the economy and consumer tastes, and sporting goods and recreational products face competition from other leisure activities.

K2’s Marine and Outdoor segment products are, in most instances, subject to price competition, ranging from moderate in marine antennas and monofilament line to intense for commodity-type products. Many of K2’s marine and outdoor competitors have greater financial and other resources than K2.

Certain K2 businesses are highly seasonal

Certain K2 businesses are highly seasonal. Historically, certain of K2’s businesses, such as fishing tackle and water sports products, baseball and softball, skis and snowboards, winter apparel, bikes, and in-line skates have experienced seasonal swings in their businesses. This seasonality impacts K2’s working capital requirements and hence overall financing needs. In addition, K2’s borrowing capacity under the revolving credit facility is impacted by the seasonal change in receivables and inventory. The seasonality of K2’s businesses has also led to higher income levels in the second half of the year compared to the first half of the year.

14

A large portion of K2’s sales are to sporting goods retailers. Many of K2’s smaller retailers and some larger retailers are not strongly capitalized. Adverse conditions in the sporting goods retail industry can adversely impact the ability of retailers to purchase K2 products, or could lead retailers to request credit terms that would adversely affect K2’s cash flow and involve significant risks of nonpayment.

Purchasing decisions made by a small number of large format sporting goods retailers can have a significant impact on K2’s results.

Although the sporting goods manufacturing industry is highly fragmented, many of the retail customers that purchase sporting goods are highly concentrated. Large format sporting goods retailers are important to K2’s results of operations, and Wal-Mart accounted for approximately 15% of K2’s net sales for the year ended December 31, 2005. Due to their size, these retailers may demand better prices and terms from K2, and these demands may have an adverse impact on K2’s margins. In addition, if any of these large format sporting goods retailers were to decide to materially reduce the amounts or types of K2 products that they purchase, such decision would have a material adverse impact on K2’s business, financial condition, results of operations and prospects.

Changing consumer tastes and styles as well as adverse economic developments could harm K2’s business.

Consumer demand for recreational products is strongly influenced by matters of taste and style. K2 cannot assure you that K2 will successfully develop new products to address new or shifting consumer demand. An unexpected change in consumer tastes or product demand could seriously harm K2’s business. K2’s inability to timely and successfully respond to developments and changing styles could hurt its competitive position or render its products noncompetitive.

K2 cannot assure you that demand for its products will remain constant. The sales of leisure products are affected by changes in the economy and consumer tastes, both of which are difficult to predict. Continued adverse developments affecting economies throughout the world, including a general tightening of the availability of credit, increasing energy costs, declining consumer confidence and significant declines in the stock market could lead to a further reduction in discretionary spending for K2’s products.

K2’s financial results vary from quarter to quarter, which could hurt K2’s business and the market price of its stock.

Various factors affect K2’s quarterly operating results and some of them are not within K2’s control. They include, among others:

• weather and snow conditions;

• the timing and introduction of new products;

• the mix of products sold;

• the timing of significant orders from and shipments to customers;

• product pricing and discounts;

• the timing of its acquisitions of other companies and businesses; and

• general economic conditions.

These and other factors are likely to cause financial results of K2 to fluctuate from quarter to quarter. The trading price of K2 common stock could decline dramatically. Based on the foregoing, K2 believes that quarter-to-quarter comparisons of its results of operations may not be meaningful. Therefore, purchasers of K2 common stock should not view K2’s historical results of operations as reliable indications of its future performance.

15

K2 may not be able to attract or retain the management employees necessary to remain competitive in its industry; the loss of one or more of K2’s key personnel, including Mr. Richard J. Heckmann, Chairman and Chief Executive Officer of K2, and J. Wayne Merck, President and Chief Operating Officer, could have a material adverse effect on K2’s business, financial condition, results of operations and prospects.

K2’s continued success depends on the retention, recruitment and continued contributions of K2’s key management, finance, marketing and staff personnel, many of whom would be difficult or impossible to replace. The competition for qualified personnel is intense. K2 cannot assure you that it will be able to retain its current personnel or recruit the key personnel it requires. Specifically, Mr. Richard J. Heckmann, K2’s Chairman and Chief Executive Officer, has been fundamental to developing K2’s growth strategy and, without his services, K2’s implementation of its growth strategy might fail. The loss of services of members of K2’s key personnel, including Mr. Heckmann and Mr. Merck, could have a material adverse effect on K2’s business, financial condition, results of operations and prospects.

International operations, unfavorable political developments, natural disasters and weak foreign economies may seriously harm K2’s financial condition.

K2’s business is dependent on international trade, both for sales of finished goods and low-cost manufacturing and sourcing of products. K2’s three principal markets are North America, Europe and Asia. K2’s revenues from international operations were approximately 27.2% of K2’s sales for the year ended December 31, 2005. K2 expects that its revenues from international operations will continue to account for a significant portion of its total revenues. Any political developments adversely affecting trade with Europe or Asia (especially China) or a natural disaster to any of K2’s facilities therein could severely impact K2’s business, financial condition, results of operations and prospects. K2’s international operations are subject to a variety of risks, including:

• recessions in foreign economies;

• the adoption and expansion of trade restrictions;

• limitations on repatriation of earnings;

• reduced protection of intellectual property rights in some countries;

• longer receivables collection periods and greater difficulty in collecting accounts receivable;

• difficulties in staffing and managing foreign operations;

• social, political and economic instability;

• unexpected changes in regulatory requirements;

• acts of war and terrorism;

• ability to finance foreign operations;

• changes in consumer tastes and trends;

• natural disasters or other crises, such as the outbreak of Severe Acute Respiratory Syndrome (“SARS”) and Avian “bird” flu;

• tariffs and other trade barriers;

• U.S. government licensing requirements for export; and

• currency conversion risks and currency fluctuations, including the potential revaluation of the Chinese Renminbi (“Yuan”).

In addition, K2 will continue to outsource a number of its supply contracts to entities in foreign nations and will continue to be highly reliant on overseas manufacturing. Specifically, K2 maintains significant manufacturing capacity in China and Costa Rica. Political or economic developments adversely affecting the operation of these facilities could result in late deliveries, lower sales and earnings, and unanticipated costs.

16

Significant price volatility or interruptions in supply of K2’s raw materials may result in increased costs that it may be unable to pass on to customers, which could reduce profitability.

The prices of the raw materials, such as resin-based products, steel and aluminum, that K2 purchases from third parties are cyclical and volatile. K2 purchases a substantial portion of these raw materials from third party suppliers, and the cost of these raw materials represents a substantial portion of our cost of products sold. In recent periods, K2 has experienced significantly higher crude oil prices, which have resulted in increased prices for resin-based products. In addition, the fluctuations of supply and demand for raw materials have led to increased price volatility.

Although K2 frequently enters into supply agreements to acquire these raw materials, these agreements typically provide for market based pricing and provide K2 only limited protection against price volatility. While K2 attempts to match cost increases with corresponding product price increases, K2 is not always able to raise product prices immediately or at all. Timing differences between raw material prices, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, have had and may continue to have a negative effect on profitability. If any of K2’s suppliers is unable to meet its obligations under present supply agreements, K2 may be forced to pay higher prices to obtain the necessary raw materials from other sources, and K2 may not be able to increase prices for finished products to recoup the higher raw materials cost. In addition, if any of the raw materials that K2 uses becomes unavailable within the geographic area from which they are now sourced, then K2 may not be able to obtain cost-effective substitutes. Any underlying cost increase that K2 is not able to pass on to customers or any interruption in supply of raw materials could increase K2’s costs or decrease revenues, which could reduce profitability.

K2 may be required to recognize future intangible impairment charges.

Pursuant to U.S. Generally Accepted Accounting Principles (“GAAP”), K2 is required to test its goodwill and other indefinite-lived intangible assets to determine if they are impaired. Such tests are required to be done annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value the asset below its carrying amount. Disruptions to K2’s business, protracted economic weakness, unexpected significant declines in operating results of reporting units, and market capitalization declines may result in additional charges for goodwill and other intangible asset impairments. Future impairment charges could substantially affect K2’s reported earnings in the periods of such charges. In addition, such charges would further reduce K2’s ability to make cash dividends, investments, stock repurchases and early payment of debt subordinated to K2’s 7.375% senior notes due July 2014 because of restrictions set forth in K2’s indenture governing such notes.

Changes in currency exchange rates could affect K2’s revenues.

A significant portion of K2’s production and approximately 25% of K2’s sales for the year ended December 31, 2005 are denominated in foreign currencies and are subject to exchange rate fluctuation risk. Although K2 engages in some hedging activities to reduce foreign exchange transaction risk, changes in the exchange rates between the U.S. dollar and the currencies of Europe and Asia could make K2 products less competitive in foreign markets, and could reduce the sales and earnings represented by foreign currencies. Additionally, such fluctuation could result in an increase in cost of products sold in foreign markets reducing margins and earnings.

Acts of war or terrorism may have an adverse effect on K2’s business.

Acts of war or terrorism may have an adverse effect on the economy generally, and more specifically on K2’s business, financial condition, results of operations and prospects. Among various other risks, such occurrences have the potential to significantly decrease consumer spending on leisure products and activities, adversely impact K2’s ability to consummate future debt or equity financings and negatively affect K2’s ability to manufacture, source and deliver low-cost goods in a timely manner.

17

K2 is subject to and may incur liabilities under various environmental laws.

K2 is subject to federal, state, local and foreign laws and regulations that govern activities that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal of and exposure to hazardous substances. In that regard, K2 has been and could be subject to claims and inquiries related to alleged substances in K2’s products that may be subject to notice requirements or exposure limitations, particularly in California, which may result in fines and penalties. K2 is also subject to laws and regulations that impose liability for cost and damages resulting from past disposals or other releases of hazardous substances. For example, K2 may incur liability under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and similar laws, some of which impose strict, and in some cases, joint and several, liability for the cleanup of contamination resulting from past disposals of waste, including disposal at off-site locations. K2 is currently aware of matters involving discharge of hazardous materials at old waste sites in South Carolina and Michigan. At December 31, 2005 and 2004, K2 had recorded an estimated liability of approximately $800,000 for environmental matters. In addition, K2 has acquired and intends to continue to acquire pre-existing businesses, such as Rawlings, Völkl, Marker and Marmot, that have historical and ongoing operations, and K2 has limited information about the environmental condition of the properties of such companies. It is possible that soil and groundwater contamination may exist on these or other of K2’s properties resulting from current or former operations. Although K2 is not aware of any issues arising under current environmental laws that would be reasonably likely to have a material adverse effect on K2’s business, financial condition, results of operations, or prospects, K2 cannot assure you that such matters will not have such an impact.

Unfavorable weather can adversely affect K2’s sales.

Sales of K2’s sporting goods and recreational products are strongly influenced by the weather. For example, poor snow conditions in the winter or summer conditions unfavorable to outdoor sports can adversely affect sales of important K2 products.

K2 is subject to and may incur liabilities under various tax laws.

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 an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense would result. K2 has established a valuation allowance against certain of its deferred tax assets in each jurisdiction where it can not conclude that it is more likely than not that such assets will be realized. If actual results are less favorable than those projected by management, additional income tax expense could be required.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

18

ITEM 2. PROPERTIES

The table below provides information with respect to the principal production and distribution facilities utilized by K2 for operations as of December 31, 2005.

		Owned Facilities		Leased Facilities
		No. of Locations	Square Footage	No. of Locations	Square Footage
Location	Type of Facility
Marine Outdoor
Minnesota	Distribution and production	1	278,000	5	335,000
South Carolina	Distribution and production	2	400,000	2	130,000
North Carolina	Distribution and production	—	—	1	50,000
Texas	Production	—	—	1	19,000
Foreign	Distribution and production	2	48,000	8	2,318,000
		5	726,000	17	2,852,000
Action Sports
Arkansas	Distribution	1	14,000	—	—
California	Distribution and production	—	—	2	76,000
Missouri	Distribution and production	—	—	3	322,000
New Hampshire	Distribution	—	—	2	48,000
Vermont	Distribution and production	—	—	1	3,000
Utah	Distribution	—	—	1	1,000
Washington	Distribution and production	1	165,000	1	146,000
Foreign	Distribution and production	3	226,000	24	318,000
		5	405,000	34	914,000
Team Sports
Alabama	Distribution	2	412,000	1	1,000
California	Distribution and production	—	—	5	128,000
Connecticut	Distribution and production	—	—	1	1,000
Minnesota	Distribution and production	—	—	5	35,000
Missouri	Distribution and production	—	—	3	502,000
New York	Production	3	83,000	1	27,000
Pennsylvania	Distribution	—	—	1	7,000
Tennessee	Distribution and production	4	253,000	—	—
Foreign	Distribution and production	1	70,000	1	34,000
		10	818,000	18	735,000
Apparel and Footwear
California	Distribution and production	—	—	4	131,000
Oregon	Distribution and production	—	—	1	1,000
Nevada	Distribution and production	—	—	1	158,000
Utah	Distribution and production	—	—	1	30,000
Washington	Distribution and production	—	—	4	55,000
Foreign	Distribution	—	—	3	4,000
		—	—	14	379,000

19

In March 2005, the corporate headquarters of K2 relocated to approximately 77,000 square feet of leased office space in Carlsbad, California. The terms of K2’s leases range from one to nineteen years, and many are renewable.

K2 believes, in general, its plants and equipment are adequately maintained, in good operating condition and are adequate for K2’s present needs. K2 regularly upgrades and modernizes its facilities and equipment and expands its facilities to meet production and distribution requirements.

ITEM 3. 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 is 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 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. 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

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 December 31, 2005 and 2004, 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 financial statements or its operations going forward.

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 December 31, 2005, K2 continues to be a defendant or co-defendant in approximately 90 single family residential EIFS cases, the majority of which are pending in Alabama and Texas. K2 is also

20

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.

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, although such insurance carriers have issued “reservation of rights” letters in respect of certain claims and lawsuits. Although K2’s claims experience 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 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 assuming a judgment is entered for this amount. Based on the agreement with its insurer to indemnify K2 on all claims as well as adequate insurance coverage and 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, results of operations or financial condition.

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 and product 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.

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

21

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 filed a motion to recover approximately $0.6 million in attorney’s fees and costs – this motion is currently pending. Following the verdict, K2 established in the second quarter 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. The only matter that remains open for the Missouri District Court is the licensee’s motion for approximately $0.6 million for its attorneys’ fees and costs. Accordingly, there is currently a judgment against K2 and Rawlings for approximately $6.8 million.

K2 intends 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 will be 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 take 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 seeking to enjoin Miken from continuing to manufacture certain bats and seeks damages for all past alleged infringements of its patent.

In July 2004, the Minnesota Court issued an order interpreting certain of Wilson’s claims concerning its patent, and this interpretation appears to be favorable to K2 and Miken. And, based on this favorable ruling, Miken moved for summary judgment, on which the Minnesota Court still has not ruled. Then, on March 17, 2005, the Minnesota District 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 similar patent issues as those in Miken Composites, L.L.C. v. Wilson Sporting Goods Co.

Each of K2 and Miken has denied all material allegations and asserted various affirmative defenses in respect to Wilson’s counterclaims. The resolution of this matter will depend primarily upon contested facts, and cannot be accurately predicted. Although each of K2 and Miken believes that it has significant defenses to Wilson’s counterclaims, in the event that K2 and Miken are unsuccessful in the declaratory judgment and counterclaim actions, K2 will be required to record an expense in the period when the loss resulting from the resolution of the matter is probable and estimable, and may be enjoined from sales of the accused softball bats. The litigation process for this case, including any appeals, is estimated to be two to three years.

22

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

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Principal Markets and Holders

K2’s common stock is listed on the New York Stock Exchange and the Pacific Stock Exchange under the symbol “KTO.” At February 28, 2006, there were 3,256 holders of record of common stock of K2.

Common Stock Prices

The following table sets forth, for the quarters indicated, the reported high, low and closing sales prices of K2’s Common Stock, as reported by the New York Stock Exchange during K2’s two most recent fiscal years.

	Stock Prices
	High		Low		Close
2005
Fourth	$	11.50	$	8.81	$	9.96
Third		13.64		11.17		11.51
Second		13.90		11.34		12.61
First		15.88		12.73		13.44
2004
Fourth	$	17.25	$	14.29	$	15.88
Third		15.23		12.74		14.31
Second		16.92		13.60		15.70
First		18.50		15.13		16.03

Equity Compensation Plan Information

Information regarding K2’s equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, is set forth in the section entitled “Equity Compensation Plan Information” in K2’s Notice of Annual Meeting of Shareholders and Proxy Statement, to be filed within 120 days after K2’s fiscal year end of December 31, 2005 (the “Proxy Statement”), which information is incorporated herein by reference.

Dividends

K2 has paid no cash dividends since May 1999 nor does K2 anticipate paying any cash dividends in the foreseeable future. Under K2’s Amended and Restated Credit Facility, K2 is limited to the amount of dividends that it may issue. On the date of the issuance, K2 must not be in default, as defined by the Amended and Restated Credit Facility, and its unused availability must be equal to or greater than $50.0 million on each day for the 180 days proceeding and following the date of issuance. If such unused availability is less than $50.0 million, K2’s limit on cash dividends is $5.0 million per year. In addition, K2’s indenture governing its 7.375% senior notes due July 2014 contains certain restrictions concerning cash dividends. See Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Sources of Capital, and Note 6 of Notes to Consolidated Financial Statements for further description of K2’s credit facilities and senior note indenture.

23

Purchases of Equity Securities by the Issuer

K2 has an ongoing authorization, as amended, from the Board of Directors to repurchase shares of K2’s common stock or securities convertible into such stock in the open market or negotiated transactions. K2’s authorization is for up to $50 million of shares of common stock or securities convertible into such stock, subject to, among other things, the Company’s financing agreements including its credit facilities and its indenture governing its senior notes. K2 does not generally purchase stock during the “quiet periods” it has established in advance of its quarterly earnings release. In connection with an escrow arrangement related to the acquisition of Marmot in 2004, K2 canceled 15,906 shares of its stock during 2005 at par value that were held in escrow.

Transfer Agent, Registrar and Dividend Disbursing Agent for Common Stock

K2’s Transfer Agent, Registrar and Dividend Disbursing Agent for Common Stock is:

Computershare Trust Co., Inc.

350 Indiana Street

Suite 800

Golden, Colorado 80401

ITEM 6. SELECTED FINANCIAL DATA

	Year Ended December 31
	2005			2004			2003			2002			2001 (a)
	(Thousands, except per share figures)
Statement of Operations Data:
Net sales	$	1,313,598		$	1,200,727		$	718,539		$	582,159		$	589,519
Cost of products sold		861,955			800,678			498,620			411,620			429,338
Gross profit		451,643			400,049			219,919			170,539			160,181
Selling expenses		230,413			197,134			116,509			86,394			103,688
General and administrative expenses		147,076			121,895			71,358			56,862			55,212
Non-cash intangible impairment charges (b)		253,154			—			—			—			—
Operating income (loss)		(179,000	)		81,020			32,052			27,283			1,281
Interest expense		30,352			21,449			9,950			8,966			13,631
Debt extinguishment costs (c)		—			—			6,745			—			—
Other income, net (d)		(2,840	)		(246	)		(2,218	)		(253	)		(375	)
Income (loss) from operations
before provision (credit) for income taxes		(206,512	)		59,817			17,575			18,570			(11,975	)
Provision (credit) for income taxes		5,049			20,876			6,151			6,500			(4,271	)
Net Income (loss)	$	(211,561	)	$	38,941		$	11,424		$	12,070		$	(7,704	)
Basic earnings (loss) per share of Common Stock:
Net income (loss)	$	(4.57	)	$	0.97		$	0.46		$	0.67		$	(0.43	)
Diluted earnings (loss) per share of Common Stock:
Net income (loss)	$	(4.57	)	$	0.86		$	0.44		$	0.67		$	(0.43	)
Basic shares outstanding of Common Stock		46,272			40,285			24,958			17,941			17,940
Diluted shares outstanding of Common Stock (e)		46,272			49,345			28,750			17,994			17,940
Balance Sheet Data: (f)
Total current assets	$	778,216		$	773,156		$	525,532		$	323,924		$	307,175
Total assets		1,190,576			1,456,365			871,871			438,410			423,400
Total current liabilities		308,788			349,175			254,761			115,302			99,422
Long-term obligations		379,720			349,347			133,261			73,007			97,828
Total debt plus off-balance sheet financing facility (g)		437,281			415,911			216,138			96,120			160,557
Shareholders’ equity		454,024			682,866			434,040			231,296			214,657

24

(a) Operating income and net loss include downsizing costs totaling $18.0 million ($11.7 million net of taxes) of which $15.7 million was charged to cost of products sold and $2.3 million was charged to general and administrative expenses.

(b) For 2005, K2 recorded a $253.2 million non-cash intangible impairment charge as a result of our annual impairment testing of goodwill and other indefinite-lived intangible assets. See Note 5 to Notes Consolidated Financial Statements.

(c) For 2003, amount includes $4.7 million of a make-whole premium and $2.0 million for the write-off of capitalized debt costs.

(d) For 2004 and 2003, other income includes a $0.2 million and $2.2 million gain related to the sale of the composite utility and decorative light pole product lines, respectively. See Note 3 to Notes Consolidated Financial Statements.

(e) For 2004 and 2003, diluted shares of common stock outstanding include the dilutive impact of stock options and warrants and the assumed conversion of convertible subordinated debentures. See Note 13 to Notes to Consolidated Financial Statements.

(f) For 2004 and 2003, the increase in balance sheet data, including total current assets, total assets, total current liabilities, long-term obligations, total debt plus off-balance sheet financing facility and shareholders’ equity was primarily attributable to K2’s acquisition activities during 2004 and 2003. See Note 2 to Notes to Consolidated Financial Statements.

(g) Year 2001 includes debt related to an accounts receivable securitization facility that qualified for off-balance sheet treatment.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in connection with the other sections of this Annual Report on Form 10-K, including Part I, “Item 1: Business”; Part II, “Item 6: Selected Financial Data”; and Part II, “Item 8: Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on K2’s current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in Part I, “Item 1A: Risk Factors”. K2’s actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any future divestitures, mergers, acquisitions or other business combinations.

K2 Inc. 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 and Miken in the Team Sports segment; K2, Völkl, Marker, Ride and Brass Eagle 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. The Marine and Outdoor segment represented $392.2 million, or 29.9%, of K2’s 2005 consolidated net sales, the Action Sports segment represented $482.5 million, or 36.7% of 2005 consolidated net sales, the Team Sports segment had net sales of $265.2 million, or 20.2% of 2005 consolidated net sales and the Apparel and Footwear segment had net sales of $173.7 million, or 13.2% of 2005 consolidated net sales.

Overview

K2 believes that in 2005 the sporting goods market experienced a continuation of the trends of the past few years. First, the sporting goods market experienced very modest growth in wholesales sales. Second, there was a growing influence of large format sporting goods retailers and retailer buying groups as well as the consolidation of certain sporting goods retailers worldwide, all of which has resulted in a consolidation of sporting goods suppliers. Based on these market trends, K2 believes that the most successful sporting goods suppliers will be those with greater financial and other resources, including those with the ability to produce or source high-quality, low cost products and deliver these products on a timely basis, to invest in product development projects and the ability to access distribution channels with a broad array of products and brands. In addition, as the

25

influence of large sporting goods retailers grows, K2 believes that these retailers will prefer to rely on fewer and larger sporting goods suppliers to help them manage the supply of products and the allocation of shelf space.

As a result of these market trends, K2 has embarked upon a program to leverage its existing operations and to complement and diversify its product offerings within the sporting goods and recreational products industries. K2 intends to implement its internal growth strategy by continuing to improve operating efficiencies, extending its product offerings through new product launches and maximizing its extensive distribution channels. In addition, K2 will continue to seek strategic acquisitions of other sporting goods companies with well-established brands and complementary distribution channels.

Net sales for 2005 improved 9.4% to $1.3 billion from $1.2 billion in 2004, which was up 67.1% to $1.2 billion from $718.5 million in 2003, primarily due to the acquisitions K2 completed during 2003, 2004 and 2005, as well as organic growth from most of K2’s existing brands. Gross profit percentage improved to 34.4% in 2005 from 33.3% in 2004 and 30.6% in 2003 primarily as the result of a more favorable product mix resulting from K2’s acquisitions, fewer close-out sales and continued reduced product costs associated with the China manufacturing facility. Operating loss for 2005 was $179.0 million, or (13.6%) of net sales, compared to operating income of $81.0 million, or 6.7% of net sales in 2004 and $32.1 million, or 4.5% of net sales, in 2003. The decrease was largely due to the recording of a $253.2 million non-cash intangible charge as a result of our annual testing of goodwill and other indefinite-lived intangible assets (see Note 5 to Notes to the Consolidated Financial Statements), decrease in sales of paintball products and increased other selling and general and administrative expenses, partially offset by higher sales volume and an improvement in gross profit percentage. The increase in selling, general and administrative expenses in dollars and as a percentage of sales for 2005 was primarily attributable to higher sales growth and to the seasonality associated with the acquisitions of Marmot, Völkl and Marker in mid 2004. These acquired companies have higher selling, general and administrative expenses as a percentage of net sales in the first and second quarters of the year due to lower sales volume as compared to the third and fourth quarters.

During 2005 and 2004, K2 made significant progress towards achieving its strategic objectives as follows:

• K2 completed two acquisitions during 2005, including the following:

• Acquisition of substantially all of the assets of Hodgman, Inc., a business engaged in the design, selling and distribution of hunting and fishing waders, and

• Acquisition of JRC Products Limited, a business engaged in the design, selling and distribution of fishing tackle products.

• K2 completed nine acquisitions during 2004, including the following:

• Acquisition in a stock-for-stock exchange offer/merger transaction of Fotoball USA, Inc. (later renamed K2 Licensed Products, Inc.), a marketer and manufacturer of souvenir and promotional products, principally for team sports;

• Acquisition of substantially all of the assets of Worr Games, businesses engaged in the design, manufacturing, selling and distribution of paintball markers and paintball-related products and accessories;

• Acquisition of substantially all of the assets of IPI Innovations, Inc., a business engaged in the design, manufacturing, selling and distribution of gun and bow mounting systems, and other products and accessories for all-terrain vehicles;

• Acquisition of Ex Officio, a division of The Orvis Company, Inc., a business engaged in the design, manufacture, selling and distribution of high-end travel, adventure and outdoor clothing and accessories;

• Acquisition of Marmot, a leader in the premium technical outdoor apparel and equipment market;

• Acquisitions of Völkl and Marker: Völkl is a well established and recognized brand in the worldwide alpine ski market and Marker has gained worldwide recognition for its patented ski-bindings; and

26

• Acquisition of substantially all of the assets of Miken Composites LLC, a business engaged in the design, manufacturing, selling and distribution of composite softball bats and softball-related products and accessories.

• The newly acquired brands along with K2’s existing brands have allowed K2 to aggregate its brand strength in complementary distribution channels in a consolidating industry characterized by large format sporting goods retailers and retail buying groups.

• The newly acquired brands have helped K2 strengthen its customer relationships.

• K2 has continued to leverage its China manufacturing and Asian product sourcing capabilities. In the past two years, K2 increased the capacity of its China operations and increased the size of its sourcing group to accommodate the product needs of its acquisitions and existing companies.

• K2 introduced a number of new products during 2004 and 2005 in the sporting goods markets as a means to drive organic growth.

• K2 continued to focus on cost reduction initiatives by relocating the manufacturing of K2 branded products to K2’s China facilities.

• K2 established the K2 Merchandising group to improve the marketing of K2 products and strengthen K2’s relationships with its retailers.

• K2 completed a restructuring of its debt and equity through the private placement of $200.0 million of senior notes in July 2004, the replacement of K2’s revolving credit facility with an amended and restated revolving credit facility of $250.0 million in July 2004 (which was amended and restated in February 2006 to extend the maturity to 2011 with reduced pricing and increased flexibility), and the public offering of $99.2 million of common stock in 2004. These new sources of capital replaced higher interest borrowings and provided K2 more opportunity and flexibility to make progress towards its strategic objectives.

Matters Affecting Comparability

Operating Segments.    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 and K2 Licensed Products. The Action Sports segment includes skis, bindings, snowboards, snowshoes, in-line skates and paintball products. The Apparel and Footwear segment includes skateboard shoes and apparel, technical apparel and equipment and outdoor and adventure travel apparel.

Acquisitions.    The consolidated statements of operations for 2005 include the operating results of each of the businesses acquired in 2004, however the 2004 results include less than a full twelve months of results of K2 Licensed Products, which was acquired by K2 on January 23, 2004, Worr Games and IPI, both of which were acquired by K2 on April 19, 2004, Ex Officio, which was acquired by K2 on May 12, 2004, Marmot, which was acquired by K2 on June 30, 2004 and Völkl and Marker, both of which were acquired on July 7, 2004.

Net sales from acquisitions completed by K2 on or subsequent to December 31, 2004 accounted for $15.1 million of net sales for 2005. Net sales for the period from January 1, 2005 through the earlier of the one year anniversary date of acquisition or December 31, 2005 for acquisitions completed by K2 in 2004 and 2005 which either did not have operations in 2004 or which did not have a full twelve months of operations in 2004 accounted for $102.7 million of net sales for 2005. For further discussion of K2’s acquisition activities see Note 2 of the Notes to Consolidated Financial Statements.

Divestiture.    On May 27, 2003, K2 completed the sale of the assets of its composite utility and decorative light poles and related product lines (the “Division”) to a subsidiary of Genlyte Thomas Group LLC. The Division was sold for approximately $20.1 million in cash and the assumption of certain liabilities by the buyer. During 2004 and 2003, K2 recorded a gain on sale of the Division of $0.2 million and $2.2 million, respectively, which included a reserve in respect of the estimated costs of disposal and amounts related to the retention of certain liabilities by K2.

27

Debt Extinguishment Costs.    K2’s operating results for 2003 include approximately $6.7 million of debt extinguishment costs in conjunction with K2’s debt refinancing activities in March 2003. K2 expensed approximately $2.0 million ($1.3 million, or $0.05 per diluted share, after tax) of capitalized debt costs related to the payoff of the amounts outstanding under its existing debt facilities, and an additional $4.7 million ($3.1 million, or $0.11 per diluted share, after tax) was paid in cash and expensed for a make-whole premium related to the prepayment of K2’s $200 million of senior notes.

Consolidated Results of Operations

The following table sets forth selected financial data and certain ratios and relationships calculated from the Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003:

										2005 vs. 2004 Increase/(Decrease)					2004 vs. 2003 Increase/(Decrease)
	2005			2004			2003			$			%		$		%
Net sales	$	1,313.6		$	1,200.7		$	718.5		$	112.9		9.4%		$	482.2	67.1%
Gross profit		451.6			400.0			219.9			51.6		12.9%			180.1	81.9%
Operating income (loss) (a)		(179.0	)		81.0			32.1			(260.0	)	(321.0%	)		48.9	152.3%
Net income (loss) (b)		(211.6	)		38.9			11.4			(250.5	)	(644.0%	)		27.5	241.2%
Diluted earnings (loss) per share	$	(4.57	)	$	0.86		$	0.44		$	(5.43	)	(631.4%	)	$	0.42	95.5%
Expressed as a percentage of net sales:
Gross margin (c)		34.4	%		33.3	%		30.6	%
Selling, general and administrative expense		28.7	%		26.6	%		26.2	%
Non-cash intangible charges		19.3	%		0.0	%		0.0	%
Operating margin (d)		-13.6	%		6.7	%		4.5	%

(a) Operating loss for 2005 includes $253.2 million in non-cash intangible charges as discussed in Note 5 in the Notes to Consolidated Financial Statements.

(b) Net income for 2003 includes $6.7 million ($4.4 million net of taxes) for debt extinguishment costs as discussed in Matters Affecting Comparability above.

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

(d) Operating Margin is defined as operating income (loss) divided by net sales as presented in the Consolidated Statements of Operations.

Downsizing and Restructuring Activities

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.

Review of Operations: Comparison of 2005 to 2004

Net sales increased to $1.3 billion from $1.2 billion in the prior year. Net loss was $211.6 million, or ($4.57) per diluted share, as compared to net income of $38.9 million, or $0.86 per diluted share, in the prior year. The 2005 net loss includes a non-cash intangible charge of $243.0 million, net of taxes.

Net Sales.    In the Marine and Outdoor segment, net sales increased to $392.2 million in 2005 as compared with $336.9 million in 2004. The overall improvement in net sales during 2005 resulted from increased sales of

28

Shakespeare fishing tackle products of $28.3 million, higher sales of Stearns products of $33.0 million, including new sales of Sospenders flotation devices, which was acquired in the fourth quarter of 2004 and new sales of Hodgman wader products, which was acquired in the second quarter of 2005, partially offset by lower sales of Shakespeare monofilament products of $6.0 million. The increase in sales of Shakespeare fishing tackle products reflected growth in the sales of Pflueger reels, kits and combos, fish line, military antennas and new sales of All-Star rods, which was acquired in the second quarter of 2004. Increased sales of Stearns outdoor products reflected higher demand for children’s flotation products, water-ski vests, inflatables, rainwear and ATV accessories.

In the Action Sports segment, net sales decreased to $482.5 million as compared to $502.7 million in 2004. The decrease is primarily the result of lower sales of paintball products of $24.2 million, snowboards of $15.7 million, in-line skates of $11.7 million and bikes of $4.4 million, which was licensed in the third quarter of 2005, partially offset by the acquisitions of Völkl and Marker in July 2004 and the increase in net sales of K2 skis of $14.6 million. The decline in sales of paintball products, snowboards and in-line skates reflects soft consumer demand in the industry. In the event that consumer demand continues to remain soft for paintball products, this could have a significant negative impact on net sales, gross profits and operating income in future periods for the Action Sports segment.

Net sales of the Team Sports segment improved to $265.2 million for 2005 as compared to $250.4 million in 2004. The improvement was due to new sales of Miken softball bats, which was acquired in the fourth quarter of 2004 and higher sales of baseballs of $5.2 million, gloves of $2.4 million and team apparel of $1.5 million, partially offset by lower sales of Worth metal softball bats of $2.5 million, Rawlings basketballs of $1.7 million and K2 Licensed Products of $0.8 million.

Net sales of the Apparel and Footwear segment improved to $173.7 million in 2005 as compared to $110.7 million in 2004. The increase in net sales from 2004 is the result of the acquisitions of Ex Officio in May 2004 and Marmot on June 30, 2004 which had combined net sales of $41.6 million for K2 in the first six months of 2005, as well as higher sales of skateboard shoes and apparel of $19.8 million. The increase in sales of skateboard shoes and apparel was mainly due to increased sales of Adio branded product.

K2’s international operations (operating locations outside of the United States) represented $357.8 million, or 27.2% of K2’s consolidated net sales in 2005 as compared to $329.6 million, or 27.5% of K2’s consolidated net sales for 2004. The increase in net sales from international operations was primarily due to the acquisitions of Marmot and Völkl and Marker in mid 2004 which had 2005 six months of net sales from international operations of $28.4 million. These increases were partially offset by lower sales of in-line skates of $10.1 million and snowboards of $2.7 million.

Gross profit.    Gross profit for 2005 was $451.6 million, or 34.4% of net sales, as compared with $400.0 million, or 33.3% of net sales in 2004. The improvement in gross profit dollars for the 2005 period was attributable to the increase in sales volume in 2005 and an increase in gross profit as a percentage of net sales. The improvement in the gross profit percentage was primarily due to higher gross margins in the Team Sports segment as compared to 2004 and higher gross margin product sales resulting from K2’s acquisitions completed during or after the 2004 second quarter, particularly the acquisitions of Marmot and Ex Officio in the Apparel and Footwear segment.

Costs and Expenses. Selling expenses for 2005 were $230.4 million, or 17.5% of net sales, as compared with $197.1 million, or 16.4% of net sales, in 2004. General and administrative expenses for 2005 were $147.1 million, or 11.2% of net sales, as compared with $121.9 million, or 10.2% of net sales, in 2004. The increase in selling expenses in dollars was attributable to the increase in sales volume for 2005 as compared to the prior year and acquisitions completed at the end of or after the 2004 second quarter by K2 which resulted in additional selling expenses of $21.5 million. The increase in selling, general and administrative expenses in dollars and as a percentage of sales for 2005 was primarily attributable to higher sales growth and to the seasonality associated with the acquisitions of Marmot, Völkl and Marker in mid 2004. These acquired companies have higher selling, general and administrative expenses as a percentage of net sales in the first and second quarters of the year due to lower sales volume as compared to the third and fourth quarters.

29

In performing K2’s annual impairment test of indefinite-lived intangible assets in accordance with Statements of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”), K2 determined that the carrying value of certain indefinite-lived intangible assets associated with its Action Sports and Team Sports segments exceeded their estimated fair values. Consequently, K2 recorded non-cash intangible impairment charges of $28.8 million. Additionally, in performing the annual testing of goodwill in accordance with SFAS No. 142, K2 determined that impairment existed for each of the following reporting units in an amount equal to the carrying value of its goodwill, or $43.2 million for Brass Eagle, $101.1 million for Action Sports and $80.1 million for Team Sports and thus recorded non-cash intangible charges for those amounts. See Note 5 in the Notes to Consolidated Financial Statements for further details.

Operating Income or Loss.    Operating loss for 2005 was $179.0 million, or (13.6%) of net sales, as compared to operating income of $81.0 million, or 6.7% of net sales, in 2004. The decrease in operating income was due to the increase in selling, general and administrative expenses as discussed above and the non-cash intangible charge of $253.2 million, partially offset by higher sales volume and gross profit in 2005 as compared to 2004.

K2’s international operations (operating locations outside of the United States) had an operating loss of $17.2 million for 2005 as compared with operating income of $38.6 million for 2004. The loss was primarily due to the non-cash intangible charge of $54.3 million related to international operations.

Interest Expense.    Interest expense was $30.4 million in 2005 as compared to $21.4 million in 2004. The increase in interest expense for 2005 was primarily attributable to higher average borrowing levels during the 2005 as compared to 2004. Borrowings on average were higher in 2005 due to borrowings made to fund acquisitions and the seasonal working capital requirements of businesses acquired during 2004. Higher inventories as expected at Stearns and Rawlings also contributed to the increased average borrowings.

Income Taxes.    During 2005, K2 had income tax expense of $5.0 million on a pre-tax loss of $206.5 million as compared to income tax expense of $20.7 million on pretax income of $59.9 million during 2004. The 2005 expense was less than the expected benefit from the pretax loss due to the impairment of goodwill which is not deductible for tax purposes. The expense was also impacted by K2 establishing a valuation allowance against certain of its deferred tax assets in each jurisdiction where it can not conclude that it is more likely than not that such assets will be realized. The resultant $5.0 million of 2005 income tax expense consists primarily of foreign taxes which were largely not affected by the impairment.

Segment information.    Total segment operating loss (before interest expense, corporate expenses, the gain on the sale of the composite utility and decorative light poles and related product lines and income taxes) was $163.4 in 2005 compared to an operating profit of $95.1 million in 2004. See Note 14, “Segment Information” in the Notes to Consolidated Financial Statements for the calculation of segment operating profit (loss).

In the Marine and Outdoor segment, operating profit improved to $50.3 million in 2005 as compared with an operating profit of $42.4 million in 2004. The increase in operating profit was mainly due to an increase in sales volume and a decrease in selling, general and administrative expenses as a percentage of net sales.

In the Action Sports segment, operating loss was $147.4 million in 2005 as compared to an operating profit of $39.3 million in 2004. The decrease was due to a non-cash intangible charge of $168.3 million, decreased sales of paintball products, snowboards, in-line skates and bikes (which business was licensed to a third party in third quarter 2005), partially offset by the acquisitions of Völkl and Marker in mid 2004 and the increase in net sales of K2 skis. Selling, general and administrative expenses also increased as a percentage of net sales largely due to the decline in paintball, and to the seasonality associated with the acquisitions of Völkl and Marker in mid 2004.

In the Team Sports segment, operating loss was $82.0 million in 2005 as compared to an operating profit of $2.4 million in 2004. The decrease was due to a non-cash intangible charge of $84.9 million, higher non-cash amortization charges of intangibles, and lower gross margins and higher selling, general and administrative expenses at K2 Licensed Products, partially offset by increased sales volume largely for the new sales for Miken bats, which was acquired in the fourth quarter of 2004 and an increase in gross profit margin as a percentage of sales.

30

In the Apparel and Footwear segment, operating profit was $15.7 million in 2005 as compared to $11.0 million in 2004. The improvement in operating profit dollars was attributable to the acquisitions of Marmot in June 2004 and Ex Officio in May 2004, which resulted in increased sales volume and higher gross margins during 2005, which included a full twelve months of operations of such acquisitions. The decline in operating profits in percentage terms is due to higher selling, general and administrative expenses due to the seasonality associated with the acquisition of Marmot in June 2004. Marmot has higher selling, general and administrative expenses as a percentage of net sales in the first and second quarters of the year due to lower sales volume as compared to the third and fourth quarters. Growth in Adio branded Apparel and Footwear sales also contributed to the increased sales volume.

Review of Operations: Comparison of 2004 to 2003

Net sales increased to $1.2 billion from $718.5 million in the prior year. Net income for 2004 was $38.9 million, or $0.86 per diluted share, as compared to net income of $11.4 million, or $0.44 per diluted share, in the prior year. Net income for 2003 included $4.4 million, or $0.15 per diluted share, in after-tax charges for early extinguishment of debt.

Net sales.    In the Marine and Outdoor segment, net sales for 2004 totaled $336.9 million as compared with $324.0 million in 2003. The 2003 year included $12.6 million of net sales related to Shakespeare’s composite utility and decorative light poles and related product lines (the “Division”). K2 sold the assets of the Division in May 2003. The overall improvement in net sales during 2004 (excluding the 2003 net sales of the Division) resulted from increased sales of Shakespeare fishing tackle products of $10.7 million, new sales of all-terrain vehicle accessory products of $5.3 million resulting from K2’s acquisition of IPI during the second quarter of 2004, higher sales of Stearns products of $6.8 million and increased sales of Shakespeare monofilament products of $2.8 million. Sales of Shakespeare fishing tackle products improved, reflecting growth in sales of Pflueger reels, marine antennas and the addition of All-Star rods in mid-2004. Increased sales of Stearns outdoor products reflected higher demand for rain gear and children’s flotation products. Sales of monofilament products improved, reflecting demand for new products in the European market.

In the Action Sports segment, net sales for 2004 were $502.7 million as compared with $247.0 million in the prior year. The increase is the result of $101.7 million and $8.3 million in net sales of paintball products and snowshoes, respectively (companies acquired in the 2003 fourth quarter), $136.4 million in net sales resulting from the acquisitions of Völkl and Markerin July 2004, and from higher sales of snowboard products of $13.0 million and K2 skis of $18.9 million. Partially offsetting these increases was a decline in sales of in-line skates and scooters of $23.9 million. The increase in snowboard sales resulted mainly from the popularity of the Ride brand, while ski sales benefited from the popularity of K2 skis in the domestic and European markets. The decline in in-line skates sales is the result of sluggish worldwide retail sales for the industry, caused by soft consumer demand.

In the Team Sports segment, net sales for 2004 were $250.4 million as compared with $116.9 million in 2003. The increase from 2003 is primarily due to the acquisitions of Rawlings at the end of the 2003 first quarter, Worth at the end of the 2003 third quarter and K2 Licensed Products in January 2004, resulting in additional net sales of $93.5 million, $27.8 million and $29.2 million, respectively.

In the Apparel and Footwear segment, net sales for 2004 were $110.7 million as compared with $30.6 million in 2003. The increase in net sales from 2003 is the result of the acquisitions of Ex Officio and Marmot in 2004 which had combined sales of $64.2 million for K2 in 2004 as well as higher sales of skateboard shoes and apparel of $15.9 million. The increase in sales of skateboard shoes and apparel reflects the strong sell through of the Adio shoe brand and an expanded retail distribution network.

K2’s international operations (operating locations outside of the U.S.) represented $329.6 million, or 27.5% of K2’s consolidated net sales for 2004 as compared to $208.9 million, or 29.1% of K2’s consolidated net sales

31

for 2003. The increase in net sales from international operations was due to the acquisitions of Völkl and Markerduring 2004 which had net sales from international operations of $97.3 million, improved ski and snowboard sales of $18.5 million and $6.9 million of higher sales of Shakespeare monofilament products in Europe, and a $16.2 million increase as the result of stronger foreign currencies relative to the U.S. dollar as compared to 2003. These improvements were partially offset by lower 2004 sales of in-line skates of $14.7 million.

Gross profit.    Gross profit for 2004 was $400.0 million, or 33.3% of net sales, as compared with $219.9 million, or 30.6% of net sales in 2003. The improvement in gross profit dollars for 2004 was attributable to the increase in 2004 sales volume and an increase in gross profit as a percentage of net sales. The improvement in the gross profit percentage was due to a more favorable product mix as compared to 2003 resulting from K2’s recent acquisitions, fewer close-out sales in the current year as compared to the prior year, as well as continued reduced products costs associated with the China manufacturing facility. These improvements were partially offset by increased raw material costs.

Costs and expenses.    Selling expenses for 2004 increased to $197.1 million, or 16.4% of net sales, as compared with $116.5 million, or 16.2% of net sales, in 2003. The increase in selling expenses was attributable to the increase in sales volume for 2004 as compared to the prior year and recent acquisitions made by K2 which resulted in additional selling expenses of $65.2 million. In addition, translated selling expenses for international locations were $3.0 million higher as a result of stronger foreign currencies relative to the U.S. dollar as compared to 2003.

General and administrative expenses for 2004 were $121.9 million, or 10.2% of net sales, compared with $71.4 million, or 9.9% of net sales, in 2003. The increase in general and administrative expenses in dollars for 2004 was primarily attributable to higher sales volume during the 2004 period and acquisitions made by K2 which resulted in additional general and administrative expenses of $35.3 million. In addition, K2 incurred higher amortization costs on intangible assets of $1.6 million as the result of K2’s acquisition activities in 2003 and 2004, and $2.1 million in higher external professional fees related to K2’s compliance with section 404 of the Sarbanes-Oxley Act. In addition, translated general and administrative expenses for international locations were $1.2 million higher as a result of stronger foreign currencies relative to the U.S. dollar as compared to 2003.

Research and development expenses increased $4.9 million, or 51.0%, to $14.5 million from $9.6 million in 2003 as the result of K2’s acquisitions during 2003 and 2004, which resulted in the inclusion of additional research and development expenses totaling $3.6 million beginning with the date of each acquisition. The remaining increase in research and development expenses was attributable to additional costs spent in the development of new products.

Operating income.    Operating income for 2004 increased to $81.0 million, or 6.7% of net sales, as compared to operating income of $32.1 million, or 4.5% of net sales, in 2003. The increase in operating income reflects higher sales volume and an improvement in gross profit percentage, partially offset by higher selling and general and administrative expenses. The improvement in operating income as a percentage of net sales was due to higher gross profits as a percentage of net sales.

K2’s international operations (for operating locations outside of the U.S.) represented $38.6 million, or 47.7% of K2’s operating income, for 2004 as compared with $13.8 million, or 43.0% of K2’s operating income for 2003. The increase in operating income from international operations during 2004 was attributable to the acquisitions of Völkl and Marker in 2004, and improved sales of skis, snowboards and monofilament products, partially offset by lower sales of in-line skates.

Interest expense.    Interest expense for 2004 increased to $21.4 million, compared with $10.0 million in 2003. The increase in interest expense for 2004 was primarily attributable to higher average borrowing levels during the entire year resulting from K2’s acquisitions during 2003 and 2004. Borrowings on average were higher during 2004 due to borrowings made to fund acquisitions and the seasonal working capital requirements of the businesses acquired during 2004 and 2003.

32

Other income, net.    Other income was $0.2 million for 2004 as compared to $2.2 million in 2003. Other income generally includes gains or losses on disposals of fixed assets and other miscellaneous income and expenses. In 2004 and 2003, other income included a $0.2 million and $2.2 million gain, respectively, on the sale of the composite utility and decorative light poles and related product lines.

Income taxes.    The effective income tax rate for 2004 was 34.9 % and for 2003 was 35.0%.

Segment information.    Total segment operating profit (before interest expense, corporate expenses, the gain on the sale of the composite utility and decorative light poles and related product lines, debt extinguishment costs and income taxes) improved to $95.1 million in 2004 from $37.9 million in 2003. See Note 14, “Segment Information” in the Notes to Consolidated Financial Statements for the calculation of segment operating profit.

In the Marine and Outdoor segment, operating profit was $42.4 million in 2004 as compared with an operating profit of $44.4 million in 2003. The 2003 year included $0.8 million of operating income related to Shakespeare’s composite utility and decorative light poles and related product lines (the “Division”). K2 sold the assets of the Division in May 2003. The remaining decline in operating profit was attributable to lower gross margins on sales of monofilament products due to an increase in raw material costs and an increase in sales of lower margin products. The acquisitions made by K2 during 2004 in this segment did not have a significant impact on operating profit during 2004.

In the Action Sports segment, operating profit was $39.3 million in 2004 as compared to an operating profit of $4.7 million in 2003. The improvement in operating profit was attributable to the acquisitions of Völkl and Marker in July 2004 and Brass Eagle in December 2003, which resulted in increased in sales volume during 2004 and higher gross margins. Partially offsetting these improvements was a $3.6 million increase in amortization expense of intangible assets and of the increase to fair market value of acquired inventories, which were a direct result of K2’s acquisitions in this segment during 2003 and 2004. K2’s other acquisition in this segment during 2004 did not have a significant impact on operating profit during 2004. The operating profit for 2004 includes the results of the acquisitions of Völkl and Marker in July 2004. Both Völkl and Marker are highly seasonal businesses that are profitable in the third and fourth quarters and normally generate losses in the first and second quarters of the year.

In the Team Sports segment, an operating profit of $2.4 million was reported in 2004 as compared to an operating loss of $12.1 million in 2003. The improvement in operating profit was attributable to a full year of operating results of Rawlings and Worth^, which were acquired by K2 in March 2003 and September 2003, respectively. In addition the acquisition of K2 Licensed Products in January 2004 contributed to the improvement in operating profit. Partially offsetting these improvements was a $1.1 million increase in amortization expense of intangible assets which was a direct result of K2’s acquisitions in this segment during 2003 and 2004. K2’s other acquisition in this segment during 2004 did not have a significant impact on operating profit during 2004.

In the Apparel and Footwear segment, operating profit was $11.0 million in 2004 as compared to an operating profit of $0.9 million in 2003. The improvement in operating profit was attributable to the acquisitions of Marmot in June 2004 and Ex Officio in May 2004, which resulted in increases sales volume and higher gross margins during 2004. In addition, operating profit generated by skateboard shoes and apparel improved due to increased sales volume and improved gross margins as the result of fewer close-out sales. Partially offsetting these improvements was a $1.5 million increase in amortization expense of intangible assets which was a direct result of K2’s acquisitions in this segment during 2004. The operating profit for 2004 includes the results of the acquisitions of Marmot in June 2004. Marmot is a highly seasonal business that is profitable in the third and fourth quarters and normally generates losses in the first and second quarters of the year.

Liquidity and Sources of Capital

Cash Flow Activity

K2’s operating activities provided $16.6 million of cash in 2005 as compared to $13.8 million during 2004. The increase in cash provided from operations during 2005 was primarily attributable to a decrease in the usage

33

of cash for accounts receivable ($11.2 million in 2005 compared to $102.7 million in 2004) partly offset by the following: an increase in inventories of $31.5 million in 2005 compared to an $8.2 million decrease in 2004; a decrease in payroll and other accrued liabilities of $12.9 million compared to an increase of $27.0 million in 2004.

Net cash used for investing activities was $51.6 million in 2005 as compared to $217.2 million during 2004. The lower use of cash in 2005 as compared to 2004 was primarily due to a decrease in cash used for acquisitions from $175.8 million in the prior year to $16.5 million in the current year.

Net cash provided by financing activities in 2005 was $21.7 million as compared with $207.4 million during 2004. The greater amount of cash provided by financing activities during 2004 was due primarily to $200.0 million of gross proceeds received from the issuance of senior notes and $93.6 million of net proceeds received from the issuance of equity.

Capital Structure and Resources

K2’s principal long-term borrowing facility is a $250.0 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 $350.0 million, subject to certain conditions, and has a $100.0 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 December 31, 2005, there were $95.3 million of borrowings outstanding under the Facility, $8.3 million of outstanding letter of credit issuances (consisting of $8.1 million of standby letters of credit and $0.2 million of trade letters of credit which expire over the next 12 months) and $145.3 million of available borrowing capacity. At December 31, 2005, K2 also had outstanding $25.0 million of 7.25% convertible subordinated debentures due March 2010, $75.0 million of 5.00% convertible senior debentures due June 2010 and $200.0 million of 7.375% senior notes due July 2014. At December 31, 2005, K2 had $43.0 million outstanding under various foreign lending arrangements.

Long-term Financial Obligations and Other Commercial Commitments

The following summarizes the outstanding borrowings, contractual obligations and long-term liabilities of K2 at December 31, 2005 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)	$	413,982	$	3,265	$	6,007	$	101,420	$	303,290
Operating leases (2)		78,972		19,237		23,376		15,438		20,921
Licensing arrangements (3)		7,097		3,901		2,876		320		—
Endorsement and sponsorship arrangements (4)		7,139		4,797		2,119		223		—
Pension contributions (5)		1,280		1,280		—		—		—
Total contractual cash obligations	$	508,470	$	32,480	$	34,378	$	117,401	$	324,211

(1) Includes principal payments contractually outstanding under K2’s lending arrangements. See Note 6 to Notes to Consolidated Financial Statements, for additional information on K2’s long-term debt obligations.

34

(2) See Note 8 to Notes to Consolidated Financial Statements for additional information on K2’s operating leases.

(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 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 December 31, 2005 (see also Note 6 to Notes of Consolidated Financial Statements):

• Outstanding borrowings of $95.3 million under its $250 million secured bank revolving credit line due February 21, 2011 with interest payments due at LIBOR plus 1.125% to 1.875% 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 $18.7 million under various foreign lending arrangements of which $3.3 million was due within one year. Interest rates on these borrowings range from 0% to 7.25%.

K2 believes that the credit available under the Facility, together with cash flow from operations, will be sufficient for K2’s business needs during 2006. 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 $200.0 million senior notes and $25.0 million convertible subordinated debentures place limitations on the incurrence of indebtedness by K2.

Off-Balance Sheet Arrangements

K2 did not enter into any off-balance sheet arrangements during 2005 or 2004, nor did K2 have any off-balance sheet arrangements outstanding at December 31, 2005 or 2004.

Environmental Matters

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 December 31, 2005 and 2004, K2 had recorded an estimated liability of approximately $800,000 for environmental liabilities. The estimates are based on K2’s share of the

35

remediation costs 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 financial statements or its operations going forward.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised), “Share-Based Payment.” SFAS No. 123 (Revised) requires that companies recognize compensation expense equal to the fair value of stock options or other share based payments. The impact on K2’s net income (loss) will include the remaining amortization of the fair value of existing options currently disclosed as pro forma expense in Note 1 and is contingent upon the number of future options granted, the selected transition method and the selection of either the Black-Scholes or the binominal lattice model for valuing options.

On April 14, 2005, the SEC adopted a new rule that amended the compliance dates of SFAS No. 123 (Revised) to require implementation no later than the beginning of the first fiscal year beginning after June 15, 2005 (the year beginning January 1, 2006 for K2). K2 is in the process of evaluating the use of certain option-pricing models as well as the assumptions to be used in such models. When such evaluation is complete, K2 will determine the transition method to use, the timing of adoption and the impact any change in valuation models might have.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle unless it is impracticable to do so. SFAS No. 154 also provides that a change in method of depreciating or amortizing long-lived non-financial assets be accounted for as a change in estimate effected by a change in accounting principle and that correction of errors in previously issued financial statements should be termed a “restatement.” SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and corrections of errors made in fiscal years beginning after June 1, 2005. K2 believes that implementing SFAS No. 154 should not have a material impact on its financial position and results of operations.

In February 2006, the FASB issued 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 and clarifies that both interest-only and principal-only strips are not subject to the provision of SFAS 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. The company is currently evaluating the provisions of SFAS No. 155 to determine the impact on its consolidated financial statements.

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.

36

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.

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.

Warranty

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.

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.

37

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 December 31, 2005. 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.

In performing its impairment test of indefinite-lived intangible assets, K2 determined that the carrying value of certain indefinite-lived intangible assets associated with its Action Sports and Team Sports segments exceeded their estimated fair values. Consequently, K2 recorded impairment charges of $28.8 million for the year ended December 31, 2005.

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

38

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.

K2 determined in accordance with SFAS No. 142 that K2’s segments meet the criteria for aggregation and therefore performed its analysis at the reporting segment level except for Brass Eagle. Brass Eagle is determined to be a component that is economically dissimilar enough to be considered a Reporting Unit under SFAS No. 142 and therefore subject to separate goodwill testing from the Marine and Outdoor, Action Sports, Team Sports and Apparel and Footwear Reporting Units. The fair value of K2’s reporting units was 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 applied to each of the income and market approaches was based on the data available and specific facts and circumstances surrounding each reporting unit.

In performing the fiscal 2005 annual test, K2 assumed an income tax rate of 35% for all reporting units and a discount rate of 11% for all reporting units, except Brass Eagle for which a 12% discount rate was assumed. K2 assumed the following long-term sales growth rates for each of the reporting units: Marine and Outdoor 0%; Action Sports 2%; Team Sports 2%; Apparel and Footwear 5%; and Brass Eagle 1%.

Because the trading value of K2’s shares indicated a level of equity market capitalization below its book value at the time of the application of the impairment test, there was indication that one or more of K2’s reporting units would fail the first step of the goodwill impairment test. In performing the first step of the goodwill impairment test, K2 determined that there was an indicator of impairment in the Brass Eagle, Action Sports and Team Sports reporting units, because the carrying value of each of these reporting units exceeded their estimated fair value. The excess of the carrying value over the estimated fair value of the Brass Eagle reporting unit was primarily due to the significant decline in the paintball market leading to lower expected future cash flows for the business. The excess of the carrying value over the estimated fair value of the Action Sports and Team Sports reporting unit was due to lower expected future cash flows for those reporting units. The lower expected cash flows have led to a larger difference in valuations between the income approach and the market approaches used to determine fair value. Due to the larger variance in valuations, K2 placed 100% weighting on the income approach valuation for the Brass Eagle, Action Sports and Team Sports reporting units compared to an equal weighting which had been used in previous years.

In performing the second step of the goodwill impairment test, K2 allocated the estimated fair values of the Brass Eagle, Action Sports and Team Sports reporting units determined in step one of the impairment test, to the assets and liabilities of the respective reporting unit in accordance with SFAS No. 141 “Business Combinations.” K2 measured the impairment for each of the reporting units to be equal to the carrying value of its goodwill, or $43.2 million for Brass Eagle, $101.1 million for Action Sports and $80.1 million for Team Sports.

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

39

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.

At December 31, 2005, K2 believes that it was in compliance with all of its requirements under its debt agreements.

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 Statement No. 109, net deferred tax assets are reduced by a valuation allowance if, based on all the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The amount of deferred tax assets considered realizable was determined based on (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. K2 has established a valuation allowance against its deferred tax assets in each jurisdiction where it can not conclude that it is more likely than not that such assets will be realized. In the event that actual results differ from these estimates or we adjust these estimates in future periods, K2 may need to establish an additional valuation allowance which would result in an increase to 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. 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

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 domestic pension plan (the “K2 Pension Plan”) was amended to freeze the accrual of future benefits for all of the employees, except for about 20 employees subject to a collective bargaining agreement. 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. Such employees subject to a collective bargaining agreement will continue to accrue a benefit until September 16, 2006. The impact of this plan change on K2’s benefit costs is a one-time recognized curtailment loss of $0.4 million in the 2004 third quarter. The impact on future benefit costs is the elimination of the service cost and an $8.0 million reduction of the projected benefit obligation for future pay increases. This plan change has further resulted in an estimated reduction in net periodic pension costs for the 2005 year of $2.8 million.

K2 also has a pension plan which covered certain employees of the Simplex Building Products division which K2 sold in 2000. This plan is referred to as the “Simplex UAW Pension Plan.” This plan was merged with the “K2 Pension Plan” as of December 31, 2005. The disclosures that follow also include this plan as of December 31, 2004.

40

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

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.

As of December 31, 2005, K2’s assumption related to the discount rate was 5.67% as of December 31, 2005 compared to 5.75% as of December 31, 2004. The expected return on assets assumption for 2005 and 2004 was 8.25%. During the year ended December 31, 2005, K2 made contributions totaling $4.9 million to the plan.

As of December 31, 2005, K2’s assumptions on the foreign plans related to the discount rate, projected compensation increases and expected return on assets were 4.46%, 4.16% and 4.52%, respectively compared to 4.78%, 4.16% and 4.61%, respectively, as of December 31, 2004. During the year ended December 31, 2005, K2 made contributions totaling $1.4 million to the foreign plans.

Domestic plan pension expense for the 2004 year was approximately $0.1 million lower than the 2003 year. The 2004 decrease in pension expense was primarily attributable to the following: the plan freeze on August 31, 2004 resulting in a reduction in expense of approximately $0.6 million; better than expected 2003 asset returns resulting in a reduction to expense of approximately $0.3 million; all of which were offset by an increase in pension expense of approximately $0.8 million due to changes in assumptions regarding the discount rate, expected return on assets, mortality rates, administrative expenses and changes in participant demographics.

Domestic plan pension expense for the 2005 year was approximately $2.5 million lower than the 2004 year. The 2005 decrease in pension expense was primarily attributable to the following: the plan freeze on August 31, 2004 resulting in a reduction in expense of approximately $2.8 million; better than expected 2004 asset returns resulting in a reduction to expense of approximately $0.1 million, and an offsetting increase of $0.4 million for a change in discount rate from 6.25% to 5.75% and changes in participant demographics.

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%; $0.2 million increase for lower expected contributions in 2006; $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 $0.1 million to the plans in 2006.

Based on the decrease in the discount rate and lower expected asset returns, the accumulated benefit obligation of the domestic pension plan exceeded the fair value of the assets of the plan by $20.4 million and $22.5 million at December 31, 2005 and 2004, respectively. These asset shortfalls resulted in K2 recording a non-cash charge to accumulated other comprehensive income, a component of K2’s shareholders’ equity, of $16.6 million ($11.5 million, net of taxes) at December 31, 2005. Based on this amount recorded, K2 had $20.4 million and $22.5 million, of net pension liabilities as of December 31, 2005 and 2004, respectively, consisting of $20.4 and $22.5 million, respectively, in asset shortfalls. As of December 31, 2005, K2 treated $0.1 million of the pension liability as current and $20.3 million as long-term as K2 estimates contributions totaling $0.1 million to be made to the plans during the year ended December 31, 2006.

41

Pension expense related to the foreign plans for the 2005 year was approximately $0.3 million higher than the 2004 year. The 2005 increase in pension expense was primarily attributable to the following, which reflects the addition of German plans during 2004: a $0.1 million increase in service cost, a $0.3 million increase in interest cost, partially offset by a $0.1 million increase in asset returns. For 2006, pension expense 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.

Based on the decrease in the discount rate and lower expected asset returns, the accumulated benefit obligation of the foreign pension plans exceeded the fair value of the assets of the plans by $7.8 million and $8.5 million as of December 31, 2005 and 2004, respectively. These asset shortfalls resulted in K2 recording a non-cash charge to accumulated other comprehensive income, a component of K2’s shareholders’ equity, of $1.6 million ($1.3 million, net of taxes) as of December 31, 2005. Based on this amount recorded, K2 had $7.8 million and $8.5 million, of net pension liabilities as of December 31, 2005 and 2004, respectively, consisting of $7.8 and $8.5 million, respectively, in asset shortfalls. As of December 31, 2005, K2 treated $1.2 million of the pension liability as current and $6.6 million as long-term as K2 estimates contributions totaling $1.2 million to be made to the plans during the year ended December 31, 2006.

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.

Impact of Inflation and Changing Prices

The inflation rate, as measured by the U.S. Consumer Price Index, has been relatively low in the last few years, and therefore, pricing decisions by K2 have largely been influenced by competitive market conditions. Depreciation expense is based on the historical cost to K2 of its fixed assets, and therefore, is considerably less than it would be if it were based on current replacement cost. While buildings, machinery and equipment acquired in prior years will ultimately have to be replaced at significantly higher prices, it is expected this will be a gradual process over many years.

42

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Foreign Currency and Derivatives

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 December 31, 2005, K2 had foreign exchange contracts with maturities of within one year to exchange various foreign currencies to dollars in the aggregate amount of $51.5 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 year end, a hypothetical 10% weakening of the U.S. dollar relative to other currencies would not materially adversely affect expected first 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 December 31, 2005, K2 had $300 million in principal amount of fixed rate debt represented by the convertible debentures and senior notes and $138.3 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 December 31, 2005, an immediate change of one percentage point in the applicable interest rate

43

would have caused an increase or decrease in interest expense of approximately $1.4 million on an annual basis. At December 31, 2005, up to $145.3 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. December 31, 2005, K2 had no such derivative financial instruments outstanding.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

K2 INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year ended December 31
	2005			2004			2003
	(Thousands, except per share figures)
Net sales	$	1,313,598		$	1,200,727		$	718,539
Cost of products sold		861,955			800,678			498,620
Gross profit		451,643			400,049			219,919
Selling expenses		230,413			197,134			116,509
General and administrative expenses		147,076			121,895			71,358
Non-cash intangible impairment charges		253,154			—			—
Operating income (loss)		(179,000	)		81,020			32,052
Interest expense		30,352			21,449			9,950
Debt extinguishment costs		—			—			6,745
Other income, net		(2,840	)		(246	)		(2,218	)
Income (loss) before provision for income taxes		(206,512	)		59,817			17,575
Provision for income taxes		5,049			20,876			6,151
Net income (loss)	$	(211,561	)	$	38,941		$	11,424
Basic earnings (loss) per share of Common Stock:	$	(4.57	)	$	0.97		$	0.46
Diluted earnings (loss) per share of Common Stock:	$	(4.57	)	$	0.86		$	0.44
Basic shares outstanding of Common Stock		46,272			40,285			24,958
Diluted shares outstanding of Common Stock		46,272			49,345			28,750

See notes to consolidated financial statements

44

K2 INC.
CONSOLIDATED BALANCE SHEETS
	At December 31
	2005			2004
	(Thousands, except number of shares)
Assets
Current Assets
Cash and cash equivalents	$	11,797		$	25,633
Accounts receivable, less allowances for doubtful accounts of $15,922 (2005) and $14,895 (2004)		380,442			369,914
Inventories, net		359,028			325,125
Deferred income taxes		5,044			29,709
Prepaid expenses and other current assets		21,905			22,775
Total current assets		778,216			773,156
Property, Plant and Equipment
Land and land improvements		4,651			6,794
Buildings and leasehold improvements		69,251			55,900
Machinery and equipment		217,882			204,651
Construction in progress		3,418			5,614
		295,202			272,959
Less allowance for depreciation and amortization		151,147			131,995
		144,055			140,964
Other Assets
Goodwill		107,027			349,760
Tradenames		117,001			137,329
Other intangible assets, net		19,988			21,276
Deferred income taxes		—			7,506
Other		24,289			26,374
Total Assets	$	1,190,576		$	1,456,365
Liabilities and Shareholders’ Equity
Current Liabilities
Bank loans	$	24,296		$	31,490
Accounts payable		93,470			103,158
Income taxes payable		31,946			28,386
Accrued payroll and related		40,555			67,443
Other accruals		85,256			83,624
Current portion of long-term debt		33,265			35,074
Total current liabilities		308,788			349,175
Long-term pension liabilities		26,758			16,854
Long-term debt		280,717			250,812
Deferred income taxes		21,286			58,123
Convertible subordinated debentures		99,003			98,535
Shareholders’ Equity
Preferred Stock, $1 par value, authorized 12,500,000 shares, none issued		—			—
Common Stock, $1 par value, authorized 110,000,000 in 2005 and 2004 issued shares—47,663,227 in 2005 and 47,543,108 in 2004		47,663			47,543
Additional paid-in capital		503,624			502,322
Retained earnings (deficit)		(65,003	)		146,558
Treasury shares at cost, 763,140 in 2005 and 747,234 in 2004		(9,360	)		(9,107	)
Accumulated other comprehensive loss		(22,900	)		(4,450	)
Total Shareholders’ Equity		454,024			682,866
Total Liabilities and Shareholders’ Equity	$	1,190,576		$	1,456,365

See notes to consolidated financial statements

45

K2 INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock			Additional paid-in capital			Retained earnings (deficit)			Employee Stock Ownership Plan and stock option loans			Treasury shares, at cost			Accumulated other comprehensive loss			Total
	(Thousands)
Balance at December 31, 2002	$	18,679		$	143,365		$	96,193		($	1,380	)	($	9,107	)	($	16,454	)	$	231,296
Net income for the year 2003								11,424												11,424
Translation adjustments																	7,947			7,947
Change in additional minimum pension liability, net of $189 in taxes																	(351	)		(351	)
Net unrealized loss on derivative instruments, net of $908 in taxes																	(1,687	)		(1,687	)
Comprehensive income																				17,333
Shares issued in connection with acquisitions		14,250			156,284															170,534
Value of warrants issued in connection with issuance of convertible subordinated debentures					2,303															2,303
Exercise of stock options		1,218			7,990															9,208
Income tax benefit on stock option exercises					3,200															3,200
Employee Stock Ownership Plan, amortization, loan and partial loan repayment											166									166
Balance at December 31, 2003		34,147			313,142			107,617			(1,214	)		(9,107	)		(10,545	)		434,040
Net income for the year 2004								38,941												38,941
Translation adjustments																	10,276			10,276
Change in additional minimum pension liability, net of $2,838 in taxes																	(5,270	)		(5,270	)
Net unrealized gain on derivative instruments, net of $575 in taxes																	1,089			1,089
Comprehensive income																				45,036
Shares issued in connection with acquisitions		6,313			95,327															101,640
Shares issued in connection with equity offering, net		6,400			87,180															93,580
Exercise of stock options and warrants		683			4,368															5,051
Income tax benefit on stock option exercises					2,100															2,100
Amortization of restricted stock awards					199															199
Employee Stock Ownership Plan, amortization and loan repayment											1,214									1,214
Other items					6															6
Balance at December 31, 2004		47,543			502,322			146,558			—			(9,107	)		(4,450	)		682,866
Net loss for the year 2005								(211,561	)											(211,561	)
Translation adjustments																	(16,325	)		(16,325	)
Change in additional minimum pension liability, net of $323 in taxes																	(2,945	)		(2,945	)
Net unrealized gain on derivative instruments, net of $123 in taxes																	820			820
Comprehensive loss																				(230,011	)
Shares canceled in connection with acquisitions		(6	)		(80	)								(253	)					(339	)
Stock option modification					67															67
Exercise of stock options and warrants		88			535															623
Amortization of restricted stock awards		38			780															818
Balance at December 31, 2005	$	47,663		$	503,624		($	65,003	)	$	—		($	9,360	)	($	22,900	)	$	454,024

See notes to consolidated financial statements

46

K2 INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31
	2005			2004			2003
	(Thousands)
Operating Activities
Net income (loss)	$	(211,561	)	$	38,941		$	11,424
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on sale of operating division		—			(206	)		(2,222	)
Depreciation of property, plant and equipment		30,202			23,721			15,518
Amortization of intangibles and increase in fair value of inventories from acquisitions		4,333			8,561			2,879
Amortization of deferred debt and warrant costs		2,500			3,073			3,249
Non-cash stock compensation charges		885			224			—
Non-cash intangible impairment charges		253,154			—			—
Deferred taxes		(4,097	)		4,750			2,980
Increase (decrease) in long-term pension liabilities		9,904			5,681			(1,380	)
Changes in operating assets and liabilities:
Accounts receivable, net		(11,168	)		(102,658	)		25,178
Inventories, net		(31,477	)		8,166			(20,156	)
Prepaid expenses and other current assets		998			1,661			(2,579	)
Accounts payable		(14,227	)		(5,035	)		3,925
Payroll and other accrued liabilities		(12,865	)		26,964			(2,745	)
Net cash provided by operations		16,581			13,843			36,071
Investing Activities
Property, plant and equipment expenditures		(41,901	)		(36,297	)		(20,759	)
Disposals of property, plant and equipment		3,571			1,245			400
Purchases of businesses, net of cash acquired		(16,466	)		(175,838	)		(38,902	)
Proceeds received from sale of operating division		—			—			20,132
Other items, net		3,204			(6,359	)		(5,820	)
Net cash used in investing activities		(51,592	)		(217,249	)		(44,949	)
Financing Activities
Issuance of senior notes		—			200,000			—
Issuance of convertible subordinated debentures		—			—			100,000
Borrowings under long-term debt		1,024,500			738,366			523,673
Payments of long-term debt		(995,936	)		(788,489	)		(584,811	)
Net borrowings under (payments on) accounts receivable purchase facility		—			—			(25,702	)
Net increase (decrease) in short-term bank loans		(7,445	)		(32,531	)		4,490
Net proceeds from equity issuance		—			93,580			—
Debt issuance costs		—			(8,591	)		(8,257	)
Proceeds received from exercise of stock options and warrants		623			5,051			8,983
Net cash provided by financing activities		21,742			207,386			18,376
Effects of foreign exchange rates on cash and cash equivalents		(567	)		397			530
Net increase (decrease) in cash and cash equivalents		(13,836	)		4,377			10,028
Cash and cash equivalents at beginning of year		25,633			21,256			11,228
Cash and cash equivalents at end of year	$	11,797		$	25,633		$	21,256

See notes to consolidated financial statements

47

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005

Note 1—Summary of Significant Accounting Policies

Organization

K2 is a consumer products company with a portfolio of brands including Shakespeare, Pflueger, Stearns, Sospenders and Hodgman in the Marine and Outdoor segment; Rawlings, Worth and Miken in the Team Sports segment; K2, Völkl, Marker, Ride and Brass Eagle in the Action Sports segment; and Adio, Marmot and Ex Officio in the Apparel and Footwear segment. The Marine and Outdoor segment represented $392.2 million, or 29.9%, of K2’s 2005 consolidated net sales, the Action Sports segment represented $482.5 million, or 36.7% of 2005 consolidated net sales, the Team Sports segment had sales of $265.2 million, or 20.2% of 2005 consolidated net sales and K2’s Apparel and Footwear segment had net sales of $173.7 million, or 13.2% of 2005 consolidated net sales.

Principles of Consolidation

The consolidated financial statements include the accounts of K2 and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Fiscal Periods

K2 maintains its books using a 52/53 week year ending on the last Sunday of December. For purposes of the consolidated financial statements, the year end is stated as of December 31. The years ended December 31, 2005, 2004 and 2003 consisted of 52 weeks.

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. 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.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions affecting the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual amounts could differ from those estimates.

Foreign Currency Translation

The functional currency for most foreign operations is the local currency. The financial statements of foreign subsidiaries have been translated into 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 year. The gains and losses associated with the translation of the financial statements resulting from the changes in exchange rates from year to year have been reported in the accumulated other comprehensive income or loss account in shareholders’ equity. To the extent assets and liabilities of the

48

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 1—Summary of Significant Accounting Policies (Continued)

foreign operations are realized or the foreign operations pay back intercompany debt, amounts previously reported in 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 inter-company 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.

Cash and Cash Equivalents

Short-term investments (including any debt securities) that are part of K2’s cash management portfolio are classified as cash equivalents carried at amortized cost. These investments are liquid, are of limited credit risk and have original maturities of three months or less when purchased. The carrying amount of cash equivalents approximates market value.

Accounts Receivable and Allowances

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. At December 31, 2005 and 2004, K2’s receivables from sporting goods retailers who sell skis, bindings, skates and snowboards amounted to 48% and 52%, respectively, of total receivables. 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.

49

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 1—Summary of Significant Accounting Policies (Continued)

Property, plant and equipment are recorded at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets, ranging from 1 to 50 years. At December 31, 2005, the weighted average useful life for buildings and leasehold improvements was 19.1 years and for machinery and equipment was 9.7 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 December 31, 2005. 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. 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,

50

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 1—Summary of Significant Accounting Policies (Continued)

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.

Warranty

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:

	For the year ended December 31
	2005			2004			2003
	(Thousands)
Balance at January 1	$	9,691		$	5,526		$	2,954
Charged to costs and expenses		11,366			8,394			4,677
Increase to reserve resulting from acquisitions		—			2,618			3,498
Amounts charged to reserve		(10,611	)		(6,847	)		(5,603	)
Balance at December 31	$	10,446		$	9,691		$	5,526

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 businesses. 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. 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

51

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 1—Summary of Significant Accounting Policies (Continued)

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

As described in Note 9, K2 sponsors a noncontributory defined benefit pension plan (“K2 Pension Plan”) that covers approximately 750 of its domestic employees. K2 also has five smaller defined benefit plans in the United Kingdom and 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.

Stock-Based Compensation and Other Equity Instruments

K2 currently applies the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” which allows entities to continue to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees,” and related interpretations and provide pro forma net income (loss) and pro forma net income (loss) per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. K2 has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. As such, compensation expense for stock options issued to employees is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.

Had compensation cost been determined based upon the fair value at the grant date for K2’s stock options under SFAS No. 123 using the Black Scholes option pricing model, pro forma net income (loss) and pro forma net income (loss) per share, including the following weighted average assumptions used in these calculations, would have been as follows:

	December 31
	2005			2004			2003
	(Thousands, except per share data, percentages and years)
Net income (loss) as reported (a)	$	(211,561	)	$	38,941		$	11,424
Less: Total stock-based compensation expense determined under fair value based method for all awards, net of taxes		11,532			2,157			586
Net income (loss) , adjusted	$	(223,093	)	$	36,784		$	10,838
Earnings (loss) per share:
Basic—as reported	$	(4.57	)	$	0.97		$	0.46
Basic—pro forma	$	(4.82	)	$	0.91		$	0.43
Diluted—as reported	$	(4.57	)	$	0.86		$	0.44
Diluted—pro forma	$	(4.82	)	$	0.82		$	0.42
Risk free interest rate		3.63	%		3.55	%		2.71	%
Expected life of options		5 years			5 years			5 years
Expected volatility		49.3	%		43.3	%		49.8	%
Expected dividend yield		—			—			—
(a)    2005 net loss includes a $243.0 million, net of taxes, non-cash intangible impairment charges related to annual goodwill testing in accordance with SFAS No. 142 (Note 5).

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised), “Share Based Payment,” which will require K2 to measure the cost of employee services received in exchange for an

52

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 1—Summary of Significant Accounting Policies (Continued)

award of equity instruments based on the grant-date fair value of the award. That cost will be 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 will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123 (Revised) eliminates the use of APB Opinion No. 25 and the option for pro forma disclosure. SFAS No. 123 (Revised) will become effective for K2 beginning in the 2006 first quarter. SFAS No. 123 (Revised) permits public companies to adopt its requirements using one of two methods. (1) A”modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123 (Revised) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123 (Revised) that remain unvested on the effective date. (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 plans to adopt SFAS No. 123 (Revised) using the modified-prospective method.

As permitted by SFAS No. 123, K2 currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and as such, compensation expense for stock options issued to employees is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The adoption of SFAS No. 123 (Revised)’s fair value method could have a significant impact on our result of operations, although it is not expected to have a significant impact on our overall financial position. The impact of the adoption of SFAS No. 123 (Revised) can not be predicted a this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123 (Revised) in prior periods, the impact of SFAS No. 123 (Revised) would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) and earnings (loss) per share as reflected in the table above.

SFAS No. 123 (Revised) 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 current guidance. This requirement will reduce operating cash flows and increase net financing cash flows in periods after adoption. K2 can not estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options.

During 2005, 2004 and 2003, stock options granted were 1,002,650, 1,192,400, and 617,900, respectively. Using the Black Scholes option pricing model and the assumptions as noted above, the options granted each had a weighted average fair value of $5.80, $7.98 and $4.79, respectively.

The pro forma amounts may not be representative of future amounts recorded since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years.

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

53

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 1—Summary of Significant Accounting Policies (Continued)

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 is expected to be recorded in conjunction with K2’s adoption of SFAS No. 123 (Revised 2004). The incremental expense associated with the acceleration of the options is included in the pro forma disclosures above for the year ended December 31, 2005.

Shipping and Handling Costs

K2 reports freight billed to customers as a component of net sales and related freight costs are reflected primarily in selling expenses. The amount of freight costs reflected in selling expenses for the years ended December 31, 2005, 2004 and 2003 amounted to $18.6 million, $16.9 million and $11.7 million, respectively.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2005, 2004 and 2003 amounted to $42.5 million, $25.3 million and $18.1 million, respectively.

Research and Development

Consistent with K2’s business strategy of continuing to develop innovative brand name products and improving the quality, cost and delivery of products, K2 maintains decentralized research and development departments at several of its manufacturing centers, which are engaged in product development and the search for new applications and manufacturing processes. Expenditures for research and development activities totaled approximately $20.7 million in 2005, $14.5 million in 2004 and $9.6 million in 2003.

Other Income, net

Other income generally includes gains or losses on disposals of fixed assets and other miscellaneous income and expenses.

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in shareholders’ equity except those resulting from investments by, and distributions to, shareholders. Accordingly, K2’s comprehensive income (loss) includes net income (loss) and foreign currency adjustments that arise from the translation of the financial statements of K2’s foreign subsidiaries, minimum pension liability and fair value gains and losses on certain derivative instruments.

Recent Accounting Pronouncements

On April 14, 2005, the SEC adopted a new rule that amended the compliance dates of SFAS No. 123 (Revised) to require implementation no later than the beginning of the first fiscal year beginning after June 15, 2005 (the year beginning January 1, 2006 for K2). K2 is in the process of evaluating the use of certain option- pricing models as well as the assumptions to be used in such models. When such evaluation is complete, K2 will determine the transition method to use, the timing of adoption and the impact any change in valuation models might have.

54

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 1—Summary of Significant Accounting Policies (Continued)

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle unless it is impracticable to do so. SFAS No. 154 also provides that a change in method of depreciating or amortizing long-lived non-financial assets be accounted for as a change in estimate effected by a change in accounting principle and that correction of errors in previously issued financial statements should be termed a “restatement.” SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and corrections of errors made in fiscal years beginning after June 1, 2005. K2 believes that implementing SFAS No. 154 should not have a material impact on its financial position and results of operations.

In February 2006, the FASB issued 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 and clarifies that both interest-only and principal-only strips are not subject to the provision of SFAS 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 and results of operations.

Reclassifications

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

Note 2—Acquisitions

During the 2005 second quarter, K2 completed the acquisition of substantially all of the assets of 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 assumed 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.

During 2004, K2 completed nine acquisitions, including the acquisitions of Fotoball USA, Inc. (later renamed K2 Licensed Products, Inc.) on January 23, 2004, Ex Officio on May 12, 2004, Marmot on June 30, 2004 and Völkl and Marker on July 7, 2004 as well as five smaller acquisitions.

55

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 2—Acquisitions (Continued)

During 2003, K2 completed seven acquisitions, including the acquisitions of Rawlings Sporting Goods Company, Inc. (“Rawlings”), on March 26, 2003, Worth, Inc. (“Worth”), on September 16, 2003 and Brass Eagle, Inc. (“Brass Eagle”), on December 8, 2003 as well as five smaller acquisitions.

At December 31, 2005, there was approximately $6.0 million of cash and 523,563 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 certain periods presented.

The consolidated statements of operations for the year ended December 31, 2005 include the operating results of each of the businesses acquired in 2004, however the 2004 results include less than a full year of results of K2 Licensed Products, which was acquired by K2 on January 23, 2004, Worr Game Products and IPI, both of which were acquired by K2 on April 19, 2004, Ex Officio, which was acquired by K2 on May 12, 2004, Marmot, which was acquired by K2 on June 30, 2004 and Völkl and Marker, both of which were acquired on July 7, 2004.

The following summarized unaudited pro forma information of K2 assumes the acquisitions of Marmot and Völkl and Marker had occurred as of January 1, 2004, the earliest date for which information is presented below. This pro forma information does not purport to be indicative of what would have occurred had the acquisitions been made as of those dates, or of results which may occur in the future. Pro forma results of operations of K2’s other acquisitions completed during 2004 and 2005 have not been presented because the effects of these additional acquisitions were not material on either an individual basis or aggregate basis to K2’s consolidated results of operations.

	For the year ended December 31
	2005			2004
	(Thousands, except per share amounts)
Pro Forma Information (Unaudited)
Net sales	$	1,313,598		$	1,258,777
Operating income (loss) (a)		(179,000	)		65,587
Net income (loss)		(211,561	)		24,253
Diluted earnings (loss) per share	$	(4.57	)	$	0.51

(a) 2005 operating loss includes a non-cash intangible impairment charges of $253.2 million ($243.0 million net of taxes) recorded in accordance with SFAS No. 142 (Note 5).

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.

56

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 2—Acquisitions (Continued)

The following table summarizes the activity in 2004 and 2005:

	Employee Severance			Employee Relocation			Subtotal			Lease Termination Costs			Total
	(Thousands)
Balance at December 31, 2003	$	2,411		$	816		$	3,227		$	1,203		$	4,430
Reserves established in conjunction with acquisitions		6,968			40			7,008			4,034			11,042
Adjustments to reserve estimates (reflected as an adjustment of the cost of the acquired companies)		(974	)		—			(974	)		—			(974	)
Utilized in 2004:		(1,415	)		(488	)		(1,903	)		(40	)		(1,943	)
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

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

Note 3—Sale of Operating Division

On May 27, 2003, K2 completed the sale of the assets of the composite utility and decorative light poles and related product lines (the “Division”) of its Marine and Outdoor segment to a subsidiary of Genlyte Thomas Group LLC. The Division was sold for approximately $20.1 million in cash and the assumption of certain liabilities by the buyer. During 2003 and 2004, K2 recorded a gain on sale of the Division of $2.2 million and $0.2 million, respectively, which included the costs of disposal and amounts related to the retention of certain liabilities by K2.

Note 4—Inventories

Inventories consisted of the following at December 31:

	2005		2004
	(Thousands)
Finished goods	$	266,340	$	237,162
Work in process		18,796		15,389
Raw materials		73,892		72,574
Total inventories	$	359,028	$	325,125

57

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 5—Intangible Assets

The components of intangible assets consisted of the following at December 31:

	Weighted Average Useful Life	2005								2004
		Gross Amount		Accumulated Amortization		Impairment Charge (a)		Net Book Value		Gross Amount		Accumulated Amortization		Net Book Value
		(Thousands)
Intangibles subject to amortization:
Patents	7.9 years	$	16,164	$	4,729		—	$	11,435	$	14,142	$	3,161	$	10,981
Customer contracts/relationships	8.2 years		8,215		2,689		—		5,526		8,139		1,488		6,651
Licensing agreements	7.4 years		2,795		1,357		—		1,438		2,795		868		1,927
Trademarks	7.1 years		955		279		—		676		955		128		827
Non-compete agreements	4.1 years		1,574		661		—		913		1,347		212		1,135
Order backlog and other	0.2 years		1,560		1,560		—		—		1,040		1,285		(245	)
			31,263		11,275		—		19,988		28,418		7,142		21,276
Intangibles not subject to amortization: (by segment)
Tradename
Marine and Outdoor			3,252		—		—		3,252		352		—		352
Action Sports			81,690		—		24,015		57,675		81,690		—		81,690
Team Sports			39,287		—		4,813		34,474		33,687		—		33,687
Apparel and Footwear			21,600		—		—		21,600		21,600		—		21,600
Goodwill
Marine and Outdoor			26,959		—		—		26,959		22,853		—		22,853
Action Sports			144,229		—		144,229		—		156,211		—		156,211
Team Sports			80,097		—		80,097		—		88,722		—		88,722
Apparel and Footwear			80,068		—		—		80,068		81,974		—		81,974
			477,182		—		253,154		224,028		487,089		—		487,089
Total intangibles		$	508,445	$	11,275	$	253,154	$	244,016	$	515,507	$	7,142	$	508,365

(a) Non-cash intangible impairment charges as a result of annual testing in accordance with SFAS No. 142.

58

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 5—Intangible Assets (Continued)

The increase in intangibles subject to and not subject to amortization at December 31, 2005 from December 31, 2004 is due to K2’s acquisition activities during 2005 as follows:

	December 31, 2004 Net Book Value			2005 Activity												December 31, 2005 Net Book Value
				Purchase Price Allocation (a)			Other Activity (b)			Amortization			Impairment Charge (c)
	(Thousands)
Intangibles subject to amortization:
Patents	$	10,981		$	453		$	1,569		$	(1,568	)		—		$	11,435
Customer contracts/relationships		6,651			76			—			(1,201	)		—			5,526
Licensing agreements		1,927			—			—			(489	)		—			1,438
Tradenames/trademarks		827			—			—			(151	)		—			676
Non-compete agreements		1,135			225			2			(449	)		—			913
Order backlog and other		(245	)		520			—			(275	)		—			—
		21,276			1,274			1,571			(4,133	)		—			19,988
Intangibles not subject to amortization: (by segment)
Tradename
Marine and Outdoor		352			2,900			—			—			—			3,252
Action Sports		81,690			—			—			—			(24,015	)		57,675
Team Sports		33,687			5,600			—			—			(4,813	)		34,474
Apparel and Footwear		21,600			—			—			—			—			21,600
Goodwill											—			—			—
Marine and Outdoor		22,853			3,811			295			—			—			26,959
Action Sports		156,211			(280	)		(11,702	)		—			(144,229	)		—
Team Sports		88,722			(6,522	)		(2,103	)		—			(80,097	)		—
Apparel and Footwear		81,974			(404	)		(1,502	)		—			—			80,068
		487,089			5,105			(15,012	)		—			(253,154	)		224,028
Total intangibles	$	508,365		$	6,379		$	(13,441	)	$	(4,133	)	$	(253,154	)	$	244,016

(a) Amounts in this column represent the allocation of purchase price to intangibles in accordance with Statement of Financial Accounting Standards (“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 a reduction in the reserves established upon acquisition in accordance with SFAS No. 141.

(c) Non-cash intangible impairment charges as a result of annual testing in accordance with SFAS No. 142.

Amortization expense for intangibles subject to amortization was approximately $4.1 million for the year ended December 31, 2005. Amortization expense of intangible assets subject to amortization is estimated to be approximately $3.5 million during 2006, approximately $3.3 million during 2007, approximately $3.2 million during 2008, approximately $2.0 million during 2009 and approximately $1.4 million during 2010.

In performing its impairment test of indefinite-lived intangible assets, K2 determined that the carrying value of certain indefinite-lived intangible assets associated with its Action Sports and Team Sports segments exceeded their estimated fair values. Consequently, K2 recorded impairment charges of $28.8 million.

K2 determined in accordance with SFAS No. 142 that K2’s segments meet the criteria for aggregation and therefore performed its analysis at the operating segment level except for Brass Eagle. Brass Eagle is determined

59

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 5—Intangible Assets (Continued)

to be a component that is economically dissimilar enough to be considered a Reporting Unit under SFAS No. 142 and therefore subject to separate goodwill testing from the Action Sports, Team Sports, Marine and Outdoor and Apparel and Footwear Reporting Units. The fair value of K2’s reporting units was 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 discounted future cash flows. The present value of estimated discounted 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 applied to each of the income and market approaches was based on the data available and specific facts and circumstances surrounding each reporting unit.

In performing the fiscal 2005 annual test, K2 assumed an income tax rate of 35% for all reporting units and a discount rate of 11% for all reporting units except Brass Eagle, for which a 12% discount rate was assumed. K2 assumed the following long-term sales growth rates for each of the reporting units: Marine and Outdoor 0%; Action Sports 2%; Team Sports 2%; Apparel and Footwear 5%; and Brass Eagle 1%.

Because the trading value of K2’s shares indicated a level of equity market capitalization below its book value at the time of the annual impairment test, there was indication that one or more of K2’s reporting units would fail the first step of the goodwill impairment test. In performing the first step of the goodwill impairment test, K2 determined that there was an indicator of impairment in the Brass Eagle, Action Sports and Team Sports reporting units, because the carrying value of each of these reporting units exceeded their estimated fair value. The excess of the carrying value over the estimated fair value of the Brass Eagle reporting unit was primarily due to the significant decline in the paintball market leading to lower expected future cash flows for the business. The excess of the carrying value over the estimated fair value of the Action Sports and Team Sports reporting unit was due to lower expected future cash flows for those reporting units. The lower expected cash flows have lead to a larger difference in valuations between the income approach and the market approaches used to determine fair value. Due to the larger variance in valuations, K2 placed 100% weighting on the income approach valuation for the Brass Eagle, Action Sports and Team Sports reporting units compared to a two thirds and one third weighting on the market approach and income approach, respectively, which had been used in previous years.

In performing the second step of the goodwill impairment test, K2 allocated the estimated fair values of the Brass Eagle, Action Sports and Team Sports reporting units determined in step one of the impairment test, to the assets and liabilities of the respective reporting unit in accordance with SFAS No. 141 “Business Combinations”. K2 measured the impairment for each of the reporting units to be equal to the carrying value of its goodwill, or $43.2 million for Brass Eagle, $101.1 million for Action Sports and $80.1 million for Team Sports.

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, technological change, economic conditions, or changes to K2’s business operations. Such changes may result in impairment charges recorded in future periods.

60

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 5—Intangible Assets (Continued)

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.

Note 6—Borrowings and Other Financial Instruments

At December 31, 2005, K2’s principal long-term borrowing facility was a five-year, $250 million revolving Credit Facility (“Facility”) expiring on July 1, 2009 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, but as of December 31, 2005 bear a rate equal to the prime rate, or a LIBOR interest rate plus 2.00%, and the Facility had an unused commitment fee of 0.375% per year which was reduced to 0.25% under the restated and amended credit facility discussed below. The Facility includes various covenants, including requirements that K2 maintain a minimum debt service coverage ratio, as well as limiting annual capital expenditures, indebtedness, dividends and certain investment activities.

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 December 31, 2005, borrowings of $95.3 million were outstanding under the Facility bearing an average interest rate of 6.36%. At December 31, 2005, there were also letters of credit outstanding under the Facility of $8.3 million (consisting of $8.1 million of standby letters of credit and $0.2 million of trade letters of credit expiring over the next 12 months). K2 has classified $30 million of seasonal borrowings outstanding under the Facility at December 31, 2005 as current. Pursuant to the terms of the Facility, an additional $145.3 million was available for borrowing at December 31, 2005.

At December 31, 2005, 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 noteholders 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 December 31, 2005, the aggregate unamortized fair market value of $1.0 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.

61

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 6—Borrowings and Other Financial Instruments (Continued)

At December 31, 2005, 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 December 31, 2005, K2 also had $27.6 million and $15.4 million outstanding under short-term and long-term foreign lending arrangements, respectively. K2 had approximately $53.0 million additionally available for borrowing at December 31, 2005. The short-term facilities generally have no termination date but are reviewed annually for renewal and are denominated in the subsidiaries’ local currencies. At December 31, 2005, interest rates on the foreign facilities ranged from 1% to 7.25%. The weighted average interest rates on the foreign facilities as of December 31, 2005 and 2004 were 4.74% and 4.4%, respectively.

At December 31, 2005, 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.

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

	2005			2004
	(Thousands)
$250 million five-year secured bank revolving credit line due February 21, 2011, interest payments due at LIBOR plus 1.125% to 1.875% or at the prime rate and a commitment fee of 0.25% on the unused portion of the line through February 21, 2011.	$	95,286		$	60,191
$75 million convertible debentures, due June 15, 2010 with semi-annual interest payable at 5.00%		75,000			75,000
$25 million convertible subordinated debentures, due March 3, 2010 with quarterly interest payable at 7.25%		25,000			25,000
$200 million senior notes, due July 1, 2014 with semi-annual interest payable at 7.375%		200,000			200,000
Foreign lending arrangements		18,696			23,650
Other		—			2,045
		413,982			385,886
Less-unamortized warrant discount		(997	)		(1,465	)
Less-amounts due within one year		(3,265	)		(4,619	)
Less- reclassification of payments on revolving credit facility to current		(30,000	)		(30,455	)
	$	379,720		$	349,347

62

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 6—Borrowings and Other Financial Instruments (Continued)

The principal amount of long-term debts contractually maturing in each of the five years ended December 31 following 2005 is:

	(Thousands)
2006	$	3,265
2007		2,558
2008		3,449
2009		717
2010		100,703
Thereafter		303,290
	$	413,982

Interest paid on short and long-term debt for the years ended December 31, 2005, 2004 and 2003 was $27.9 million, $11.5 million, and $8.1 million, respectively.

The carrying amounts for the short-term lines of credit and the long-term bank revolving credit line approximate their fair value since floating interest rates are charged, which approximate market rates. As of December 31, 2005, the fair value of the $25.0 million of convertible subordinated debentures and $75.0 million convertible debentures, based on quoted market interest rates, was $26.5 million and $73.2 million, respectively. The fair value of the $200.0 million convertible debentures, based on quoted market interest rates, was $233.8 million at December 31, 2005.

K2, including its foreign subsidiaries, enters forward exchange contracts to hedge certain firm and anticipated purchase commitments, which are denominated in U.S. or foreign currencies. The purpose of the foreign currency hedging activities is to reduce K2’s risk of fluctuating exchange rates. K2’s forward contracts are accounted for as hedges because the derivative instruments are designated and effective as hedges and reduce K2’s exposure to identified risks. The ineffective portion of derivative transactions was not material to the results of operations for the year ended December 31, 2005. At December 31, 2005, K2 had foreign exchange contracts with maturities of within one year to exchange various foreign currencies to dollars in the aggregate amount of $51.5 million. At December 31, 2005, the fair value of these contracts was an unrealized loss of $0.2 million, which was reflected, net of taxes, as a decrease to accumulated other comprehensive loss and as a current liability on the consolidated balance sheet. The fair value of these contracts will be recognized in cost of products sold when the related inventory is sold which is expected to be within one year. Counterparties on foreign exchange contracts expose K2 to credit losses in the event of non-performance, but K2 does not anticipate non-performance based on the credit ratings of the financial institutions.

Note 7—Income Taxes

Income (loss) from operations before provision (credit) for income taxes for the years ended December 31 was taxed under the following jurisdictions:

	2005			2004		2003
	(Thousands)
Domestic	$	(175,280	)	$	22,497	$	(726	)
Foreign		(31,232	)		37,320		18,301
	$	(206,512	)	$	59,817	$	17,575

63

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 7—Income Taxes (Continued)

Components of the provision (credit) for income taxes applicable to operations for the three years ended December 31 are:

	2005						2004						2003
	Current			Deferred			Current			Deferred			Current		Deferred
							(Thousands)
Federal	$	(658	)	$	(22,194	)	$	(1,052	)	$	10,429		$	2,839	$	(1,867	)
State		726			(2,681	)		475			1,227			498		319
Foreign		5,395			(636	)		10,067			(270	)		3,750		612
Valuation Allowance		—			25,097			—			—			—		—
	$	5,463		$	(414	)	$	9,490		$	11,386		$	7,087	$	(936	)

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

	2005		2004		2003
			(Percent)
Statutory federal income tax rate	(35.0	)	35.0		35.0
State income tax effect, net of federal benefit	(0.4	)	1.7		3.0
Tax rate differential on foreign earnings	(1.3	)	(3.7	)	(8.6	)
Non deductible goodwill	27.1		—		—
Valuation Allowance	12.2		—		—
Other	(0.2	)	1.9		5.6
	2.4		34.9		35.0

Pretax earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when effectively repatriated. No provision for United States income taxes has been made on undistributed earnings of foreign subsidiaries, since these earnings are currently expected to be permanently reinvested. At December 31, 2005, $125.8 million of accumulated undistributed earnings of non-U.S. subsidiaries were considered permanently reinvested. It is not practical to determine the amount of income tax payable in the event we repatriated all undistributed foreign earnings.

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 where the ultimate tax determination is uncertain. K2 believes that it has adequately provided for income tax issues not yet resolved with federal, state, and foreign tax authorities. If these amounts provided 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 K2 determines that provision for the liabilities is no longer necessary. If an ultimate tax assessment exceeds K2’s estimate of tax liabilities, an additional charge to expense will result.

During 2005, K2 has upgraded its ongoing Unilateral Advance Pricing Negotiation with the Internal Revenue Service (“IRS”) to a Bilateral Advance Pricing Agreement Negotiation between the IRS and the Federal Republic of Germany (“Germany”) for approval of an intercompany transfer pricing methodology. Obtaining approval from the respective taxing jurisdictions would formalize the utilization of net operating losses in Germany, and the recovery of prior taxes paid in the United States. K2 will continue to file its United States and

64

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 7—Income Taxes (Continued)

German tax returns using this transfer pricing methodology. Although K2 has already received tentative refunds as a result of the adjustment, the full tax benefit of such refunds has not been included into income as the negotiations are ongoing. K2 believes it has adequately provided for this issue. Therefore, in 2002 K2 recorded $4.8 million of these refunds as a current liability, pending the outcome of the discussions with the relevant tax authorities. Approval of this transfer pricing methodology could generate a significant reduction to K2’s income tax expense in the future.

The IRS is currently conducting an audit of K2’s Federal income tax returns for the 2001 through 2004 tax years. The Company does not believe that the outcome of these matters will have a material adverse effect on the consolidated results of operations or consolidated financial position.

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

	2005			2004
	(Thousands)
Deferred Tax Assets:
Insurance accruals	$	2,253		$	1,007
Foreign loss carryovers		535			2,200
Domestic loss carryovers		22,988			21,623
Bad debt reserve		3,880			4,056
Inventory reserve		4,160			4,413
Warranty reserve		2,531			2,297
Advertising reserve		2,552			1,898
Uniform capitalization		1,701			1,865
Restructure & contingency reserve		10,259			13,020
Pension accrual		7,759			8,084
Amortization of goodwill and other intangibles		20,981			7,506
Other		9,539			7,818
		89,138			75,787
Valuation allowance		(62,257	)		(38,574	)
Deferred Tax Assets	$	26,881		$	37,213
Deferred Tax Liabilities:
Amortization of tradename and other intangibles	$	(28,440	)	$	(47,804	)
Depreciation of property, plant and equipment		(8,286	)		(7,449	)
Other		(6,397	)		(2,870	)
Deferred Tax Liabilities		(43,123	)		(58,123	)
Net deferred tax liability	$	(16,242	)	$	(20,910	)

65

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 7—Income Taxes (Continued)

The non-cash intangible impairment charge in 2005 resulted in a significant increase to K2’s non-current deferred tax assets. K2 considered this fact as well as all the available positive and negative evidence to assess whether a valuation allowance was required. Due to uncertainty regarding the realizability of its net deferred tax assets, K2 has established a valuation allowance of approximately $25.1 million in 2005. Subsequent increases or decreases to this valuation allowance will effect income tax expense in the future.

As a result of its recent acquisitions, K2 has recorded deferred tax assets for cumulative temporary differences that existed at the time of the acquisition as well as purchase accounting reserves that have been established related to these acquisitions. Valuation allowances have been established against certain of these deferred tax assets to the extent that K2 can not conclude that it is more likely than not such deferred tax assets will be realized. K2 realized tax benefits that reduced the goodwill of such acquisitions in the amounts of $3.5 million, $2.6 million, and zero for 2005, 2004 and 2003, respectively. At December 31, 2005, approximately $34.9 million of the valuation allowance relates to deferred tax assets for which subsequently recognized tax benefits will be first applied to reduce the remaining balance of goodwill, and then other non current intangible assets related to that acquisition until exhausted, and then to reduce income tax expense.

K2 has total available Federal net operating loss carryovers of approximately $91.0 million, which begin to expire in 2011. Most of these carryovers relate to the acquisitions which are described below.

At the acquisition date of Ride Inc. (“Ride”) in 1999, Ride had approximately $30 million of federal net operating loss carryovers which begin to expire in 2010. The ability of K2 to utilize these losses to reduce future tax due is subject to an annual Internal Revenue Code §382 limitation. As of December 31, 2005, K2 had approximately $26 million of federal net operating loss carryovers remaining, and had recorded a deferred tax asset for these net operating loss carryovers of only $0.8 million due to uncertainties regarding its realization. For financial reporting purposes, subsequently recognized tax benefits in excess of this deferred tax asset would reduce income tax expense.

At the acquisition date of Rawlings Sporting Goods Company, Inc. (“Rawlings”), Rawlings had approximately $30 million of federal net operating loss carryovers which begin to expire in 2018. The ability of K2 to utilize these losses to reduce future tax due is subject to an annual Internal Revenue Code §382 limitation. At the time of the acquisition, a valuation allowance was recorded to reduce the deferred tax asset attributable to the net operating losses. For financial reporting purposes, the realization of these carryovers would result in adjustments to the valuation allowance amount being applied as a reduction to other non current intangible assets related to that acquisition until exhausted, and then to reduce income tax expense.

At December 31, 2005, foreign subsidiaries had unused operating loss carryovers of approximately $2.1 million, certain of which begin to expire in 2009. Since the use of these operating loss carryovers is limited to future taxable earnings of the related foreign subsidiaries, a valuation allowance of approximately $0.2 million has been recorded. At December 31, 2005 the net deferred tax asset for foreign net operating loss carryovers, after valuation allowance, is approximately $0.5 million. For financial reporting purposes, the release of these valuation allowances would reduce income tax expense.

K2 recorded a deferred tax asset related to additional minimum pension liability of its United States companies which was included as a component of other comprehensive income (loss) in the amount of zero, $2.6 million and $0.3 million in the years ended December 31, 2005, 2004 and 2003, respectively.

66

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 7—Income Taxes (Continued)

The amount of income tax benefit attributable to employee stock option transactions that was allocated to shareholders’ equity was zero, $2.1 million and $3.4 million for 2005, 2004 and 2003, respectively.

Income taxes paid, net of refunds, in the years ended December 31, 2005, 2004 and 2003 were $2.8 million, $6.5 million and $3.6 million, respectively.

Note 8—Commitments and Contingencies

Leases are primarily for rentals of facilities, and about two-thirds of the leases contain rights to extend the terms from one to ten years. Net rental expense, including those rents payable under noncancelable leases and month-to-month tenancies, amounted to $22.4 million, $18.0 million and $9.4 million for the years ended December 31, 2005, 2004 and 2003, respectively.

In the ordinary course of business, K2 also enters into licensing arrangements and endorsement contracts with athletes and other organizations. These agreements have required minimum payments due during the term of the contracts.

Future minimum payments due under these arrangements at December 31, 2005 are as follows:

Contractual Obligations	Total		2006		2007		2008		2009		2010		Beyond
		(Thousands)
Leases	$	78,972	$	19,237	$	13,357	$	10,019	$	8,386	$	7,052	$	20,921
Licensing arrangements		7,097		3,901		1,701		1,175		160		160		—
Endorsement and sponsorship arrangements		7,139		4,797		1,476		643		145		78		—
Total contractual cash obligations	$	93,208	$	27,935	$	16,534	$	11,837	$	8,691	$	7,290	$	20,921

K2 has not experienced any substantial difficulty in obtaining raw materials, parts or finished goods inventory for its sporting goods, other recreational products and industrial businesses. 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.

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 is 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 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. 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.

67

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 8—Commitments and Contingencies

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 December 31, 2005 and 2004, 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 financial statements or its operations going forward.

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 December 31, 2005, K2 continues to be a defendant or co-defendant in approximately 90 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.

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, although such insurance carriers have issued “reservation of rights” letters in respect of certain claims and lawsuits. Although K2’s claims experience 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 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.

68

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 8-Commitments and Contingencies (Continued)

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 assuming a judgment is entered for this amount. Based on the agreement with its insurer to indemnify K2 on all claims as well as adequate insurance coverage and 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, results of operations or financial condition.

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 and product 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 judgemnts.

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 filed a motion to recover approximately $0.6 million in attorney’s fees and costs – this motion is currently pending. Following the verdict, K2 established in the second quarter 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,

69

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 8-Commitments and Contingencies (Continued)

(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. The only matter that remains open for the Missouri District Court is the licensee’s motion for approximately $0.6 million for its attorneys’ fees and costs. Accordingly, there is currently a judgment against K2 and Rawlings for approximately $6.8 million.

K2 intends 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 will be 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 take 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 seeking to enjoin Miken from continuing to manufacture certain bats and seeks damages for all past alleged infringements of its patent.

In July 2004, the Minnesota Court issued an order interpreting certain of Wilson’s claims concerning its patent, and this interpretation appears to be favorable to K2 and Miken. And, based on this favorable ruling, Miken moved for summary judgment, on which the Minnesota Court still has not ruled. Then, on March 17, 2005, the Minnesota District 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 similar patent issues as those in Miken Composites, L.L.C. v. Wilson Sporting Goods Co.

Each of K2 and Miken has denied all material allegations and asserted various affirmative defenses in respect to Wilson’s counterclaims. The resolution of this matter will depend primarily upon contested facts, and cannot be accurately predicted. Although each of K2 and Miken believes that it has significant defenses to Wilson’s counterclaims, in the event that K2 and Miken are unsuccessful in the declaratory judgment and counterclaim actions, K2 will be required to record an expense in the period when the loss resulting from the resolution of the matter is probable and estimable, and may be enjoined from sales of the accused softball bats. The litigation process for this case, including any appeals, is estimated to be two to three years.

70

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits

Domestic plans

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. The impact of this plan change on K2’s benefit costs is a one-time recognized curtailment loss of $0.4 million in the 2004 third quarter. The impact on future benefit costs is the elimination of the service cost and an $8.0 million reduction of the projected benefit obligation for future pay increases. This plan change has further resulted in an estimated reduction in net periodic pension costs for the 2005 year of $2.8 million.

K2 also has a pension plan which covered certain employees of the Simplex Building Products division which K2 sold in 2000. This plan is referred to as the “Simplex UAW Pension Plan.” This plan was merged with the “K2 Pension Plan” as of December 31, 2005. The disclosures that follow also include this plan as of December 31, 2004.

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 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. K2’s assumption related to the discount rate was 5.67% as of December 31, 2005 compared to 5.75% as of December 31, 2004. The expected return on assets assumption for 2005 and 2004 was 8.25%. During the year ended December 31, 2005, K2 made contributions totaling $4.9 million to the plan.

Pension expense for the 2004 year was approximately $0.1 million lower than the 2003 year. The 2004 decrease in pension expense was primarily attributable to the following: the plan freeze on August 31, 2004 resulting in a reduction in expense of approximately $0.6 million; better than expected 2003 asset returns resulting in a reduction to expense of approximately $0.3 million; all of which were offset by an increase in pension expense of approximately $0.8 million due to changes in assumptions regarding the discount rate, expected return on assets, mortality rates, administrative expenses and changes in participant demographics.

Pension expense for the 2005 year was approximately $2.5 million lower than the 2004 year. The 2005 decrease in pension expense was primarily attributable to the following: the plan freeze on August 31, 2004 resulting in a reduction in expense of approximately $2.8 million; better than expected 2004 asset returns

71

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits (Continued)

resulting in a reduction to expense of approximately $0.1 million, and an offsetting increase of $0.4 million for a change in discount rate from 6.25% to 5.75% and changes in participant demographics.

For 2006, 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 lower 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%; $0.2 million increase for lower expected contributions in 2006; $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 $0.1 million to the plan in 2006.

Based on the decrease in the discount rate and lower expected asset returns, the accumulated benefit obligation of the pension plan exceeded the fair value of the assets of the plan by $20.4 million and $22.5 million at December 31, 2005 and 2004, respectively. These asset shortfalls resulted in K2 recording a non-cash charge to accumulated other comprehensive income (loss), a component of K2’s shareholders’ equity, of $16.6 million ($11.5 million, net of taxes) at December 31, 2005. Based on this amount recorded, K2 had $20.4 million and $22.5 million, of net pension liabilities as of December 31, 2005 and 2004, respectively, consisting of $20.4 and $22.5 million, respectively, in asset shortfalls. As of December 31, 2005, K2 treated $0.1 million of the pension liability as current and $20.3 million as long-term as K2 estimates contributions totaling $0.1 million to be made to the plan during the year ended December 31, 2006.

72

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits (Continued)

The following table sets forth the defined benefit plan’s funded status and amounts recognized in K2’s consolidated balance sheets at December 31:

	Pension Plan
	2005			2004
	(Thousands, except percentages)
Change in benefit obligation
Benefit obligation at beginning of year	$	72,326		$	68,168
Service cost		164			1,353
Interest cost		4,030			4,356
Curtailment gain		—			(8,016	)
Actuarial loss		811			11,024
Benefits paid		(4,174	)		(4,559	)
Benefit obligation at end of year	$	73,157		$	72,326
Change in fair value of plan assets
Fair value of plan assets at beginning of year	$	49,793		$	46,547
Actual return on fair value of plan assets		2,165			4,290
Employer contributions		4,932			3,515
Benefits paid		(4,174	)		(4,559	)
Fair value of plan assets at end of year		52,716			49,793
Recorded assets and liabilities
*Funded status of the plan	$	(20,441	)	$	(22,533	)
Unrecognized actuarial loss		16,574			14,460
Net amount recognized	$	(3,867	)	$	(8,073	)
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability	$	(20,441	)	$	(22,533	)
Accumulated other comprehensive loss		16,574			14,460
Net amount recognized at end of year	$	(3,867	)	$	(8,073	)

* Fair value of assets less benefit obligation

The curtailment gain of $8.0 million recognized on the plan during 2004 was attributable to a reduction in the projected benefit obligation due to the amendment of the plan effective August 31, 2004, whereby no additional benefits were to accrue under the plan to existing or new employees.

73

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits (Continued)

Net periodic benefit cost consisted of the following for the year ended December 31:

	Pension Plan
	2005			2004			2003
	(Thousands)
Net periodic benefit cost
Service cost	$	164		$	1,353		$	1,695
Interest cost		4,030			4,356			4,137
Expected return on plan assets		(4,108	)		(3,753	)		(3,570	)
Amortization of prior service cost		—			46			72
Recognition of net loss		640			901			1,029
Curtailment loss		—			353			52
Net periodic benefit cost	$	726		$	3,256		$	3,415

Additional information about the pension plan as of and for the year ended December 31 is as follows:

	Pension Plan
	2005			2004
	(Thousands)
Additional information for pension plans with an accumulated benefit obligation and projected benefit obligation in excess of plan assets:
Projected benefit obligation	$	73,157		$	72,326
Accumulated benefit obligation		73,157			72,326
Fair value of plan assets		52,716			49,793
Additional information:
Accumulated benefit obligation	$	73,157		$	72,326
Increase in minimum liability included in other comprehensive income (loss)		2,114			7,620
Actual return on plan assets		2,165			4,290
Weighted average assumptions used to determine benefit obligations at December 31:
Discount rate		5.67	%		5.75	%
Rate of compensation increase		—			—
Weighted average assumptions used to determine net periodic benefit cost:
Discount rate		5.75	%		6.25	%
Expected long-term rate of return on plan assets		8.25	%		8.25	%
Rate of compensation increase		—			—
Measurement Date		December 31			December 31

74

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits (Continued)

K2’s pension plan asset allocations at December 31, 2005 and 2004 by asset category are as follows:

Asset Category	Target Allocation Ranges	Actual Allocation Pension Plan
		2005	2004
Equity	50%-70%	59.9%	57.3%
Fixed Income	30%-50%	36.8%	36.3%
Other	0%-10%	3.3%	6.4%
		100.0%	100.0%

In consideration of the plan’s funded status, participant demographics, the plan’s long-term investment objectives, and the financial status of K2, the Retirement Committee has adopted an overall investment objective for the plan’s assets that is consistent with a balanced approach of long-term growth of assets and moderate levels of current income. The investment objective is expected to earn long-term returns comprised of capital appreciation and current income sufficient to keep pace with or exceed the actuarial liability growth rate, to fund current benefit payments and other disbursements, and to maintain (or grow) the purchasing power of plan’s assets.

It is desired that the plan earns returns at or above (higher than) the appropriate dollar-weighted benchmark as represented by ”market” benchmarks or mix of indexes that reflect the Plan’s return objectives and risk tolerance constraints. This benchmark or “policy index” for the plan is constructed as follows: 40% S&P 500 Index, 10% MCSI EAFE, 10% Russell 2500 Stock Index, 40% Merrill Lynch Domestic Master Bond Index. The plan is expected to exceed the average annual return of this benchmark on a risk-adjusted basis over a (three to) five-year rolling time period or a full market cycle.

The absolute return goal for the plan is the actuarial interest rate for the plan, which is currently 7.75% in 2006. The plan is expected to exceed the policy index return and the absolute return goals each measured on a compound average annual return basis after the deduction of investment management fees and annualized over a five-year rolling time period or a full market cycle.

The expected cash flows for K2’s pension plan are as follows:

	Pension Benefits
	(Thousands)
K2 contributions expected to be made in 2006:	$	61
Expected benefit payments:
2006	$	3,653
2007		3,735
2008		3,469
2009		3,847
2010		4,182
2011-2015		22,217
Total	$	41,103

75

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits (Continued)

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”). The four foreign plans in Germany 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.

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. 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. As of December 31, 2005, K2’s assumptions related to the discount rate, projected compensation increases and expected return on assets were 4.46%, 4.16% and 4.52%, respectively compared to 4.78%, 4.16% and 4.61%, respectively, as of December 31, 2004. During the year ended December 31, 2005, K2 made contributions totaling $1.4 million to the foreign plans.

Pension expense for the 2005 year was approximately $0.3 million higher than the 2004 year. The 2005 increase in pension expense was primarily attributable to the following, which reflects the addition of German plans during 2004: a $0.1 million increase in service cost, a $0.3 million increase in interest cost, partially offset by a $0.1 million increase in asset returns. For 2006, pension expense 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 plans in 2006.

Based on the decrease in the discount rate and lower expected asset returns, the accumulated benefit obligation of the pension plans exceeded the fair value of the assets of the plans by $7.8 million and $8.5 million as of December 31, 2005 and 2004, respectively. These asset shortfalls resulted in K2 recording a non-cash charge to accumulated other comprehensive income (loss), a component of K2’s shareholders’ equity, of $1.6 million ($1.3 million, net of taxes) as of December 31, 2005. Based on this amount recorded, K2 had $7.8 million and $8.5 million, of net pension liabilities as of December 31, 2005 and 2004, respectively, consisting of $7.8 million and $8.5 million, respectively, in asset shortfalls. As of December 31, 2005, K2 treated $1.2 million of the pension liability as current and $6.6 million as long-term as K2 estimates contributions totaling $1.2 million to be made to the plans during the year ended December 31, 2006.

76

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits (Continued)

The following table sets forth the defined benefit foreign plans’ funded status and amounts recognized in K2’s consolidated balance sheets as of December 31:

	Foreign Pension Plans
	2005			2004
	(Thousands)
Change in benefit obligation
Benefit obligation at beginning of year	$	19,668		$	16,226
Service cost		308			207
Interest cost		862			577
Employee contributions		61			66
Actuarial loss		905			1,140
Exchange rate changes		(2,311	)		1,795
Benefits paid		(641	)		(343	)
Benefit obligation at end of year	$	18,852		$	19,668
Change in fair value of plan assets
Fair value of plan assets at beginning of year	$	10,628		$	8,801
Actual return on fair value of plan assets		366			262
Employer contributions		1,367			912
Employee contributions		61			66
Exchange rate changes		(1,218	)		930
Benefits paid		(641	)		(343	)
Fair value of plan assets at end of year	$	10,563		$	10,628
Reconciliation of funded status
*Funded status of the plans	$	(8,289	)	$	(9,040	)
Unrecognized actuarial loss		2,105			1,292
Net amount recognized at end of year	$	(6,184	)	$	(7,748	)
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost	$	23		$	20
Accrued benefit liability		(7,775	)		(8,580	)
Accumulated other comprehensive loss		1,568			812
Net amount recognized at end of year	$	(6,184	)	$	(7,748	)

* Fair value of assets less benefit obligation

77

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits (Continued)

Net periodic benefit cost consisted of the following for the year ended December 31:

	Foreign Pension Plans
	2005			2004
	(Thousands)
Net periodic benefit cost
Service cost	$	308		$	206
Interest cost		862			577
Expected return on plan assets		(466	)		(331	)
Net periodic benefit cost	$	704		$	452

The above table does not include the foreign plans for 2003 amounts as it was not practical to obtain the information. Four of the five plans were acquired in 2004.

Additional information about the foreign pension plans as of and for the year ended December 31 is as follows:

	Foreign Pension Plans
	2005			2004
	(Thousands)
Additional information for pension plans with an accumulated benefit obligation and projected benefit obligation in excess of plan assets:
Projected benefit obligation	$	18,709		$	19,517
Accumulated benefit obligation		18,189			19,007
Fair value of plan assets		10,415			10,470
Additional information:
Accumulated benefit obligation	$	18,333		$	19,158
Increase in additional minimum liability included in other comprehensive income (loss)		756			812
Actual return on plan assets		366			262
Weighted average assumptions used to determine benefit obligations at December 31:
Discount rate		4.46	%		4.78	%
Rate of compensation increase		4.16	%		4.16	%
Weighted average assumptions used to determine net periodic benefit cost:
Discount rate		4.78	%		5.14	%
Expected long-term rate of return on plan assets		4.52	%		4.61	%
Rate of compensation increase		4.16	%		4.16	%
Measurement Date		December 31			December 31

78

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits (Continued)

K2’s foreign pension plans weighted average asset allocations as of December 31, 2005 and 2004 by asset category are as follows:

Asset Category	Target Allocation		Actual Pension Plan of K2 Inc.
			2005		2004
Equity	23.9	%	22.6	%	20.4	%
Fixed Income	71.5	%	72.2	%	74.3	%
Real Estate	4.6	%	4.7	%	4.8	%
Other	0.0	%	0.5	%	0.5	%
	100.0	%	100.0	%	100.0	%

To guide it in its strategic management of the assets and control of the various risks to which the Shakespeare Company Retirement and Death Benefit Scheme (“the Scheme”) is exposed, the overall investment objective adopted by the Trustees is to maximize return subject to an acceptable level of risk, where both risk and return are measured relative to the liabilities of the Scheme. However, it is also the aim to protect the Minimum Funding Requirement position.

The Trustees have determined a benchmark of asset types. This strategy is based on the investment objectives and expert advice. It currently involves a majority exposure to long dated fixed interest bonds with the balance in other asset classes. The current benchmark allocation is constructed as follows: 36% Balanced, 21.4% long dated fixed-interest Gilts, 21.3% Index-Linked Gilts, 21.3% long dated Corporate Bonds. Although the portfolio is not rebalanced back to this benchmark, the trustees review from time to time and adjust as they deem necessary.

Regarding the Germany plans, the direct promises are not funded and there is no investment policy. The support funds are reinsured with an insurance company. The insurance company determines the investment policy and invests predominantly in fixed income investments with a small exposure to equities and property.

The expected cash flows for K2’s foreign pension plans are as follows:

	Pension Benefits
	(Thousands)
K2 contributions expected to be made in 2006:	$	1,220
Expected benefit payments:
2006	$	712
2007		741
2008		764
2009		799
2010		832
2011-2015		4,756
Total	$	8,604

79

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 9—Employee Retirement Benefits (Continued)

Defined contribution plan

K2 also sponsors defined contribution pension plans covering most of its domestic employees. Contributions by K2 for the defined contribution plans are determined as a percent of the amounts contributed by the respective employees. During 2005, 2004 and 2003, K2 expensed contributions of $3.6 million, $2.1 million and $0.9 million, respectively, related to these plans.

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, 2003	$	(3,133	)	$	(5,255	)	$	(2,157	)	$	(10,545	)
Currency translation adjustment		10,276			—			—			10,276
Change in additional minimum pension liability, net of $2,838 in taxes		—			(5,270	)		—			(5,270	)
Reclassification adjustment for amounts recognized in cost of sales		—			—			2,087			2,087
Change in fair value of derivatives, net of $575 in taxes		—			—			(998	)		(998	)
Balance at December 31, 2004		7,143			(10,525	)		(1,068	)		(4,450	)
Currency translation adjustment		(16,325	)								(16,325	)
Change in additional minimum pension liability, net of $323 in taxes					(2,945	)					(2,945	)
Reclassification adjustment for amounts recognized in cost of sales								927			927
Change in fair value of derivatives, net of $123 in taxes								(107	)		(107	)
Balance at December 31, 2005	$	(9,182	)	$	(13,470	)	$	(248	)	$	(22,900	)

The earnings associated with K2’s investment in its foreign subsidiaries are considered to be permanently invested and no provision for U.S. federal and state income taxes on those earnings or translation adjustments has been provided.

Note 11—Stock Options

Under K2’s 2005, 2004, 1999 and 1994 Stock Option Plans (“2005 Plan,” “2004 Plan,” “1999 Plan” and “1994 Plan,” respectively), 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. The 2005 Plan and 2004 Plan also permit for the granting of restricted shares, restricted stock units and other stock-based and performance awards.

During 2005 and 2004, 100,000 and 130,000, respectively, shares of restricted common stock were granted to certain key employees, subject to repurchase or forfeiture. The restriction period on 170,000 of these grants

80

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 11—Stock Options (Continued)

shall lapse as to one-third of the restricted shares on each annual anniversary of the date of grant. The restriction period on 20,000 of these grants shall lapse as to one-fifth of the restricted shares on each annual anniversary of the date of grant. The restriction period on 40,000 of these grants shall lapse as to twenty percent, thirty percent and fifty percent of the restricted shares on the first, second and third, respectively, annual anniversary of the date of grant. During the years ended December 31, 2005 and 2004, K2 recognized compensation expense of approximately $818,000 and $199,000, respectively, in conjunction with these equity awards, which is based on the market value of the shares on date of grant.

The 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.

Options granted, exercised and forfeited under the 2005 Plan, 2004 Plan, 1999 Plan and 1994 Plan and options assumed from acquisitions (collectively, “the Plans”) were as follows:

			Exercise Price
	Shares		Low		High		Weighted Average
Options outstanding at December 31, 2002	1,860,130		$	7.13	$	29.88	$	11.83
Granted	617,900			7.45		17.89		7.72
Assumed from acquisitions	1,760,646			2.46		25.68		8.32
Exercised	(1,217,794	)		2.83		17.25		7.39
Forfeited	(156,880	)		7.13		26.50		19.29
Options outstanding at December 31, 2003	2,864,002			2.46		29.88		9.99
Granted	1,192,400			12.97		15.34		13.74
Assumed from acquisitions	219,827			2.39		65.00		10.70
Exercised	(666,914	)		2.39		17.25		7.40
Forfeited	(70,029	)		7.04		24.03		16.45
Options outstanding at December 31, 2004	3,539,286			2.39		65.00		11.66
Granted	1,002,650			10.47		13.15		12.50
Exercised	(88,215	)		2.39		11.97		7.05
Forfeited	(216,389	)		2.39		61.20		18.70
Options outstanding at December 31, 2005	4,237,332		$	2.39	$	65.00	$	11.60

At December 31, 2005, 2004 and 2003, stock options to purchase 3,971,082, 1,985,565 and 2,289,854 were exercisable at weighted average prices of $11.86, $11.46 and $10.60, respectively. At December 31, 2005, 230,240 shares of common stock were reserved for issuance under the Plans.

81

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 11—Stock Options (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 December 31, 2005 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–$4.06	22,826	$	3.13	5.48 years	22,826	$	3.13
$4.72–$5.84	146,528		5.11	5.65 years	146,528		5.11
$6.12–$7.25	444,961		7.12	4.18 years	444,961		7.12
$7.30–$8.76	859,208		7.70	5.92 years	605,458		7.81
$9.51–$13.25	1,337,635		12.35	8.0 years	1,325,135		12.35
$13.69–$14.51	1,124,081		13.71	8.25 years	1,124,081		13.71
$15.34–$19.47	124,360		17.34	3.88 years	124,360		17.34
$20.00–$26.50	175,183		24.71	1.55 years	175,183		24.71
$29.88–$65.00	2,550		49.07	.80 years	2,550		49.07
Total	4,237,332	$	11.60	6.76 years	3,971,082	$	11.86

Note 12—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, shares held in escrow and warrants, using the treasury stock method, and of the debentures using the “if converted” method. The table below provides a reconciliation from basic shares to fully diluted shares for the respective periods.

Options to purchase 4,237,332, 3,539,286 and 2,864,002 shares of common stock were outstanding at December 31, 2005, 2004 and 2003, respectively. At December 31, 2005, there were also 192,000 unvested restricted stock awards outstanding and 523,623 shares held in escrow relating to certain acquisitions. At December 31, 2005, shares of common stock issuable upon conversion of the $100 million of convertible debentures totaling 7,803,775 and warrants to purchase 767,589 of shares of common stock were outstanding.

For the years ended December 31, 2005, 2004 and 2003, approximately 4,237,000, 426,000 and 960,000 stock options, respectively, were excluded since their inclusion would have been antidilutive. For the year ended December 31, 2005, 767,589 warrants were also excluded as their inclusion would have been antidilutive. The EPS calculation for year ended December 31, 2003 also excluded 2,097,282 shares from the issuance of $25 million convertible subordinated debentures in February 2003, since their inclusion would have also been antidilutive.

82

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 12—Earnings Per Share Data

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

	Year ended December 31
	2005			2004		2003
	(Thousands, except per share amounts)
Determination of diluted number of shares:
Average common shares outstanding		46,272			40,285		24,958
Assumed conversion of dilutive stock options, restricted stock and warrants		—			854		596
Shares held in escrow relating to completed acquisitions		—			402		26
Assumed conversion of subordinated debentures		—			7,804		3,170
Diluted average common shares outstanding (b)		46,272			49,345		28,750
Calculation of diluted earnings (loss) per share:
Net income (loss)	$	(211,561	)	$	38,941	$	11,424
Add: interest component on assumed conversion of subordinated debentures, net of taxes		—			3,616		1,354
Net income (loss), adjusted (a)	$	(211,561	)	$	42,557	$	12,778
Diluted earnings (loss) per share (a/b)	$	(4.57	)	$	0.86	$	0.44

Note 13—Shareholders’ Equity

On July 1, 2004, K2 completed the sale of 6.4 million shares of its common stock at $15.50 per share. The net proceeds to K2 from the offering were approximately $93.6 million and were used to repay borrowings under K2’s Facility.

Preferred Stock

Shares are issuable in one or more series, and the Board of Directors has authority to fix the terms and conditions of each series. No shares were issued or outstanding during 2005 and 2004.

Preferred Stock Rights

Rights are outstanding which entitle the holder of each share of Common Stock of K2 to buy one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock at an exercise price of $60.00 per one one-hundredth of a share, subject to adjustment. The rights are not separately tradable or exercisable until a party either acquires, or makes a tender offer resulting in ownership of, at least 15% of K2’s common shares. If a person becomes the owner of at least 15% of K2’s outstanding common shares (an “Acquiring Person”), each holder of a right other than such Acquiring Person and its affiliates is entitled, upon payment of the then-current exercise price per right (the “Exercise Price”), to receive shares of Common Stock (or Common Stock equivalents) having a market value of twice the Exercise Price. If K2 subsequently engages in a merger, a business combination or an asset sale with the Acquiring Person, each holder of a right other than the Acquiring Person and its affiliates is thereafter entitled, upon payment of the Exercise Price, to receive stock of the Acquiring Person having a market value of twice the Exercise Price. At any time after any party becomes an

83

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 13—Shareholders’ Equity (Continued)

Acquiring Person, the Board of Directors may exchange the rights (except those held by the Acquiring Person) at an exchange ratio of one common share per right. Prior to a person becoming an Acquiring Person, the rights may be redeemed at a redemption price of one cent per right, subject to adjustment. The rights are subject to amendment by the Board.

Shares Reserved

K2 had 110,000,000 authorized shares of common stock at December 31, 2005 and December 31, 2004. The table below outlines common shares reserved for future issuance:

	December 31
	2005		2004
	(Thousands)
Total Authorized Shares	110,000		110,000
Common shares issued	(47,663	)	(47,543	)
Shares reserved for future issuance:
Stock options outstanding	(4,237	)	(3,539	)
Restricted stock awards—unvested	(192	)	(130	)
Stock options reserved for future issuance	(230	)	(1,292	)
Warrants under 7.25% Debentures	(921	)	(921	)
Shares issuable upon conversion of 7.25% Debentures	(2,517	)	(2,517	)
Shares issuable upon conversion of 5.00% Debentures	(5,707	)	(5,706	)
Remaining Authorized Shares	48,533		48,352

Note 14—Segment Data

As a result of recent acquisitions, beginning in the 2004 third quarter, K2 reclassified 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 and K2 Licensed Products. The Action Sports segment includes skis, snowboards, snowshoes, in-line skates and paintball products. The Apparel and Footwear segment includes Marmot and Ex Officio products as well as skateboard shoes and related apparel.

Although the sporting goods manufacturing industry is highly fragmented, many of the retail customers that purchase sporting goods are highly concentrated. Large format sporting goods retailers are important to K2’s results of operations and net sales to Wal-Mart Stores, Inc. and its affiliates accounted for approximately 15% of K2’s consolidated net sales for 2005, compared to 16% in 2004 and 15% in 2003.

K2 evaluates performance based on operating profit or loss (before interest, gain on sale of operating division, debt extinguishment costs, corporate expenses and income taxes). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 of Notes to Consolidated Financial Statements. Intercompany profit or loss is eliminated where applicable.

84

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 14—Segment Data (Continued)

The information presented below is as of or for the year ended December 31.

	Net Sales to Unaffiliated
	Customers						Intersegment Sales						Operating Profit (Loss)
	2005		2004		2003		2005		2004		2003		2005			2004			2003
	(Millions)
Marine and Outdoor	$	392.2	$	336.9	$	324.0	$	146.8	$	117.2	$	80.7	$	50.3		$	42.4		$	44.4
Action Sports (a)		482.5		502.7		247.0		10.5		5.0		—		(147.4	)		39.3			4.7
Team Sports (b)		265.2		250.4		116.9		—		—		—		(82.0	)		2.4			(12.1	)
Apparel and Footwear		173.7		110.7		30.6		2.8		1.0		1.4		15.7			11.0			0.9
Total segment data	$	1,313.6	$	1,200.7	$	718.5	$	160.1	$	123.2	$	82.1		(163.4	)		95.1			37.9
Corporate expenses, net														(12.7	)		(13.9	)		(5.8	)
Gain on sale of operating division														—			—			2.2
Debt extinguishment costs														—			—			(6.7	)
Interest expense														(30.4	)		(21.4	)		(10.0	)
Income (loss) before income taxes													$	(206.5	)	$	59.8		$	17.6

(a) 2005 Operating loss includes non-cash intangible impairment charges of $168.3 million.

(b) 2005 Operating loss includes non-cash intangible impairment charges of $84.9 million.

85

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 14—Segment Data (Continued)

							Depreciation and
	Identifiable Assets						Amortization						Capital Expenditures
	2005		2004		2003		2005		2004		2003		2005		2004		2003
	(Millions)
Marine and outdoor	$	318.4	$	266.8	$	201.3	$	10.8	$	6.6	$	6.6	$	20.6	$	12.8	$	8.3
Action sports		431.9		680.0		382.5		16.6		16.7		7.2		12.8		14.2		5.6
Team sports		218.9		269.2		243.1		5.0		6.3		2.7		2.7		4.1		2.6
Apparel and Footwear		180.3		168.1		9.0		1.2		2.2		0.2		3.3		1.1		0.1
Total segment data		1,149.5		1,384.1		835.9		33.6		31.8		16.7		39.4		32.2		16.6
Corporate		41.0		72.3		36.0		3.4		3.6		3.5		2.5		4.1		4.2
Total	$	1,190.5	$	1,456.4	$	871.9	$	37.0	$	35.4	$	20.2	$	41.9	$	36.3	$	20.8

	2005		2004		2003
	(Millions)
Net sales by location
United States	$	955.8	$	871.1	$	509.6
Canada		33.4		28.5		15.1
Europe		249.1		237.2		135.1
Asia / Pacific		75.3		63.9		58.7
Total foreign countries		357.8		329.6		208.9
Total net sales	$	1,313.6	$	1,200.7	$	718.5
Assets
North America	$	886.8	$	1,133.9	$	709.5
Europe		201.8		230.6		105.5
Asia / Pacific		101.9		91.9		56.9
Total assets	$	1,190.5	$	1,456.4	$	871.9
Long-lived and intangible assets
North America	$	308.9	$	569.6	$	290.2
Europe		49.8		58.1		18.1
Asia / Pacific		29.4		21.6		11.6
Total long-lived assets	$	388.1	$	649.3	$	319.9

86

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 15—Supplemental Guarantor Information

Obligations to pay principal and interest on K2’s Senior Notes are guaranteed fully and unconditionally by certain of 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 is presented below.

Condensed Consolidating Statements of Operations

(Thousands)

	For the year ended December 31, 2005
				Guarantor			Non-guarantor			Eliminating			Consolidated
	K2 Inc.			Subsidiaries			Subsidiaries			Entries			K2 Inc.
Net sales	$	—		$	960,768		$	512,910		$	(160,080	)	$	1,313,598
Cost of products sold		—			651,148			369,691			(158,884	)		861,955
Gross profit		—			309,620			143,219			(1,196	)		451,643
Selling expenses		—			158,912			71,501			—			230,413
General and administrative expenses		31,060			81,723			34,293			—			147,076
Non-cash intangible impairment charges		193,123			5,763			54,268			—			253,154
Operating income (loss)		(224,183	)		63,222			(16,843	)		(1,196	)		(179,000	)
Income in consolidated subsidiaries		38,328						—			(38,328	)		—
Other (income) expense, net		(648	)		(1,737	)		(455	)		—			(2,840	)
Interest expense		26,354			98			3,900			—			30,352
Income (loss) before income taxes		(211,561	)		64,861			(20,288	)		(39,524	)		(206,512	)
Provision for income taxes		—			(784	)		5,833			—			5,049
Net income (loss)	$	(211,561	)	$	65,645		$	(26,121	)	$	(39,524	)	$	(211,561	)

Condensed Consolidating Statements of Income

(Thousands)

	For the year ended December 31, 2004
				Guarantor			Non-guarantor			Eliminating			Consolidated
	K2 Inc.			Subsidiaries			Subsidiaries			Entries			K2 Inc.
Net sales	$	—		$	961,657		$	362,296		$	(123,226	)	$	1,200,727
Cost of products sold		—			654,295			268,855			(122,472	)		800,678
Gross profit		—			307,362			93,441			(754	)		400,049
Selling expenses		—			159,194			37,940			—			197,134
General and administrative expenses		25,440			77,216			19,239			—			121,895
Operating income (loss)		(25,440	)		70,952			36,262			(754	)		81,020
Income in consolidated subsidiaries		85,376			—			—			(85,376	)		—
Other (income) expense, net		2,304			1,142			(3,692	)		—			(246	)
Interest expense		18,691			(547	)		3,305			—			21,449
Income (loss) before income taxes		38,941			70,357			36,649			(86,130	)		59,817
Provision for income taxes		—			11,079			9,797			—			20,876
Net income (loss)	$	38,941		$	59,278		$	26,852		$	(86,130	)	$	38,941

87

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 15—Supplemental Guarantor Information (Continued)

Condensed Consolidating Statements of Income

(Thousands)

	For the year ended December 31, 2003
				Guarantor		Non-guarantor			Eliminating			Consolidated
	K2 Inc.			Subsidiaries		Subsidiaries			Entries			K2 Inc.
Net sales	$	—		$	512,651	$	287,939		$	(82,051	)	$	718,539
Cost of products sold		—			358,658		221,359			(81,397	)		498,620
Gross profit		—			153,993		66,580			(654	)		219,919
Selling expenses		—			82,752		33,757			—			116,509
General and administrative expenses		13,243			43,006		15,109			—			71,358
Operating income (loss)		(13,243	)		28,235		17,714			(654	)		32,052
Income in subsidiaries		37,938			—		—			(37,938	)		—
Other (income) expense, net		(2,224	)		2,208		(2,202	)		—			(2,218	)
Interest expense		15,495			845		355			—			16,695
Income (loss) before income taxes		11,424			25,182		19,561			(38,592	)		17,575
Provision for income taxes		—			1,789		4,362			—			6,151
Net income (loss)	$	11,424		$	23,393	$	15,199		$	(38,592	)	$	11,424

88

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 15—Supplemental Guarantor Information (Continued)

Condensed Consolidating Balance Sheets

(Thousands)

	As of December 31, 2005
			Guarantor			Non-guarantor		Eliminating			Consolidated
	K2 Inc.		Subsidiaries			Subsidiaries		Entries			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
Investment in affiliates		841,857		—			—		(841,857	)		—
Advances to affiliates		1,002		380,406			73,432		(454,840	)		—
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 subordinated 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

89

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 15—Supplemental Guarantor Information (Continued)

Condensed Consolidating Balance Sheet—Continued

(Thousands)

	As of December 31, 2004
				Guarantor		Non-guarantor		Eliminating			Consolidated
	K2 Inc.			Subsidiaries		Subsidiaries		Entries			K2 Inc.
Assets
Current Assets
Cash and cash equivalents	$	3,167		$	5,098	$	17,368	$	—		$	25,633
Accounts receivable, net		34,168			240,652		176,630		(81,536	)		369,914
Inventories, net		—			212,526		112,599		—			325,125
Deferred income taxes		27,970			14		1,725		—			29,709
Prepaid expenses and other current assets		716			5,582		16,477		—			22,775
Total current assets		66,021			463,872		324,799		(81,536	)		773,156
Property, plant and equipment		8,548			153,883		110,528		—			272,959
Less allowance for depreciation and amortization		638			93,939		37,418		—			131,995
		7,910			59,944		73,110		—			140,964
Investment in affiliates		563,600			—		—		(563,600	)		—
Advances to affiliates		19,955			506,099		4,767		(530,821	)		—
Intangible assets, net		476,870			14,100		17,395		—			508,365
Deferred Income Taxes		—			7,506		—		—			7,506
Other		20,707			2,702		2,965		—			26,374
Total Assets	$	1,155,063		$	1,054,223	$	423,036	$	(1,175,957	)	$	1,456,365
Liabilities and Shareholders’ Equity
Current Liabilities
Bank loans	$	—		$	—	$	31,490	$	—		$	31,490
Accounts payable		3,043			97,124		84,527		(81,536	)		103,158
Accrued liabilities		56,193			62,320		60,940		—			179,453
Current portion of long-term debt		30,455			421		4,198		—			35,074
Total current liabilities		89,691			159,865		181,155		(81,536	)		349,175
Long-term pension liabilities		16,854			—		—		—			16,854
Long-term debt		229,736			1,624		19,452		—			250,812
Deferred income taxes		52,048			6,075		—		—			58,123
Advances from affiliates		(14,667	)		478,277		67,211		(530,821	)		—
Convertible subordinated debentures		98,535			—		—		—			98,535
Interdivisional equity		—			408,382		155,218		(563,600	)		—
Shareholders’ Equity		682,866			—		—		—			682,866
Total Liabilities and Shareholders’ Equity	$	1,155,063		$	1,054,223	$	423,036	$	(1,175,957	)	$	1,456,365

90

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 15—Supplemental Guarantor Information—(Continued)

Condensed Consolidating Statements of Cash Flows

(Thousands)

	For the year ended December 31, 2005
				Guarantor			Non-guarantor			Eliminating			Consolidated
	K2 Inc.			Subsidiaries			Subsidiaries			Entries			K2 Inc.
Operating Activities
Net income (loss)	$	(211,561	)	$	65,645		$	(26,121	)	$	(39,524	)	$	(211,561	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		7,502			14,516			15,017			—			37,035
Non-cash intangible impairment charges		193,123			5,763			54,268			—			253,154
Non-cash stock compensation charges		885			—			—			—			885
Deferred taxes		(6,875	)		1,730			1,048			—			(4,097	)
Increase in long-term pension liabilities		3,527			—			6,377			—			9,904
Changes in operating assets and liabilities:
Accounts receivable, net		(9,532	)		(6,486	)		13,049			(8,199	)		(11,168	)
Inventories, net		—			(40,182	)		8,705			—			(31,477	)
Prepaid expenses and other current assets		(2,765	)		965			2,798			—			998
Accounts payable		30,868			(12,999	)		(40,295	)		8,199			(14,227	)
Payroll and other accruals		(352	)		(2,526	)		(9,987	)		—			(12,865	)
Net cash provided by (used in) operating activities		4,820			26,426			24,859			(39,524	)		16,581
Investing Activities
Property, plant & equipment expenditures		(2,251	)		(17,087	)		(22,563	)		—			(41,901	)
Disposals of property, plant & equipment		138			2,042			1,391			—			3,571
Purchase of businesses, net of cash acquired		—			(15,099	)		(1,367	)		—			(16,466	)
Other items, net		31,859			189,437			20,641			(238,733	)		3,204
Net cash provided by (used in) investing activities		29,746			159,293			(1,898	)		(238,733	)		(51,592	)
Financing Activities
Borrowings under long-term debt		1,024,500			—			—			—			1,024,500
Payments of long-term debt		(989,054	)		(1,928	)		(4,954	)					(995,936	)
Net increase (decrease) in short-term bank loans		—			—			(7,445	)		—			(7,445	)
Proceeds received from exercise of stock options		623			—			—			—			623
Net cash provided by (used in) financing activities		36,069			(1,928	)		(12,399	)		—			21,742
Effects of foreign exchange rates on cash and cash equivalents		—			—			(567	)		—			(567	)
(Increase) decrease in investment in subsidiaries		(278,257	)		—			—			278,257			—
Advances (to) from affiliates		207,030			(187,295	)		(19,735	)		—			—
Net increase (decrease) in cash and cash equivalents		(592	)		(3,504	)		(9,740	)		—			(13,836	)
Cash and cash equivalents at beginning of year		3,167			5,098			17,368			—			25,633
Cash and cash equivalents at end of period	$	2,575		$	1,594		$	7,628		$	—		$	11,797

91

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 15—Supplemental Guarantor Information—(Continued)

Condensed Consolidating Statements of Cash Flows—Continued

(Thousands)

	For the year ended December 31, 2004
				Guarantor			Non-guarantor			Eliminating			Consolidated
	K2 Inc.			Subsidiaries			Subsidiaries			Entries			K2 Inc.
Operating Activities
Net income (loss)	$	38,941		$	59,278		$	26,852		$	(86,130	)	$	38,941
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of operating division		(206	)		—			—			—			(206	)
Depreciation and amortization		11,956			13,655			9,744			—			35,355
Non-cash stock compensation charges		224			—			—			—			224
Deferred income taxes		30,284			(15,674	)		(9,860	)		—			4,750
Increase in long-term pension liabilities		5,681			—			—			—			5,681
Changes in operating assets and liabilities:
Accounts receivable, net		6,452			(58,621	)		(61,977	)		11,488			(102,658	)
Inventories, net		—			(15,458	)		23,624			—			8,166
Prepaid expenses and other current assets		257			975			429			—			1,661
Accounts payable		3,043			(24,207	)		27,617			(11,488	)		(5,035	)
Payroll and other accruals		14,863			13,215			(1,114	)		—			26,964
Net cash provided by (used in) operating activities		111,495			(26,837	)		15,315			(86,130	)		13,843
Investing Activities
Property, plant & equipment expenditures		(4,098	)		(10,615	)		(21,584	)		—			(36,297	)
Disposals of property, plant & equipment		—			1,093			152			—			1,245
Purchase of businesses, net of cash acquired		(175,838	)		—			—			—			(175,838	)
Other items, net		12,959			(30,091	)		(15,336	)		26,109			(6,359	)
Net cash provided by (used in) investing activities		(166,977	)		(39,613	)		(36,768	)		26,109			(217,249	)
Financing Activities
Issuance of senior notes		200,000			—			—			—			200,000
Borrowings under long-term debt		738,366			—			—			—			738,366
Payments of long-term debt		(788,489	)		—			—			—			(788,489	)
Net decrease in short-term bank loans		—			—			(32,531	)		—			(32,531	)
Net proceeds from equity issuance		93,580			—			—			—			93,580
Debt issuance costs		(8,591	)		—			—			—			(8,591	)
Proceeds received from exercise of stock options and warrants		5,051			—			—			—			5,051
Net cash provided by (used in) financing activities		239,917			—			(32,531	)		—			207,386
Effect of foreign exchange rates on cash and cash equivalents		—			—			397			—			397
(Increase) decrease in investment in subsidiaries		(60,021	)		—			—			60,021			—
Advances (to) from affiliates		(123,930	)		69,350			54,580			—			—
Net increase in cash and cash equivalents		484			2,900			993			—			4,377
Cash and cash equivalents at beginning of year		2,683			2,198			16,375			—			21,256
Cash and cash equivalents at end of period	$	3,167		$	5,098		$	17,368		$	—		$	25,633

92

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 15- Supplemental Guarantor Information (Continued)

Condensed Consolidating Statements of Cash Flows—Continued

(Thousands)

	For the year ended December 31, 2003
	K2 Inc.			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminating Entries			Consolidated K2 Inc.
Operating Activities
Net income (loss)	$	11,424		$	23,393		$	15,199		$	(38,592	)	$	11,424
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of operating division		(2,222	)		—			—			—			(2,222	)
Depreciation and amortization		4,590			12,189			4,867			—			21,646
Deferred income taxes		12,546			(8,711	)		(855	)		—			2,980
Decrease in long-term pension liabilities		(1,380	)		—			—			—			(1,380	)
Changes in operating assets and liabilities:
Accounts receivable, net		(20,376	)		44,238			(6,227	)		7,543			25,178
Inventories, net		—			(4,877	)		(15,279	)		—			(20,156	)
Prepaid expenses and other current assets		1,616			(794	)		(3,401	)		—			(2,579	)
Accounts payable		(12	)		1,845			9,635			(7,543	)		3,925
Payroll and other accruals		18,109			(23,318	)		2,464			—			(2,745	)
Net cash provided by (used in) operating activities		24,295			43,965			6,403			(38,592	)		36,071
Investing Activities
Property, plant & equipment expenditures		(4,408	)		(9,583	)		(6,768	)		—			(20,759	)
Disposals of property, plant & equipment		—			248			152			—			400
Purchase of businesses, net of cash acquired		(38,902	)		—			—			—			(38,902	)
Proceeds from sale of operating division		20,132			—			—			—			20,132
Other items, net		126,434			(33,552	)		(9,572	)		(89,130	)		(5,820	)
Net cash provided by (used in) investing activities		103,256			(42,887	)		(16,188	)		(89,130	)		(44,949	)
Financing Activities
Issuance of convertible subordinated debentures		100,000			—			—			—			100,000
Borrowings under long-term debt		523,673			—			—			—			523,673
Payments of long-term debt		(584,811	)		—			—			—			(584,811	)
Repayment under accounts receivable purchase facility		(25,702	)		—			—			—			(25,702	)
Net increase in short-term bank loans					13			4,477			—			4,490
Debt issuance costs		(8,257	)		—			—			—			(8,257	)
Proceeds received from exercise of stock options		8,983			—			—			—			8,983
Net cash used in financing activities		13,886			13			4,477			—			18,376
Effect of foreign exchange rates on cash and cash equivalents		—			—			530			—			530
(Increase) decrease in investment in subsidiaries		(127,722	)		—			—			127,722			—
Advances (to) from affiliates		(12,307	)		(654	)		12,961			—			—
Net increase in cash and cash equivalents		1,408			437			8,183			—			10,028
Cash and cash equivalents at beginning of year		1,275			1,761			8,192			—			11,228
Cash and cash equivalents at end of period	$	2,683		$	2,198		$	16,375			—		$	21,256

93

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 16—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. During 2005, 2004 and 2003, K2 paid a total of approximately $913,000, $954,000 and $214,000, respectively, pursuant to these agreements related to expenses incurred by Mr. Heckmann and other executive officers of K2.

Note 17—Quarterly Operating Data (Unaudited)

	Quarter
	First		Second		Third		Fourth			Year
	(Millions, except per share and stock price amounts)
2005
Net sales	$	318.3	$	301.4	$	340.4	$	353.5		$	1,313.6
Gross profit		102.8		99.8		125.1		123.9			451.6
Net income (loss) (a)	$	2.3	$	1.5	$	16.7	$	(232.1	)	$	(211.6	)
Basic earnings per share
Net income (loss)	$	0.05	$	0.03	$	0.36	$	(5.01	)	$	(4.57	)
Diluted earnings per share
Net income (loss)	$	0.05	$	0.03	$	0.32	$	(5.01	)	$	(4.57	)
Cash dividend per share—none
Stock prices:
High	$	15.88	$	13.90	$	13.64	$	11.50		$	15.88
Low	$	12.73	$	11.34	$	11.17	$	8.81		$	8.81

(a) Fourth quarter net loss includes non-cash intangible impairment charges of $243.0 million, net of taxes.

94

K2 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2005

Note 17—Quarterly Operating Data (Unaudited) (Continued)

	Quarter
	First		Second		Third		Fourth		Year
	(Millions, except per share and stock price amounts)
2004
Net sales	$	277.4	$	251.0	$	333.5	$	338.8	$	1,200.7
Gross profit		86.6		77.4		119.2		116.8		400.0
Net income	$	10.7	$	6.2	$	13.2	$	8.8	$	38.9
Basic earnings per share
Net income	$	0.31	$	0.18	$	0.28	$	0.19	$	0.97
Diluted earnings per share
Net income	$	0.27	$	0.16	$	0.26	$	0.18	$	0.86
Cash dividend per share—none
Stock prices:
High	$	18.50	$	16.92	$	15.23	$	17.25	$	18.50
Low	$	15.13	$	13.60	$	12.74	$	14.29	$	12.74

95

K2 INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of K2 Inc.

We have audited the accompanying consolidated balance sheets of K2 Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15 (a-2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of K2 Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of K2 Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2006 expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

San Diego, California

March 9, 2006

96

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of K2 Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that K2 Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). K2 Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that K2 Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, K2 Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of K2 Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of K2 Inc. and our report dated March 9, 2006 expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

San Diego, California

March 9, 2006

97

ITEM  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM  9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

K2 maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (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 at the reasonable assurance level as of the Evaluation Date.

Changes in Internal Control Over Financial Reporting

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 has materially affected, or are reasonably likely to materially affect, K2’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management of K2 is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

K2, under the supervision of and with the participation of management, including the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, assessed the Company’s internal control over financial reporting as of December 31, 2005, based on criteria for effective internal control over financial reporting described in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer concluded that the Company maintained effective internal control over financial reporting as of December 31, 2005, based on the specified criteria.

Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K has issued an attestation report on management’s assessment of the effectiveness of K2’s internal control over financial reporting as of December 31, 2005, and such report is included under Item 8, “Financial Statements and Supplementary Data” above.

98

Officer Certifications

K2 has included the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer certifications regarding K2’s public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2 and 31.3 to this report. Additionally, the certification of the Chief Executive Officer required by the New York Stock Exchange Listing Standards, Section 303A.12(a), relating to K2’s compliance with the New York Stock Exchange Corporate Governance Listing Standards, was submitted to the New York Stock Exchange on April 18, 2005.

Inherent Limitations on Effectiveness of Controls

K2’s management, including the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, does not expect that its disclosure controls and procedures or internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within K2 have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Furthermore, an important part of K2’s growth strategy has been, and will likely continue to be, the acquisition of complementary businesses, and the process of integrating new businesses into K2’s control system may hinder the effectiveness of K2’s overall disclosure controls.

ITEM  9B. OTHER INFORMATION

Subject to the satisfactory completion of the audit of Ernst & Young for fiscal year 2005 as referred to in their report, the Compensation Committee of the Board of Directors of K2 authorized and approved payments of cash incentive compensation for fiscal year 2005 and increases in the annual salaries for fiscal year 2006 for each of K2’s named executive officers. Pursuant to such authorization and approval, Richard J. Heckmann, Chairman of the Board and Chief Executive Officer, will receive $595,000 in incentive compensation for fiscal year 2005 and will receive an annual base salary of $755,000 for fiscal year 2006; J. Wayne Merck, President and Chief Operating Officer, will receive $260,000 in incentive compensation for fiscal year 2005 and will receive an annual base salary of $620,000 for fiscal year 2006; Dudley W. Mendenhall, Senior Vice President and Chief Financial Officer, will receive $140,000 in incentive compensation for fiscal year 2005 and will receive an annual base salary of $325,000 for fiscal year 2006; John J. Rangel, President—K2 Inc. European Operations, will receive $140,000 in incentive compensation for fiscal year 2005 and will receive an annual base salary of $310,000 for fiscal year 2006; and Monte H. Baier, Vice President, General Counsel and Secretary, will receive $125,000 in incentive compensation for fiscal year 2005 and will receive an annual base salary of $280,000 for fiscal year 2006.

99

PART III

ITEM  10. Directors and Executive Officers of the Registrant.

The names of the executive officers of K2 and their ages, titles and biographies as of the date hereof are incorporated by reference from Part I, Item 1, above.

The remaining information required by this Item 10 will be included in the Proxy Statement to be filed within 120 days after K2’s fiscal year end of December 31, 2005 and is incorporated herein by reference:

ITEM  11. Executive Compensation.

The information required by this Item 11 will be included in the Proxy Statement, and such information is incorporated herein by reference.

ITEM  12. Security Ownership Of Certain Beneficial Owners And Management.

The information required by this Item 12 will be included in the Proxy Statement, and such information is incorporated herein by reference.

ITEM  13. Certain Relationships And Related Transactions.

The information required by this Item 13 will be included in the Proxy Statement, and such information is incorporated herein by reference.

ITEM  14. Principal Auditor Fees And Services.

The information required by this Item 14 will be included in the Proxy Statement, and such information is incorporated herein by reference.

100

PART IV

ITEM  15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report.

(a-1) Financial Statements (for the three years ended December 31, 2005 unless otherwise stated):

	Page Reference Form 10-K
Consolidated statements of operations	44
Consolidated balance sheets at December 31, 2005 and 2004	45
Consolidated statements of shareholders’ equity	46
Consolidated statements of cash flows	47
Notes to consolidated financial statements	48-95
Report of Independent Registered Public Accounting Firm	96
Report of Independent Registered Public Accounting Firm	97
Management’s Report on Internal Control Over Financial Reporting	98

(a-2) Consolidated financial statement schedule:

II-Valuation and qualifying accounts 107

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

(a-3)  Exhibits

(3)(i)(1)	Restated Certificate of Incorporation dated May 4, 1989.
(3)(i)(2)	Certificate of Amendment of Restated Certificate of Incorporation dated May 31, 1995.
(3)(i)(3)	Certificate of Amendment of Restated Certificate of Incorporation dated May 24, 1996.
(3)(i)(4)	Certificate of Amendment of the Certificate of Incorporation, filed as Exhibit 3.1 to Form 8-K, dated March 26, 2003 and incorporated herein by reference.
(3)(i)(5)	Certificate of Amendment of Restated Certificate of Incorporation, filed as Annex F to Schedule 14A filed April 14, 2004 and incorporated herein by reference.
(3)(ii)	By-Laws of K2 Inc., as amended and restated, filed as Exhibit 3.1 to Form 8-K filed February 17, 2005 and incorporated herein by reference.
(4)(a)	Rights Agreement dated as of July 1, 1999 between K2 Inc. and Harris Trust Company of California, as Rights Agent, which includes thereto the Form of Rights Certificate to be distributed to holders of Rights after the Distribution, filed as Item 2, Exhibit 1 to Form 8-A filed August 9, 1999 and incorporated herein by reference.
(b)	Securities Purchase Agreement dated as of November 2002, among K2 Inc. and the purchasers set forth on the signature pages thereto, filed as Item 7, Exhibit 4.1 to Form 8-K filed February 25, 2003 and incorporated herein by reference.

101

(c)	Form of Amended and Restated Convertible Debenture—Exhibit A to the Securities Purchase Agreement, filed as Exhibit 4.1 and 4.2 to Form 8-K filed June 5, 2003 and incorporated herein by reference.
(d)	Form of Amended and Restated Stock Purchase Warrant—Exhibit B to the Securities Purchase Agreement, filed as Exhibit 4.3 to Form 8-K filed June 5, 2003 and incorporated herein by reference.
(e)	Stock Purchase Warrant, filed as Exhibit 4.4 to Form 8-K filed June 5, 2003 and incorporated herein by reference.
(f)	Registration Rights Agreement—Exhibit C to the Securities Purchase Agreement, filed as Item 7, Exhibit 4.4 to Form 8-K filed February 25, 2003 and incorporated herein by reference.
(g)	Form of Amendment to Registration Rights Agreement dated June 4, 2003, filed as Exhibit 4.5 to Form 8-K filed June 5, 2003 and incorporated herein by reference.
(h)	Indenture dated as of June 10, 2003, filed as Exhibit 4.2 to Form S-3 filed September 8, 2003 and incorporated herein by reference.
(i)	Form of $75,000,000, 5.00% Convertible Senior Note, filed as Exhibit 4.3 to Form S-3 filed September 8, 2003 and incorporated herein by reference.
(j)	Registration Rights Agreement, dated as of June 10, 2003, filed as Exhibit 4.4 to Form S-3 filed September 8, 2003 and incorporated herein by reference.
(k)	Purchase Agreement, dated June 24, 2004, by and among K2 Inc., the guarantors listed therein and J.P. Morgan Securities Inc., as representative of the initial purchasers, filed as Exhibit 99.1 to Form 8-K filed June 28, 2004 and incorporated herein by reference.
(l)	Registration Rights Agreement, dated as of July 1, 2004, by and among K2 Inc., the guarantors listed therein and J.P. Morgan Securities Inc. and Banc of America Securities LLC, filed as Exhibit 10.9 to Form S-4 filed December 2, 2004 and incorporated herein by reference.
(m)	Indenture, dated as of July 1, 2004, among K2 Inc., the subsidiary guarantors named therein and U.S. Bank, National Association, as trustee, filed as Exhibit 10.15 to Form S-4 filed December 2, 2004 and incorporated herein by reference.
(10)(a)	Amended and Restated Credit Agreement dated as of February 21, 2006 among K2 Inc. and certain of its subsidiaries party thereto, the financial institutions named therein, as lenders, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and other parties named therein, filed as Exhibit 10.1 to Form 8-K filed February 24, 2006 and incorporated herein by reference.
(b)	Pledge and Security Agreement dated as of March 25, 2003, among K2 Inc. and Debtors set forth on the signature pages thereto, and Bank One, N.A., filed as Exhibit 10(c) to Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
(c)	Guaranty and Security Confirmation dated as of February 21, 2006 (amending Guaranty and Security Agreement dated as of July 1, 2004).
(d)	Retirement agreement dated November 20, 1995 between K2 Inc. and B.I. Forester.

102

(e)	Trust for Anthony Industries, Inc. Supplemental Employee Retirement Plan for the Benefit of B.I. Forester between K2 Inc. and Wells Fargo Bank N.A., as Trustee, dated November 20, 1995.
(f)	Special Supplemental Benefit Agreement between K2 Inc. and Bernard I. Forester dated December 9, 1986.
(g)	1994 Incentive Stock Option Plan.
(h)	1999 Incentive Stock Option Plan.
(i)	Form of Indemnification Agreement for K2 Inc. Directors and Executive Officers dated as of August 7, 2003, filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.
(j)	Reimbursement Agreement dated as of October 28, 2003 between Richard J. Heckmann and K2 Inc., filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.
(k)	Amendment No. 1 to Reimbursement Agreement dated as of July 6, 2004 between Richard J. Heckmann and K2 Inc., filed as Exhibit 10 to 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.
(l)	2004 Long-Term Incentive Plan, as approved by stockholders on May 13, 2004 and amended on June 30, 2004, filed as Exhibit 4 to 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.
(m)	2005 Long-Term Incentive Plan, as adopted by the Compensation Committee as of April 28, 2005, filed as Exhibit 4.1 to Form S-8 filed June 28, 2005 and incorporated herein by reference.
(n)	Form of Employment Agreement entered into by and between K2 Inc. and Richard J. Heckmann, filed as Exhibit 10.1 to Form 8-K filed February 17, 2005 and incorporated herein by reference.
(o)	Form of Employment Agreement entered into by and between K2 Inc. and each of J. Wayne Merck and John J. Rangel, filed as Exhibit 10.2 to Form 8-K filed February 17, 2005 and incorporated herein by reference.
(p)	Form of Employment Agreement entered into by and between K2 Inc. and each of Dudley W. Mendenhall and Monte H. Baier, filed as Exhibit 10.3 to Form 8-K filed February 17, 2005 and incorporated herein by reference.
(q)	K2 Inc. Severance Benefit Plan dated February 14, 2005, filed as Exhibit 10.4 to Form 8-K filed February 17, 2005 and incorporated herein by reference.
(r)	Asset Purchase Agreement dated June 8, 2000 by and between Tyco International (US) Inc., Ludlow Building Products, Inc. as Buyer, Tyco Plastics Services AG, as IP Buyer, and K2 Inc., as Seller.
(s)	Stock and Loan Purchase Agreement, dated as of June 15, 2004, among K2 Inc., Clarance S.à.r.l., Cavoma L.P. and the stockholders of Völkl Sports Holding AG, filed as Exhibit 2.1 to Form 8-K filed July 9, 2004 and incorporated herein by reference.
(t)	Stock and Loan Purchase Agreement, dated as of June 15, 2004, among K2 Inc., Clarance S.à.r.l., Cavoma L.P., Tecnica S.p.A. and the stockholders of CT Sports Holding AG, filed as Exhibit 2.2 to Form 8-K filed July 9, 2004 and incorporated herein by reference.

103

(12)	Statement of Computation of Ratio of Earnings to Fixed Charges.
(21)	Subsidiaries of K2 Inc.
(23)	Consent of Independent Registered Public Accounting Firm.
(24)	Power of Attorney (included in the signature page hereto).
(31.1)	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.3)	Certification by the Chief Operating Officer 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. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Refer to (a-3) above.

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

104

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 16, 2006	By:	/s/    THOMAS R. HILLEBRANDT
		Thomas R. Hillebrandt Corporate Controller and Chief Accounting Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Richard J. Heckmann, Dudley W. Mendenhall and Monte H. Baier, and each of them, with full power of substitution and full power to act without the other, his true and lawful attorney-in-fact and agent to act for him or her in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and any subsequent amendments the Company may hereafter file with the Securities and Exchange Commission, and to file this Annual Report on Form 10-K, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in order to effectuate the same as fully, to all intents and purposes, as they, he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.

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

Signature	Title	Date
/s/    RICHARD J. HECKMANN         Richard J. Heckmann	Chief Executive Officer and Chairman of the Board	March 16, 2006
/s/    J. WAYNE MERCK         J. Wayne Merck	President and Chief Operating Officer	March 16, 2006
/s/    DUDLEY W. MENDENHALL         Dudley W. Mendenhall	Senior Vice President and Chief Financial Officer	March 16, 2006
/s/    THOMAS R. HILLEBRANDT         Thomas R. Hillebrandt	Corporate Controller and Chief Accounting Officer	March 16, 2006
/s/    WILFORD D. GODBOLD, JR.         Wilford D. Godbold, Jr.	Director	March 16, 2006
/s/    ROBIN E. HERNREICH         Robin E. Hernreich	Director	March 16, 2006
/s/    LOU HOLTZ         Lou Holtz	Director	March 16, 2006

105

Signature	Title	Date
/s/    STEWART M. KASEN         Stewart M. Kasen	Director	March 16, 2006
/s/    ANN MEYERS         Ann Meyers	Director	March 16, 2006
/s/    ALFRED E. OSBORNE, JR.         Alfred E. Osborne, Jr.	Director	March 16, 2006
/s/    DAN QUAYLE         Dan Quayle	Director	March 16, 2006
/s/    EDWARD F. RYAN         Edward F. Ryan	Director	March 16, 2006

106

K2 INC.

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

(Thousands)

	Balance at beginning of year		Additions		Deductions		Balance at end of year
Description			Charged to costs and expenses		Amounts charged to reserve net of reinstatements
Year ended December 31, 2005
Allowance for doubtful items and sales returns	$	14,895	$	6,560	$	5,533	$	15,922
	$	14,895	$	6,560	$	5,533	$	15,922
Year ended December 31, 2004
Allowance for doubtful items and sales returns	$	7,558	$	11,277	$	3,940	$	14,895
	$	7,558	$	11,277	$	3,940	$	14,895
Year ended December 31, 2003
Allowance for doubtful items and sales returns	$	7,838	$	4,804	$	5,084	$	7,558
	$	7,838	$	4,804	$	5,084	$	7,558

107

EX-3.I.1

EXHIBIT (3)(i)(1)

RESTATED CERTIFICATE OF INCORPORATION

OF

ANTHONY INDUSTRIES, INC.

(Under Section 245 of the General Corporation Law)

It is hereby certified that:

1. The present name of the corporation (hereinafter called the “Corporation”) is ANTHONY INDUSTRIES, INC.

2. The name under which the corporation was originally incorporated is ANTHONY POOLS, INC., and the date of filing of the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware was September 15, 1959.

3. The provisions of the Certificate of Incorporation as amended and/or supplemented were restated and integrated into a single instrument entitled “Restated Certificate of Incorporation of Anthony Industries, Inc.”, which was filed with the Secretary of State of the State of Delaware on November 25, 1986.

4. The provisions of the Restated Certificate of Incorporation, as heretofore amended and/or supplemented and as further amended hereby, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled “Restated Certificate of Incorporation of Anthony Industries, Inc.”, without further amendment and without any

discrepancy between the provisions of the restated certificate of incorporation as heretofore and hereinabove amended and/or supplemented and the provisions of said single instrument.

5. The Board of Directors of the Corporation has duly adopted the Restated Certificate of Incorporation pursuant to the provisions of Section 245 of the General Corporation Law of the State of Delaware in the form set forth as follows:

Restated Certificate of Incorporation

of

Anthony Industries, Inc.

FIRST: The name of the corporation is ANTHONY INDUSTRIES, INC.

SECOND: Its registered office in the State of Delaware is located at No. 1209 Orange Street, in the City of Wilmington, County of New Castle. The name and address of its registered agent is The Corporation Trust Company, No. 1209 Orange Street, Wilmington, Delaware.

THIRD: The nature of the business, or objects or purposes to be transacted, promoted or carried on are:

To design, manufacture, construct, distribute, sell, install and service swimming pools of all kinds and to manufacture, sell and deal in all equipment, devices, apparatus, accessories, parts, hardware and building material of all kinds incident to or useful in conducting a swimming pool business.

- 2 -

To design, manufacture, fabricate, construct, sell and service pleasure boats of all kinds and types and made of all kinds of materials and manufacture, sell and deal in all equipment, devices, parts and accessories incidental thereto.

To manufacture, purchase or otherwise acquire, invest in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of, trade, deal in and deal with goods, wares and merchandise and personal property of every class and description.

To acquire, and pay for in cash, stock or bonds of this corporation or otherwise, the good will, rights, assets and property, and to undertake or assume the whole or any part of the obligations or liabilities of any person, firm, association or corporation.

To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage or otherwise dispose of letters patent of the United States or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trademarks and trade names, relating to or useful in connection with any business of this corporation.

To acquire by purchase, subscription or otherwise, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any of the shares of the capital stock, or any voting trust certificates in respect of the shares of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and other securities, obligations, choses in action and evidences of

- 3 -

indebtedness or interest issued or created by any corporations, joint stock companies, syndicates, associations, firms, trusts or persons, public or private, or by the government of the United States of America, or by any foreign government, or by any state, territory, province, municipality or other political subdivision or by any governmental agency, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including the right to execute consents and vote thereon, and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof.

To enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government or colony or dependency thereof.

To borrow or raise moneys for any of the purposes of the corporation and, from time to time without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the corporation, whether at the time owned or thereafter

- 4 -

acquired, and to sell, pledge or otherwise dispose of such bonds or other obligations of the corporation for its corporate purposes.

To loan to any person, firm or corporation any of its surplus funds, either with or without security.

To purchase, hold, sell and transfer the shares of its own capital stock; provided it shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of its capital except as otherwise permitted by law, and provided further that shares of its own capital stock belonging to it shall not be voted upon directly or indirectly.

To have one or more offices, to carry on all or any of its operations and business and without restriction or limit as to amount to purchase or otherwise acquire, hold, own, mortgage, sell, convey or otherwise dispose of, real and personal property of every class and description in any of the states, districts, territories or colonies of the United States, and in any and all foreign countries, subject to the laws of such state, district, territory, colony or country.

In general, to carry on any other business in connection with the foregoing, and to have and exercise all the powers conferred by the laws of Delaware upon corporations formed under the General Corporation Law of the State of Delaware, and to do any or all of the things hereinbefore set forth to the same extent as natural persons might or could do.

- 5 -

The objects and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in this certificate of incorporation, but the objects and purposes specified in each of the foregoing clauses of this article shall be regarded as independent objects and purposes.

FOURTH: The total number of shares of all classes of stock which the corporation shall have authority to issue is fifty-two million five hundred thousand (52,500,000) shares, consisting of

(a) Twelve million five hundred thousand (12,500,000) shares of Preferred Stock of the par value of $1.00 per share (hereafter referred to as “Preferred Stock”); and

(b) Forty million (40,000,000) shares of Common Stock of the par value of $1.00 per share (hereafter referred to as “Common Stock”).

A. Preferred Stock: Shares of Preferred Stock may be issued from time to time in one or more series, as may from time to time be determined by the Board of Directors, each of said series to be distinctly designated. All shares of any one series of Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends, if any, thereon shall be cumulative, if made cumulative. The voting powers and the preferences and relative, participating, optional and other special rights or each such series, and the qualifications, limitations or restrictions thereof, if any, may

- 6 -

differ from those of any and all other series at any time outstanding. The Board of Directors of the corporation is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of a particular series of Preferred Stock, the voting powers and the designations, preferences and relative, optional and other special rights, and the qualifications, limitations and restrictions of such series, including, but without limiting the generality of the foregoing, the following:

1. The distinctive designation of, and the number of shares of Preferred Stock which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors;

2. The rate and times at which, and the terms and conditions on which, dividends, if any, on Preferred Stock of such series shall be paid, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes, or series of the same or other classes of stock and whether such dividends shall be cumulative or noncumulative;

3. The right, if any, of the holders of Preferred Stock of such series to convert the same into, or exchange the same for, shares of any other class or classes or of any series

- 7 -

of the same or any other class or classes of stock of the corporation and the terms and conditions of such conversion or exchange;

4. Whether or not Preferred Stock of such series shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions on which, Preferred Stock of such series may be redeemed;

5. The rights, if any, of the holders of Preferred Stock of such series upon the voluntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding-up, of the corporation;

6. The terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of such series, and

7. The voting powers, if any, of the holders of such series of Preferred Stock which may, without limiting the generality of the foregoing, include the right, voting as a series by itself or together with other series of Preferred Stock or all series of Preferred Stock as a class, to elect one or more directors of the corporation if there shall have been a default in the payment of dividends on any one or more series of Preferred Stock or under such other circumstances and on such conditions as the Board of Directors may determine.

B. Common Stock:

1. After the requirements with respect to preferential dividends on the Preferred Stock (fixed in accordance with the

- 8 -

provisions of Paragraph A of this Article FOURTH), if any, shall have been met and after the corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts (fixed in accordance with the provisions of Paragraph A of this Article FOURTH), and subject further to any other conditions which may be fixed in accordance with the provisions of Paragraph A of this Article FOURTH, then and not otherwise the holders of Common Stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors.

2. After distribution in full of the preferential amount, if any (fixed in accordance with the provisions of Paragraph A of this Article FOURTH), to be distributed to the holders of Preferred Stock in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up, of the corporation, the holders of the Common Stock shall be entitled to receive all the remaining assets of the corporation, tangible and intangible, of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively.

3. Except as may otherwise be required by law or by the provisions of such resolution or resolutions as may be adopted by the Board of Directors pursuant to Paragraph A of this

- 9 -

Article FOURTH, each holder of Common Stock shall have one vote in respect of each share of Common Stock held by him on all matters voted upon by the stockholders.

C. Other Provisions:

1. No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the corporation of any class or series, or bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of the corporation of any class or series, or carrying any right to purchase stock of any class or series, but any such unissued stock, additional authorized issue of shares of any class or series of stock or securities convertible into or exchangeable for stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, whether such holders or others, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion.

2. The relative powers, preferences and rights of each series of Preferred Stock in relation to the powers, preferences and rights of each other series of Preferred Stock shall, in each

- 10 -

case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to authority granted in paragraph A of this Article FOURTH and the consent, by class or series vote or otherwise, of the holders of such of the series of Preferred Stock as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of Preferred Stock whether or not the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, the powers, preferences and rights of such outstanding series, or any of them; provided, however, that the Board of Directors may provide in the resolution or resolutions as to any series of Preferred Stock adopted pursuant to Paragraph A of this Article FOURTH that the consent of the holders of a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of Preferred Stock.

3. Subject to the provisions of subparagraph 2 of this Paragraph C, shares of any series of Preferred Stock may be issued from time to time as the Board of Directors of the corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors.

4. Shares of Common Stock may be issued from time to time as the Board of Directors of the corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors.

- 11 -

FIFTH: The minimum amount of capital with which the corporation will commence business is One Thousand Dollars ($1,000.00).

SIXTH: The names and places of residences of the incorporators are as follows:

NAMES	RESIDENCES
R.F. Westover	100 West Tenth Street Wilmington, Delaware
L.A. Schoonmaker	100 West Tenth Street Wilmington, Delaware
A.D. Atwell	100 West Tenth Street Wilmington, Delaware

SEVENTH: The corporation is to have perpetual existence.

EIGHTH: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatsoever.

NINTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized:

To make, alter or repeal the bylaws of the corporation.

To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation.

To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created.

- 12 -

By resolution passed by a majority of the whole Board, to designate one or more committees, each committee to consist of two or more of the directors of the corporation, which, to the extent provided in the resolution or in the bylaws of the corporation, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be stated in the by-laws of the corporation or as may be determined from time to time by resolution adopted by the Board of Directors.

TENTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in

- 13 -

value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation.

ELEVENTH: Meetings of stockholders may be held outside the State of Delaware, if the by-laws so provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the by-laws of the corporation. Elections of directors need not be by ballot unless the by-laws of the corporation shall so provide.

TWELFTH: The corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.

THIRTEENTH: The number of directors which shall constitute the whole Board of Directors shall be eight. The Board of Directors shall be divided into three classes, the first class of

- 14 -

which shall consist of two directors and the second and third classes of which shall consist of three directors each. At the annual meeting of shareholders held in 1973, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting, and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Subject to the foregoing, at each annual meeting of shareholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting after their election. Vacancies may be filled by a majority of the directors then in office, though less than a quorum, and the directors so chosen shall hold office for the unexpired portion of the term of directors whose places they have been elected to fill.

FOURTEENTH: The affirmative vote of 66-2/3% of all outstanding shares of the corporation entitled to vote thereon shall be required:

(a) for the adoption of any agreement for the merger of the corporation with or into any other corporation or for the consolidation of the corporation with any other corporation; or

(b) to authorize any sale, lease, transfer or exchange of all or substantially all of the assets of the corporation to any other person (as hereinafter defined).

- 15 -

For the purpose of this Article FOURTEENTH, the term “person” shall mean any corporation, partnership, association, or other business entity, trust, estate or individual.

The affirmative vote of 66-2/3% of all outstanding shares of the corporation entitled to vote thereon shall be required for the amendment of all or any part of this Article FOURTEENTH.

FIFTEENTH: The shareholder vote required to approve Business Combinations (as hereinafter defined) shall be as set forth in this Article FIFTEENTH.

Section 1. Higher Vote for Business Combinations. In addition to any affirmative vote required by any other provision of this Certificate of Incorporation, by law or otherwise, and except as otherwise expressly provided in Section 2 of this Article FIFTEENTH:

(a) any merger or consolidation of the corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Shareholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or

(b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder

- 16 -

of any assets of the corporation, or any Subsidiary, having an aggregate Fair Market Value (as hereinafter defined) of $5,000,000 or more; or

(c) the issuance or transfer by the corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; or

(d) the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of any Interested Shareholder or any Affiliate of any Interested Shareholder; or

(e) any reclassification of securities (including any reverse stock split), or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder;

- 17 -

shall require the affirmative vote of the holders of at least 80% of the outstanding shares of the corporation’s voting stock, voting together as a single class, and the affirmative vote of at least two-thirds of the outstanding shares of voting stock held by shareholders other than the Interested Shareholder. (For purposes of this Article FIFTEENTH, each share of voting stock shall have the number of votes granted to it pursuant to Article FOURTH of this Certificate of Incorporation.) Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by any other provision of this Certificate of Incorporation, by law or otherwise.

The term “Business Combination” as used in this Article FIFTEENTH shall mean any transaction which is referred to in any one or more of paragraphs (a) through (e) of Section 1.

Section 2. When Higher Vote is not Required. The provisions of Section 1 of this Article FIFTEENTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by any other provision of this Certificate of Incorporation, by law or otherwise, if all the conditions specified in either of the following paragraphs (a) or (b) are met:

(a) The Business Combination shall have been approved by two-thirds of the Disinterested Directors (as hereinafter defined), or

- 18 -

(b) All of the following conditions shall have been met:

(i) The holders of Common Stock of the corporation shall have the right, at their option, to receive as consideration in such Business Combination, either (x) cash, (y) shares of common stock of the Interested Shareholder (“Interested Shareholder Stock”) or (z) the same type of consideration used by the Interested Shareholder in acquiring the largest portion of its holdings of shares of the corporation prior to the first public announcement of the Business Combination (the “Announcement Date”).

(ii) The aggregate amount of the cash and/or the Fair Market Value as of the date of the consummation of the Business Combination (the “Consummation Date”) of the Interested Shareholder Stock and any other consideration which the holders of Common Stock of the corporation shall have the right to receive per share in such Business Combination shall be an amount at least equal to the highest of the following:

(1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees and, after giving effect to appropriate adjustments for any recapitalizations, stock splits, stock dividends and like distributions) paid by the Interested Shareholder for any shares of Common Stock acquired by it (x) within the two-year period immediately prior to the Announcement Date or (y) in the transaction in which it became an Interested Shareholder, whichever is higher, plus interest compounded annually from the

- 19 -

date on which the Interested Shareholder became an Interested Shareholder (the “Determination Date”) through the Consummation Date at the prime rate of interest of Citibank, N.A. (or other major bank headquartered in New York City selected by a majority of the Disinterested Directors) from time to time in effect in New York City, less the aggregate amount of any cash dividends paid, and the Fair Market Value of any dividends paid in property other than cash, per share of Common Stock from the Determination Date through the Consummation Date in an amount up to but not exceeding the amount of such interest payable per share of Common Stock; or

(2) the Fair Market Value per share of Common Stock on the Announcement Date or on the Determination Date, whichever is higher; or

(3) the product of (x) the earnings per share of Common Stock for the four full consecutive fiscal quarters immediately preceding the Announcement Date as to which financial results have been published by the corporation, multiplied by (y) the then highest price/earnings multiple (if any) of such Interested Shareholder and any of its Affiliates as customarily computed and reported in the financial community; or

(4) the product of (x) the price per share equal to the Fair Market Value per share of Common Stock determined pursuant to paragraph (b)(ii)(2) of this Section 2, multiplied by (y) a percentage determined by dividing (A) the highest per share price (including any brokerage commissions, transfer taxes and

- 20 -

soliciting dealers’ fees and after giving effect to appropriate adjustments for any recapitalizations, stock splits, stock dividends and like distributions) paid by the Interested Shareholder for any shares of Common Stock acquired by it within the two-year period immediately prior to the Announcement Date, by (B) the Fair Market Value per share of Common Stock on the first day in such two-year period upon which the Interested Shareholder acquired any shares of Common Stock.

(iii) After such Interested Shareholder has become an Interested Shareholder, and prior to the consummation of such Business Combination:

(1) there shall have been no failure to pay nor reduction in the annual rate of dividends regularly paid on the corporation’s Common Stock (as such rate may be adjusted from time to time to reflect changes in the corporation’s capitalization) unless such failure to pay or reduction is approved by a majority of the Disinterested Directors; and

(2) such Interested Shareholder shall not have become the beneficial owner of any additional shares of Common Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder.

(iv) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax

- 21 -

credits or other tax advantages provided by the corporation, whether in anticipation of or in connection with such Business Combination.

(v) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to the shareholders of the corporation at least thirty days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions).

Section 3. Certain Definitions. For purposes of this Article FIFTEENTH:

(a) A “person” shall mean any individual, firm, corporation or other entity.

(b) “Interested Shareholder” shall mean any person (other than the Corporation or any Subsidiary) who or which:

(i) is the beneficial owner, directly or indirectly, of 10% or more of the outstanding voting stock of the corporation; or

(ii) is an Affiliate (as hereinafter defined) of the corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the then outstanding voting stock; or

- 22 -

(iii) is an assignee of or has otherwise succeeded to any shares of voting stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933.

(c) A person shall be a “beneficial owner” of any voting stock:

(i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or

(ii) which such person or any of its Affiliates or Associates has (x) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (y) the right to vote pursuant to any agreement, arrangement or understanding, excluding, however, any voting stock which such person has the right to vote in his capacity as a fiduciary of any employee benefit plan maintained by the corporation; or

(iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or

- 23 -

disposing of any shares of voting stock, excluding, however, any voting stock which such person has the right to vote in his capacity as a fiduciary of any employee benefit plan maintained by the corporation.

(d) For purposes of determining whether a person is an Interested Shareholder pursuant to paragraph (b) of this Section 3, the number of shares of voting stock deemed to be outstanding shall include shares deemed owned through application of paragraph (c) of this Section 3 but shall not include any other shares of voting stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

(e) “Affiliate” or “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on March 1, 1984.

(f) “Subsidiary” means any company of which a majority of any class of equity security is owned, directly or indirectly, by the corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth in paragraph (b) of this Section 3, the term “Subsidiary” shall mean only a company of which a majority of each class of equity security is owned, directly or indirectly, by the corporation.

(g) “Disinterested Director” means any member of the Board of Directors of the corporation (the “Board”) who is unaffiliated with the Interested Shareholder and was a member of the Board

- 24 -

prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board.

(h) “Fair Market Value” means: (i) in the case of stock, the highest closing sale price with respect to a share of such stock during the thirty-day period immediately preceding the date in question on the Composite Tape for New York Stock Exchange Listed Stock, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the thirty-day period preceding the date in question on the National Association of Securities Dealers Automated Quotations System, Inc., or any system then in use, or, if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith, in each case after giving effect to appropriate adjustments for any recapitalizations, stock splits, stock dividends and like distributions; and (ii) in the case of

- 25 -

property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith.

(i) In the event of any Business Combination in which the corporation survives, the phrase “other consideration which the holders of Common Stock of the corporation shall have the right to receive” as used in paragraph (b)(ii) of Section 2 of this Article FIFTEENTH shall include the shares of Common Stock and/or the shares of any other class of outstanding voting stock retained by the holders of such shares.

Section 4. Powers of Disinterested Directors. A majority of the Disinterested Directors of the corporation shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article FIFTEENTH, including without limitation (a) whether a person is an Interested Shareholder, (b) the number of shares of voting stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, (d) whether the requirements of paragraph (b) of Section 2 have been met with respect to any Business Combination, and (e) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $5,000,000 or $1,000,000, respectively, or more;

- 26 -

and the good faith determination of a majority of the Disinterested Directors on such matters shall be conclusive and binding for all the purposes of this Article FIFTEENTH.

Section 5. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article FIFTEENTH shall be construed to relieve the Board of Directors or any Interested Shareholder from any fiduciary obligation imposed by law.

Section 6. Amendment, Repeal, etc. Notwithstanding any other provision of this Certificate of Incorporation (and notwithstanding the fact that a lesser percentage may be specified by this Certificate of Incorporation, by law or otherwise), the affirmative vote of the holders of at least 80% of the outstanding shares of the corporation’s voting stock, voting together as a single class, and the affirmative vote of at least two-thirds of the outstanding shares of voting stock held by shareholders other than an Interested Shareholder shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article FIFTEENTH of this Certificate of Incorporation.

SIXTEENTH: Action shall be taken by shareholders of the corporation only at a duly called annual or special meeting of shareholders of the corporation and shareholders may not act by written consent.

SEVENTEENTH: Elimination of Certain Liability of Directors. No director shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty by

- 27 -

such director as a director, provided that this Article SEVENTEENTH shall not eliminate or limit the liability of a director (i) for any breach of such director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions of such director not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which such director derived an improper personal benefit, in respect of which such breach of fiduciary duty occurred; nor shall this Article SEVENTEENTH eliminate or limit the liability of a director for any act or omission occurring prior to the date this Article SEVENTEENTH becomes effective. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article SEVENTEENTH to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended from time to time.

EIGHTEENTH:

(a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he, or a person of whom he is the legal representative, (1) is or was a director or

- 28 -

officer of the Corporation or (2) is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent), shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his heirs, executors and administrators; provided, however, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the

- 29 -

Corporation. The right to indemnification conferred in this Article EIGHTEENTH shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his capacity as such (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service with respect to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article EIGHTEENTH or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers.

(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this Article EIGHTEENTH is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense

- 30 -

of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

(c) Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article EIGHTEENTH shall not be exclusive of any other right

- 31 -

which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or Disinterested Directors or otherwise.

(d) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.

- 32 -

(e) Funding. The Board of Directors may, in its discretion, from time to time, establish arrangements for the funding of the Corporation’s obligations under this Article EIGHTEENTH, including, without limitation, revocable or irrevocable letters of credit and trusts.

Signed and attested to on May 4, 1989.

/s/ Bernard I. Forester

Bernard I. Forester

Chairman of the Board of Directors

ATTEST:

/s/ Susan E. McConnell

Susan E. McConnell

Secretary

EX-3.I.2

EXHIBIT (3)(i)(2)

CERTIFICATE OF AMENDMENT

OF

RESTATED CERTIFICATE OF INCORPORATION

OF

ANTHONY INDUSTRIES, INC.

It is hereby certified that:

1. The name of the corporation (hereinafter called the “Company”) is ANTHONY INDUSTRIES, INC.

2. The name under which the Company was originally incorporated is ANTHONY POOLS, INC., and the date of filing of the original certificate of incorporation of the Company with the Secretary of State of the State of Delaware is September 15, 1959.

3. The provisions of the certificate of incorporation as amended and/or supplemented were restated and integrated into a single instrument entitled “Restated Certificate of Incorporation of Anthony Industries, Inc.”, filed with the Secretary of State of the State of Delaware on May 12, 1989.

4. The Restated Certificate of Incorporation of the Company is hereby amended by striking out Article THIRTEENTH thereof and by substituting in lieu of said Article the following new Article:

“THIRTEENTH: The Board of Directors shall be divided into three classes. Directors in each class shall be elected to hold office until the third annual meeting of stockholders following their election. The Board of Directors shall consist of from six to nine directors, with the actual number constituting the whole Board, and the number of directors in each class, being set from time to time by action of the Board of Directors; provided, however, that no decrease in the number of directors constituting the whole Board or the number of directors in any class may shorten the term of any incumbent director.”

5. The amendment of the Restated Certificate of Incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

Signed and attested to on May 31, 1995.

/s/ M. E. Lane

M. E. Lane

Vice President

ATTEST:

/s/ Susan E. McConnell

Susan E. McConnell

Secretary

2

EX-3.I.3

EXHIBIT 3(i)(3)

CERTIFICATE OF AMENDMENT

OF

RESTATED CERTIFICATE OF INCORPORATION

OF

ANTHONY INDUSTRIES, INC.

It is hereby certified that:

1. The name of the corporation (hereinafter called the “Company”) is ANTHONY INDUSTRIES, INC.

2. The name under which the Company was originally incorporated is ANTHONY POOLS, INC., and the date of filing of the original certificate of incorporation of the Company with the Secretary of State of the State of Delaware is September 15, 1959.

3. The provisions of the certificate of incorporation as amended and/or supplemented were restated and integrated into a single instrument entitled “Restated Certificate of Incorporation of Anthony Industries, Inc.”, filed with the Secretary of State of the State of Delaware on May 12, 1989.

4. The Restated Certificate of Incorporation of the Company is hereby amended by striking out Article FIRST thereof and by substituting in lieu of said Article the following new Article:

“FIRST: The name of the corporation is K2 Inc.”

5. The Restated Certificate of Incorporation of the Company is hereby amended by striking out Article THIRTEENTH thereof and by substituting in lieu of said Article the following new Article:

“THIRTEENTH: The Board of Directors shall be divided into three classes. Directors in each class shall be elected to hold office until the third annual meeting of stockholders following their election. The Board of Directors shall consist of from eight to eleven directors, with the actual number constituting the whole Board, and the number of directors in each class, being set from time to time by action of the Board of Directors; provided, however, that no decrease in the number of directors constituting the whole Board or the number of directors in any class may shorten the term of any incumbent director.”

5. The amendment of the Restated Certificate of Incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

Signed and attested to on May 24, 1996.

/s/ JOHN J. RANGEL

John J. Rangel

Senior Vice President - Finance

ATTEST:

/s/ SUSAN E. MCCONNELL

Susan E. McConnell

Secretary

2

EX-10.C

EXHIBIT 10(c)

K2 INC.

GUARANTY AND SECURITY AGREEMENTS CONFIRMATION

CONFIRMATION, dated as of February 21, 2006 (this “Confirmation”), with respect to the Guaranty Agreements (as defined in the Amended and Restated Credit Agreement (defined below)) and the Security Agreements (as defined in the Amended and Credit Agreement (defined below); the Guaranty Agreements and the Security Agreements, collectively, the “Credit Support Documents”).

WHEREAS, certain of the parties hereto have heretofore entered into an Amended and Restated Credit Agreement dated as of July 1, 2004 (the “2004 Credit Agreement”), among the Borrowers, the lending institutions from time to time parties thereto and JPMorgan Chase Bank, N.A., as contractual representative for such lending institutions (the “Administrative Agent”), as amended by the First Amendment to the Amended and Restated Credit Agreement, dated as of September 30, 2004 (the “First Amendment”), the Second Amendment to the Amended and Restated Credit Agreement, dated as of March 18, 2005 (the “Second Amendment”), the Third Amendment to the Amended and Restated Credit Agreement, dated as of May 25, 2005 (the “Third Amendment”) and the Fourth Amendment to the Amended and Restated Credit Agreement, dated as of July 25, 2005 (the “Fourth Amendment”) (the 2004 Credit Agreement, as amended by the First Amendment, the Second Amendment, the Third Amendment and the Fourth amendment, the “Existing Credit Agreement”);

WHEREAS, concurrently with the execution of this Confirmation, the Existing Credit Agreement will be amended and restated as of the date hereof (the Existing Credit Agreement, as so amended and restated, the “Amended and Restated Credit Agreement”; unless otherwise defined herein, capitalized terms defined therein and used herein being so used as so defined);

WHEREAS, each party to a Guaranty Agreement has guaranteed, and has agreed to reaffirm its guarantee of, the obligations guaranteed therein;

WHEREAS, each party to a Security Agreement has granted to the Agent, for the ratable benefit of the Lenders, a first priority security interest in the collateral referred to therein, as collateral security for the Obligations; and

WHEREAS, each party hereto (each, a “Confirming Party”) wishes to confirm that all of its liabilities and obligations, and Liens and security interests created, as applicable, under the Credit Support Documents to which it is a party will remain in full force and effect after giving effect to the amendment and restatement of the Existing Credit Agreement pursuant to the Amended and Restated Credit Agreement.

NOW, THEREFORE, in consideration of the premises and to induce the Agents and the Lenders to enter into the Amended and Restated Credit Agreement and to induce the Lenders to make or maintain their extensions of credit thereunder, each Confirming Party hereby agrees with the Administrative Agent, for the ratable benefit of the Lenders, as follows:

1. Each Confirming Party hereby consents to the execution and delivery of, and the amendment and restatement of the Existing Credit Agreement pursuant to, the Amended and Restated Credit Agreement. Each Confirming Party hereby agrees that each reference to the “Credit Agreement” in the Credit Support Documents shall be deemed to be a reference to the Amended and Restated Credit Agreement and that each reference to the “Agent” shall be deemed to be a reference to the Collateral Agent and/or the Administrative Agent, as applicable.

2. Each Confirming Party hereby agrees that:

a. all of its obligations and liabilities under the Credit Support Documents to which it is a party remain in full force and effect on a continuous basis after giving effect to the amendment and restatement of the Existing Credit Agreement pursuant to the Amended and Restated Credit Agreement; and

b. all of the Liens and security interests created and arising under the Security Agreements remain in full force and effect on a continuous basis, unimpaired, uninterrupted and undischarged, and having the same perfected status and priority as existed prior to the effectiveness of the Amended and Restated Credit Agreement, after giving effect to the amendment and restatement of the Existing Credit Agreement pursuant to the Amended and Restated Credit Agreement, as collateral security for the Obligations.

3. Each Confirming Party hereby represents and warrants that each of the representations and warranties contained in the Credit Support Documents, is true and correct in all material respects on and as the date hereof (after giving effect to this Confirmation and each of the addenda to the schedules attached to the joinder documents delivered from time to time since July 1, 2004) as if made on and as of such date; provided that references in the representations and warranties contained in the Credit Support Documents to the “the date hereof” shall be deemed to refer to the date of this Confirmation.

4. Each Confirming Party agrees that it shall take any action reasonably requested by the Administrative Agent or the Collateral Agent in order to confirm or effect the intent of this Confirmation.

5. This Confirmation shall be governed by, and construed and interpreted in accordance with, the law of the State of New York.

6. This Confirmation may be executed by one or more of the parties hereto on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.

2

IN WITNESS WHEREOF, the undersigned have caused this CONFIRMATION to be executed and delivered by their respective duly authorized officer as of the day and year first above written.

K2 INC.
By:	/s/ Dudley W. Mendenhall
	Dudley W. Mendenhall
	Senior Vice President and Chief Financial Officer

BRASS EAGLE, LLC
EX OFFICIO LLC
K2 EYEWEAR, LLC
WGP, LLC
HILTON CORPORATE CASUALS, LLC
SHAKESPEARE COMPANY, LLC
SHAKESPEARE CONDUCTIVE FIBERS, LLC
EARTH PRODUCTS, INC.
K2 BIKE, INC.
K-2 CORPORATION
K-2 INTERNATIONAL, INC.
K2 LICENSED PRODUCTS, INC.
K2 MERCHANDISING, INC.
K2 SNOWSHOES, INC.
KATIN, INC.
MORROW SNOWBOARDS, INC.
RAWLINGS SPORTING GOODS COMPANY
RIDE, INC.
RIDE SNOWBOARD COMPANY
SHAKESPEARE INDUSTRIES, INC.
SITCA CORPORATION
SMCA, INC.
STEARNS INC.
JT PROTECTIVE GEAR LLC
JT USA LLC
SATV, LLC
SHAKESPEARE ALL STAR ACQUISITION LLC
K2 CORPORATION OF CANADA
RAWLINGS CANADA INCORPORATED
SHAKESPEARE COMPANY (UK) LIMITED
SHAKESPEARE INTERNATIONAL LIMITED
SHAKESPEARE MONOFILAMENT UK LIMITED
SOSPENDERS, LLC
MARKER VOLKL USA INC.
SPORTS RECREATION COMPANY LTD.
EX OFFICIO INTERNET COMPANY, LLC
MARMOT MOUNTAIN LLC
MIKEN SPORTS, LLC
K-2 INTERNET COMPANY, LLC
By:	/s/ Dudley W. Mendenhall
	Dudley W. Mendenhall Authorized Signatory

Accepted and acknowledged as of
the date first above written:
JPMORGAN CHASE BANK, N.A., as Administrative
Agent and Collateral Agent
By:	/s/ Kevin D. Padgett
Name:	Kevin D. Padgett
Title:	Vice President

EX-10.D

EXHIBIT 10(d)

AGREEMENT

AGREEMENT dated as of November 20, 1995 between Anthony Industries, Inc. (the “Company”) and B. I. Forester (“Forester”). Forester has been President and/or Chief Executive Officer of the Company for over 25 years and presently serves the Company as Chairman of the Board and Chief Executive Officer. The Company and Forester desire to provide for Forester’s retirement as an employee of the Company and his continued service to the Company as a consultant, all as of January 1, 1996 (the “Effective Date”). Forester is currently employed pursuant to an amended and restated Employment Agreement dated as of December 31, 1991 and as amended on October 20, 1994 (the “1991 Amended Agreement”). Accordingly, provided that the Employment Period (as defined in the 1991 Amended Agreement) shall not have been terminated prior to January 1, 1996 by reason of Forester’s death or pursuant to Section 5(a) thereof, the Company and Forester hereby amend and restate the 1991 Amended Agreement, effective as of the Effective Date, to read in its entirety as follows (the “1995 Agreement”).

1. (a) The Company hereby engages Forester, for the period (hereinafter referred to as the “Consulting Period”) commencing on the Effective Date and terminating on December 31, 1998 or Forester’s earlier death, as a consultant to the Company on such matters as the Chief Executive Officer of the Company may from time to time request, provided such matters are consistent with Forester’s former activities at the Company. Forester shall not be required to devote more than fifty hours to such consultancy in any calendar month during the Consulting Period.

(b) The Company shall pay to Forester, bi-weekly during the Consulting Period, consulting fees at an annual rate of $200,000. During the Consulting Period: (i) Forester shall be entitled to receive group medical, hospital, dental, life and long-term disability insurance substantially the same as that provided to him immediately prior to the Effective Date and be eligible for reimbursement under the Company’s Officers’ or Directors’ Medical Expense Reimbursement Plans, and (ii) the Company shall continue the Commonwealth Life Insurance Company policy in the amount of $250,000 insuring Forester’s life and payable to the beneficiary designated by Forester (“Commonwealth”). The existing insurance agreement relating to a split-dollar life insurance policy insuring Forester’s life shall continue in effect in accordance with its terms. With respect to Commonwealth, the Company shall pay all premiums required to obtain a fully paid up policy prior to expiration of the Consulting Period. During the Consulting Period, Forester shall continue to receive the perquisites provided to him prior to the Effective Date (all material perquisites having been acknowledged by Forester and the Company in writing), shall be provided an office and secretarial assistance as required and shall be reimbursed for business expenses reasonably incurred by him for the benefit of the Company.

2. (a) Forester hereby waives all rights to receive, and agrees to forego the payment of, any incentive compensation under the Company’s Executive Officers’ Incentive Compensation Plan (the “Plan”) with respect to 1995. In lieu of the foregoing incentive

compensation, the Company shall pay to Forester the amount of $431,200 (the “Target Payment”) pursuant to the terms of this 1995 Agreement, subject to the following adjustments:

(i) If Incentive Compensation Income (as defined below) for 1995 (the “1995 ICI”) is less than $27,984,000 (the “Target ICI”) but not less than $25,507,000, then Forester shall be entitled to receive an amount equal to the Target Payment reduced by $4.74 for each $100 by which the 1995 ICI is less than the Target ICI. For purposes of this 1995 Agreement, Incentive Compensation Income means the consolidated net income of the Company as shown in the annual report but before (1) extraordinary items (as that term is used in generally accepted accounting principles), (2) incentive compensation awarded under the Plan and (3) provision for state and federal income taxes.

(ii) If the 1995 ICI is less than $25,507,000 but not less than $18,421,000, then Forester shall be entitled to receive an amount equal to the Target Payment reduced by (y) the amount of $117,410, plus (z) $4.43 for each $100 by which the 1995 ICI was less than $25,507,000.

(b) The definitive amount that Forester is entitled to receive under this Section 2 is hereafter referred to as the “Final Payment” and is payable in its entirety on March 15, 1996.

(c) Forester’s right to receive payment of the Final Payment is hereby vested and subject to no forfeiture contingency.

(d) Forester hereby waives all right to receive, and agrees to forego all presently unpaid installments of, awards under the Plan with respect to prior years. In lieu of such unpaid installments, the Company shall pay to Forester, pursuant to the terms of this 1995 Agreement, the amount of $432,268, such amount to be paid to Forester in installments of $259,360 on March 15, 1996 and $172,908 on March 15, 1997. The foregoing payments are hereby vested and subject to no forfeiture contingency.

3. (a) Upon Forester’s death, whether during the Consulting Period or thereafter, the Company shall pay $50,000 per year, for a period of ten years, as follows:

(i) $25,000 per year to Eunice Forester, or if she is not living at the time any such payment is due, such payment shall be made in equal shares to Donald A. Forester and Kenneth C. Forester or, if Donald or Kenneth is not then living, his share shall be paid to his then living issue per stripes or, if none, to the survivor of Donald and Kenneth; and

(ii) $25,000 per year to Forester’s beneficiaries to be designated from time to time by a notice from him in writing to the Secretary of the Company; the first such payments to be made within thirty days after Forester’s death and subsequent payments to be made on the nine succeeding anniversaries of the date of his death.

2

(b) The obligations of the Company set forth in this Section 3 shall survive the expiration or termination of the other provisions of this 1995 Agreement. Those obligations set forth in Section 3(a)(i) hereof may not be modified without the written consent of Eunice Forester, and those set forth in Section 3(a)(ii) hereof are subject to Section 14 hereof.

4. The Company will provide Forester with a “supplemental employee retirement plan” (herein “SERP”) as follows:

(a) Commencing on January 1, 1997 and continuing monthly thereafter during Forester’s lifetime, the Company shall pay to Forester an amount equal to (i) 4.6% of Average Accounting Base Compensation (as defined herein), reduced by (ii) the monthly amount received by Forester under the Pension Plan of Anthony Industries, Inc. (the “Pension Plan”). At Forester’s death, the Company shall pay to Forester’s widow a monthly benefit in an amount equal to (i) 4.6% of Average Accounting Base Compensation reduced by (ii) any monthly amount received by Forester’s widow under the Pension Plan, commencing on the first day of the month following the month in which Forester dies and ending on the earlier of (x) the date of Forester’s widow’s death or (y) the completion of a five-year period. For purposes of this SERP, Average Accounting Base Compensation shall mean the average of the highest three calendar years of Accounting Base Compensation during Forester’s employment with the Company, and Accounting Base Compensation for a calendar year shall mean the sum of Forester’s Basic Compensation (as defined in the 1991 Amended Agreement) and incentive compensation awarded in respect of such calendar year. The Company shall promptly deliver to Forester, or Forester’s widow, as the case may be, a copy of the schedule of payments required to be made by this provision and which is to be furnished to the Trustee pursuant to Section 2.1 of the Trust.

(b) If the Company or the Trustee fails to make any payment to Forester or Forester’s widow (hereinafter referred to as “The Foresters”) provided for in Section 4(a) hereof when due and such failure continues until the 30th day after demand by The Foresters therefor, The Foresters shall have the right to declare a breach at any time thereafter (the “Date of Breach”) and require the Company to pay to Forester or his widow, as the case may be, within seven days after the Date of Breach, in lieu of all payments otherwise due under Section 4(a) hereof, an amount equal to the Lump Sum Equivalent (as defined herein). The Lump Sum Equivalent shall mean an amount equal to the actuarial present value of all remaining payments computed using a 7.5% discount rate and the average of male and female mortality factors in the 1983 GAM table. For illustrative purposes, such factor for a 65 year old male with a 46 year old spouse is 129.872.

(c) Simultaneously with the execution and delivery of this 1995 Agreement, the Company is funding this SERP by promptly establishing a “rabbi trust” (the “Trust”) with Wells Fargo Bank as trustee (Wells Fargo Bank or its successor, as provided in the

3

Trust, is hereinafter referred to as the “Trustee”) in the form attached hereto as Exhibit A, and is depositing into the Trust cash in an amount equal to the Accumulated Benefits Obligation (“ABO”) of the Company to Forester and Forester’s widow under this SERP calculated as of December 31, 1995. The ABO has been calculated in accordance with SFAS 87 (i) using a discount rate of 7.75% and (ii) in respect to the next to the last sentence of Section 4(a) hereof, including in the calculation the Target Payment as defined in Section 2(a) hereof. Simultaneously with the deposit of such funds into the Trust, the Company is delivering to Forester a certificate, in form and substance reasonably satisfactory to Forester, of TPF&C or another nationally recognized actuarial firm (hereinafter “Actuary”) certifying that the amount deposited is not less than the Company’s ABO as of December 31, 1995 with respect to the required payments to Forester and Forester’s widow under this SERP calculated on the basis of the discount rate and Target Payment set forth, or referred to, in this Section 4(c).

(d) Within 30 days after releasing the audited net income of the Company for the year 1995 over the wire service, the Company shall deliver to Forester a supplementary certificate from the Actuary showing the Company’s audited ABO to Forester and Forester’s widow at December 31, 1995 calculated on the basis of substituting the Final Payment defined in Section 2(b) hereof for the assumed Target Payment used in Section 4(c) and utilizing a discount rate of 7.75%. The difference, if any, between the amount deposited pursuant to Section 4(c) and the amount of the ABO calculated in accordance with this Section 4(d) shall be withdrawn from the Trust by the Company within seven days thereafter.

(e) Commencing with the year 1998, the Company shall deliver to Forester within 90 days after the end of that year and each subsequent year (i) a statement of assets and liabilities of the Trust as of the end of the respective year showing the individual assets at cost and at fair market value (the “Trust Statement”) and (ii) a certificate of the Actuary setting forth the amount required as of the last day of each year to fully fund the benefit payable under this SERP utilizing a discount rate of 7.75% (the “Full Funding Amount”). Such certificate shall set forth all actuarial assumptions used. To the extent that the Full Funding Amount exceeds the fair market value of the net assets shown on the Trust Statement as of the last day of each such year, the difference shall be deposited by the Company in the Trust in five substantially equal annual payments commencing seven days after delivery of the Actuary’s certificate for the respective year. To the extent that the fair market value of the net assets shown on the Trust Statement exceeds the Full Funding Amount, such excess may be used as an offset against any current and future payments due from prior years’ calculations. To the extent such fair market value of the net assets exceed 110% of the Full Funding Amount, such excess may be withdrawn by the Company. The Company shall promptly notify The Foresters of its decision to withdraw Trust assets in accordance with this Section 4(e).

(f) The Company shall pay the fees and expenses of the Actuary. The performance by the Company of its obligations under Sections 4(c), 4(d) and 4(e) hereof shall not relieve the Company of the obligation to make the payments to Forester and Forester’s widow set forth in Section 4(a) hereof.

4

5. If the Company breaches this 1995 Agreement and such breach continues uncured for more than 30 days after notice of such breach is given by Forester (“Notice of Breach”) the Company shall, in addition to any other amounts payable hereunder, pay to Forester within 30 days after the period for curing such breach has expired the then unpaid amount of consulting fees for the full unexpired term of the 1995 Agreement and the then unpaid balance of any payments referenced in Section 2(c) or (d) hereof. The Company shall also pay in full within 30 days after the period for curing such breach has expired all future premiums necessary to obtain a fully paid up life insurance policy with Commonwealth for the insurance coverage described in Section 1(b)(ii) hereof. For the full unexpired term of the 1995 Agreement commencing with the event of breach, the Company shall also continue Forester’s participation in all group insurance and medical expense reimbursement plans set forth in Section 1(b)(i) hereof and shall continue to provide him with, or reimburse him for the cost of, all perquisites provided to him prior to the event of breach.

6. If a Change in Control (as defined in Section 7 hereof) shall occur after the Effective Date, the Company shall satisfy all obligations set forth in Section 5 hereof, except that all payments required thereunder shall be made promptly after the Change in Control has occurred.

7. Except as provided below, for purposes of this 1995 Agreement a Change in Control shall be deemed to have occurred if:

(a) an event that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the 1934 Act, as in effect on the date hereof, occurs; or

(b) any person (other than any person who as of the date hereof is the beneficial owner of 10% or more of the Company’s voting securities) or group of persons acting in concert becomes the beneficial owner of 20% or more of the Company’s outstanding voting securities or securities convertible into such amount of voting securities; or

(c) within two years after a tender offer or exchange offer, or as the result of a merger, consolidation, sale of substantially all of the Company’s assets or a contested election of the Board of Directors, or any combination of such transactions, the persons who were directors of the Company prior to the transaction do not constitute a majority of the Board of Directors of the Company or its successor; provided, however, that no such event shall be deemed to constitute a Change in Control if, but only if, two-thirds of the Prior Directors of the Company and the Successor Directors, if any, voting together, within five days after such Prior Directors receive notice of such event, adopt a resolution stating that such event, for purposes of this 1995 Agreement, shall not be deemed to constitute a Change in Control. For purposes of this 1995 Agreement, Prior Directors are those directors of the Company in office immediately prior to such event, and Successor Directors are successors to Prior Directors who were recommended to succeed Prior Directors by a majority of the Prior Directors then in office.

5

8. The Company hereby represents to Forester that, subject to the 1995 Agreement becoming effective:

(a) Forester hereby surrenders to the Company all stock options which are not exercisable prior to December 30, 1995 (the “Surrendered Options”). The Company hereby agrees to pay to Forester on January 2, 1996 an amount equal to (i) the difference between the weighted average exercise price of the Surrendered Options and the per share fair market value of the Company’s common stock on the date hereof multiplied by the number of shares of Company common stock subject to the Surrendered Options, minus (ii) the amount of $200,000. The per share fair market value of the Company’s common stock, for purposes of this provision, shall be the higher of (a) the closing sale price of the common stock as reported on the consolidated reporting system established pursuant to Section 11(a) of the Securities Exchange Act of 1934, as amended, or, if the common stock is not so reported, the closing sale price of the common stock on the principal exchange market for the common stock.

(b) The principal balance of and all accrued interest on any loans from the Company to Forester arising from the exercise of stock options by Forester prior to the Effective Date (the “Terminated Loans”) shall be repaid in full on January 2, 1996 pursuant to the following sentence. Concurrently with the repayment of the Terminated Loans, the Company shall lend to Forester an amount equal to the principal balance of and accrued interest on the Terminated Loans (which amount shall be used to repay such obligations) pursuant to replacement loan agreements which shall have the identical terms and conditions as the loan agreements relating to the Terminated Loans, except that the third paragraph of each replacement loan agreement shall read in its entirety as follows:

(i) For all loans which contain a six-year maturity provision:

“The principal amount of the Loan will become due and payable on the first to occur of (i) the sixth anniversary of the date hereof and (ii) one year after the date of my death.”

(ii) For that loan which contains a five-year maturity provision:

“The principal amount of the Loan will become due and payable on the first to occur of (i) the fifth anniversary of the date hereof and (ii) one year after the date of my death.”

(iii) For that loan which contains a four-year maturity provision:

“The principal amount of the Loan will become due and payable on the first to occur of (i) the fourth anniversary of the date hereof and (ii) one year after the date of my death.”

(iv) For all loans which contain a three-year maturity provision:

“The principal amount of the Loan will become due and payable on the first to occur of (i) the third anniversary of the date hereof and (ii) one year after the date of my death.”

6

Forester hereby consents and agrees to the actions referred to in this Section 8, and acknowledges that the Company is making no representation with respect to, and shall not in any way be responsible for, the tax consequences, if any, to Forester of such actions.

9. (a) Forester shall not at any time, either during or after the Consulting Period, directly or indirectly, disclose, publish or divulge to any person (except in furtherance of the Company’s business), or appropriate, use or cause, permit or induce any person to appropriate or use, any proprietary, secret or confidential information of the Company. If so requested by the Company, Forester shall, following termination of the Consulting Period, promptly deliver or return to the Company all materials of a proprietary, secret or confidential nature relating to the Company and any other property of the Company which may have theretofore been delivered to, or may then be in the possession or control of, Forester.

(b) Forester shall not, at any time during the Consulting Period or for a period of one year thereafter, in any manner or capacity engage or have any interest in any business directly competitive with any business in which the Company is engaged in the United States or any foreign country; provided, however, that Forester’s ownership of one percent or less interest in any company whose common stock is publicly traded shall not constitute prohibited competition for the purposes of this Section 9(b).

10. The Company shall reimburse Forester on demand for all expenses, including, without limitation, attorneys’, accountants’, actuaries’ and other experts’ fees and expenses, reasonably incurred by Forester at any time in connection with this 1995 Agreement, including, without limitation, in connection with defending the validity of, enforcing his rights under, or recovering amounts due or damages under this 1995 Agreement.

11. Any offer, notice, request or other communication hereunder shall be in writing and shall be deemed to have been duly given if hand delivered or mailed by registered or certified mail, return receipt requested, addressed to the respective address of each party hereinafter set forth, or to such other address as each party may designate by a notice pursuant hereto, which change of address shall be effective upon receipt thereof:

If to the Company:

Anthony Industries, Inc.

4900 South Eastern Avenue

Los Angeles, CA 90040

Attention: Chief Executive Officer

If to Forester:

Mr. Bernard I. Forester

121 Fremont Place

Los Angeles, CA 90005

12. Subject to the terms of the following sentence, if any provision of this 1995 Agreement shall be held for any reason to be unenforceable, the remainder of this 1995 Agreement shall nevertheless remain in full force and effect. In the event that this 1995

7

Agreement is held to be void or voidable, or substantially all of its terms are otherwise held to be unenforceable, then (i) this 1995 Agreement shall be deemed voided, (ii) the 1991 Amended Agreement shall be deemed to remain in full force and effect, except that each reference in Section 4 thereof to 114.696 shall be deemed to be a reference to 129.872 (which the parties acknowledge was uncorrected error therein), (iii) the employment of Forester as Chief Executive Officer of the Company shall be deemed terminated by the Company in material breach of the terms of the 1991 Amended Agreement and (iv) the provisions of Section 6 of the 1991 Amended Agreement shall be deemed to apply to such termination and breach, except that with respect to Section 6(a) of the 1991 Amended Agreement, (A) the Basic Compensation payable to Forester pursuant to clause 6(a)(i)(x) shall be deemed to be $200,000 per year, (B) no incentive compensation shall be paid to Forester pursuant to clause 6(a)(i)(y) with respect to the 1996 and 1997 calendar years (but Forester shall be entitled to any unpaid incentive compensation with respect to prior years, plus the payment of incentive compensation for the 1995 calendar year in an amount equal to the amount of the highest incentive compensation award granted to Forester in respect of any year during the five calendar years immediately preceding the breach), and (C) no payments shall be made to Forester pursuant to clause 6(a)(ii). The waiver by The Foresters or the Company of a breach by the Company or Forester, as the case may be, of any provision of this 1995 Agreement shall not be deemed to be a waiver of any future breach of such provision or of any other provision, no matter how many such waivers The Foresters or the Company may grant.

13. This 1995 Agreement, including, without limitation, the provisions of this Section 13, shall be binding upon and inure to the benefit of, and shall be deemed to refer with equal force and effect to, any corporation or other successor to the Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Company. This 1995 Agreement shall not be assignable by the Company or any such successor, except to the corporate or other successor referred to in the preceding sentence. Forester may not assign, pledge or encumber his interest in this 1995 Agreement without the written consent of the Company. At Forester’s death, his widow shall become a third party beneficiary of Section 4 hereof with powers to enforce her benefits and rights thereunder or recover damages for the breach thereof.

14. Forester shall perform all services required under this 1995 Agreement personally and as an independent contractor to the Company. Forester shall not, while rendering such services, engage in any conduct inconsistent with his status as an independent contractor. Except as otherwise provided in this 1995 Agreement, Forester shall not enter into any commitments on behalf of the Company. Forester or Forester’s beneficiaries, as the case may be, shall be solely responsible for the payment of any and all local, state and federal taxes due in respect of amounts paid by the Company pursuant to this 1995 Agreement; provided, however, that the Company shall have the right to make such provisions as it deems necessary or appropriate to satisfy any obligation it may have to withhold federal, state or local income or other taxes incurred by reason of payments pursuant to this 1995 Agreement. Forester’s status as a consultant under this 1995 Agreement shall not disqualify him from receiving benefits provided to non-employee directors of the Company generally to which he would otherwise be entitled, excluding benefits provided under the Directors’ SERP.

8

15. This 1995 Agreement contains the entire agreement and understanding between the Company and Forester with respect to the subject matter hereof and may not be changed, amended or terminated orally, but only by an agreement in writing, nor may any of the provisions hereof be waived orally, but only by an instrument in writing, in any such case signed by the party against whom enforcement of any change, amendment, termination or waiver is sought.

ANTHONY INDUSTRIES, INC.
By:	/s/ John J. Rangel
Authorized Signatory
/s/ B. I. Forester
B. I. FORESTER

9

EX-10.E

EXHIBIT 10(e)

TRUST FOR ANTHONY INDUSTRIES, INC.

SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN

FOR THE BENEFIT OF

B. I. FORESTER

This Agreement made this 20 day of November, 1995, by and between ANTHONY INDUSTRIES, INC. (“the Company”) and WELLS FARGO BANK N.A. (“Trustee”).

WHEREAS, pursuant to that certain agreement between the Company and B. I. Forester (“Forester”) dated November 20, 1995 (the “November 20 Agreement”), the Company has adopted a “Supplemental Employee Retirement Plan” for the benefit of B. I. Forester (“SERP”);

WHEREAS, the Company will incur liability under the terms of such SERP with respect to benefits payable to Forester and his spouse (hereinafter the “Foresters”);

WHEREAS, the Company wishes to establish a trust (hereinafter called “Trust”) and to contribute assets to the Trust that shall be held therein, subject only to the claims of the Company’s creditors in the event of the Company’s Insolvency, as herein defined, until paid to the Foresters in such manner and at such times as specified in the SERP;

WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the SERP as an unfunded plan maintained for the purpose of providing deferred compensation for a “select group of management or highly compensated employees” for purposes of Title I of the Employee Retirement Income Security Act of 1974;

WHEREAS, it is the intention of the Company to make contributions to the Trust to provide it with a source of funds to assist it in the meeting of its liabilities under the SERP;

NOW, THEREFORE, Anthony Industries, Inc. and Wells Fargo Bank N.A. do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:

ARTICLE 1

ESTABLISHMENT OF TRUST

1.1 The Company hereby deposits with Trustee in trust not less than One Dollar ($1.00), which shall be the initial principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement and the SERP. This Trust Agreement and the SERP are intended to be administered together by the Company.

1.2 The Trust hereby established shall be irrevocable by the Company.

1.3 The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly.

1.4 The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of the Foresters and general creditors as herein set forth. The Foresters shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the SERP and this Trust Agreement shall be mere unsecured contractual rights of the Foresters against the Company. Any assets held by the Trust will be subject to the claims of the Company’s general creditors under federal and state law in the event of Insolvency, as defined in Section 3.1 herein.

1.5 The Company may, from time to time, make additional deposits of cash in Trust with the Trustee as required by the terms of the SERP, to augment the principal to be held, administered and disposed of by the Trustee as provided in the SERP and the Trust.

ARTICLE 2

PAYMENTS TO THE FORESTERS

2.1 At such time as the Foresters become entitled to receive distributions, the Company shall deliver to the Trustee a schedule (the “Payment Schedule”) that indicates the monthly amounts payable in respect of Forester, and the monthly due date for payment of such monthly amounts. Upon the death of Forester, and if Forester’s spouse shall have survived him, the Company shall deliver a new Payment Schedule to the Trustee indicating the monthly amount payable to Forester’s surviving spouse. Except as otherwise provided herein, Trustee shall make payments to the Foresters in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the SERP and shall pay amounts withheld to the appropriate taxing authorities unless the Trustee determines that such amounts have already been reported, withheld and paid by the Company.

2.2 The entitlement of the Foresters to benefits under the SERP shall be determined solely by the Company under the terms of the SERP.

2.3 The Company may make payment of benefits directly to the Foresters as they become due under the terms of the SERP. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time each payment is payable to the Foresters. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the SERP, the Company shall make the balance of each such payment as it falls due. The Trustee shall notify the Company when principal and earnings are not sufficient.

ARTICLE 3

TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO THE

FORESTERS WHEN THE COMPANY IS INSOLVENT

3.1 The Trustee shall cease payment of benefits to the Foresters if the Company is Insolvent. The Company shall be considered “Insolvent” for purposes of this Trust if (a) the Company is unable to pay its debts as they become due, or (b) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.

2

3.2 At all times during the continuance of this Trust, as provided in Section 1.4 hereof, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below.

(a) The Board of Directors and Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing of the Company’s Insolvency. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to the Foresters.

(b) Unless the Trustee has actual knowledge of the Company’s Insolvency, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company’s solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company’s solvency.

(c) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to the Foresters and shall hold the assets of the Trust for the benefit of the Company’s general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of the Foresters to pursue their rights as general creditors of the Company with respect to benefits due under the SERP or otherwise.

(d) The Trustee shall resume the payment of benefits to the Foresters in accordance with Article 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent).

3.3 Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3.2 hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to the Foresters under the terms of the SERP for the period of such discontinuance, less the aggregate amount of any payments made to the Foresters by the Company in lieu of the payments provided for hereunder during any such period of discontinuance.

ARTICLE 4

PAYMENTS TO THE COMPANY

Except as permitted under the terms of the SERP or in the case of Insolvency, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payments of benefits have been made to the Foresters pursuant to the terms of the SERP. In accordance with Section 4(e) of the SERP, the Company shall have the right and power to direct the Trustee to return Trust assets (including income that is accumulated and reinvested) to the Company to the extent that the fair market value of the net assets of the Trust on the last day of the year exceeds 110% of the Full Funding Amount for such year.

3

ARTICLE 5

INVESTMENT OF SERP ASSETS

5.1 Except as provided in Article 4, during the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. The Company or an investment manager retained by the Company, shall direct the Trustee as to the investment of Trust assets. All investments shall be made at the sole discretion of the Company or such investment manager, except that in no event may the Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by the Company, other than a de minimis amount held in common investment vehicles. Subject to the Company’s obligation to fund the Trust in accordance with the SERP, the Company shall have no responsibility to make the Trust whole for any losses resulting from such investments. All rights associated with assets of the Trust, other than the investment decisions retained by the Company, shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercised by or rest with the Foresters.

5.2 Except as provided below, the Company shall have all power and responsibility for the management, disposition, and investment of the Trust assets, and the Trustee shall comply with proper written directions of the Company concerning the Trust assets. The Company shall not issue directions in violation of the terms of this Agreement. The Trustee shall have no duty or responsibility to review, initiate action, or make recommendations regarding the Trust assets and shall retain such assets until directed in writing by the Company to dispose of them.

5.3 The Company may appoint an Investment Manager or Managers to direct, control or manage the investment of all or a portion of the Trust assets. The Company shall notify the Trustee in writing of the appointment of each Investment Manager and the portion of the Trust assets subject to the Investment Manager’s direction. If the foregoing conditions are met, the Investment Manager shall have the power to manage, acquire, retain or dispose of such portion of the Trust assets and the Trustee shall not be liable for the acts or omissions of the Investment Manager or be under an obligation to invest or otherwise manage the portion of the Trust assets which is subject to the direction of such Investment Manager.

5.4 Except as provided in Section 5.1 above, the Trust may hold assets of any kind, including shares of any registered investment company, whether or not the Trustee or any of its affiliates is an advisor to, or other service provided to, such company and received compensation from such company for the services provided.

ARTICLE 6

ACCOUNTING BY TRUSTEE

The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last

4

preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be, valued separately at cost and at market value.

ARTICLE 7

RESPONSIBILITY OF TRUSTEE

7.1 The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the SERP or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute.

7.2 If the Trustee undertakes or defends any litigation arising in connection with this Trust, the Company agrees to indemnify the Trustee against the Trustee’s reasonable costs, expenses and liabilities (including, without limitation, attorneys’ fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust, provided, however, that the Company shall have the right to assume the defense of any such litigation with counsel reasonably acceptable to the Trustee and to settle any such litigation with the consent of the Trustee, which consent will not be unreasonably withheld.

7.3 The Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder.

7.4 The Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy.

7.5 Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code.

5

ARTICLE 8

COMPENSATION AND EXPENSES OF TRUSTEE

The Company shall pay all reasonable administrative expenses of the Trustee and such fees of the Trustee on which the Company and the Trustee may agree. If not so paid, the fees and expenses shall be paid from the Trust.

ARTICLE 9

REMOVAL OF TRUSTEE

9.1 The Trustee may resign at any time by written notice to the Company, which shall be effective sixty (60) days after receipt of such notice unless the Trustee agrees otherwise.

9.2 The Trustee may be removed by the Company on sixty (60) days notice or upon shorter notice accepted by the Trustee.

9.3 Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within sixty (60) days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit.

9.4 If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Article 10 hereof, by the effective date of resignation or removal under Sections 9.1 or 9.2. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust.

ARTICLE 10

APPOINTMENT OF SUCCESSOR

10.1 If the Trustee resigns, or is removed, in accordance with Section 9.1 or 9.2 hereof, the Company may appoint any bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace the Trustee upon resignation or removal, except that such bank trust department or other party may not be a lender or an affiliate of a lender to the Company. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer.

10.2 The successor Trustee need not examine the records and acts of any prior Trustee. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes the successor Trustee.

6

ARTICLE 11

AMENDMENT OR TERMINATION

11.1 This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the SERP or shall make the Trust revocable.

11.2 The Trust shall not terminate until the date on which the Foresters are no longer entitled to benefits pursuant to the terms of the SERP. Upon termination of the Trust any assets remaining in the Trust shall be returned to the Company.

11.3 Upon written approval of the Foresters, the Company may terminate this Trust prior to the time all benefit payments under the SERP have been made. All assets in the Trust at termination shall be returned to the Company.

ARTICLE 12

MISCELLANEOUS

12.1 Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.

12.2 Benefits payable to the Foresters under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.

12.3 This Trust Agreement shall be governed by and construed in accordance with the laws of the State of California.

ARTICLE 13

EFFECTIVE DATE

The effective date of this Trust Agreement shall be November 20, 1995.

ARTICLE 14

ACCEPTANCE BY THE TRUSTEE

This Trust has been accepted by the Trustee which agrees to hold in trust and administer the Fund hereunder, subject to all of the terms and conditions hereof.

7

IN WITNESS WHEREOF, ANTHONY INDUSTRIES, INC. and WELLS FARGO BANK N.A. have executed this Agreement this 20 day of November, 1995.

THE COMPANY:
ANTHONY INDUSTRIES, INC.
By:	/s/ John J. Rangel

THE TRUSTEE:
WELLS FARGO BANK N.A.
By:	/s/ M. J. Cowen
By:	/s/ Pamela Howard

8

EX-10.F

EXHIBIT (10) (f)

ANTHONY INDUSTRIES, INC.

SPECIAL SUPPLEMENTAL BENEFIT AGREEMENT

BETWEEN ANTHONY INDUSTRIES, INC.

AND BERNARD I. FORESTER

A Special Supplemental Benefit Agreement

For Bernard I. Forester

TABLE OF CONTENTS

Title of Plan		Page 1
I.	The Facts	Page 1
II.	This Agreement	Page 2
	Definitions	Page 2
	Beneficiary	Page 2
	Committee	Page 3
	Cost of Capital	Page 3
	Special Survivor Benefit	Page 3
	Determination of Survivor Benefit	Page 4
	Withholding; Unemployment Taxes	Page 5
	Amendment	Page 5
	Unsecured General Creditor	Page 5
	Nonassignability	Page 5
	Employment Not Guaranteed	Page 6
	Gender, Singular and Plural	Page 6
	Notice	Page 6
	Arbitration	Page 7
	Captions	Page 7
	Validity	Page 7
	Applicable Law	Page 7
	Counterpart Signatures	Page 8

ANTHONY INDUSTRIES, INC.

SPECIAL SUPPLEMENTAL BENEFIT

AGREEMENT

I. THE FACTS:

The important facts concerning this Agreement are as follows:

A. Bernard I. Forester (“Executive”) is an officer and employee of the Corporation.

B. Executive has applied for a Pacific Mutual Life Insurance Company Increasing Whole Life Insurance Policy (“Policy”) as evidenced by Exhibit B attached hereto. Executive and Corporation have entered into a Split-Dollar Insurance Agreement as of December 9, 1986 regarding the Policy (“Contract”) as evidenced by Exhibit A attached hereto. Pacific Mutual Life Insurance Company and any other company issuing a policy of insurance which shall be subject to the Contract shall be referred to as an “Insurer.” From time to time Executive may acquire additional insurance on Executive’s life, and Corporation may assist Executive in carrying such additional insurance under the terms of the Contract. Any such additional insurance shall be considered part of the Policy for purposes of this Agreement.

C. Pursuant to the terms of the Contract, the Corporation will assist the Executive in carrying the Policy.

- 1 -

In return for this assistance, Corporation will receive a portion of the Policy proceeds that are payable upon Executive’s death.

D. Corporation desires to recover all sums that are payable by the Corporation under the terms of the contract plus 10% pretax on said sums and wishes to transfer certain amounts as provided herein, in excess of such recovery that Corporation may receive to the Executive’s designated beneficiaries; accordingly, the Corporation and Executive desire to enter into this Special Executive Supplemental Benefit Agreement for Executive and/or his designated beneficiaries.

II. THIS AGREEMENT:

NOW, THEREFORE, in consideration of the foregoing, Corporation and Executive agree:

A. Definitions.

For purposes of this Agreement the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise:

(1) Beneficiary. “Beneficiary” means the person or persons designated by Executive as his Beneficiary (both principal as well as contingent) to whom payment under this Agreement shall be made upon Executive’s death. Each Beneficiary designation shall become effective only when filed in writing with the Committee during the Executive’s lifetime on a form prescribed by the Committee. If the

- 2 -

Executive fails to designate a Beneficiary or if all designated Beneficiaries predecease the Executive, the Beneficiary shall be the Executive’s estate.

(2) Committee. “Committee” means the Compensation Committee appointed by the Board of Directors to administer all compensation matters with the Executive, including matters related to this Agreement.

(3) Cost Of Capital. “Cost Of Capital” means the Corporation’s cost of funds for money invested by the Corporation under the terms of the Contract and for money paid to Executive pursuant to the terms of this Agreement. For purposes of this Agreement, the Corporation’s cost of funds shall be deemed to be 10% pre-tax. Whenever, Cost Of Capital must be calculated hereunder for money invested under the terms of the Contract or paid under the terms of this Agreement, such money shall be credited with 10% pre-tax interest compounded on an annual basis.

B. Special Survivor Benefit.

Upon the death of the Executive, Corporation shall pay a Special Survivor Benefit to the Beneficiary. This Special Survivor Benefit shall be paid within 30 days of the receipt of the Corporation’s share of Policy proceeds as determined under the terms of the Contract. The amount of this Special Survivor Benefit, if any, shall be equal to the Executive’s Vested Percentage of the Excess Proceeds. For this purpose, Excess Proceeds shall mean Corporation’s share of the net Policy proceeds as determined under the terms of the

- 3 -

Contract, less the total amount of money invested under the terms of the Contract or paid pursuant to the terms of this Agreement plus the Corporation’s Cost Of Capital for the money so invested and paid. For purposes of this Agreement, Vested Percentage will be determined as of the date of Executive’s death according to the following table:

Date of Distribution	Vested Percentage
Before the first anniversary hereof	0	%
On or after the first anniversary hereof but before the second anniversary	10	%
On or after the second anniversary hereof but before the third anniversary	20	%
On or after the third anniversary hereof but before the fourth anniversary	30	%
On or after the fourth anniversary hereof but before the fifth anniversary	40	%
On or after the fifth anniversary hereof	50	%

C. Annual Determination Of Special Survivor Benefit.

The Corporation shall provide the Executive each year on the Policy’s anniversary date a statement that shows the amount, if any, of the Special Survivor Benefit that would have been paid in the event the Executive had died on the Policy anniversary date in question. The Executive shall acknowledge his receipt of this statement and signify his approval of the Special Survivor Benefit calculation by dating and signing a copy of the statement.

- 4 -

D. Withholding; Unemployment Taxes.

To the extent required by the law in effect at the time payments are made, the Corporation shall withhold from payments made hereunder the minimum taxes required to be withheld by the Federal or any state or local government.

E. Amendment.

This Agreement may not be amended without the written consent of both parties.

F. Unsecured General Creditor.

Executive and his Beneficiary, heirs, successors, and assigns shall have no legal or equitable rights, interest, or claims in any property or assets of Corporation, nor shall they be Beneficiaries of, or have any rights, claims, or interests in the Corporation’s interest in the Policy as determined pursuant to the terms of the Contract. Any and all of the Corporation’s assets, including its interest in the Policy, shall be, and remain, the general, unpledged, unrestricted assets of the Corporation. Corporation’s obligations under this Agreement shall be merely that of an unfunded and unsecured promise of Corporation to pay money in the future.

G. Nonassignability.

Neither the Executive nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and

- 5 -

all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by Executive or any other person, nor be transferable by operation of law in the event of the Executive’s or any other person’s bankruptcy or insolvency.

H. Employment Not Guaranteed.

Nothing contained in this Agreement nor any action taken hereunder shall be construed as a contract of employment or as giving the Executive any right to be retained in the employ of the Corporation or to serve as a director.

I. Gender, Singular And Plural.

All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular.

J. Notice.

Any notice or filing required or permitted to be given to the Committee under the Agreement shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Corporation, directed to the attention of the Secretary of the Corporation. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

- 6 -

K. Arbitration.

Any controversy or claim arising out of or relating to the Agreement, or the breach thereof, including specifically any dispute over the annual determination of the amount, if any, of the Special Survivor Benefit, shall be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment on the award rendered may be entered in any court having jurisdiction thereof. The arbitrator shall be authorized to award reasonable legal fees and expenses to the prevailing party.

L. Captions.

The captions of the various paragraphs herein are for convenience only, and none of them is intended to be any part of the body or text of this Agreement, nor intended to be referred to in construing any of the provisions hereof.

M. Validity.

If any portion of this Agreement should be held illegal, unenforceable, void or voidable by any court, each of the remaining terms hereof shall nevertheless remain in full force and effect as a separate contract.

N. Applicable Law.

This Agreement shall be subject to and shall be interpreted under the laws of the State of California.

- 7 -

O. Counterpart Signatures.

This Agreement may be executed in any number of counterparts, any of which shall be deemed to be an original.

DATED	December 9, 1986	/s/ Bernard I. Forester
		Bernard I. Forester

		ANTHONY INDUSTRIES, INC.
DATED	3-14-87		/s/ M. Philip Anthony
			M. Philip Anthony
			Chairman of the Executive Committee

- 8 -

EXHIBIT A

SPLIT DOLLAR INSURANCE AGREEMENT

An Agreement between Anthony Industries, Inc.

and Bernard I. Forester

TABLE OF CONTENTS

Title of Contract		Page 1
I.	The Parties	Page 1
II.	Date Of The Agreement	Page 1
III.	The Facts	Page 1
IV.	This Agreement	Page 2
	Owner’s Rights	Page 2
	Corporation’s Premium Obligation	Page 2
	Right To Borrow From Policy	Page 3
	Obligation To Pay Policy Loan Interest	Page 4
	Right To Surrender Paid-Up Additions	Page 4
	Division Of Policy Proceeds	Page 5
	Possession Of The Policy	Page 5
	Right To Surrender Policy	Page 5
	Insurer Not A Party	Page 5
	ERISA Provisions	Page 6
	Execution Of Other Documents	Page 6
	Defaults Not Waived	Page 6
	Captions	Page 6
	Parties Bound	Page 7
	Construction Of Agreement	Page 7
	Miscellaneous Provisions	Page 7
	Termination Of Employment	Page 7
	Arbitration	Page 8
	Applicable Law	Page 9
	Counterpart Signatures	Page 9
V.	Signatures	Page 9
Exhibit B		Page 10

SPLIT DOLLAR INSURANCE

AGREEMENT

I. THE PARTIES:

This Agreement is made and entered into by and between the following who are hereinafter collectively referred to as the “Parties”: Anthony Industries, Inc. (“Corporation”) and Bernard I. Forester (“Owner”).

II. DATE OF THE AGREEMENT:

The date of this Agreement is the 9th day of December, 1986.

III. THE FACTS:

The important facts concerning this Agreement are as follows:

A. Owner is an officer and employee of the Corporation.

B. Owner has applied for a Pacific Mutual Life Insurance Company Increasing Whole Life Insurance Policy (“Policy”) as evidenced by Exhibit B attached hereto. Such insurance company and any other company issuing a policy of insurance which shall be subject to this Agreement shall be referred to as an “Insurer.” From time to time Owner may acquire additional insurance on Owner’s life, and Corporation

- 1 -

may assist Owner in carrying such additional insurance. Any such additional insurance shall be scheduled on a rider to this Agreement, and shall be subject to all of the terms of this Agreement.

C. The Corporation wishes to assist the owner in carrying insurance on Owner’s life.

D. The Corporation and Owner have entered into a Special Supplemental Benefit Agreement (“Benefit Agreement”) . Terms used in this Agreement shall have the same meaning as in the Benefit Agreement, unless otherwise indicated.

IV. THIS AGREEMENT;

NOW, THEREFORE, in consideration of the foregoing, and of the respective promises hereinafter set forth, the Parties agree as follows:

A. Owner Retains All Rights Except As Provided Hereunder.

Owner shall continue to be the owner of the Policy, and Owner may exercise all ownership rights granted to the Owner by the terms of the Policy, except as provided in this Agreement.

B. Corporation’s Obligation To Pay Premium.

The Corporation shall pay the entire premium on the Policy to the Insurer on the due date of the premium, including a special roll-in of $325,000 during the first Policy year. The Corporation’s interest in the Policy shall be as provided in this Agreement, and Owner agrees to execute and deliver a collateral assignment of the Policy to the Corporation

- 2 -

upon execution of this Agreement. The assignment shall be security for the repayment of the Corporation’s interest in the Policy. The obligation of the Corporation to pay premiums shall begin on the date when the Insurer issues a premium statement for the Policy and shall continue for as long as Owner remains living.

C. Right To Make Policy Loans.

The rights of the Corporation and of the Owner with respect to policy loans shall be as follows:

(a) As collateral assignee of the Policy, the Corporation may exercise any loan privileges under the Policy without the consent of the Owner, but such loan privileges shall be exercised only as provided in this Agreement.

(b) The Corporation shall have the right to borrow against the Policy as follows:

(1) During the first Policy Year, Corporation may borrow the maximum amount of cash that may be borrowed from the Policy after taking into account the amount that Owner may borrow from the Policy in Policy Year One; provided, however, the maximum amount that Corporation may borrow shall be $50,000.

- 3 -

(2) During the second Policy Year, Corporation may borrow an amount equal to the difference between $50,000 and the amount borrowed by the Corporation in Policy Year One so that the total Policy loans made by the Corporation equals $50,000.

(3) No borrowing from the Policy may be made by the Corporation after its total Policy loans equal $50,000.

(c) Owner shall have the right to borrow $350,000 from the Policy in Policy Year One. Thereafter, Owner shall have no right to borrow from the Policy.

D. Obligations To Pay Policy Loan Interest.

Owner and Corporation shall each pay all interest attributable to their Policy loans.

E. Right To Surrender Paid-Up Additions.

Commencing with Policy Year Seven, Corporation may elect to pay annual Policy premiums by surrendering paid-up additions that have accumulated within the Policy. The Corporation shall not have the right to surrender paid-up additions to pay all or any part of the Policy loan interest. The Owner shall have no right to surrender paid-up additions; provided, however, if the Corporation fails to pay an annual Policy premium, Owner may surrender paid-up additions for that purpose.

- 4 -

F. Division Of Policy Proceeds.

Upon the death of the Owner, this Agreement shall terminate and the beneficiary or beneficiaries designated by the owner in the beneficiary provision endorsed on the Policy shall receive $350,000 of the Policy’s gross proceeds and said proceeds shall be first applied against any borrowings made by the Owner pursuant to the terms of this Agreement. The balance of the Policy proceeds shall be paid to the Corporation.

G. Possession Of The Policy.

The Corporation shall have possession of the Policy during the period that the owner shall be obligated to the Corporation, but the Corporation shall make the Policy available to the Owner and to the Insurer whenever necessary to endorse changes of beneficiaries on the Policy.

H. Right To Surrender Policy.

The Owner shall have the sole right to exercise all rights granted to the Owner under the Policy, subject to the collateral assignment to the Corporation. However, notwithstanding anything herein to the contrary or anything in the Policy to the contrary, neither the Owner nor the Corporation shall have the right to cancel or surrender the Policy without the written consent of the other party to this Agreement.

I. Insurer Not A Party To This Agreement.

In no event shall the Insurer be considered a party to this Agreement nor to any modifications or amendment of this Agreement, nor to any supplement to this Agreement.

- 5 -

Payment or other performance of Insurer’s obligations in accordance with the terms of the Policy shall fully discharge the Insurer from any and all liability under the Policy. The Insurer shall not be obligated to inquire as to the distribution or application of any amounts payable or paid by the Insurer under the Policy.

J. ERISA Provisions.

If this plan is subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), the Corporation is the “named fiduciary” of the Split-Dollar Life Insurance Plan for which this Agreement is hereby designated the written plan instrument.

K. Execution Of Other Documents.

Each of the Parties shall execute promptly all documents and instruments now or hereafter necessary or convenient to effectuate the purpose and intent of this Agreement.

L. Defaults Not Waived.

No waiver of the breach of any of the terms or provisions of this Agreement shall be, or be construed to be, a waiver of any preceding or succeeding breach of the same or any other provisions hereof.

M. Captions.

The captions of the various paragraphs herein are for convenience only, and none of them is intended to be any part of the body or text of this Agreement, nor intended to be referred to in construing any of the provisions hereof.

- 6 -

N. Parties Bound.

This Agreement shall inure to the benefit of and be binding upon the Parties hereto and their respective heirs, executors, administrators, successors, assigns and legal representatives .

O. Construction Of Agreement.

This Agreement has been prepared and negotiations in connection therewith have been carried on by the joint efforts of the respective counsel for the Parties. This Agreement is to be construed simply and fairly and not strictly for or against any of the Parties.

P. Miscellaneous Provisions.

If any portion of this Agreement should be held illegal, unenforceable, void or voidable by any court, each of the remaining terms hereof shall nevertheless remain in full force and effect as a separate contract.

Q. Owner’s Termination Of Employment.

If Owner’s employment with the Corporation terminates (i) for cause, (ii) because Owner materially breaches the Employment Agreement between the Corporation and the Owner dated May 10, 1984 or a successor employment agreement (the “Employment Agreement”), or (iii) because Owner fails to enter into a successor employment agreement, expiring no later than December 31, 1993, on substantially the same terms as the Employment Agreement if so requested by the Corporation, the Policy shall be surrendered and the Owner shall receive $350,000 of the Policy’s gross surrender proceeds which

- 7 -

said proceeds shall be first applied against any borrowings made by the Owner pursuant to the terms of this Agreement. The balance of the Policy’s surrender proceeds shall be paid to the Corporation and shall be treated as the Corporation’s share of the Policy’s proceeds arising from the death of Owner for purposes of Article II, paragraph B of the Benefit Agreement. If the Corporation’s share of such proceeds are sufficient to produce Excess Proceeds, the Corporation shall pay to Owner the Vested Percentage of such Excess Proceeds. If the Corporation’s share of such proceeds is less than the total amount of money invested under the terms of the Contract or paid pursuant to the terms of this Agreement plus the Corporation’s Cost of Capital for the money so invested and paid, Owner shall pay the difference to the Corporation within 90 days of the Corporation’s receipt of the surrender proceeds.

R. Arbitration.

Any controversy or claim arising out of or relating to the Agreement, or the breach thereof, including specifically any dispute over the annual determination of the amount, if any, of the Special Survivor Benefit, shall be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment on the award rendered may be entered in any court having jurisdiction thereof. The arbitrator shall be authorized to award reasonable legal fees and expenses to the prevailing party.

- 8 -

S. Applicable Law.

This Agreement shall be subject to and shall be interpreted under the laws of the State of California.

T. Counterpart Signatures.

This Agreement may be executed in any number of counterparts, any of which shall be deemed to be an original.

IN WITNESS WHEREOF, the Parties have executed this Agreement effective the ninth day of December 1986, in both their individual capacities and in their fiduciary capacities set forth above.

DATED	December 9, 1986	/s/ Bernard I. Forester
		Bernard I. Forester
		ANTHONY INDUSTRIES, INC.
DATED	3 - 14 - 87	/s/ M. Philip Anthony
		M. Philip Anthony
		Chairman of the Executive Committee

- 9 -

EXHIBIT B

- 10 -

PACIFIC MUTUAL

LIFE INSURANCE COMPANY

INCREASING

WHOLE LIFE

INSURANCE

POLICY

Illegible

INDEX

Illegible

POLICY DATA

POLICY NUMBER	012175736
PLAN	INCREASING WHOLE LIFE-IV
INSURED	BERNARD I FORESTER
INITIAL AMOUNT OF INSURANCE	$343,782
POLICY DATE	SEPTEMBER 1 1986
PREMIUM PERIOD	42 YEARS
SEX AND ISSUE AGE	MALE, AGE 58
PREMIUM CLASS	PREFERRED
TOTAL FIRST PREMIUM	$57,000.14
PREMIUM INTERVAL	ANNUAL
LOAN INTEREST RATE	INDEXED IN ADVANCE

OWNER

THE INSURED

BENEFICIARY DESIGNATION

INSURED’S ESTATE & ANTHONY INDUSTRIES INC

PAGE 3

BENEFITS AND PREMIUMS					012175736 BERNARD I FORESTER MALE ISSUE AGE 58
FORM	POLICY PLAN	INITIAL AMOUNT		ANNUAL PREMIUM		PAYABLE FOR
85-24	INCREASING WHOLE LIFE-IV PREFERRED RISK DISCOUNT	$	343,782 —	$ $	57,000.14 .00	42 YEARS 42 YEARS
	ADDITIONAL RIDERS

A PREMIUM IS DUE ON THE POLICY DATE AND EVERY 12 MONTHS AFTER THAT FOR 42 YEARS.

PAGE 4

TABLE OF VALUES

THE VALUES SHOWN BELOW, OTHER THAN DEATH BENEFITS, ARE AS OF THE END OF THE YEAR IF ALL PREMIUMS DUE HAVE BEEN PAID. DEATH BENEFITS ARE AS OF THE START OF THE YEAR. WE WILL ADJUST THE CASH VALUE AND DEATH BENEFIT AS DESCRIBED ON PAGE 6. CREDITS, WHICH INCREASE THE ACCUMULATION VALUES AND CASH VALUES, WILL INCREASE THE DEATH BENEFIT IN LATER YEARS SO THAT THE ACCUMULATION VALUE DOES NOT EXCEED THE NET SINGLE PREMIUM FOR THE DEATH BENEFIT. 012175736
BERNARD I FORESTER
MALE ISSUE AGE 58

POLICY YEAR	ATTAINED AGE OF INSURED	DEATH BENEFIT		ACCUMULATION VALUE		CASH VALUE		PAID-UP LIFE INSURANCE AMOUNT
1	59	$	343,782	$	40,340	$	21,365	$	41,085
2	60	$	343,782	$	91,871	$	76,691	$	143,712
3	61	$	343,782	$	146,242	$	132,959	$	242,896
4	62	$	370,096	$	202,587	$	191,202	$	340,676
5	63	$	464,151	$	260,501	$	251,013	$	436,424
6	64	$	555,722	$	319,628	$	312,038	$	529,693
7	65	$	644,960	$	379,941	$	374,248	$	620,633
8	66	$	732,006	$	441,407	$	441,407	$	715,540
9	67	$	816,993	$	503,992	$	503,992	$	799,069
10	68	$	900,016	$	567,662	$	567,662	$	880,741
11	69	$	980,658	$	632,061	$	632,061	$	960,129
12	70	$	1,060,038	$	697,832	$	697,832	$	1,038,347
13	71	$	1,137,191	$	764,261	$	764,261	$	1,114,503
14	72	$	1,213,217	$	831,953	$	831,953	$	1,189,711
15	73	$	1,286,774	$	899,828	$	899,828	$	1,262,701
16	74	$	1,359,464	$	968,783	$	968,783	$	1,335,078
17	75	$	1,430,085	$	1,037,724	$	1,037,724	$	1,405,601
18	76	$	1,499,348	$	1,106,935	$	1,106,935	$	1,474,893
19	77	$	1,567,843	$	1,176,696	$	1,176,696	$	1,543,453
20	78	$	1,635,231	$	1,246,666	$	1,246,666	$	1,610,876

CONTINUED-

SURRENDER CHARGE
POLICY YE AR	CHARGE
1	$	18,975
2	$	15,180
3	$	13,283
4	$	11,385
5	$	9,488
6	$	7,590
7	$	5,693
8 AND AFTER	$	0

PAGE 5

TABLE OF VALUES

THE VALUES SHOWN BELOW. OTHER THAN DEATH BENEFITS, ARE AS OF THE END OF THE YEAR IF ALL PREMIUMS DUE HAVE BEEN PAID. DEATH BENEFITS ARE AS OF THE START OF THE YEAR. WE WILL ADJUST THE CASH VALUE AND DEATH BENEFIT AS DESCRIBED ON PAGE 6. CREDITS, WHICH INCREASE THE ACCUMULATION VALUES AND CASH VALUES, WILL INCREASE THE DEATH BENEFIT IN LATER YEARS SO THAT THE ACCUMULATION VALUE DOES NOT EXCEED THE NET SINGLE PREMIUM FOR THE DEATH BENEFIT. 012175738 BERNARD I FORESTER MALE ISSUE AGE 58

POLICY YEAR	ATTAINED AGE OF INSURED	DEATH BENEFIT		ACCUMULATION VALUE		CASH VALUE		PAID-UP LIFE INSURANCE AMOUNT
21	79	$	1,701,604	$	1,316,881	$	1,316,881	$	1,677,191
22	80	$	1,767,355	$	1,387,675	$	1,387,675	$	1,742,843
23	81	$	1,832,422	$	1,458,999	$	1,458,999	$	1,807,875
24	82	$	1,896,435	$	1,530,469	$	1,530,469	$	1,871,993
25	83	$	1,959,482	$	1,601,997	$	1,801,997	$	1,935,396
26	84	$	2,021,746	$	1,673,472	$	1,673,472	$	1,998,299
27	85	$	2,083,514	$	1,744,835	$	1,744,835	$	2,060,883
28	86	$	2,145,016	$	1,816,083	$	1,816,083	$	2,123,188
29	87	$	2,206,752	$	1,887,560	$	1,887,560	$	2,185,639
30	88	$	2,268,083	$	1,958,760	$	1,958,760	$	2,247,497
31	89	$	2,329,783	$	2,030,475	$	2,030,475	$	2,309,446
32	90	$	2,391,784	$	2,102,867	$	2,102,867	$	2,371,336
33	91	$	2,453,985	$	2,176,159	$	2,176,159	$	2,432,983
34	92	$	2,516,292	$	2,250,674	$	2,250,674	$	2,494,168
35	93	$	2,579,136	$	2,327,347	$	2,327,347	$	2,555,180
36	94	$	2,641,873	$	2,406,310	$	2,406,310	$	2,615,192
37	95	$	2,704,517	$	2,488,500	$	2,488,500	$	2,674,417
38	96	$	2,766,089	$	2,573,799	$	2,573,799	$	2,732,233
39	97	$	2,825,983	$	2,662,113	$	2,662,113	$	2,788,748
40	98	$	2,883,662	$	2,752,717	$	2,752,717	$	2,844,470
41	99	$	2,939,875	$	2,845,045	$	2,845,045	$	2,901,202
42	100	$	2,998,514	$	2,940,473	$	2,940,473	$	2,940,473

PAGE 5.1

Policy Benefits

Death Benefits - When we receive proof that the insured’s death occurred while this policy was in effect, we will pay the insurance provided by this policy and its riders. The insurance amount on the Policy Date is the “initial amount of insurance” shown on page 3. Thereafter, the insurance amount will be no less than the greater of the guaranteed insurance amount, which is the death benefit shown on page 5 for the current policy year, or that amount which is required for this policy to be deemed “life insurance” according to the Internal Revenue Code of 1954 (the Code) as amended in Section 7702 by the Deficit Reduction Tax Act of 1984, as applicable when this policy was issued. Such required amount will be determined based on the Accumulation Value (defined below and the Cash Value Accumulation Test defined in Section 7702 of the Code. We reserve the right to amend this policy to comply with future changes in the Code and any regulations or rulings issued under the provisions of the Code as they relate to the definition of “life insurance.” We will provide you with a copy of any such amendment.

A refund or charge will be made to adjust any premium payments required by this policy to the end of the month in which the insured dies; and, any policy loan debt will be deducted. We will not refund extra premiums for substandard risks. We will pay the resulting amount to the beneficiary. We will also pay interest on that amount from the date of death to the date of payment. The yearly rate of interest will be the same as we use for death benefits left with us at interest.

Guaranteed Accumulation Value - The guaranteed accumulation value at the end of each year is shown on page 5.

Accumulation Value - The accumulation value is never less than the guaranteed accumulation value.

The accumulation value is:

• the guaranteed accumulation value;

• plus any additional accumulation value from credits;

• plus the cash value provided by dividends and any riders;

• less mortality charges for any increased death benefits.

The increased death benefit at any time is:

• the current insurance amount;

• less the guaranteed insurance amount;

• less the current accumulation value;

• plus the guaranteed accumulation value. Increased death benefits will generally result from credits or dividends, but could also result from any increases in the insurance amount required to satisfy the definition of “life insurance.”

The guaranteed mortality charges for each age are shown on page 10.

Cash Values - The guaranteed cash value amount at the end of each year is shown on page 5. If larger, the cash value will be the accumulation value less the surrender charge shown on page 5.

• The cash value of any paid-up insurance under this policy is equal to the reserve for that paid-up insurance.

• The cash value within 90 days of lapse will equal the cash value on the date of lapse.

• The cash value of any paid-up insurance within 31 days after an anniversary will not be less than the cash value on that anniversary.

Cash Benefits - You may surrender this policy at any time for its cash value. When you do, we will pay you the net cash value, which is:

• the total cash value provided by this policy;

• less any policy loan debt.

Loan Benefits - We will make a loan to you on the sole security of this policy. The loan may be for any amount up to the loan value. Interest may be charged in advance or in arrears; this is an option at issue only. The method applicable to this contract is shown on page 3.

The following section applies only to policies with interest charged in arrears.

The loan value is the amount which, with interest to the next policy anniversary, will equal the net cash value as of the next premium due date.

• Policy loan debt at any time means the amount of any outstanding loan plus accrued interest.

• Interest will be charged on a loan from the date of the loan at a yearly rate described below. Interest is payable at the end of each year. If it is not paid, we will add it to the loan.

• You may repay all or a part of the loan at any time while this policy is in force.

• If the policy loan debt exceeds the total cash value of the policy, this policy will terminate 31 days after we mail notice to your last known address and that of any known assignee.

The following section applies only to policies with interest charged in advance.

The loan value is the amount which, with any unpaid interest, will equal the net cash value as of the policy loan date.

• Policy loan debt at any time means the amount of any outstanding loan less unearned interest.

• Interest will be charged in advance on a loan from the date of the loan at a yearly rate described below. Interest is payable at the beginning of each year, or when the loan is made or increased. If it is not paid, we will add it to the loan.

Page 6

Policy Benefits (continued)

Loan Benefits (continued)

• You may repay all or a part of the loan debt at any time while this policy is in force.

• If the policy loan debt exceeds the total cash value of the policy, this policy will terminate 31 days after we mail notice to your last known address and that of any known assignee.

The remainder of this Loan Benefits section applies to all policies.

Except as described in the next paragraph, the rate that we charge will be determined by the Maximum Interest Rate. The interest rate that we charge will equal the Maximum Interest Rate, when interest is charged in arrears. When interest is charged in advance, the interest rate that we charge will equal the discount rate equivalent to the Maximum Interest Rate. The discount rate is determined as the Maximum Interest Rate divided by the sum of one and the Maximum Interest Rate. The Maximum Interest Rate is the higher of:

• the monthly average of the Moody’s Corporate Bond Yield Average-Monthly Average Corporates, as published by Moody’s Investors Service, Inc. or its successor, for the calendar month ending two months before the month in which the policy anniversary occurs; or

• 5%.

The Maximum Interest Rate applicable to your policy will be determined annually;

• The interest rate we charge may be increased if the increase is  ¹/2% or more per year.

• The interest rate we charge will be decreased if the decrease is  ¹/2% or more per year.

• Any change in the interest rate will be effective on the policy anniversary.

• The revised interest rate will be charged on the entire outstanding loan during the year.

We will notify you of the current policy loan interest rate on your policy when:

• you make a loan on your policy; or

• you first exercise the Automatic Premium Loan provision of your policy; or

• we increase the interest rate on an existing loan. We will give you reasonable advance notice before the anniversary on which the increase is effective.

In the event that the Moody’s Corporate Bond Yield Average-Monthly Average Corporates is no longer published, we will use a substantially similar average as established by regulation within the state in which this policy is delivered.

Dividends - At the end of the first and each following year, we will determine your dividend, if any. Currently, dividends are zero and we do not expect that any dividends will become payable. At your choice, any dividends that do become payable may be:

• paid in cash;

• applied toward any premium due but not paid;

• used to buy paid-up life insurance additions; or

• left to accumulate at interest at 4% per year.

If you do not make a choice, dividends will be used to buy paid-up life insurance additions. You may turn in paid-up life insurance additions and accumulated dividends at any time for their net cash value.

Interest Credit - At the end of each policy year, we will determine an Interest Credit on your policy. This credit will be added to the accumulation value. This credit will never be less than zero. The amount of the interest credit will equal:

• the product of the Unloaned Interest Rate and the Unloaned Policy Value;

• plus the product of the Loaned Interest Rate and the Loaned Policy Value;

• less 4 ¹/2% times the Accumulation Value; where these elements have the following definitions.

Unloaned Interest Rate is a rate set annually by us. This rate will not be less than the Average T-Bill Rate. Average T-Bill Rate means the average, over a 12-month period ending two months prior to the month in which the policy anniversary occurs, of the published discount rate for 13-week United States Treasury Bills. This average is established from the results of the regularly scheduled weekly auctions. This average will not be affected by any special auction which may occur between regularly scheduled weekly auctions. If the auction program is discontinued, we reserve the right to adopt an index which in our sole opinion is a comparable index.

Loaned Interest Rate means the policy loan interest rate applicable to the policy year, expressed as an effective yield rate, times a factor which will never be less than 87 ¹/2%.

Accumulation Value means the year-end accumulation value of this policy as defined on page 6 before any credits are applied for the current policy year.

Loaned Policy Value means the average outstanding loan during the policy year. This will be determined by dividing the policy loan interest incurred during the policy year by the policy loan interest rate applicable to the policy year.

Unloaned Policy Value means the excess of the Accumulation Value over the Loaned Policy Value.

Mortality/Expense Credit - At the end of each policy year, we will determine a mortality expense credit on your policy. This credit will be added to the accumulation value. This credit will never be less than zero.

Page 7

Premiums, Lapse and Reinstatement

Payment - Premiums are payable:

• in the amounts, at the intervals and on the due dates shown on page 4:

• to us or to our agent who will give you a receipt.

Grace Period - There is a grace period of 31 days for you to pay each premium after the first. Insurance will continue during the grace period.

Automatic Premium Loan - Any premium not paid by the end of its grace period will be paid by charging it as a policy loan if:

• you have told us in writing to do this; and

• the loan value on the due date is a least as much as the premium, with interest, then due.

Each loan will take effect as of the due date of the premium not paid.

Lapse - If any premium is not paid by the end of its grace period, this policy will lapse. The date of lapse is the due date of the premium not paid. Upon lapse, the net cash value may be taken in cash. Otherwise, the total cash value will be used to buy paid-up life insurance in the amount which it will buy for the lifetime of the insured at net single premium rates. Paid-up insurance may be surrendered at any time for its net cash value.

Any paid-up whole life additions and any policy loan debt will be continued under the paid-up insurance option.

Reinstatement - You may reinstate this policy within five years of lapse if:

• it has not been surrendered;

• you provide evidence of insurability which satisfies us; and

• you pay all past due premiums with interest on each from its due date, compounded each year at the policy loan interest rate applicable to that year.

Change Provision

Change of Plan - You may change this policy to any permanent life insurance plan agreed to by you and us by:

• paying the required costs; and

• meeting any other conditions set by us.

Change of Insured - You may change the insured on this policy by:

• paying the required costs; and

• meeting any other conditions set by us including the following:

• on the change date, the current insured’s age may not be more than 80 and the proposed insured’s age may not be more than 75; and

• the proposed insured must be insurable according to our criteria for underwriting insurance risks.

Change Date - For either type of change allowed above, the change date is the first monthly anniversary of the policy date on or after which the conditions for change are met.

When there is a change of insured, the policy date after the change will be the later of:

• the policy date before the change; or

• the first anniversary following the date of birth of the new insured.

The contestable and suicide periods in the policy will begin anew on the change date.

The new amount of insurance will be set so that the cash value after the change is the same as it was before the change. If the policy has no cash value, the amount will be set so that premiums are the same.

Any policy loan debt or assignment of this policy will continue on the new policy.

Change of Loan Benefits

Benefit - You may change the Loan Benefits provision of this policy at any time to a fixed policy loan interest rate. The fixed rate is 8% if interest is charged in arrears or 7.4% if charged in advance. When you elect this option, the Interest Credit provision of this policy is no longer operative. The interest credited to your policy in excess of the guaranteed 4% is at our sole discretion.

You have the right to change back to the original Loan Benefits provision but not during the first five years after election of this option. If you do this, the original Interest Credit provision again becomes operative.

Any election to change the Loan Benefits provision:

• will be effective on the policy anniversary following the election;

• will apply to all outstanding loans; and

• will apply to all future policy years until changed.

Page 8

Income Benefits

Income Benefits - Cash benefits may be used to buy a monthly income for the lifetime of the insured. Death benefits may be used to buy a monthly income for the lifetime of the beneficiary. After it starts the income will last for at least ten years. The purchase rates for the monthly income will be set from time to time. However, the income bought by each $1,000 will always be at least as large as that shown below.

	Monthly Income
Age	Male		Female
30	$	3.98	$	3.82
32		4.04		3.88
34		4.12		3.92
36		4.20		3.98
38		4.28		4.06
40		4.38		4.12
42		4.48		4.20
44		4.60		4.30
46		4.72		4.40
48		4.86		4.50
50		5.02		4.62
52		5.18		4.76
54		5.34		4.92
56		5.54		5.08
58		5.74		5.26
60		5.96		5.46
62		6.22		5.68
64		6.48		5.94
66		6.78		6.22
68		7.10		6.54
70		7.44		6.90
72		7.78		7.28
74		8.14		7.68
75		8.32		7.89

Monthly income amounts for ages not shown are halfway between the two amounts for the nearest two ages which are shown.

Guaranteed amounts for ages under 30 are the same as those for age 30; guaranteed amounts for ages over 75 are the same as those for age 75. Amounts shown are based on the 1971 Individual Annuity Mortality Table with interest at 4%.

This benefit is not available if the income would be less than $25 a month. We may require evidence of survival for incomes which last more than ten years.

General Provisions

The Contract - The application is attached to the policy. Together, they make up the entire contract. All statements in the application are representations and not warranties. Only statements in the application can be used to void this policy or to defend a claim on the grounds of misrepresentation.

Compliance With Law - If any provision of this policy is in conflict with any applicable statute, it is hereby amended to conform to the minimum requirements of such statute.

This policy shall be construed in accordance with the laws of the state where it is delivered.

Modifications - Only our President or Secretary has the right to change or waive the terms of this policy.

Incontestability - This policy will be incontestable after it has been in force during the insured’s lifetime for two years from the policy date.

Suicide Exception - If the insured dies by suicide, while sane or insane, within two years of the policy date, no death benefits will be paid. Instead, we will return the premiums paid less any policy loan debt, and less any dividends or credits paid to you in cash.

Misstatements - If any of the insured’s age, sex, or smoking habits is misstated, benefits will be those the premiums paid would have bought for the correct age, sex, or smoking habits.

Settlements - All payments under this policy are to be made at our home office.

Deferment of Cash Value - We may defer payments of net cash value for up to six months. We may similarly defer policy loans except those made for the sole purpose of paying premiums on our policies. Interest will be paid on any payment of net cash value which we defer more than 30 days. The rate of interest will be at least 4% per year.

Owner - The owner of this policy is as shown on page 3 or in a later written change. If there are two or more owners, they will own this contract as joint tenants with right of survivorship unless stated otherwise.

Beneficiary - The beneficiary of this policy is as shown on page 3 or in a later written change. Unless you state otherwise, death benefits will be paid in equal shares to the beneficiaries who live to receive them, or if none, amounts due will be paid to you or your estate.

Assignment - If you assign this policy, your rights and those of any beneficiary are subject to the rights of the assignee.

Notice - Changes, assignments, and requests will not affect us unless we receive them in writing at our home office.

Age and Dates - As used in this policy and any riders, age means age as of nearest birthday on the policy anniversary. Policy years, months and anniversaries are determined from the policy date shown on page 3.

Calculations - We use the Commissioners 1980 Standard Ordinary Mortality Table to compute all values, reserves and net premiums under this policy. Calculations are based on continuous functions and interest at 4% per year. Separate tables are used for males and females. All values and reserves are at least equal to those required by the insurance law for the state in which this policy is delivered. The cash value within a policy year is adjusted for lapse of time and premiums paid for any portion of the policy year. A detailed statement of the method of computing these items has been filed with the insurance supervisory official of that state. Reserves are never less than the corresponding cash values.

Page 9

Guaranteed Mortality Charges

As described on page 6, there is a mortality charge for any increased death benefit generated by credits or dividends. The guaranteed annual mortality charge for the increased death benefit is the 1980 CSO mortality rate, male or female, for the age at the beginning of the policy year. These rates are as follows:

Attained Age Beginning of Year	1980 CSO Rate Per Thousand
	MALE	FEMALE
0	4.18	2.89
1	1.07	0.87
2	0.99	0.81
3	0.98	0.79
4	0.95	0.77
5	0.90	0.76
6	0.86	0.73
7	0.80	0.72
8	0.76	0.70
9	0.74	0.69
10	0.73	0.68
11	0.77	0.69
12	0.85	0.72
13	0.99	0.75
14	1.15	0.80
15	1.33	0.85
16	1.51	0.90
17	1.67	0.95
18	1.78	0.98
19	1.86	1.02
20	1.90	1.05
21	1.91	1.07
22	1.89	1.09
23	1.86	1.11
24	1.82	1.14
25	1.77	1.16
26	1.73	1.19
27	1.71	1.22
28	1.70	1.26
29	1.71	1.30
30	1.73	1.35
31	1.78	1.40
32	1.83	1.45
33	1.91	1.50
34	2.00	1.58
35	2.11	1.65
36	2.24	1.76
37	2.40	1.89
38	2.58	2.04
39	2.79	2.22
40	3.02	2.42
41	3.29	2.64
42	3.56	2.87
43	3.87	3.09
44	4.19	3.32
45	4.55	3.56
46	4.92	3.80
47	5.32	4.05
48	5.74	4.33
49	6.21	4.63
50	6.71	4.96
51	7.30	5.31
52	7.96	5.70
53	8.71	6.15
54	9.56	6.61
55	10.47	7.09
56	11.46	7.57
57	12.49	8.03
58	13.59	8.47
59	14.77	8.94
60	16.08	9.47
61	17.54	10.13
62	19.19	10.96
63	21.06	12.02
64	23.14	13.25
65	25.42	14.59
66	27.85	16.00
67	30.44	17.43
68	33.19	18.84
69	36.17	20.36
70	39.51	22.11
71	43.30	24.23
72	47.65	26.87
73	52.64	30.11
74	58.19	33.93
75	64.19	38.24
76	70.53	42.97
77	77.12	48.04
78	83.90	53.45
79	91.05	59.35
80	98.84	65.99
81	107.48	73.60
82	117.25	82.40
83	128.26	92.53
84	140.25	103.81
85	152.95	116.10
86	166.09	129.29
87	179.55	143.32
88	193.27	158.18
89	207.29	173.94
90	221.77	190.75
91	236.98	208.87
92	253.45	228.81
93	272.11	251.51
94	295.90	279.31
95	329.96	317.32
96	384.55	375.74
97	480.20	474.97
98	657.98	655.85
99	1000.00	1000.00

Page 10

EX-10.G

EXHIBIT 10(g)

ANTHONY INDUSTRIES, INC.

1994 INCENTIVE STOCK OPTION PLAN

1. PURPOSES OF THE PLAN

The purposes of this Anthony Industries, Inc. 1994 Incentive Stock Option Plan (the “Plan”) are to enable Anthony Industries, Inc. (the “Company”) and its Subsidiaries (as defined herein) to attract, retain and motivate Key Employees (as defined herein) who are important to the success and growth of the business of the Company, to enable the Company to attract, retain and motivate the most qualified individuals to serve as directors, and to create a long-term mutuality of interest between the stockholders of the Company and such Key Employees and directors by granting them options (which may, in the case of Key Employees, be either incentive stock options (as defined herein) or nonqualified stock options) to purchase the Company’s Common Stock.

2. DEFINITIONS

(a) “ACT” means the Securities Exchange Act of 1934, as it may be amended from time to time, or any successor statute.

(b) “ANNUAL GRANT DATE” means January 2 of each year during the term of the Plan; provided, however, that if such date is not a date on which any stock exchange on which the Common Stock is then traded or NASDAQ is open for trading, the Annual Grant Date shall be the immediately succeeding date on which such trading occurs.

(c) “BOARD” means the Board of Directors of the Company.

(d) “CODE” means the Internal Revenue Code of 1986, as amended.

(e) “COMMITTEE” means such committee, if any, appointed by the Board to administer the Plan, in conformity with Rule 16b-3 promulgated under the Act, consisting of two or more directors as may be appointed from time to time by the Board. If the Board does not appoint a committee for this purpose, “Committee” means the Board.

(f) “COMMON STOCK” means the common stock of the Company, par value $1.00 per share, any common stock into which such Common Stock may be converted, and any common stock resulting from any reclassification of the Common Stock.

(g) “COMPANY” means the Company and its Subsidiaries, any of whose employees are Participants in the Plan.

(h) “DISABILITY” means permanent and total disability, as determined by the Committee in its sole discretion, provided that in no event shall any disability that is not a permanent and total disability within the meaning of Section 22(e)(3) of the Code be treated as a Disability. A Disability shall be deemed to occur at the time of the determination by the Committee of the Disability.

(i) “ELIGIBLE DIRECTOR” means a director of Anthony Industries, Inc. who is not an officer or employee of the Company or any of its Subsidiaries.

(j) “FAIR MARKET VALUE” means the value of a Share (as defined herein) on a particular date, determined as follows:

(i) If the Common Stock is listed or admitted to trading on such date on a national securities exchange or quoted on the National Market System of the National Association of Securities Dealers’ Automated Quotations Systems (“NASDAQ”), the closing sales price of a Share as reported on the relevant composite transaction tape, if applicable, or on the principal such exchange (determined by trading volume in the Common Stock) or through the National Market System, as the case may be, on such date, or in the absence of reported sales on such day, the mean between the reported bid and asked prices reported on such composite transaction tape or on such exchange or through the National Market System, as the case may be, on such date; or

(ii) If the Common Stock is not listed or quoted as described in the preceding clause, but bid and asked prices are quoted through NASDAQ, the mean between the closing bid and asked prices as quoted through NASDAQ on such date; or

(iii) If the Common Stock is not listed or quoted as described in clauses (i) or (ii) above, by such other method as the Committee determines to be reasonable and consistent with applicable law; or

(iv) If the Common Stock is not publicly traded, such amount as is set by the Committee in good faith.

(k) “INCENTIVE STOCK OPTION” means any Option which is intended to qualify as an “incentive stock option” as defined in Section 422 of the Code.

(l) “KEY EMPLOYEE” means any person who is an executive officer or other valuable staff, managerial, professional or technical employee of the Company, as determined by the Committee. A Key Employee may also be a director of the Company.

(m) “OPTION” means the right to purchase one Share at a prescribed purchase price on the terms specified in the Plan. An Option may be an Incentive Stock Option or a nonqualified option.

(n) “PARTICIPANT” means an Eligible Director or a Key Employee of the Company who is granted Options under the Plan.

(o) “PURCHASE PRICE” means the purchase price per share payable upon exercise of an option.

2

(p) “SECURITIES ACT” means the Securities Act of 1933, as it may be amended from time to time, or any successor statute.

(q) “SHARE” means a share of Common Stock.

(r) “SUBSIDIARY” means any “subsidiary corporation” within the meaning of Section 424(f) of the Code. An entity shall be deemed a Subsidiary of the Company only for such periods as the requisite ownership relationship is maintained.

(s) “SUBSTANTIAL STOCKHOLDER” means any Participant who is a Key Employee and who, at the time of grant, owns directly or is deemed to own, by reason of the attribution rules set forth in Section 424(d) of the Code, Shares possessing more than 10% of the total combined voting power of all classes of stock of the Company.

(t) “TERMINATION OF EMPLOYMENT” means that an individual is no longer an employee of the Company or any Subsidiary. In the event an entity shall cease to be a Subsidiary of the Company, any individual who is not otherwise an employee of the Company or another Subsidiary shall suffer a Termination of Employment at the time the entity ceases to be a Subsidiary. A leave of absence approved by the Committee shall not constitute a Termination of Employment.

3. EFFECTIVE DATE; EXPIRATION OF PLAN

The Plan shall become effective upon its adoption by the Board of Directors (the “Effective Date”), subject to the approval of the stockholders of the Company at the next succeeding Annual Meeting of Stockholders. The Plan will terminate on the tenth anniversary of the Effective Date, unless earlier terminated in accordance with Section 12. No option shall be granted under the Plan on or after the tenth anniversary of the Effective Date, but Options previously granted may extend beyond that date.

4. ADMINISTRATION

(a) DUTIES OF THE COMMITTEE. The Plan shall be administered by the Committee. The Committee shall have full authority, subject to the terms of the Plan: to interpret the Plan and to decide all questions and settle all controversies and disputes that may arise in connection with the Plan; to establish, amend, and rescind rules for carrying out the Plan; to administer the Plan; to select Key Employees to participate in, and grant Options to Key Employees under, the Plan; to determine the terms, exercise price and permitted forms of payment for each Option granted under the Plan to Key Employees; to determine which Options granted under the Plan to Key Employees shall be Incentive Stock Options; to prescribe the form or forms of the agreements evidencing Options and any other instruments required under the Plan and to change such forms from time to time; and to make all other determinations and take all such steps in connection with the Plan and the Options as the Committee, in its sole discretion, deems necessary or desirable. Except with respect to Options granted to Eligible Directors under Section 8, the Committee shall not be bound to any standards of uniformity or similarity of action, interpretation or conduct in the discharge of its duties, regardless of the apparent similarity of the matters coming before it. The determination, action or conclusion of the Committee in connection with the foregoing shall be final and conclusive.

3

(b) ADVISORS. The Committee may designate officers or other employees of the Company or competent professional advisors to assist it in the administration of the Plan, and may grant authority to such persons to execute Option Agreements (as defined herein) or other documents on behalf of the Committee. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan, and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultants and agents shall be paid by the Company.

(c) INDEMNIFICATION. No officer, member or former member of the Committee shall be liable for any action taken or made in good faith with respect to the Plan or any Option granted under it. To the maximum extent permitted by applicable law, each officer, member or former member of the Committee and the Board shall be indemnified and held harmless by the Company against any cost or expense (including reasonable fees of counsel reasonably acceptable to the Company) or liability (including any sum paid in settlement of a claim), and advanced all amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted by applicable law, arising out of any act or omission to act in connection with the Plan. Such indemnification shall be in addition to any rights of indemnification the officers, members or former members may have as officers or directors under applicable law or under the Certificate of Incorporation or By-Laws of the Company.

(d) MEETINGS OF THE COMMITTEE. The Committee shall select one of its members as a Chairman and shall adopt such rules and regulations as it shall deem appropriate concerning the holding of its meetings and the transaction of its business. Any member of the Committee may be removed at any time, either with or without cause, by resolution adopted by the Board, and any vacancy on the Committee may at any time be filled by resolution adopted by the Board. All determinations by the Committee shall be made at a meeting duly called and held at which a majority of the members of the Committee are in attendance in person or through telephonic communication. Any determination set forth in writing and signed by all of the members of the Committee shall be as fully effective as if it had been made by a majority vote of the members at a meeting duly called and held.

5. SHARES; ADJUSTMENT UPON CERTAIN EVENTS.

(a) SHARES TO BE DELIVERED. Shares to be issued under the Plan shall be made available, at the discretion of the Board, either from authorized but unissued Shares or from issued Shares reacquired by the Company and held in treasury. No fractional Shares will be issued or transferred upon the exercise of any Option.

(b) NUMBER OF SHARES. Subject to adjustment as provided below in this Section 5, the maximum aggregate number of Shares that may be issued under the Plan shall be 1,000,000. If Options are for any reason canceled, or expire or terminate unexercised, the Shares covered by such Options shall again be available for grant of Options, subject to the limit provided in the preceding sentence.

(c) ADJUSTMENTS; RECAPITALIZATION; ETC. The existence of the Plan and Options granted hereunder shall not affect in any way the right of power of the Board or the

4

stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business or any other corporate act or proceeding. If the Company takes any such action, however, the following provisions shall, to the extent applicable, govern:

(i) If and whenever the Company shall effect a stock split, stock dividend, subdivision, recapitalization or combination of Shares or other change in the Company’s capital stock, (x) the Purchase Price per Share and the number and class of Shares and/or other securities with respect to which outstanding Options thereafter may be exercised, and (y) the total number and class of Shares and/or other securities that may be issued under the Plan, shall be proportionately adjusted by the Committee. The Committee may also make such other adjustments as it deems necessary to take into consideration any other event (including, without limitation, accounting changes) if the Committee determines that such adjustment is appropriate to avoid distortion of the operation of the Plan.

(ii) Subject to Section 5(c)(iii), if the Company merges or consolidates with one or more corporations, then, from and after the effective date of such merger or consolidation, upon exercise of Options theretofore granted, the Participant shall be entitled to acquire under such Options, in lieu of the number of Shares as to which such Options shall then be exercisable but on the same terms and conditions of exercise thereof, the number and class of Shares and/or other securities or properties (including cash) which the Participant would have held or been entitled to receive immediately after such merger or consolidation if, immediately prior to such merger of consolidation, the Participant had been the holder of record of the total number of Shares receivable upon exercise of such Options (whether or not then exercisable) had such merger or consolidation not occurred.

(iii) In the event of a merger or consolidation in which the Company is not the surviving entity or any transaction that results in the acquisition of substantially all of the Company’s outstanding Common Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of all of the Company’s assets (all of the foregoing being referred to as “Acquisition Events”), the Committee may, in its sole discretion, terminate all outstanding Options granted to Key Employees by delivering notice of termination to such Key Employee, provided that, during the twenty (20) day period following the date on which such notice of termination is delivered, each Participant who is a Key Employee shall have the right to exercise in full all of his or her Options that are then outstanding (without regard to any limitations on exercisability otherwise contained in the Option Agreements). If an Acquisition Event occurs and the Committee does not terminate the outstanding Options granted to Key Employees pursuant to the preceding sentence, then the provisions of Section 5(c)(ii) shall apply.

5

(iv) In the event of an Acquisition Event, then each outstanding Option granted to Eligible Directors shall terminate on the date immediately preceding the date of the Acquisition Event or, if applicable, the record date set in connection with such Acquisition Event; provided that, during the twenty (20) day period ending on the date of such termination, each Eligible Director shall have the right to exercise in full all of his or her then outstanding Options, whether or not such Options are otherwise then exercisable, and the Committee shall give prior notice of such Acquisition Event and termination as promptly as is reasonably practicable under the circumstances.

(v) Subject to Section 5(b), the Committee may grant Options under the Plan in substitution for options held by employees of another corporation who concurrently become employees of the Company as the result of a merger or consolidation of the employing corporation with the Company, or as the result of the acquisition by the Company of property or stock of the employing corporation. Such substitute awards may be granted on such terms and conditions as the Committee considers appropriate in the circumstances.

(vi) If, as a result of any adjustment made pursuant to the preceding paragraphs of this Section 5, any Participant shall become entitled upon the exercise of Options to receive any securities other than Common Stock, the number and class of securities thereafter receivable upon exercise shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock set forth in this Section 5, as determined by the Committee in its sole discretion.

(vii) Except as expressly provided above, the issuance by the Company of shares of stock of any class, or securities convertible into shares of Stock of any class, for cash, property, labor or services, whether upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number and class of Shares and/or other securities or property subject to Options theretofore granted or the Purchase Price per Share.

6. AWARDS AND TERMS OF OPTIONS FOR KEY EMPLOYEES

(a) GRANT. The Committee may grant Options, including Options intended to be Incentive Stock Options, to Key Employees of the Company. Each Option shall be evidenced by an Option agreement (the “Option Agreement”) in such form not inconsistent with the Plan as the Committee shall approve from time to time.

(b) EXERCISE PRICE. The purchase price per share (the “Purchase Price”) deliverable upon the exercise of an Option granted to a Key Employee shall be determined by the Committee (but in no event less than par value of the Share), except that the Purchase Price of an Incentive Stock Option shall not be less than 100% (110% for an Incentive Stock Option granted to a Substantial Stockholder) of the Fair Market Value at the time the Incentive Stock Option is granted.

6

(c) NUMBER OF SHARES. Each Option Agreement shall specify the number of Options granted to the Key Employee, as determined by the Committee in its sole discretion. The maximum number of shares of Common Stock that may be granted under the Plan in any year to the following officers of the Company, if selected as Participants, and if such officer is, as of the end of such year the chief executive officer of the Company or among the four highest compensated officers of the Company (other than the chief executive officer) as determined pursuant to the executive compensation rules promulgated under the Act, is the following specified percentage of the total number of Options authorized for grant under the Plan at the time of grant to such officer: chief executive officer—5%; chief operating officer—5%; any senior vice president—4%; any vice president—3%.

(d) EXERCISABILITY. At the time of grant, the Committee shall specify when and on what terms the Options granted to a Key Employee shall be exercisable. In the case of Options not immediately exercisable in full, the Committee may at any time accelerate the time at which all or any part of the Options may be exercised. No Option shall be exercisable after the expiration of ten (10) years from the date of grant (five (5) years in the case of an Incentive Stock Option granted to a Substantial Stockholder). Every Option shall be subject to earlier termination as provided in Section 7 below.

(e) SPECIAL RULE FOR INCENTIVE STOCK OPTIONS. If required by Section 422 of the Code or any successor provision, to the extent the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by a Key Employee during any calendar year (under all plans of his or her employer corporation and its parent and subsidiary corporations) exceeds $100,000 (or such other amount as may be provided from time to time under Section 422 of the Code or any successor provision), such Options shall not be treated as Incentive Stock Options. Nothing in this special rule shall be construed as limiting the exercisability of any Option.

(f) ACCELERATION OF EXERCISABILITY ON CHANGE OF CONTROL. Upon a Change of Control of the Company (as defined herein) all outstanding Options granted to Key Employees not then fully exercisable shall immediately become fully exercisable. For this purpose, a “Change of Control” shall be deemed to have occurred if:

(i) any person (or group of persons acting in concert) other than the Company’s Employee Stock Ownership Plan becomes the beneficial owner of 20% or more of the Company’s outstanding voting securities or securities convertible into such amount of voting securities; or

(ii) within two years after a tender offer or exchange offer, or as the result of a merger, consolidation, sale of substantially all of the Company’s assets or a contested election of the Board of Directors, or any combination of such transactions, the persons who were directors of the Company prior to such transaction do not constitute a majority of the Board of Directors of the Company or its successor; provided, however, that no transaction shall be deemed to constitute a Change in Control if such transaction is approved by two-thirds of the Prior Directors of the Company and the Successor Directors (each as hereafter defined), if any, voting together. For purposes of this Agreement, Prior Directors are those directors of the Company in office immediately

7

prior to such event, and Successor Directors are successors to Prior Directors who were recommended to succeed Prior Directors by a majority of the Prior Directors then in office.

(g) EXERCISE OF OPTIONS.

(i) METHOD. A Key Employee may elect to exercise Options by giving written notice to the Secretary of the Company of such election and of the number of Options such Participant has elected to exercise, accompanied by payment in full of the aggregate Purchase Price for the number of shares for which the Options are being exercised.

(ii) LOANS.

(A) The Company may lend money to a Key Employee in connection with the exercise of an Option on the terms and subject to the conditions hereinafter provided in this Paragraph 6(g)(ii) and such other terms and conditions not inconsistent therewith as the Committee may determine.

(B) A loan made under the Plan shall not exceed in principal amount the lesser of (i) the Fair Market Value on the date the loan is made of the Shares purchased upon exercise of the Option with respect to which the loan is made, or (ii) the sum of the aggregate Purchase Price being paid upon exercise of such Options and the Optionee’s income taxes estimated to be payable with respect to the exercise of such Options.

(C) Indebtedness with respect to any loan made under this Plan shall be satisfied in cash or, with the consent of the Committee, by delivery of Shares having a Fair Market Value on the date such loan is satisfied equal to such indebtedness, or by any combination of cash and such Shares.

(D) Options granted under the Plan shall include a provision permitting loans under this Paragraph 6 if, and on such terms and conditions as, the Committee in its discretion has so determined, such provision to be evidenced in the recorded actions of the Committee and expressly provided in the Option Agreement delivered to the Key Employee.

(iii) PAYMENT. Shares purchased pursuant to the exercise of Options granted to Key Employees shall be paid for at the time of exercise as follows:

(A) in cash or by check, bank draft or money order payable to the order of the Company;

(B) if so permitted by the Committee: (i) through the delivery of unencumbered Shares (including Shares being acquired pursuant to the Options then being exercised), provided such Shares (and such Options) have been owned by the Key Employee for such periods as may be required by applicable accounting standards to avoid a charge to earnings, or (ii) through a combination of Shares and cash as provided above;

8

(C) through the delivery of irrevocable instructions to a broker to deliver promptly to the Company an amount equal to the aggregate Purchase Price; or

(D) on such other terms and conditions as may be acceptable to the Committee and in accordance with the General Corporation Law of the State of Delaware.

Upon receipt of payment, the Company shall deliver to the Participant as soon as practicable a certificate or certificates for the Shares then purchased.

7. EFFECT OF TERMINATION OF EMPLOYMENT

(a) DEATH AND DISABILITY. Upon the Termination of Employment of a Key Employee, all outstanding Options then exercisable (and any outstanding Options not previously exercisable but made exercisable by the Committee at or after the Termination of Employment) shall remain exercisable by the Key Employee for the following time periods (subject to the ten-year limit set forth in Section 6(d)):

(i) In the event of the Key Employee’s death, such Options shall remain exercisable (by the Key Employee’s estate or by the person given authority to exercise such Options by the Key Employee’s will or by operation of law) for a period of one (1) year from the date of the Key Employee’s death, provided that the Committee, in its sole discretion, may at any time extend such time period to up to three (3) years from the date of the Key Employee’s death.

(ii) In the event the Key Employee’s employment terminates due to Disability, such Options shall remain exercisable for one (1) year from the date of the Key Employee’s Termination of Employment, provided that the Committee, in its sole discretion, may at any time extend such time period to up to three (3) years from the date of the Key Employee’s Termination of Employment.

(b) OTHER TERMINATION. In the event of a Termination of Employment for any reason other than as provided in Section 7(a) or in 7(c), all outstanding Options shall remain exercisable after such Termination of Employment (but only to the extent exercisable immediately prior thereto) for a period of three (3) months after such termination, provided that the Committee, in its sole discretion, may at any time extend such time period to up to one (1) year from the date of the Key Employee’s Termination of Employment.

(c) CAUSE. Upon the Termination of Employment of a Key Employee for Cause (as defined herein) or if it is discovered after his other Termination of Employment that such Key Employee had engaged in conduct that would have justified a Termination of Employment for Cause, all outstanding Options held by the Key Employee shall immediately be canceled. Termination of Employment shall be deemed to be for “Cause” for purposes of this Section 7(c) if (i) the Key Employee shall have committed fraud or any felony in connection with his or her

9

duties as an employee of the Company, willful misconduct or any act of disloyalty, dishonesty, fraud or breach of trust or confidentiality as to the Company, or any other act which is intended to cause or may reasonably be expected to cause economic injury to the Company, or (ii) such termination is or would be deemed to be for Cause under any employment agreement between the Company and the Key Employee.

8. AWARDS AND TERMS OF OPTIONS FOR ELIGIBLE DIRECTORS.

(a) GRANT. Without further action by the Committee, the Board of Directors or the stockholders of the Company, (i) each individual who is an Eligible Director on the Effective Date shall be automatically granted Options to purchase One Thousand (1,000) Shares on the first Annual Grant Date thereafter, (ii) each individual who first becomes an Eligible Director after the Effective Date shall be automatically granted Options to purchase One Thousand (1,000) Shares on the first Annual Grant Date thereafter; and (iii) on each Annual Grant Date during the term of this Plan, each person who is then serving as an Eligible Director and who is not then being granted Options pursuant to the preceding clause of this Section 8(a) shall be automatically granted Options to purchase Five Hundred (500) Shares.

(b) EXERCISE PRICE. The Purchase Price deliverable upon the exercise of an Option granted under this Section 8 shall be the greater of (i) one hundred percent (100%) of the Fair Market Value of a Share on the date of grant of such Option, or (ii) the par value of the Share.

(c) EXERCISABILITY. Each Option granted under this Section 8 shall become exercisable at the rate of 20% after one year from date of grant, an additional 30% after two years and an additional 50% after three years, all exercisable amounts being cumulative, and no Option shall be exercisable after the expiration of ten (10) years from the date of grant. Except as provided in Section 8(e), Options granted to any Eligible Director may be exercised only during the continuance of his or her service as a director of the Company.

(d) EXERCISE OF OPTIONS. An Eligible Director electing to exercise one or more Options shall give written notice of such election and of the number of Options he or she has elected to exercise to the Secretary of the Company, accompanied by payment in full of the aggregate Purchase Price for such Shares. Such payment or provision for payment may be made either in cash or by check, bank draft or money order payable to the order of the Company.

(e) EFFECT OF TERMINATION OF SERVICES. If an Eligible Director shall cease to be a director of the Company for any reason other than removal for cause, including, without limitation, as a result of death, disability, resignation, failure to stand for reelection or failure to be reelected, Options theretofore granted to such Eligible Director may be exercised by such Eligible Director or, in the case of death, by his or her estate or the person given authority to exercise such Options by will or by operation of law for the following periods: (i) at any time within one year from the date of death of the Eligible Director or his or her cessation of service by reason of disability; and (ii) at any time within three months (3) from the date the Eligible Director ceased to serve on the Board for any reason other than death or disability; provided, however, that (i) such Options may be exercised only to the extent they were exercisable on the date the Eligible Director ceased to serve on the Board, and (ii) no Option shall be exercisable more than ten (10) years after the date of grant.

10

(f) ACCELERATION OF EXERCISABILITY ON CHANGE OF CONTROL. Upon a Change of Control of the Company as defined in Section 6(f) all outstanding Options granted to Eligible Directors not then fully exercisable shall immediately become fully exercisable.

9. NONTRANSFERABILITY

No Option shall be transferable by the Participant otherwise than by will or under applicable laws of descent and distribution, and during the lifetime of the Participant may be exercised only by the Participant or his or her guardian or legal representative. In addition, no Option shall be assigned, negotiated, pledged or hypothecated in any way (whether by operation of law or otherwise), and no Option shall be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, negotiate, pledge or hypothecate any Option, or in the event of any levy upon any Option by reason of any execution, attachment or similar process contrary to the provisions hereof, such Option shall immediately become null and void.

10. RIGHTS AS A STOCKHOLDER

A Participant (or a permitted transferee of his or her Options) shall have no rights as a stockholder with respect to any Shares covered by such Participant’s Options until such Participant shall have become the holder of record of such Shares, and no adjustments shall be made for dividends in cash or other property or distributions or other rights in respect to any such Shares except as otherwise specifically provided for in this Plan.

11. DETERMINATIONS

Each determination, interpretation or other action made or taken pursuant to the provisions of this Plan by the Committee shall be final and binding for all purposes and upon all persons, including, without limitation, the Participants, the Company, the directors, officers and other employees of the Company, and their respective heirs, executors, administrators, personal representatives and other successors in interest.

12. TERMINATION, AMENDMENT AND MODIFICATION

The Plan shall terminate at the close of business on the tenth anniversary of the Effective Date, unless terminated sooner as hereinafter provided, and no Option shall be granted under the Plan on or after that date. The termination of the Plan shall not terminate any outstanding Options that by their terms continue beyond the termination date of the Plan. At any time prior to that date, the Board or the stockholders of the Company may terminate, suspend or amend the Plan; provided, however, that insofar as it relates to Eligible Directors, this Plan may not be amended more than once every six months, other than to comport with the Code, the Employee Retirement Income Security Act, or the rules thereunder. In addition, the Board may not effect any amendment that would require the approval of the stockholders of the Company under Rule 16b-3 unless such approval is obtained.

11

The Plan and any Options granted pursuant to the Plan shall terminate and be void if the Plan is not approved by the stockholders of the Company at the Annual Meeting of Stockholders next succeeding the Effective Date. No such Option may be exercised prior to the receipt of such stockholder approval.

Nothing contained in this Section 12 shall be deemed to prevent the Board or the Committee from authorizing amendments of outstanding Options of Key Employees, including, without limitation, the reduction of the Purchase Price specified therein (or the granting or issuance of new Options at a lower Purchase Price upon cancellation of outstanding Options), so long as all Options outstanding at any one time shall not call for issuance of more Shares than the remaining number provided for under the Plan, and so long as the provisions of any amended Options would have been permissible under the Plan if such Options had been originally granted or issued as of the date of such amendment with such amended terms.

Notwithstanding anything to the contrary contained in this Section 12, no termination, amendment or modification of the Plan may without the consent of the Participant (or any transferee of such Participant’s Options), alter or impair the right and obligations arising under any then-outstanding Option.

13. NON-EXCLUSIVITY

Neither the adoption nor the amendment of the Plan by the Board, nor the submission of the Plan or such amendments to the stockholders of the Company for approval, shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting or issuance of stock options, Shares and/or other incentives otherwise than under the Plan, and such arrangements may be either generally applicable or limited in application.

14. USE OF PROCEEDS

The proceeds of the sale of Shares subject to Options under the Plan are to be added to the general funds of the Company and used for its general corporate purposes as the Board shall determine.

15. GENERAL PROVISIONS

(a) RIGHT TO TERMINATE EMPLOYMENT. Neither the adoption or the amendment of the Plan nor the grant of Options shall impose any obligations to continue the employment of any Key Employee or to retain any Eligible Director, nor shall it impose any obligation on the part of any Key Employee to remain in the employ of the Company or any Eligible Director to continue to serve on the Board, subject, however, to the provisions of any agreement between the Company and a Key Employee.

(b) PURCHASE FOR INVESTMENT. If the Committee determines that the law so requires, the holder of Options granted hereunder shall, upon any exercise or conversion thereof, execute and deliver to the Company a written statement, in form satisfactory to the Company, representing and warranting that such Participant is purchasing or accepting the Shares then acquired for such Participant’s own account and not with a view to the resale or distribution

12

thereof, that any subsequent offer for sale or sale of any such Shares shall be made either pursuant to (i) a registration statement on an appropriate form under the Securities Act, which registration statement shall have become effective and shall be current with respect to the Shares being offered and sold, or (ii) a specific exemption from the registration requirements of the Securities Act, and that in claiming such exemption the holder will, prior to any offer for sale or sale of such Shares, obtain a favorable written opinion from counsel approved by the Company as to the availability of such exception.

(c) TRUSTS, ETC. Nothing contained in the Plan and no action taken pursuant to the Plan (including, without limitation, the grant of any Option thereunder) shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and any Participant or the executor, administrator or other personal representative, or designated beneficiary of such Participant, or any other persons. Any reserves that may be established by the Company in connection with the Plan shall continue to be part of the general funds of the Company, and no individual or entity other than the Company shall have any interest in such funds until paid to a Participant. If and to the extent that any Participant or such Participant’s executor, administrator, or other personal representative, as the case may be, acquires a right to receive any payment from the Company pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company.

(d) NOTICES. Each Participant shall be responsible for furnishing the Committee with the current and proper address for the mailing to such Participant of notices and the delivery to such Participant of agreements, Shares and payments. Any notices required or permitted to be given shall be deemed given if directed to the person to whom addressed at such address and mailed by regular United States mail, first class and prepaid. If any item mailed to such address is returned as undeliverable to the addressee, mailing will be suspended until the Participant furnishes the proper address.

(e) SEVERABILITY OF PROVISIONS. If any provisions of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if such provisions had not been included.

(f) PAYMENT TO MINORS, ETC. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person’s guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Committee, the Company and their employees, agents and representatives with respect thereto.

(g) The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan.

13

16. ISSUANCE OF STOCK CERTIFICATES; LEGENDS; PAYMENT OF EXPENSES.

(a) STOCK CERTIFICATES. Upon any exercise of Options and payment of the aggregate Purchase Price as provided in the relevant Option Agreements, a certificate or certificates for the Shares as to which Options have been exercised shall be issued by the Company in the name of the person or persons exercising such Options and shall be delivered to or upon the order of such person or persons.

(b) LEGENDS. Certificates for Shares issued upon exercise of Options shall bear such legend or legends as the Committee, in its discretion, determines to be necessary or appropriate to prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act or to implement the provisions of any agreements between the Company and a Key Employee with respect to such Shares.

(c) PAYMENT OF EXPENSES. The Company shall pay all issue or transfer taxes with respect to the issuance or transfer of Shares, as well as all fees and expenses necessarily incurred by the Company in connection with such issuance or transfer and with the administration of the Plan.

17. LISTING OF SHARES AND RELATED MATTERS.

If at any time the Board shall determine in its sole discretion that the listing, registration or qualification of the Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the award or sale of Shares under the Plan, no Shares will be delivered unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board.

18. WITHHOLDING TAXES.

The Company shall be entitled to withhold (or secure payment from the Key Employee in cash or other property, including Shares already owned by the Key Employee for six (6) months or more (valued at the Fair Market Value thereof on the date of delivery) in lieu of withholding) the amount of any Federal, state or local taxes required to be withheld by the Company in connection with any Shares deliverable under this Plan in respect of Options granted to any Key Employee, and the Company may defer delivery unless such withholding requirement is satisfied. The Committee may permit any such withholding obligation to be satisfied by reducing the number of Shares otherwise deliverable to the Key Employee.

14

EX-10.H

EXHIBIT 10(h)

K2 1999 STOCK OPTION PLAN

1. PURPOSE. The purpose of this Plan is to provide a means whereby K2 Inc. (the “Company”) may, through the grant of options to purchase Common Stock of the Company, attract and retain persons of ability as key employees (including officers and directors who are also employees) and as nonemployee directors and motivate such persons to exert their best efforts on behalf of the Company and any Subsidiary. When used in the Plan with reference to employment, the term “Company” shall include Subsidiaries of the Company. As used herein the term “Subsidiary” shall mean any legal entity, 50% or more of the voting equity of which is owned or controlled directly or indirectly by the Company.

2. SHARES SUBJECT TO THE PLAN. Options may be granted by the Company from time to time to key employees and nonemployee directors of the Company to purchase shares of Common Stock ($1.00 par value) of the Company (“Common Stock”), and may be either authorized and unissued or held by the Company in its treasury. The maximum number of shares of Common Stock with respect to which options may be granted under the Plan shall be 1,400,000 shares, subject to adjustment as provided in Section 4(i). If any option granted under the Plan shall terminate, expire or, with the consent of the optionee, be canceled, new options may thereafter be granted covering such shares. Anything contained herein to the contrary notwithstanding, the aggregate number of shares of Common Stock with respect to which options may be granted during any calendar year to any employee or nonemployee director shall be limited to 150,000 and 20,000, respectively.

3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board of Directors or a committee of the Board (the “Committee”) consisting of not less than two members appointed by the Board of Directors of the Company. Each member of the Committee shall be a member of the Board who qualifies both as an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended from time to time (the “Code”), and as a “non-employee director” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934. Any vacancy occurring in the membership of the Committee shall be filled by appointment of the Board.

Subject to the provisions of the Plan, the Board or the Committee shall have the power to:

(a) determine and designate from time to time those employees of the Company to whom options are to be granted and the number of shares to be optioned to each such employee;

(b) determine from time to time the number of options and basis of granting options to nonemployee directors;

(c) authorize the granting of options which qualify as incentive stock options within the meaning of Section 422 of the Code (“Incentive Stock Options”), and options which do not qualify as Incentive Stock Options, both of which are referred to herein as options;

(d) determine the number of shares subject to each option;

(e) determine the time or times and the manner when each option shall be exercisable and the duration of the exercise period, which period shall in no event exceed ten years from the date the option is granted;

(f) extend the term of an option (including extension by reason of an optionee’s death, permanent disability or retirement) but not beyond ten years from the date of the grant.

The Board or the Committee may interpret the Plan, prescribe, amend and rescind any rules and regulations necessary or appropriate for the administration of the Plan, and make such other determinations and take such other action as it deems necessary or advisable, subject to the terms and provisions of the Plan. Without limiting the generality of the foregoing sentence, the Board or the Committee may, in its discretion, treat all or any portion of any period during which an optionee is on military leave or on an approved leave of absence from the Company as a period of employment of such optionee by the Company for purposes of accrual of his or her rights under his or her option; provided, however, that no option may be granted to an employee while he or she is on a leave of absence. Any interpretation, determination or other action made or taken by the Board or the Committee shall be final, binding and conclusive.

4. TERMS AND CONDITIONS OF OPTIONS. Each option granted under the Plan shall be evidenced by an agreement, in form approved by the Board or the Committee, which shall be subject to the following express terms and conditions and to such other terms and conditions as the Board or the Committee may deem appropriate:

(a) OPTION PERIOD. Each option agreement shall specify the period for which the option thereunder is granted (which in no event shall exceed ten years from the date of grant) and shall provide that the option shall expire at the end of such period.

(b) OPTION PRICE. The option price per share shall be determined by the Board or the Committee at the time any option is granted, and shall be not less than the fair market value (but in no event less than the par value) of the Common Stock of the Company on the date the option is granted.

(c) EXERCISE OF OPTION. No part of any option may be exercised until the optionee shall have remained in the employ of the Company for such period after the date on which the option is granted as the Board or the Committee may specify in the option agreement, subject to any provision in the option agreement for the acceleration of exercisability in the event of a change-in-control of the Company.

(d) PAYMENT OF PURCHASE PRICE UPON EXERCISE. The purchase price of the shares as to which an option shall be exercised shall be paid to the Company at the time of exercise either (i) in cash (including the proceeds of a “cashless exercise” with the assistance of a broker), or (ii) by delivering Common Stock of the Company already owned by the optionee and having a total fair market value on the date of such delivery equal to the purchase price, (iii) by delivering a combination of cash and Common Stock of the Company having a total fair market value on the date of such delivery equal to the purchase price; or

2

(iv) by a reduction of such number of shares otherwise issuable pursuant to such option as has a total fair market value on the date of exercise equal to the purchase price. The Board or the Committee may authorize a loan to any optionee to enable the exercise of options and the payment of withholding taxes arising from such exercise.

(e) EXERCISE IN THE EVENT OF DEATH OR TERMINATION OF EMPLOYMENT. (1) If an optionee’s employment by the Company shall terminate because of his or her death, retirement or permanent disability, his or her option may be exercised, to the extent provided in the option agreement, by him or her or by the person or persons to whom the optionee’s rights under the option pass by designation pursuant to Section 5, or, absent a designation, by will or applicable law, or if no such person has such right, by the executor or administrator of his or her estate, at any time, or from time to time, but not later than the earlier of (i) the expiration date specified pursuant to paragraph (a) of this Section 4 or (ii) the expiration of the period, if any, prescribed in the agreement for such an exercise. (2) If an optionee’s employment shall terminate for any reason other than death, retirement or permanent disability, all right to exercise his or her option shall terminate at the date of such termination of employment or after the expiration of any period specified in the option agreement..

(f) EXERCISE IN THE EVENT A NONEMPLOYEE DIRECTOR CEASES TO BE A DIRECTOR. If a nonemployee director shall cease to be a director because of his or her death, retirement pursuant to any age limitation for the service of directors, or permanent disability, his or her option may be exercised, to the extent provided in the option agreement, by him or her or by the person or persons to whom the optionee’s rights under the option pass by designation pursuant to Section 5, or, absent a designation, by will or applicable law, or if no such person has such right, by the executor or administrator of his or her estate, at any time, or from time to time, but not later than the earlier of (i) the expiration date specified pursuant to paragraph (a) of this Section 4 or (ii) the expiration of the period, if any, prescribed in the agreement for such an exercise. If a nonemployee director shall cease to be a director for any reason other than death, retirement pursuant to any age limitation for the service of directors or permanent disability, all right to exercise his or her option shall terminate 90 days following the date such person ceases to be a director.

(g) TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the optionee an option shall be exercisable only by him or her.

(h) INVESTMENT REPRESENTATION. Upon demand by the Board or the Committee, the optionee shall deliver to the Committee at the time of any exercise of an option a written representation that the shares to be acquired upon such exercise are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such representation prior to the delivery of any shares issued upon exercise of an option and prior to the expiration of the option period shall be a condition precedent to the right of the optionee or such other person to purchase any shares (and each option agreement shall contain an undertaking to deliver such a representation).

(i) ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK. In the event of any change in the Common Stock of the Company by reason of any stock dividend,

3

recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, or rights offering to purchase Common Stock at a price substantially below fair market value, or of any similar change affecting the Common Stock, the number and kind of shares which thereafter may be optioned and sold under the Plan and the number and kind of shares subject to option in outstanding option agreements and the purchase price per share thereunder shall be appropriately adjusted consistent with such change in such manner as the Board or the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan.

(j) OPTIONEES TO HAVE NO RIGHT AS A STOCKHOLDER. No optionee shall have any rights as a stockholder with respect to any shares subject to his or her option prior to the date of issuance to him or her of a certificate or certificates for such shares.

(k) PLAN AND OPTION NOT TO CONFER RIGHTS WITH RESPECT TO CONTINUANCE of EMPLOYMENT. The Plan and any option granted under the Plan shall not confer upon any optionee any right with respect to continuance of employment by the Company, nor shall they interfere in any way with the right of the Company to terminate his or her employment at any time.

(l) TAX WITHHOLDING. The Board or the Committee may authorize options that permit tax withholding obligations arising upon exercise to be paid by having the Company withhold shares having a total fair market value on the date of such delivery equal to the amount required.

(m) LIMITATION ON VALUE OF INCENTIVE STOCK OPTIONS. The aggregate fair market value (determined as of the time the option is granted) of the stock for which Incentive Stock Options granted to any one employee under this Plan and under all stock option plans of the Company and its Subsidiaries may by their terms first become exercisable during any calendar year shall not exceed $100,000.

(n) PROHIBITION ON REPRICING. No option granted hereunder shall be amended to reduce the exercise price thereof, or surrendered in exchange for a replacement option having a lower price; provided that this provision shall not restrict or prohibit any antidilution adjustment or other action in accordance with paragraph (i) above.

5. DESIGNATION OF BENEFICIARIES. An optionee may file with the Company a written designation of a beneficiary or beneficiaries under the Plan and may from time to time revoke or change any such designation of beneficiary. Any designation of beneficiary under the Plan shall be controlling over any other disposition, testamentary or otherwise; provided, however, that if the Board or the Committee shall be in doubt as to the entitlement of any such beneficiary to any option, it may determine to recognize only the legal representative of such optionee, in which case the Company, the Board, the Committee and the members thereof shall not be under any further liability to anyone.

6. COMPLIANCE WITH GOVERNMENT LAW AND REGULATIONS. The Plan, the grant and exercise of options thereunder, and the obligation of the Company to sell and deliver shares under such options, shall be subject to all applicable laws, rules and regulations

4

and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of Common Stock prior to (i) the listing of such shares on any stock exchange on which the Common Stock may then be listed and (ii) the completion of any registration or qualification of such shares under any state or federal law, or any ruling or regulation of any governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable.

7. AMENDMENT OR DISCONTINUANCE OF THE PLAN. The Board of Directors of the Company may at any time amend or discontinue the Plan; provided, however, that, subject to the provisions of Section 4(i) no action of the Board of Directors or of the Committee may (i) increase the number of shares with respect to which options may be granted under the Plan, (ii) permit the granting of any option at an option price less than that determined in accordance with Section 4(b), (iii) modify Section 4(n) to permit the reprising of options, or (iv) permit the extension or granting of options which expire beyond the ten-year period provided for in Sections 3(e) and 4(a). Without the written consent of an optionee, no amendment or discontinuance of the Plan shall alter or impair any option previously granted to him or her under the Plan.

8. EFFECTIVE DATE OF THE PLAN. The effective date of the Plan shall be the date of approval of the Plan by stockholders of the Company holding not less than a majority of the votes of the shares present and voting at a meeting at which the Plan is proposed for approval.

9. NAME. The Plan shall be known as the “K2 1999 Stock Option Plan.”

5

EX-10.R

EXHIBIT 10(r)

ASSET PURCHASE AGREEMENT

Dated June 8, 2000

By and Between

TYCO INTERNATIONAL (US) INC.,

LUDLOW BUILDING PRODUCTS, INC.

as Buyer

TYCO PLASTICS SERVICES AG

as IP Buyer

and

K2 INC.,

as Seller

TABLE OF CONTENTS

			Page
1.	AGREEMENT TO SELL AND AGREEMENT TO PURCHASE.		1
	1.1	ASSETS TO BE CONVEYED	1
	1.2	EXCLUDED ASSETS	3
	1.3	FURTHER ASSURANCES	3
2.	CONSIDERATION TO BE PAID BY BUYER.		3
	2.1	PURCHASE PRICE FOR ACQUISITION ASSETS	3
	2.2	ADJUSTMENT TO PURCHASE PRICE	4
	2.3	ASSUMED LIABILITIES	5
	2.4	LIABILITIES NOT ASSUMED BY BUYER	7
	2.5	ALLOCATION OF PURCHASE PRICE	8
3.	REPRESENTATIONS AND WARRANTIES OF SELLER.		8
	3.1	ORGANIZATION AND GOOD STANDING	8
	3.2	AUTHORIZATION OF AGREEMENT	8
	3.3	OWNERSHIP OF ACQUISITION ASSETS OWNERSHIP OF ACQUISITION ASSETS	9
	3.4.	FINANCIAL CONDITION	9
	3.5	PROPERTY OF SELLER	10
	3.6	AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS	12
	3.7	LABOR AND EMPLOYMENT MATTERS; PENSION AND EMPLOYEE BENEFIT PLANS	12
	3.8	LITIGATION AND COMPLIANCE WITH LAWS	14
	3.9	CONTRACTS AND OTHER INSTRUMENTS	15
	3.10	COMPENSATION OF AND INDEBTEDNESS TO AND FROM OFFICERS	16
	3.11	INSURANCE	16
	3.12	BROKERAGE	17
	3.13	KNOWLEDGE	17
	3.14	TAXES	17
	3.15	PRODUCT LIABILITY AND RECALLS	18
	3.16	UNDISCLOSED LIABILITIES	18
	3.17	RESTRICTIONS ON BUSINESS ACTIVITIES	18
	3.18	NO ILLEGAL OR IMPROPER TRANSACTIONS	18
	3.19	INVENTORY	18
	3.20	NO IMPLIED WARRANTIES	18
4.	REPRESENTATIONS AND WARRANTIES OF BUYER.		19
	4.1	ORGANIZATION; GOOD STANDING; AND CORPORATE AUTHORITY	19
	4.2	AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS	19
	4.3	REGULATORY APPROVALS	19

i

Table of Contents

(Continued)

			Page
	4.4	BROKERAGE	19
	4.5	SUFFICIENT FUNDS	20
	4.6	RELIANCE ON REPRESENTATIONS AND WARRANTIES	20
5.	CLOSING.		20
6.	CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES.		20
	6.1	ACCESS	20
	6.2	CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS	21
	6.3	CONDUCT OF BUSINESS OF DIVISION	21
	6.4	PRESERVATION OF ORGANIZATION	22
	6.5	CURRENT INFORMATION	22
	6.6	CONTRACTS	22
	6.7	COMPLETION OF TRANSACTION; HART-SCOTT-RODINO	22
	6.8	ACCOUNTS RECEIVABLE	22
	6.9	CONDITION TO TRANSFER OF CERTAIN CONTRACTS	23
	6.10	WAIVER OF COMPLIANCE WITH BULK SALES LAWS	23
	6.11	EMPLOYEES	23
	6.12	TAXES	24
	6.13	COVENANT NOT TO COMPETE	24
	6.14	COOPERATION WITH LITIGATION	24
	6.15	PRODUCT CLAIMS	25
7.	CONDITIONS TO OBLIGATIONS OF SELLER.		25
	7.1	CORRECTNESS OF REPRESENTATIONS AND WARRANTIES	25
	7.2	PERFORMANCE OF COVENANTS AND AGREEMENTS	25
	7.3	OPINION OF COUNSEL FOR BUYER	25
	7.4	ADDITIONAL CLOSING DOCUMENTS	25
	7.5	NO LEGAL BAR	26
	7.6	HSR EXPIRATION/TERMINATION	26
	7.7	MICHIGAN DEPARTMENT OF ENVIRONMENTAL QUALITY, WASTE MANAGEMENT DIVISION APPROVAL	26
8.	CONDITIONS TO OBLIGATIONS OF BUYER.		26
	8.1	CORRECTNESS OF REPRESENTATIONS AND WARRANTIES	26
	8.2	PERFORMANCE OF COVENANTS AND AGREEMENTS	26
	8.3	OPINION OF COUNSEL FOR SELLER	26
	8.4	NO LEGAL BAR	26
	8.5	TRANSFER DOCUMENTS	27
	8.6	HSR EXPIRATION/TERMINATION	27
9.	SURVIVAL; INDEMNIFICATION.		27
	9.1	SURVIVAL	27
	9.2	INDEMNIFICATION BY SELLER	27

ii

Table of Contents

(Continued)

			Page
	9.3	INDEMNIFICATION BY BUYER	27
	9.4	GENERAL INDEMNIFICATION LIMITATIONS; REMEDIATION	28
	9.5	NOTICE OF CLAIMS	28
	9.6	THIRD PARTY CLAIMS	29
	9.7	PAYMENTS	29
	9.8	REMEDIES EXCLUSIVE	29
	9.9	CERTAIN DAMAGES	29
10.	TERMINATION OF AGREEMENT		29
	10.1	EVENTS OF TERMINATION	29
	10.2	RIGHTS AND OBLIGATIONS ON TERMINATION	30
11.	MISCELLANEOUS PROVISIONS.		30
	11.1	CONSTRUCTION	30
	11.2	NOTICES	30
	11.3	ASSIGNMENT	31
	11.4	AMENDMENTS AND WAIVERS	31
	11.5	REMEDIES	32
	11.6	ATTORNEYS’ FEES	32
	11.7	BINDING NATURE OF AGREEMENT	32
	11.8	EXPENSES	32
	11.9	ENTIRE AGREEMENT	32
	11.10	SEVERABILITY	32
	11.11	COUNTERPARTS	33
	11.12	SECTION HEADINGS	33

iii

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this “AGREEMENT”) is made and entered into as of this 8th day of June, 2000 by and between Tyco International (US) Inc., a Massachusetts corporation (“TYCO”), Ludlow Building Products, Inc., a Virginia corporation (“BUYER”), Tyco Plastics Services AG, a Swiss corporation (“IP BUYER”), and K2 Inc., a Delaware corporation (“SELLER”). (Except as used in this paragraph and Sections 1, 4.1, 9 and 11.3 of this Agreement, the term “Buyer” is used herein to refer to Tyco, Buyer and IP Buyer collectively.)

RECITALS

1. Seller’s division, Simplex Products (the “DIVISION”), is engaged in the business of manufacturing and selling a variety of industrial and building products, including exterior sheathing and housewrap, recycled chipboard, exterior insulative finishing systems (“EIFS”), industrial flexible packaging materials, paperboard products and container components.

2. Tyco desires to cause Buyer and IP Buyer to acquire, and Seller desires to sell, all of the assets (tangible and intangible), properties and goodwill of Seller used or held for use primarily in the Division, on the terms and conditions hereinafter set forth.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows:

1. AGREEMENT TO SELL AND AGREEMENT TO PURCHASE.

1.1 ASSETS TO BE CONVEYED. On the Closing Date (as hereinafter defined) Seller shall convey, transfer, assign, sell and deliver to Buyer and IP Buyer, and Tyco shall cause Buyer and IP Buyer to acquire, accept and purchase, all of the assets, properties and rights of Seller used or held for use primarily in the Division (hereinafter collectively referred to as the “ACQUISITION ASSETS”) including, but not limited to, the following:

(a) Prepaid items and deposits of the Division;

(b) Accounts receivable, notes and notes receivable arising from the conduct of the Division’s business (the “ACCOUNTS RECEIVABLE”);

(c) Inventories of raw material, work-in-process and finished goods of the Division (collectively, the “INVENTORY”), whether located at the premises of the Division or elsewhere, including, without limitation, inventory of the Division held by third parties on consignment at the locations listed in SCHEDULE 1.1(c) attached hereto;

(d) Office supplies, drums, containers, tote bins and other packaging material, spare parts, safety equipment, maintenance supplies and other similar items of the Division;

1

(e) Subject to Section 6.9 hereof, real property leases (including, but not limited to, leases relating to the Leased Real Estate (as hereinafter defined)), equipment or other leases, licenses, contracts, agreements, purchases or sales orders or commitments, written or oral (collectively, the “CONTRACTS”), including, without limitation, those set forth on SCHEDULE 1.1.(e);

(f) Motor vehicles and other rolling stock used by the Division, including those which are listed in SCHEDULE 1.1(f) attached hereto;

(g) Machinery, equipment, tooling, dies, tools, furniture, fixtures, cranes and craneways owned or used by the Division on the Closing Date (hereinafter referred to collectively with the motor vehicles and other rolling stock owned or used by Seller as the “FIXED ASSETS”), whether or not fully depreciated on the books and records of Seller, including, without limitation, those assets set forth in SCHEDULE 1.1(g) attached hereto;

(h) Domestic and foreign patents, patent applications, copyrights, copyright applications, trademarks, trademark applications, service marks, service mark applications, trade names (including without limitation the names “THERMO-PLY,” “BREATHEDRY,” “FINESTONE,” “BARRICADE,” “R-WRAP” and all derivatives and variants thereof) and trade name registrations (in any such case, whether registered or to be registered in the United States of America or elsewhere) and processes, inventions, trade secrets, trade names, computer programs, formulae, know how and other intangible personal property (all of the foregoing in this Section 1.1(h) being hereinafter referred to collectively as “INTANGIBLE PERSONAL Property”) used or held for use primarily in the Division, including, without limitation, those items set forth in SCHEDULE 1.1(h) attached hereto;

(i) The real property commonly known as the Adrian, Michigan plant, the Constantine, Michigan plant and the Jacksonville, Florida facility (the “OWNED REAL ESTATE”) and more particularly described on SCHEDULE 1.1(i) attached hereto, including without limitation all improvements and fixtures located thereon and all rights and interests appurtenant thereto (such real property, improvements, fixtures and appurtenant rights and interests being hereinafter referred to collectively with the Leased Real Estate as the “REAL PROPERTY”);

(j) All federal, state, local and foreign licenses, permits and other governmental authorizations relating to the Division, including without limitation those listed in SCHEDULE 3.8.2;

(k) All goodwill of the Division, customer lists, sales brochures, computer software, books, records and accounts, correspondence, production records, employment records and any confidential information relating to or arising out of the Division, it being understood that Seller will retain duplicate copies of such books, records, accounts and other information as it may deem appropriate for its tax and other ongoing record keeping requirements;

(l) All rights of Seller under express or implied warranties from the suppliers of Seller with respect to the Acquisition Assets; and

2

(m) computer systems, equipment and other assets, properties or rights of Seller used in the Division.

With respect to the Acquisition Assets listed above, IP Buyer will acquire those Acquisition Assets referred to in Section 1.1(h).

1.2 EXCLUDED ASSETS. Notwithstanding Section 1.1 hereof, Seller is not selling, and Buyer is not purchasing, pursuant to this Agreement, any of the following (the “EXCLUDED ASSETS”), all of which shall be retained by Seller:

(a) Cash, cash equivalents and marketable securities;

(b) Rights of Seller under this Agreement and the agreements, instruments and certificates delivered in connection with this Agreement;

(c) Seller’s minute books, tax returns and other corporate documents;

(d) Seller’s duplicate copy of the books, records and accounts of the Division;

(e) All rights to claims, available to or being pursued by Seller for refunds of or credits against income taxes attributable to the Division for taxable periods ending on or before the Closing Date and for the portion ending on the Closing Date of any taxable period that includes but does not end on the Closing Date (the “PRE-CLOSING TAX PERIODS”) (determined as if such taxable period ended as of the close of business on the Closing Date).

(f) The name and mark “K2” and any name or mark derived from or including the foregoing and any other name or mark owned by the Seller and not used by the Division;

(g) All rights of Seller under any liability insurance policies except for those disclosed in SCHEDULE 3.11 attached hereto; and

(h) Computer programs, systems, equipment, intangible personal property and any other assets, properties or rights of Seller used generally in the conduct of Seller’s business and not used or held for use in the Division.

1.3 FURTHER ASSURANCES. On the Closing Date and from time to time thereafter, Seller will execute and deliver to Buyer such instruments of sale, transfer, conveyance, assignment and delivery, consents, assurances, powers of attorney and other instruments as may be reasonably requested by Buyer in order to vest in Buyer all right, title and interest in and to the Acquisition Assets and otherwise in order to carry out the purpose and intent of this Agreement.

2. CONSIDERATION TO BE PAID BY BUYER.

2.1 PURCHASE PRICE FOR ACQUISITION ASSETS. The aggregate purchase price for the Acquisition Assets (the “PURCHASE PRICE”) shall be $27,500,000, subject to adjustment under Section 2.2. The Purchase Price shall be paid to Seller by wire transfer at the Closing (as hereinafter defined) to an account designated by Seller at least three (3) business days prior to the Closing Date.

3

2.2 ADJUSTMENT TO PURCHASE PRICE. The Purchase Price shall be subject to adjustment after the Closing in accordance with the following procedure:

(a) As soon as practicable (but in no event later than forty-five (45) days after the Closing Date), Seller, with Buyer’s cooperation, shall prepare and deliver an unaudited balance sheet of the Division as of the Closing Date (the “CLOSING DATE BALANCE SHEET”) including a calculation of the Net Assets, as of the Closing Date. As used herein, “NET ASSETS” shall mean the net assets of the Division as shown on the Closing Balance Sheet. In connection with the Closing Date Balance Sheet, the physical inventory of the Acquisition Assets shall be jointly conducted by Seller and Buyer. The Closing Date Balance Sheet and Net Asset calculation: (i) shall include only the Acquisition Assets and Assumed Liabilities of the Division, (ii) shall be prepared in accordance with GAAP, except as set forth on SCHEDULE 3.4.2, and (iii) in all cases where there is a permissible choice among accounting principles and procedures in accordance with GAAP, shall be prepared on a basis consistent with Seller’s Balance Sheet as of April 2, 2000, except as indicated on APPENDIX A. Attached hereto as APPENDIX A is statement of Net Assets of the Division, as of April 2, 2000, which illustrates, and shall be used as a model, in preparing the statement of Net Assets as of the Closing Date. Seller’s Chief Financial Officer shall certify that the Closing Date Balance Sheet fairly reflects the financial position of the Division as of the Closing Date (exclusive of the Excluded Assets) and is prepared in accordance with the provisions of this Section 2.2(a).

(b) If the Net Assets of the Division set forth in the Closing Date Balance Sheet are less than $24,827,000, the Purchase Price shall be reduced to the extent of the difference. If the Net Assets of the Division set forth in the Closing Date Balance Sheet are more than $24,827,000, the Purchase Price shall be increased to the extent of the difference. The amount of any increase in the Purchase Price shall be paid by Buyer to Seller within five (5) days after final determination of the Net Assets, with interest from the date of Closing at the prime rate of Bank of America N.T.S.A., as in effect from time to time. The amount of any reduction in the Purchase Price shall be refunded by Seller to Buyer within five (5) days after such final determination, with interest for the period and at the rate set forth in the preceding sentence. Any amounts payable hereunder shall be payable by wire transfer in immediately available funds to an account designated by the party entitled to such payment at least one day before the wire transfer.

(c) Buyer shall have a reasonable time, not in excess of thirty (30) days, to review the Closing Date Balance Sheet and the Net Assets and Seller shall cooperate in furnishing all such working papers and accounting records as Buyer shall reasonably request for such purpose. If Buyer does not timely deliver a “Contest Notice” (as hereinafter defined) in accordance with Section 2.2(d), the Closing Date Balance Sheet, Net Assets and the Purchase Price adjustment derived therefrom will be final and binding on the parties. If a Contest Notice is so delivered, the Closing Date Balance Sheet, Net Assets and any adjustment to the Purchase Price shall be determined as set forth below.

4

(d) In the event that Buyer contests any part of the Purchase Price as adjusted, as set forth above, Buyer shall give Seller written notice of its objections thereto (a “CONTEST NOTICE”) within thirty (30) days following the delivery of the Closing Date Balance Sheet. Any such Contest Notice shall specify in reasonable detail the nature of any disagreement asserted and the amount claimed by Buyer. Buyer’s right to contest the Purchase Price, as adjusted hereunder, shall be limited to the inclusion on the Closing Date Balance Sheet of assets that do not exist. Without limiting the generality of the foregoing, Buyer expressly waives any right to challenge the amount of any reserve or accrual reflected on the Closing Date Balance Sheet so long as there is no downward movement in such reserve or accrual reflected in Seller’s Balance Sheet as of April 2, 2000.

(e) During the period of thirty (30) days following the timely delivery of any such Contest Notice, Buyer and Seller shall attempt to resolve any differences which Buyer and Seller may have with respect to any matter specified in the Contest Notice (which resolution, if any, shall be final and binding on all the parties). If, at the end of such thirty (30) day period, Buyer and Seller shall fail to reach written agreement with respect to all of such matters, then the matters specified in any Contest Notice with respect to which such written agreement has not been reached (the “DISPUTED MATTERS”) shall be submitted for determination by an independent certified public accounting firm of national standing (the “ACCOUNTANTS”) mutually selected by Buyer’s accountants and Seller’s accountants, respectively. The Accountants shall consider only the Disputed Matters. The Accountants shall not be required to follow any particular rules of procedure, it being the intention of the parties to create a flexible, practical and expeditious method for resolving any disagreement hereunder. The Accountants’ decision with respect to all Disputed Matters shall be final and binding upon the parties hereto.

(f) Each party shall bear its own costs and expenses for its independent auditors. The fees and expenses of the Accountants incurred in connection with its review and determination of any Disputed Matters shall be borne one-half by Buyer and one-half by Seller.

2.3 ASSUMED LIABILITIES. As further consideration for consummation of the transactions contemplated hereby, subject to Section 2.4 hereof, at the Closing, Buyer shall assume and agree to thereafter pay when due and discharge and indemnify Seller and hold Seller harmless with respect to the following liabilities (the “ASSUMED LIABILITIES”):

(a) All obligations and liabilities of Seller under Contracts that are to be acquired by Buyer pursuant to the provisions of this Agreement;

(b) All accounts payable owed by Seller arising out of operations of the Division or otherwise in respect of the Division;

(c) All obligations and liabilities (other than non-contractual product liability claims for defective products) in respect of any and all products made (if the date of manufacture is readily determinable) and sold by the Division on or after the Closing Date, including obligations and liabilities for refunds, adjustments, allowances, rebates, repairs, exchanges, returns and warranties of merchantability and other contractual warranty claims;

5

(d) All non-contractual obligations and liabilities in respect of product liability claims relating to any and all defective products (other than building products) made (if the date of manufacture is readily determinable) and sold by the Division on or after the Closing Date, including obligations and liabilities for property damage and related refunds, adjustments, allowances, repairs, exchanges, returns, claims of warranty of merchantability and other claims;

(e) All non-contractual obligations and liabilities in respect of product liability claims for any and all defective building products made (if the date of manufacture is readily determinable) and sold by the Division on or after the Closing Date, including obligations and liabilities for property damage and related refunds, adjustments, allowances, repairs, exchanges, returns, claims of warranty of merchantability and other claims;

(f) Environmental Liabilities related to the real property included in the Acquired Assets relating to any facts or circumstances arising on or after the Closing Date;

(g) All obligations and liabilities in respect of personal injury or property damage claims with respect to any real property included in the Acquired Assets as to which the date of such damage or injury (as determined in a manner consistent with the determination of the date of loss under an “occurrence based” insurance policy) was on or after the Closing Date;

(h) All obligations and liabilities arising under or in connection with (i) accrued payroll and accrued vacation with respect to all Transferred Employees; (ii) accrued benefits other than severance benefits, if any, under the Paper Industry Union Management Pension Fund (the “PAPER INDUSTRY PLAN”); (iii) severance of any Transferred Employee who is terminated as a result of or in connection with the transactions contemplated hereby, who does not accept Buyer’s offer of employment pursuant to Section 6.11 hereof or who terminates employment with Buyer after the Closing Date; (iv) post-retirement medical benefits for Transferred Employees pursuant to the terms of any applicable Collective Bargaining Agreement; and (v) any wrongful termination, grievance or other employment related claim brought by any Transferred Employee whose employment is terminated following the Closing Date to the extent that such claim is solely attributable to the actions of Buyer subsequent to the Closing Date; provided, however, that (A) (x) accrued payroll with respect to all Transferred Employees, (y) accrued vacation with respect to all hourly employees and (z) the monthly liabilities with respect to the Paper Industry Plan accrued through the Closing Date shall only be included to the extent reflected or reserved on the Closing Balance Sheet and (B) with respect to claims arising pursuant to benefits described in clause (iv) of this Section 2.3(h), Buyer will administer all such claims and Seller shall reimburse Buyer for the portion of any payments attributable to the Transferred Employees based upon years of service prior to the Closing Date; and

(i) All other liabilities, contingent or otherwise, owed by Seller, to the extent arising prior to the Closing Date out of the conduct of the Division Business by Seller and to the extent that they are reflected or reserved on the Closing Date Balance Sheet (including, without limitation, obligations and liabilities in respect of products sold by the Division prior to the Closing Date). In addition to the foregoing, to the extent of the unused Basket Amount referred to in Section 9.4(a), Buyer shall assume obligations and liabilities of the kind referred to in Section 2.3(c) above in respect of products sold by the Division prior to the Closing Date.

6

2.4 LIABILITIES NOT ASSUMED BY BUYER. Buyer shall not be deemed by anything contained in this Agreement to have assumed and Seller hereby agrees to fully pay and perform in a prompt and timely manner and to indemnify Buyer and hold Buyer harmless with respect to the following excluded liabilities (the “EXCLUDED LIABILITIES”):

(a) Any liability of Seller to any person or entity the existence of which constitutes a breach of any covenant, agreement, representation or warranty of Seller contained in this Agreement;

(b) Any liability of Seller for any federal, state, local, foreign or other taxes, except to the extent liabilities or reserves therefor are included on the Closing Date Balance Sheet;

(c) Any non-contractual obligations and liabilities in respect of product liability claims related to any defective products (other than building products) made (if the date of manufacture is readily determinable) or sold by the Division prior to the Closing Date, including obligations and liabilities for property damage and related refunds, adjustments, allowances, repairs, exchanges, returns, claims of warranty of merchantability and other claims;

(d) Any non-contractual obligations and liabilities in respect of product liability claims related to any defective building products made (if the date of manufacture is readily determinable) or sold by the Division prior to the Closing, including obligations and liabilities for property damage and related refunds, adjustments, allowances, repairs, exchanges, returns, claims of warranty of merchantability and other claims

(e) All Environmental Liabilities relating to the real property included in the Acquired Assets arising out of any facts or circumstances existing or arising prior to the Closing Date;

(f) All obligations arising in respect of personal injury or property damage claims with respect to any real property included in the Acquired Assets as to which the date of such injury or loss (as determined in a manner consistent with the determination of the date of loss under an “occurrence based” insurance policy) was prior to the Closing Date;

(g) Except as set forth in SECTION 2.3(h) or 2.3(i) and except for liabilities under Contracts to be acquired by Buyer as a part of the Acquired Assets, any liability of Seller under any “EMPLOYEE BENEFIT PLANS” for any event occurring prior to the Closing Date or any obligation for benefits accrued prior to the Closing Date. “Employee Benefit Plans” means any employee pension benefit plans (as defined in Section (3)(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), employee welfare benefit plans (as defined in Section 3(1) of ERISA, bonus, deferred compensation, incentive compensation, stock ownership, phantom stock, disability, death, dependent care, employee assistance, scholarship or other plan or program, arrangement or understanding (whether or not covered by ERISA) maintained in whole or in part, contributed to, or required to be contributed to by Seller for the benefit of any present or former officer, employee, or director of Seller or any entity which is under common control with Seller within the meaning of Section 414 of the Internal Revenue Code of 1986 (the “CODE”), any such entity being hereafter referred to as a “COMMONLY CONTROLLED ENTITY”);

7

(h) Any liability or obligation relating to claims related to wrongful termination, occupational safety, workers’ or workmen’s compensation or grievance proceedings arising out of events occurring on or before the Closing Date except to the extent any of the foregoing (i) arise in connection with the termination of any Transferred Employee following the Closing Date or (ii) are reflected on the Closing Date Balance Sheet;

(i) Any liability arising under or in connection with the matters set forth in Schedules 3.8.1, 3.8.2 and 3.15 attached hereto, except, in each case, to the extent of any reserve therefor set forth on Closing Balance Sheet and except, in the case of Section 3.15, to the extent referred to in the last sentence of Section 2.3(i); and

(j) Any liability or obligation arising as a result of any breach by Seller prior to the Closing Date of its obligations under that certain Contract dated December 26, 1995 between the Division and the Michigan Department of Environmental Quality Waste Management Division (the “Michigan Contract”).

2.5 ALLOCATION OF PURCHASE PRICE. The parties hereto agree to allocate the Purchase Price prior to the Closing among the Acquisition Assets. Seller and Buyer shall jointly complete and separately file Form 8594 with their respective federal income tax returns for the tax year in which the Closing Date occurs in accordance with such allocation, and unless required by law, each of the parties shall refrain from taking a position on any income, transfer or gains tax return, before any governmental agency charged with the collection of any such tax or in any judicial proceeding that is in any manner inconsistent with the terms of any such allocation without written consent of the other in each instance.

3. REPRESENTATIONS AND WARRANTIES OF SELLER.

Seller represents and warrants to Buyer as follows:

3.1 ORGANIZATION AND GOOD STANDING. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power to carry on the business of the Division as it is now and has since its organization been conducted and to own, lease or operate the Acquisition Assets and is duly licensed or qualified to do business and in good standing as a foreign corporation under the laws of every jurisdiction in which the name of the activities conducted by Seller and/or the character of the assets owned or leased by Seller makes such qualification or license necessary, except for those jurisdictions where the failure to be so qualified would not have a Material Adverse Effect . As used in this Agreement, “MATERIAL ADVERSE EFFECT” means any change in or effect on the business or properties of the Division that (a) is or is reasonably likely to be materially adverse to the business, operations, properties, condition (financial or otherwise), assets or liabilities of the Division taken as a whole (excluding adverse changes that are the result of: (i) economic factors affecting the economy as a whole and (ii) the announcement and pendency of the transactions contemplated hereby) or (b) materially impairs or prohibits the ability of Seller and Buyer to consummate the transactions contemplated by this Agreement.

3.2 AUTHORIZATION OF AGREEMENT. Seller has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby.

8

This Agreement and all other agreements and instruments to be executed by Seller in connection herewith have been (or upon execution will have been) duly executed and delivered by Seller, have been effectively authorized by all necessary action, corporate or otherwise, and constitute (or upon execution will constitute) legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms.

3.3 OWNERSHIP OF ACQUISITION ASSETS OWNERSHIP OF ACQUISITION ASSETS. Seller is the lawful owner of or, in the case of leased assets, has the right to use and transfer to Buyer each of the Acquisition Assets, and the Acquisition Assets are free and clear of all mortgages, pledges, liens, security interests, encumbrances and restrictions of every kind and nature (collectively, “LIENS”), other than Liens disclosed pursuant to this Agreement and encumbrances and restrictions affecting real property which do not materially interfere with the present use thereof. The delivery to Buyer of the instruments of transfer of ownership contemplated by this Agreement will vest good and marketable title to the Acquisition Assets in Buyer, free and clear of all Liens, except as referred to in the preceding sentence. The Acquisition Assets include all assets, rights and interests necessary for the conduct of the Division, as presently conducted, except as disclosed in SCHEDULE 3.3.

3.4. FINANCIAL CONDITION.

3.4.1 FINANCIAL STATEMENTS. Seller has furnished to Buyer unaudited financial statements of the Division, consisting of balance sheets as of December 31, 1999 and consolidated statements of income and cash flows for the year then ended (the “FINANCIAL STATEMENTS”). The Financial Statements, including the footnotes thereto, are attached hereto as Schedule 3.4.1.

3.4.2 ACCOUNTING STANDARDS. The Financial Statements: (i) have been prepared in accordance with the books and records of Seller; (ii) have been prepared in accordance with GAAP in a manner consistent with past practice, except for adjustments as set forth on SCHEDULE 3.4.2; and (iii) present fairly the financial position and results of operations of the Division at and for the fiscal periods indicated therein; except for the absence of certain information and footnotes required for complete financial statements prepared in accordance with GAAP and except as disclosed in the footnotes thereto.

3.4.3 ABSENCE OF CERTAIN CHANGES. Since December 31, 1999, there has not been relating to the Division:

(a) any sale, distribution, transfer or subjection to any Lien of any of Seller’s assets, except sales of inventory in the ordinary and usual course of business;

(b) any increase in the salary or other compensation or benefits payable or to become payable to any officer, director or employee, other than routine increases in the ordinary course of business consistent with past practices;

(c) any adoption of a new benefit plan or any amendment to an existing benefit plan for the employees or officers of the Division;

(d) any transaction by Seller not in the ordinary and usual course of business;

9

(e) any Material Adverse Effect;

(f) any damage, destruction or loss, whether or not covered by insurance, which has a Material Adverse Effect;

(g) any material alteration in the manner in which Seller keeps its books, accounts or records or in the accounting practices therein reflected, including the recognition and computation of accrued expenses;

(h) the incurrence of any indebtedness for borrowed money or any commitment to borrow money or any guaranty, direct or indirect, of indebtedness of others, or any prepayment of long-term debt;

(i) except as listed on SCHEDULE 3.4.3(i) or as provided elsewhere herein, any acquisition or lease of or commitment to acquire or lease any realty, or any capital expenditure in excess of $50,000 individually or in the aggregate; or

(j) any change in the operations, business or manner of conducting the Division, other than changes in the ordinary and usual course of business consistent with prior practice, none of which, individually or in the aggregate, has had or is expected to have a Material Adverse Effect.

3.5 PROPERTY OF SELLER.

3.5.1 REAL PROPERTY.

(a) Except for the Owned Real Estate and the real property commonly known as the (i) Jacksonville, Florida sales office, which constitutes the leased premises under the Lease between Seller as lessee and Beach Marine as lessor (the “JACKSONVILLE OFFICE LEASE”), (ii) Jacksonville, Florida warehouse, which constitutes the leased premises under the Lease between Seller as lessee and Eastport Partner as lessor (the “JACKSONVILLE WAREHOUSE LEASE”), (iii) Adrian, Michigan railsiding, which constitutes the leased premises under the Lease between Seller as lessee and Norfolk & Western as lessor (the “ADRIAN RAILSIDING LEASE”), (iv) Adrian, Michigan Group headquarters, which constitutes the leased premises under the Lease between Seller as lessee and Mangold LLC as lessor (the “ADRIAN HEADQUARTERS LEASE”) and (v) Seattle, Washington office, which constitutes the leased premises under the Lease between Seller as lessee and Gabriel Enterprises as lessor (the “SEATTLE LEASE” and together with the Jacksonville Office Lease, the Jacksonville Warehouse Lease, the Adrian Railsiding Lease and the Adrian Headquarters Lease, the “LEASED REAL ESTATE”), each as more fully described in SCHEDULE 3.5.1, there is no parcel of real property, building or other improvement owned or leased by Seller and used by the Division. Seller owns the Owned Real Estate free and clear of all Liens and such other covenants, restrictions, easements and imperfections of title as do not materially interfere with the present use of such property;

(b) All of the buildings, fixtures and other improvements located on the Real Property are, in all material respects, in satisfactory operating condition and repair, and the operation thereof as presently conducted is not in material violation of any applicable building code, zoning ordinance or other law or regulation;

10

(c) Seller holds valid and effective certificates of occupancy, underwriters’ certificates relating to electrical work, zoning, building, housing, safety, fire and health approvals and all other material permits and licenses required by applicable law relating to the operation of the Real Property;

(d) Seller has not experienced during the two (2) years preceding the date hereof any material interruption in the delivery of adequate quantities of any utilities (including, without limitation, electricity, natural gas, potable water, water for cooling or similar purposes and fuel oil) or other public services (including, without limitation, sanitary and industrial sewer service) required by Seller in the operation of the Division during such period; and

(e) There is no condemnation or eminent domain proceeding pending which relates to the Real Property, and, to the knowledge of Seller, there is no such proceeding threatened by any relevant governmental authority nor any such proceeding to which Seller is not a party but as to which its properties are subject which materially and adversely affects any of such properties.

3.5.2 TANGIBLE PERSONAL PROPERTY. SCHEDULE 1.1(f) or SCHEDULE 1.1(g) lists each item of tangible personal property (other than Inventory) owned by Seller or in the possession of Seller which is to be transferred to Buyer pursuant hereto and an identification of the owner of, and any agreement relating to the use of, each item of tangible personal property the rights to which are to be transferred to Buyer pursuant hereto under leases or other similar agreements included in the Contracts. Except as otherwise indicated on SCHEDULE 3.5.2, Seller owns all of the tangible personal property used in the Division free and clear of all Liens, and except as set forth in Section 1.2, all such property will be transferred to Buyer at the Closing free and clear of all Liens. Each item of such tangible personal property is located on the Real Property and is in satisfactory operating condition and repair subject to normal wear and tear.

3.5.3 INTANGIBLE PERSONAL PROPERTY. SCHEDULE 1.1(h) lists (i) an identification of each domestic and foreign patent, patent application, copyright, copyright application, trademark, trademark application, service mark, service mark application and trade name (the “INTELLECTUAL PROPERTY”) owned by Seller or used by Seller in the conduct of the business of the Division and (ii) a true and complete list of all licenses or similar agreements or arrangements to which Seller is a party either as licensee or licensor for each such item of Intellectual Property. Except as otherwise indicated on SCHEDULE 1.1(h), Seller owns or has a valid license to use all of such Intellectual Property free and clear of all Liens, and, all such Intellectual Property will be transferred to Buyer at the Closing free and clear of all Liens.

(a) There have not been any actions or other judicial or adversary proceedings involving Seller concerning any of the Intangible Personal Property included in the Acquisition Assets, nor, to the knowledge of Seller, is any such action or proceeding threatened;

11

(b) Seller has the right and authority to use all items of Intangible Personal Property included in the Acquisition Assets in connection with the conduct of the Division in the manner presently conducted and to convey such right and authority to Buyer, and such use does not, to the knowledge of Seller, conflict with, infringe upon or violate any patent, copyright, trademark, service mark, trade secret, trade name or other right of any other person, firm or corporation;

(c) There are no outstanding, nor, to the knowledge of Seller, are there any threatened, disputes or disagreements with respect to any licenses or similar agreements or arrangements included in the Intangible Personal Property included in the Acquisition Assets and the consummation of the transactions contemplated hereby will not impair any right or privilege enjoyed by Seller under any license granted to Seller by others, or give rise to the termination or cancellation thereunder except as disclosed in Schedule 1.1(h) attached hereto;

(d) The conduct of the business of the Division does not, to the knowledge of Seller, conflict with any patent, copyright, trademark, service mark, trade secret, trade name or other similar rights of others; and

(e) To the knowledge of Seller (i) there is no person, firm or corporation engaging in any activity or using any of the Intellectual Property that infringes upon, or conflicts with, the rights of the Division, and (ii) there has been no misappropriation of any material trade secrets or other confidential rights of the Division by any person, firm or corporation.

3.6 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. Except as set forth in SCHEDULE 3.6, the execution, delivery and performance of this Agreement by Seller and the consummation of the transactions contemplated hereby will not result in a breach of any of the terms and provisions of, or constitute a default under, or conflict with, any Contract or any other material agreement, indenture or other instrument to which Seller is a party or by which Seller is bound, the Certificate of Incorporation or Bylaws of Seller, or any judgment, decree, order or award of any court, governmental body or arbitrator, or any law, rule or regulation applicable to Seller.

3.7 LABOR AND EMPLOYMENT MATTERS; PENSION AND EMPLOYEE BENEFIT PLANS.

(a) Except as set forth in SCHEDULE 3.7 attached hereto, there is no (i) collective bargaining agreement or other labor agreement to which Seller is a party or by which it is bound; (ii) employment, profit sharing, deferred compensation, bonus, stock option, stock purchase, retainer, consulting, retirement, welfare, incentive or severance plan, policy or contract to which Seller is a party or by which it is bound; or (iii) each employee benefit plan and arrangement including plans described in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), in which Transferred Employees (as defined in Section 6.11) currently participate. Seller has made available to Buyer copies of all current documents and instruments governing such plans;

12

(b) Each of the plans listed in Schedule 3.7 have been administered in compliance with their terms and with all filings, reporting, disclosure and other requirements of ERISA and the Internal Revenue Code of 1986, as amended (the “Code”) and each plan (together with its related funding instrument) which is an employee pension benefit plan is qualified under Section 401 of the Code and the regulations issued thereunder, and each plan and its related funding instrument have been the subject of a favorable determination letter issued by the Internal Revenue Service holding that such plan and its related funding instrument are so qualified;

(c) Other than routine claims for benefits made in the ordinary course of business, there are no pending claims, investigations, or causes of action (“Claims”) and to the best knowledge of Seller and its affiliates, no such claims are threatened against any plan listed in Schedule 3.7 or fiduciary of any such plan by any participant, beneficiary or governmental agency with respect to the qualification or administration of such plan;

(d) No withdrawal liability (as defined in Section 4021, 4063 or 4064 of the Code or ERISA) has been, or will be, incurred as a result of the transactions contemplated by this agreement with respect to, any defined benefit plan or multi-employer plan covering the Transferred Employees;

(e) No party to any such agreement, plan or contract is in default with respect to any material term or condition thereof, nor has any event occurred which through the passage of time or the giving of notice, or both, would constitute a default thereunder or would cause the acceleration of any obligation of any party thereto; and

(f) Seller has complied in all material respects with all applicable laws, rules and regulations relating to the employment of labor, including those related to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by appropriate governmental authorities and has withheld and paid to the appropriate governmental authorities or is holding for payment not yet due to such authorities, all amounts required to be withheld from such employees of Seller and is not liable for any arrearages of wages, taxes, penalties or other sums for failure to comply with any of the foregoing. Except as set forth in SCHEDULE 3.7(c) attached hereto, there is no: (i) unfair labor practice complaint against Seller pending before the National Labor Relations Board or any state or local agency or any basis for any such complaint; (ii) pending labor strike or other material labor trouble affecting the Division; (iii) labor grievance pending against Seller or any basis for any such grievance; (iv) pending representation question respecting the employees of the Division; (v) pending arbitration proceedings arising out of or under any collective bargaining agreement to which Seller is a party; (vi) to the knowledge of Seller, any basis for which a claim may be made under any collective bargaining agreement to which Seller is a party; or (vii) pending or, to the knowledge of Seller, threatened claim against Seller regarding the discharge or dismissal of any employee based on discrimination or for any other reason and, to the knowledge of Seller there is no basis for any such claim. All reasonably anticipated obligations of Seller (whether arising by operation of law, by contract, by past custom or otherwise), for salaries, vacation and holiday pay, sick pay, bonuses and other forms of compensation payable to the officers, directors or other employees of the Division in respect of the services rendered by any of them have been paid or adequate accruals therefor have been made in the ordinary course of business in the books and records of Seller.

13

3.8 LITIGATION AND COMPLIANCE WITH LAWS.

3.8.1 LITIGATION PENDING OR THREATENED. Except as set forth in SCHEDULE 3.8.1, there is no action, suit, arbitration, proceeding, grievance or investigation, pending or (to the knowledge of Seller) threatened, before any court, tribunal, panel, master or governmental agency, authority or body in which Seller is a party or to which the Division is subject, nor is Seller, or any officer or employee of Seller enjoined from any action or subject to any continuing restriction which may adversely affect the Division.

3.8.2 VIOLATION OF LAW. Seller is not in material violation of any provision of any law, decree, order or regulation (including, without limitation, those relating to antitrust or prohibiting other anti-competitive business practices, those relating to employment practices, such as discrimination, health and safety, and those relating to minority business enterprises), applicable to the Division. Seller has all material federal, state, local, foreign and other licenses, permits and other governmental authorizations required in the conduct of the business of the Division and the operation of its properties. Such licenses, permits and other governmental authorizations, including those obtained under applicable Environmental Laws (as hereinafter defined) are listed in SCHEDULE 3.8.2. Except as provided by this Agreement, no notice to, filing with, or approval or consent of, any governmental agency or body issuing any of the permits, licenses or other governmental authorizations, or otherwise having jurisdiction over Seller or the Division or the operations or properties of the Division, is required in order to permit the execution, delivery or performance of this Agreement, the consummation of the transactions contemplated hereby or the sale, transfer and delivery of the Acquisition Assets or the continuation of the Division after the Closing. No present or, to the knowledge of Seller, prospective zoning or use restriction will adversely affect the business of the Division as now conducted or as presently proposed to be conducted hereafter, and the present conduct of the business of the Division is not dependent upon any so-called “non-conforming use” exception or any other exception which would terminate or otherwise be impaired by the transactions contemplated hereby. Seller is not a party to any consent decree issued by any governmental agency, authority or body relating to the Division.

3.8.3 ENVIRONMENTAL MATTERS. Except as set forth in SCHEDULE 3.8.3 attached hereto:

(a) Seller is in compliance in all material respects with all Environmental Laws (as defined below) which are applicable to the business, operations or assets of the Division;

(b) Seller holds, and is in compliance in all material respects with, all permits, licenses, franchises, approvals and authorizations by governmental or regulatory authorities or bodies (collectively, “PERMITS”) required under Environmental Laws for Seller to conduct the business of the Division conducted by it;

(c) Prior to the date of this Agreement, (i) to Seller’s knowledge, there are no events, conditions, actions, or omissions relating to the conduct of the business of the Division that have given or will give rise to any Environmental Liability (as defined below) based on or related to the use, processing, generation, treatment, storage, disposal,

14

transport, emission, discharge, release or threatened release of any Hazardous Substance (as defined below), and (ii) Seller has not received any written notice of the institution or pendency of any lawsuit, action, proceeding, investigation or claim by any person alleging any Environmental Liability arising from or relating to the conduct of the business of the Division;

(d) As used herein:

“ENVIRONMENTAL LAWS” means any domestic or foreign, federal, state, interstate or local statute, law or regulation having the force of law and in effect and promulgated as such as of the Closing Date (collectively, “PRE-CLOSING ENVIRONMENTAL LAWS AND REGULATIONS”) or any order, injunction, judgment, decree, common law or other enforceable requirement of any governmental entity, except to the extent that it sets forth more stringent or additional requirements than those authorized by Pre-Closing Environmental Laws and Regulations, and relating to the protection of human health, safety or the environment, including any of the foregoing related to: (i) Remedial Actions (as defined below); (ii) the reporting, licensing, permitting, or investigating of the emission, discharge, release or threatened release of Hazardous Substances into the air, surface water, groundwater or land; (iii) the manufacture, release, distribution, use, generation, treatment, storage, disposal, transport or handling of Hazardous Substances; or (iv) the protection of the health and safety of employees or the public;

“ENVIRONMENTAL LIABILITY” means any liability or obligation arising under Environmental Laws in connection with the Acquired Assets or the business or operation of the Division to the extent arising from any condition existing or any act or omission of Seller at or prior to the Closing Date, including claims, demands, assessments, judgments, orders, causes of action (including toxic tort suits), notices of actual or alleged violations or liability (including such notices regarding the disposal or release of Hazardous Substances on the premises or elsewhere), proceedings and any associated costs, assessments, losses, damages (except consequential damages), obligations, liabilities, awards, fines, sanctions, penalties, or amounts paid in settlement (including reasonable costs, fees and expenses of attorneys, accountants, consultants and other agents of such person);

“HAZARDOUS SUBSTANCE” means any substance or material: (i) that is defined as a “hazardous waste” or “hazardous substance” under any Environmental Law; (ii) that is considered toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic or mutagenic or otherwise regulated under any Environmental Law; or (iii) that contains gasoline, diesel fuel or other petroleum hydrocarbons, polychlorinated biphenyls or asbestos; and

“REMEDIAL ACTION” means any response action, removal action, remedial action, corrective action, monitoring program, sampling program, investigation or other cleanup activity required by any Environmental Law to clean up, remove, remediate, treat or abate any Hazardous Substance in the environment.

3.9 CONTRACTS AND OTHER INSTRUMENTS.

3.9.1 Except as set forth in SCHEDULE 3.9.1 attached hereto, there has not occurred any material default under any Contract on the part of Seller or, to the knowledge of

15

Seller, on the part of the other parties thereto, and no event has occurred which, with the giving of notice or the lapse of time, or both, would constitute any default under any Contract. Except as set forth in SCHEDULE 3.6 attached hereto, no consent of any party to any Contract is required in order to permit the execution, delivery or performance of this Agreement, the consummation of the transactions contemplated hereby, or the sale, transfer or delivery of the Acquisition Assets or the assumption of the liabilities to be assumed by Buyer under Section 2.3, nor will the execution, delivery or performance of this Agreement, the consummation of the transactions contemplated hereby or the sale, transfer and delivery of the Acquisition Assets or the assumption of the liabilities to be assumed by Buyer, result in a material breach of any of the terms and provisions of, or constitute a default under, or conflict with, or result in a modification of, any Contract of Seller, except for such breaches, defaults, conflicts or modifications that would not in the aggregate reasonably be expected to have a Material Adverse Effect.

3.9.2 SCHEDULE 1.1(e) attached hereto lists each Contract, except: (a) agreements for the purchase by Seller of goods, materials, supplies or services in the ordinary course of business involving less than $50,000 in consideration in each such case; and (b) agreements for the sale of goods or services in the ordinary course of business in which the sales price of the goods to be sold and the services to be rendered pursuant to each such agreement is less than $50,000 for each such agreement. True and complete copies of each of the Contracts, or where they are oral, true and complete written summaries thereof, have been delivered to Buyer by Seller.

3.10 COMPENSATION OF AND INDEBTEDNESS TO AND FROM OFFICERS.

3.10.1 SCHEDULE 3.10.1 attached hereto sets forth a true and complete list of the names of and offices held by the officers of the Division. The current compensation of each of the officers and employees of the Division (including salary, bonus, other incentive compensation and other perquisites and benefits) has been disclosed in writing to Buyer, except for any officer or employee whose aggregate compensation is less than $50,000 per annum.

3.10.2 Except as set forth in SCHEDULE 3.10.2, Seller has no financial obligation and is not otherwise indebted to any person who is an officer or employee of the Division, or to any relative of any such person or to any entity controlled directly or indirectly by, or otherwise affiliated with, such person, in any amount whatsoever other than for compensation for services rendered since the start of the current pay period of Seller and for business expenses.

3.11 INSURANCE. SCHEDULE 3.11 sets forth a true and correct list of all insurance policies of any nature whatsoever maintained by Seller relating solely to the Division at any time during the three (3) years prior to the date of this Agreement and the annual or other premiums payable thereunder. Except as disclosed in Schedule 3.11, attached hereto, there are no outstanding requirements or recommendations by any insurance company that issued any policy of insurance applicable, in whole or in part, to the properties or operations of the Division or by any Board of Fire Underwriters or other similar body exercising similar functions or by any governmental authority exercising similar functions which requires or recommends any changes in the conduct of the Division of, or any repairs or other work to be done on or with respect to any of the properties or assets of, Seller. Seller has not received any notice or other

16

communication from any such insurance company within the two (2) years preceding the date hereof canceling or materially amending or materially increasing the annual or other premiums payable under any of said insurance policies, and to the knowledge of Seller, no such cancellation, amendment or increase of premiums is threatened.

3.12 BROKERAGE. Seller has not dealt with, and is not obligated to make any payment to, any finder, broker, investment banker or financial advisor other than Salomon Smith Barney in connection with any of the transactions contemplated by this Agreement or the negotiations looking toward the consummation of such transactions.

3.13 KNOWLEDGE. Certain of the representations and warranties are made “to the knowledge.” The parties hereto agree that the meaning of such expression shall in all cases be understood as comprising actual knowledge and belief of the persons identified on SCHEDULE 3.13 after reasonable inquiry of the Division’s employees and representatives and reasonable review of the Division’s files, books and records.

3.14 TAXES.

(a) DEFINITIONS. For purposes of this Agreement:

(i) The term “Taxes” means all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to taxes, or additional amounts with respect thereto, and the term “Tax” means any one of the foregoing Taxes;

(ii) The term “Returns” means all returns, declarations, reports, statements, and other documents required to be filed in respect of Taxes, and the term “Return” means any one of the foregoing Returns;

(iii) The term “Code” means the Internal Revenue Code of 1986, as amended. All citations to the Code or to the regulations promulgated thereunder shall include any amendments or any substitute or successor provisions thereto.

(b) Seller has paid or will pay when due or finally settled all Taxes relating to the Division or to the Acquisition Assets which are or become due or payable for all periods up to and including the Closing Date (other than those to be paid by Buyer hereunder). Seller has properly filed on a timely basis, or so will file when due, all Returns relating to the Division or the Acquisition Assets for all periods up to and including the Closing Date (other than those to be filed by Buyer hereunder).

(c) LIENS. There are no liens for Taxes (other than for current Taxes not yet due and payable) on the Acquisition Assets.

(d) FOREIGN PERSON. Seller is not a person other than a United States person within the meaning of the Code.

17

3.15 PRODUCT LIABILITY AND RECALLS.

(a) Except as set forth in SCHEDULE 3.15 attached hereto, there is no action, suit, claim, inquiry, proceeding, or investigation in any case by or before any court or governmental body pending or, to the best knowledge of Seller, threatened, against or involving the Division relating to any product alleged to have been designed, manufactured, or sold by the Division and alleged to have been defective or improperly designed or manufactured.

(b) Except as set forth in SCHEDULE 3.15 attached hereto, there is no pending, or to the best knowledge of Seller, threatened recall or investigation of any product sold by Seller in connection with the Division.

3.16 UNDISCLOSED LIABILITIES. Seller has no liabilities or obligations, whether accrued, absolute, contingent or otherwise, that would be required to be reflected on a balance sheet prepared in accordance with GAAP, except (i) to the extent reflected or reserved for on the Financial Statements; (ii) liabilities or obligations disclosed in the Schedules thereto; or (iii) liabilities or obligations incurred in the ordinary course of business since the date of the Financial Statements or reflected on the Closing Date Balance Sheet.

3.17 RESTRICTIONS ON BUSINESS ACTIVITIES. Except for this Agreement or as set forth in SCHEDULE 3.17 attached hereto, to the best knowledge of Seller, there is no agreement, judgment, injunction, order or decree binding upon Seller which has or could reasonably be expected to have the effect of prohibiting or impairing any business practice of Seller, acquisition of property by Seller, or the conduct of business by Seller as currently conducted by Seller.

3.18 NO ILLEGAL OR IMPROPER TRANSACTIONS. To Seller’s knowledge, neither the Seller nor any stockholder, officer, or employee of Seller, has directly or indirectly, used funds or other assets of the Division, or made any promise or undertaking in such regards, for (a) illegal contributions, gifts, entertainment or other expenses relating to political activity; (b) illegal payments to or for the benefit of governmental officials or employees, whether domestic or foreign; (c) illegal payments to or for the benefit of any person, firm, corporation, or other entity, or any director, officer, employee, agent, or representative thereof; (d) gifts, entertainment, or other expenses that materially jeopardize the normal business relations between the Division and any of its customers; or (e) the establishment or maintenance of a secret or unrecorded fund which would violate any material law.

3.19 INVENTORY. The inventory reflected in the most recent financial statements of the Division is carried at an amount not in excess of the lower of cost or net realizable value, in each case, net of applicable reserves. The inventory is merchantable and fit for the purpose for which it was procured or manufactured, and no inventory is obsolete, damaged or defective, or not usable or saleable within one year after the Closing Date in the ordinary course of business of the Division as heretofore conducted, except to the extent reflected in applicable reserves.

3.20 NO IMPLIED WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH HEREIN, SELLER MAKES NO REPRESENTATION OR WARRANTY CONCERNING THE ACQUISITION ASSETS, INCLUDING AS TO THE QUALITY, CONDITION,

18

MERCHANTABILITY, SALABILITY, OBSOLESCENCE, WORKING ORDER OR FITNESS FOR A PARTICULAR PURPOSE THEREOF. EXCEPT AS SO SET FORTH, THE ACQUISITION ASSETS ARE SOLD TO BUYER “AS IS AND WHERE IS.”

4. REPRESENTATIONS AND WARRANTIES OF BUYER.

Buyer represents and warrants to Seller that:

4.1 ORGANIZATION; GOOD STANDING; AND CORPORATE AUTHORITY. Tyco is a corporation duly organized, validly existing and in good standing under the laws of the State of Massachusetts. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Massachusetts. IP Buyer is a corporation duly organized, validly existing and in good standing under the laws of Switzerland. Each of Tyco, Buyer and IP Buyer has the full corporate power and authority to conduct all of the business and activities conducted by it and to own or license all of the assets owned or leased by it, and is duly licensed or qualified to do business and in good standing as a foreign corporation under the laws of every jurisdiction in which the nature of the activities conducted by it, and/or the character of the assets owned or leased by it, makes such qualification or license necessary, except for those jurisdictions where the failure to be so qualified would not have a Material Adverse Effect on Tyco, Buyer or IP Buyer. Each of Tyco, Buyer and IP Buyer has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement and all other agreements herein contemplated to be executed in connection herewith have been (or upon execution will have been) duly executed and delivered by each of Tyco, Buyer and IP Buyer, have been effectively authorized by all necessary action, corporate or otherwise, and constitute (or upon execution will constitute) legal, valid and binding obligations of each of Tyco, Buyer and IP Buyer, enforceable against each of them in accordance with their respective terms.

4.2 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. The execution, delivery and performance of this Agreement by Buyer and the consummation of the transactions contemplated hereby will not result in a breach of any of the terms or provisions of, or constitute a default under, or conflict with, any agreement, indenture or other instrument to which Buyer is a party or by which it is bound, Buyer’s Articles of Incorporation and Bylaws or other governing instruments, any judgment, decree, order or award of any court, governmental body or arbitrator, or any law, rule or regulation applicable to Buyer.

4.3 REGULATORY APPROVALS. All consents, approvals, authorizations and other requirements prescribed by any law, rule or regulation which must be obtained or satisfied by Buyer and which are necessary for the consummation of the transactions contemplated by this Agreement have been obtained and satisfied.

4.4 BROKERAGE. Buyer has not dealt with, and is not obligated to make any payment to, any finder, broker or investment banker or financial advisor in connection with any of the transactions contemplated by this Agreement or the negotiations looking toward the consummation of such transactions.

19

4.5 SUFFICIENT FUNDS. Buyer has sufficient funds available for the payment of the Purchase Price upon consummation of the transactions contemplated hereby.

4.6 RELIANCE ON REPRESENTATIONS AND WARRANTIES. Buyer acknowledges that it enters into this Agreement and agrees to consummate the transactions contemplated hereby in sole reliance on the express representations and warranties contained in this Agreement and not upon any other information furnished to Buyer by Seller. BUYER ACKNOWLEDGES THAT, EXCEPT AS EXPRESSLY SET FORTH HEREIN, SELLER MAKES NO REPRESENTATION OR WARRANTY CONCERNING THE ACQUISITION ASSETS, INCLUDING AS TO THE QUALITY, CONDITION, MERCHANTABILITY, SALABILITY, OBSOLESCENCE, WORKING ORDER OR FITNESS FOR A PARTICULAR PURPOSE THEREOF AND BUYER IS PURCHASING THE ACQUISITION ASSETS “AS IS AND WHERE IS.”

5. CLOSING.

The closing of the transactions herein contemplated (the “CLOSING”) shall, unless another date, time or place is agreed to in writing by the parties hereto, take place at the offices of Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, 47th Floor, Los Angeles, California 90071 at 10:00 a.m., Los Angeles time, on June 30, 2000 or, if later, the third business day following expiration of the waiting period under the HSR Act, as defined below (the “CLOSING DATE”).

6. CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES.

6.1 ACCESS.

6.1.1 FOR THE BUYER.

(a) Between the date hereof and the Closing Date, (i) Buyer’s authorized representatives shall have reasonable access during normal business hours to all properties, operations, books, records, contracts, and documents of Seller relating to the Division, (ii) Seller will furnish and request its accountants and outside legal counsel to furnish to Buyer all information with respect to its affairs and the business of the Division that Buyer may reasonably request, (iii) Buyer shall have the right to discuss the affairs and the business of the Division with the employees of Seller and (iv) authorized representatives of Buyer shall have reasonable access during normal business hours to all Real Property in order to conduct environmental surveys and tests; provided: (1) without the prior written approval of Seller, Buyer shall not communicate with any employee of Seller or the Division, other than the employees listed on Schedule 6.1.1, attached hereto; (2) Buyer will not enter any of the premises of the Division, without first making arrangements with Seller, and any such visits shall be minimized to the extent practicable to avoid disruption of the Business; (3) that all surveys and tests shall be conducted in such a manner as to minimize the disruption to the business of the Division; (4) that at least two days prior to entering any parcel of Real Property, Buyer shall provide Seller with written notice of its intention to enter a specific parcel of Real Property and a description of and schedule for the proposed activities it plans to undertake; (5) that

20

Buyer shall cause the work to be done by qualified employees, consultants and contractors who are reasonably acceptable to Seller; and (6) that Buyer shall, at its own expense and immediately after completion of the investigating activities, restore the Real Property to substantially the same condition it was in prior to Buyer’s entry.

(b) Prior to the execution and delivery of this Agreement, Seller has not provided Buyer with access to certain competitively information concerning the Division, as set forth on SCHEDULE 6.1.1 attached hereto (“Sensitive Information”). Promptly following the date of this Agreement, and in no event later than [INSERT DATE], Seller shall provide Buyer access to the Sensitive Information. Buyer agrees that it shall implement internal procedures to assure that the Sensitive Information will not be made available, until completion of the transactions contemplated hereby, to any person engaged in sales or marketing, or in the establishment of pricing or pricing policy in any activity of Buyer which is engaged in competition with the Division.

6.1.2 FOR THE SELLER. After the Closing Date, upon reasonable prior notice, (i) authorized representatives of Seller shall have reasonable access during normal business hours to all books, records, contracts and documents of Buyer pertaining to periods prior to the Closing and relating to the Division, and may make copies thereof, to the extent that Seller reasonably determines necessary in connection with the preparation of Seller’s tax returns, or in connection with any tax, insurance, litigation or other proceeding or activity and (ii) in connection therewith, Seller shall have reasonable access to discuss the relevant affairs and business of the Division with the employees of Buyer.

6.2 CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS.

6.2.1 CONFIDENTIALITY. The Confidentiality Agreement between Buyer and Seller dated April 25, 2000 shall continue in full force and effect and shall apply to all information concerning the Division obtained by Buyer pursuant hereto.

6.2.2 PUBLIC ANNOUNCEMENTS. Any public announcement or similar publicity with respect to this Agreement or the transactions contemplated hereby will be issued, if at all, at such time and in such manner as the parties jointly determine. Seller will consult with Buyer concerning the means by which Seller’s employees will be informed of the transactions contemplated by this Agreement, and Buyer shall have the right to be present for any such communication.

6.3 CONDUCT OF BUSINESS OF DIVISION. The business of the Division shall be conducted from the date hereof through the Closing Date in accordance with prior practice and in the ordinary course of the business of the Division, and without limiting the generality of the foregoing, Seller shall not (except with the prior written consent of Buyer) do or cause or permit to occur any act, event or other occurrence which is represented or warranted not to have occurred since December 31, 1999 in Section 3.4.3 hereof. Not later than five (5) days prior to Closing, Seller shall update all Schedules hereto to reflect changes occurring subsequent to signing this Agreement with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in such schedules. Such supplement or amendment will be deemed to have amended

21

the applicable schedule to have qualified the representations and warranties contained in Article 3 and to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the matter(s) set forth in the amendment or supplement..

6.4 PRESERVATION OF ORGANIZATION. Seller shall use its best efforts to preserve the business of the Division and the organization of Seller, to keep available to Buyer the services of Seller’s present employees, and to preserve for Buyer Seller’s favorable business relationships with its suppliers, its customers and others with whom business relationships exist.

6.5 CURRENT INFORMATION. Seller will advise Buyer in writing immediately, but in any event prior to the Closing, of:

(a) the occurrence of any event which renders any of the representations or warranties set forth herein inaccurate in any material respect or the awareness of Seller that any representation or warranty set forth herein was not accurate in all material respects when made; and

(b) the failure of Seller to comply with or accomplish any of the covenants or agreements set forth herein in any material respect. Seller will also provide Buyer, promptly on becoming available, copies of all operating and financial reports prepared by, or in the normal conduct of business of, the Division.

6.6 CONTRACTS. Between the date hereof and the Closing Date, Seller will not, without the prior written consent of Buyer, (a) amend in any material respect or terminate any Contract listed on SCHEDULE 1.1(e), or (b) enter into or become a party to or submit any bid or proposal for any contract, agreement, instrument, arrangement, purchase order or commitment with any customer of the Division under which the reasonably anticipated costs and expenses of the Division will exceed its anticipated receipts.

6.7 COMPLETION OF TRANSACTION; HART-SCOTT-RODINO. Buyer and Seller shall use all necessary efforts to complete the transaction contemplated hereby. Buyer and Seller acknowledge that the transactions contemplated by this Agreement require filings with the Federal Trade Commission (the “FTC”) and the Antitrust Division of the United States Department of Justice (the “ANTITRUST DIVISION”) under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules and regulations promulgated under such Act (the “HSR ACT”). Buyer and Seller shall each promptly file with the FTC and the Antitrust Division the notifications and reports required to be filed pursuant to the HSR Act and shall undertake in good faith to file promptly any supplemental information which may be requested in connection therewith which notifications and reports will comply in all material respects with the requirements of the HSR Act. Buyer and Seller shall each furnish to the other such information as either may reasonably request to make such filings.

6.8 ACCOUNTS RECEIVABLE. If Seller receives any payments on Accounts Receivable of the Division after the Closing Date, Seller shall promptly forward such amounts to Buyer.

22

6.9 CONDITION TO TRANSFER OF CERTAIN CONTRACTS.

(a) Seller shall use commercially reasonable efforts to procure all consents, approvals or waivers which must be obtained by Seller and which are necessary for completion of the transactions described herein, including all required consents from third parties under the Contracts or otherwise and all required consents of any governmental agency or body issuing any permits, licenses or other governmental authorizations affecting Seller or its businesses or properties so that the Division may continue to be operated by Buyer without interruption or any adverse effect following the Closing. However, nothing herein shall require Seller to make any material payment in connection with the foregoing.

(b) Notwithstanding anything herein to the contrary, the parties hereto acknowledge and agree that at the Closing Seller will not assign to Buyer any such Contract which by its terms requires the consent of any other contracting party thereto unless each such consent has been obtained prior to the Closing Date. With respect to each such unassigned Contract, after the Closing Date Seller shall continue to deal with the other contracting party(ies) to such Contract as the prime contracting party and shall use its best efforts to obtain the consent of all required parties to the assignment of such Contract, but Buyer shall be entitled to the benefits of such Contract accruing after the Closing Date to the extent that Seller may provide Buyer with such benefits without violating the terms of such Contract. Buyer agrees to perform at its sole expense all of the obligations of Seller to be performed under any such Contract the benefits of which Buyer is receiving after the Closing Date.

6.10 WAIVER OF COMPLIANCE WITH BULK SALES LAWS. Buyer and Seller hereby waive compliance with the requirements of the Michigan Bulk Transfer Law and Florida Bulk Transfer Law and any other applicable bulk sales laws of any other jurisdiction.

6.11 EMPLOYEES.

(a) Buyer shall offer employment commencing on the Closing Date, on substantially similar compensation terms as those offered by Seller, to any individual who is actively employed by the Division as of the Closing Date (collectively, the “TRANSFERRED EMPLOYEES”). An employee of the Division who is absent on the Closing Date due to vacation or holiday or who has been absent as a result of a short-term or long-term disability prior to the Closing Date shall be considered actively at work on the Closing Date. On and after the Closing Date, Buyer shall comply, at its expense, with all employment laws with respect to the Transferred Employees employed as of the Closing Date, including, but not limited to, the Family and Medical Leave Act, the American Disability Act, and all federal or state laws on military leave. Transferred Employees shall be enumerated in SCHEDULE 6.11. Subject to paragraph (b) below, nothing herein shall limit the right of Buyer to make such changes in compensation, position, or responsibilities of employees of the Division as it may deem appropriate following the Closing.

(b) Buyer agrees that as of the Closing Date and for a six-month period thereafter, Buyer shall provide the Transferred Employees, for so long as they remain employees of the Division, with employee benefits that are no less favorable in the aggregate than those provided to them immediately prior to the Closing Date. With respect to Buyer’s benefit plans,

23

service accrued by Transferred Employees while employed by Seller shall be recognized for all purposes except to the extent necessary to prevent duplication of benefits. With respect to any medical, dental or other welfare benefits that are provided at any time to Transferred Employees, any applicable pre-existing exclusions shall be waived and any expenses incurred before such time under Seller’s comparable plan shall be taken into account under Buyer’s plan for purposes of satisfying applicable deductible, co-payment and maximum out-of-pocket provisions, provided that such information is provided to Buyer within 90 days following the Closing Date.

(c) All Transferred Employees shall cease active participation in Seller’s Employee Benefit Plans as of the Closing Date except to the extent required under Section 4980(B) of the Internal Revenue Code of 1986, as amended. Seller shall be responsible under the Anthony Industries Inc. Life, AD&D, Medical and Dental Insurance and workers’ compensation for claims incurred by Transferred Employees and their eligible dependents on or prior to the Closing Date.

6.12 TAXES. Seller and Buyer shall share equally any transfer, sales or use or similar taxes relating to the transactions contemplated hereby upon the consummation of such transactions.

6.13 COVENANT NOT TO COMPETE.

(a) Seller agrees that, as part of the consideration for payment by Buyer of the Purchase Price, for a period of five years immediately following the Closing Date, neither Seller nor any of its divisions or subsidiaries will, directly or indirectly, operate, perform, have any interest in, or otherwise be engaged in or concerned with a business which develops, manufactures, prepares, sells, installs, or distributes products or performs services in competition with the Division. For these purposes, ownership of securities of a company whose securities are publicly traded under a recognized securities exchange not in excess of 10% of any class of such securities shall not be considered to be competition with Buyer.

(b) Further, Seller agrees that for a period of three years following the Closing Date, neither Seller nor any of its related or affiliated entities will induce any of Seller’s employees hired by Buyer on the Closing Date to terminate his or her relationship with Buyer and to work in a business that competes with the Business.

(c) Each of Seller and Buyer acknowledges the restrictions on its activities under Sections 6.13(a) and (b) hereof (as the case may be) and constitute a material inducement to Buyer’s entering into and performing this Agreement. Each of Seller and Buyer further acknowledges, stipulates, and agrees that a breach of any of such obligations and agreements will result in irreparable harm and continuing damage to the other party for which there will be no adequate remedy at law and further agrees that in the event of any breach of said obligations and agreements, the other party and its successors and assigns will be entitled to injunctive relief and to such other relief as is proper under the circumstances.

6.14 COOPERATION WITH LITIGATION. After the Closing Date, Buyer shall cooperate with Seller and give Seller reasonable access during normal business hours to all properties, operations books, records, contracts, and documents of Buyer relating to proceedings

24

for which Seller retains responsibility pursuant to the terms of this Agreement and shall furnish and request its accountants and outside legal counsel to furnish to Seller all information with respect to such proceedings as Seller may reasonably request. Seller shall also have the right to discuss such proceedings with the employees of Buyer after the Closing Date.

6.15 PRODUCT CLAIMS. Buyer and Seller shall enter into mutually acceptable arrangements for the handling and review of obligations and liabilities (other than non-contractual product liability claims for defective products) in respect of products sold by the Division prior to the Closing, whether or not constituting Assumed Liabilities, in order that: (i) for so long as Buyer continues to engage in the Division business, at the request (and in the discretion) of Seller, all such claims shall be administered by Buyer, and warranty, replacement and repair work will be performed or provided for by Buyer in respect of Excluded Liabilities on the same basis as performed or provided in the case of Assumed Liabilities, with Seller to reimburse Buyer for all costs in respect of Excluded Liabilities and (ii) Seller shall have a reasonable right to review and audit Buyer’s records pertaining to such obligations and liabilities.

7. CONDITIONS TO OBLIGATIONS OF SELLER.

The obligations of Seller to make the deliveries contemplated at the Closing shall, in addition to the conditions set forth elsewhere herein, be subject to satisfactory completion on or prior to the Closing Date of each of the following conditions, any of which may be waived by Seller:

7.1 CORRECTNESS OF REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of Buyer contained in this Agreement shall have been true and complete in all material respects on the date hereof and shall be true and complete in all material respects on the Closing Date with the same effect as if made on the Closing Date, and Buyer shall have executed and delivered to Seller at Closing a certificate to such effect.

7.2 PERFORMANCE OF COVENANTS AND AGREEMENTS. All of the covenants and agreements of Buyer contained in this Agreement and required to be performed by Buyer on or before the Closing Date shall have been performed in all material respects, and Buyer shall have executed and delivered to Seller at Closing a certificate to such effect.

7.3 OPINION OF COUNSEL FOR BUYER. Seller shall have received an opinion of counsel for Buyer, M. Brian Moroze, Esq., substantially in the form of EXHIBIT A hereto and otherwise in form and substance reasonably satisfactory to and addressed to Seller and dated the Closing Date. In rendering such opinion, counsel may rely upon certificates of public officials and upon certificates of officers of Buyer as to factual matters and on opinions of other counsel of good standing whom such counsel believes to be reliable as to matters with respect to which the laws of jurisdictions other than Delaware and California are applicable.

7.4 ADDITIONAL CLOSING DOCUMENTS. Buyer shall have delivered to Seller at or prior to the Closing such documents (including a certificate of officers of Buyer) as Seller may reasonably request in order to enable Seller to determine whether the conditions to Seller’s obligations under this Agreement have been met and otherwise to carry out the provisions of this Agreement.

25

7.5 NO LEGAL BAR. None of the parties hereto shall be prohibited by any order, writ, injunction or decree of any governmental body of competent jurisdiction from consummating the transactions contemplated by this Agreement, and no action or proceeding shall then be pending which questions the validity of this Agreement, any of the transactions contemplated hereby or any action which has been taken by any of the parties or any corporate entity, in connection herewith, or in connection with any of the transactions contemplated hereby.

7.6 HSR EXPIRATION/TERMINATION. The waiting period (and any statutory extension thereof) under the HSR Act shall have expired or been terminated and no action, suit or proceeding shall have been initiated by the Antitrust Division or the FTC challenging the transactions provided in this Agreement under the Clayton Act or the Sherman Act.

7.7 MICHIGAN DEPARTMENT OF ENVIRONMENTAL QUALITY, WASTE MANAGEMENT DIVISION APPROVAL. The Michigan Department of Environmental Quality, Waste Management Division (the “Department”) shall have approved the transactions contemplated hereby pursuant to the Department’s rights under the Michigan Contract.

8. CONDITIONS TO OBLIGATIONS OF BUYER.

The obligations of Buyer to make the deliveries contemplated at the Closing shall, in addition to conditions set forth elsewhere herein, be subject to the satisfactory completion on or prior to the Closing Date of each of the following conditions, any of which may be waived by Buyer:

8.1 CORRECTNESS OF REPRESENTATIONS AND WARRANTIES. All representations and warranties of Seller contained in this Agreement shall have been true and complete in all material respects on the date hereof and shall be true and complete in all material respects on the Closing Date with the same effect as if made on the Closing Date (except for any breach of such representations and warranties, which when combined with all other breaches of such representations and warranties, would not result in a Material Adverse Effect), and Seller shall have executed and delivered to Buyer at Closing a certificate to that effect.

8.2 PERFORMANCE OF COVENANTS AND AGREEMENTS. All of the covenants and agreements of Seller contained in this Agreement and required to be performed on or before the Closing Date shall have been performed in all material respects, and Seller shall have delivered to Buyer at Closing a certificate to that effect.

8.3 OPINION OF COUNSEL FOR SELLER. Buyer shall have received an opinion of counsel for Seller, Gibson, Dunn & Crutcher LLP, substantially in the form of EXHIBIT B hereto and otherwise in form and substance reasonably satisfactory to and addressed to Buyer and dated the Closing Date. In rendering such opinion, counsel may rely upon certificates of public officials and upon certificates of officers of Seller as to factual matters and on opinions of other counsel of good standing whom such counsel believes to be reliable as to matters with respect to which the laws of jurisdictions other than Delaware or California are applicable.

8.4 NO LEGAL BAR. None of the parties hereto shall be prohibited by any order, writ, injunction or decree of any governmental body of competent jurisdiction from

26

consummating the transactions contemplated by this Agreement and no action or proceeding shall then be pending which questions the validity of this Agreement, any of the transactions contemplated hereby or any action which has been taken by any of the parties in connection herewith or in connection with any of the transactions contemplated hereby.

8.5 TRANSFER DOCUMENTS. Seller shall have executed and delivered to Buyer such bills of sale and other instruments of sale, transfer, conveyance, assignment and delivery covering the Acquisition Assets or any part thereof as Buyer may reasonably require to assure the full and effective sale, transfer, conveyance, assignment and delivery to Buyer of the Acquisition Assets.

8.6 HSR EXPIRATION/TERMINATION. The waiting period (and any statutory extension thereof) under the HSR Act shall have expired or been terminated and no action, suit or proceeding shall have been initiated by the Antitrust Division or the FTC challenging the transactions provided in this Agreement under the Clayton Act or the Sherman Act.

9. SURVIVAL; INDEMNIFICATION.

9.1 SURVIVAL. The representations and warranties contained in this Agreement and in any document delivered in connection herewith shall survive the Closing Date solely for the purposes of this Section 9 and shall terminate at the close of business eighteen (18) months following the Closing Date; provided, that the representations and warranties contained in Sections 3.2, 3.3, 3.8.3 and 3.14 shall survive until the applicable statute of limitations runs. No claim may be asserted by Tyco, Buyer or IP Buyer for any breach of representation or warranty herein after the survival period therefor.

9.2 INDEMNIFICATION BY SELLER. Seller shall indemnify and hold harmless Tyco, Buyer, IP Buyer and their directors, officers, employees, agents, successors, affiliates and assigns (the “BUYER PARTIES”) from and against, and reimburse the Buyer Parties on demand with respect to, any and all loss, damage (including any decrease in the value of property or securities acquired hereunder), liability, claims, cost and expense, including reasonable attorneys’, accountants’, consultants’ and engineers’ fees (collectively, “DAMAGES”), incurred by a Buyer Party by reason of or arising out of or in connection with (a) the breach of any representation or warranty contained in Section 3, or in any certificate expressly delivered to Buyer pursuant to this Agreement; provided, that, Seller shall not indemnify and hold harmless the Buyer Parties from and against any Damages incurred by a Buyer Party to the extent that an item that is the subject of a breach of a representation or warranty is reflected on the Closing Date Balance Sheet; (b) the failure of Seller to perform any agreement or covenant required by this Agreement to be performed by it; or (c) any failure of Seller to pay, perform or discharge any of the Excluded Liabilities in accordance with the terms thereof.

9.3 INDEMNIFICATION BY BUYER. Tyco, Buyer and IP Buyer agree to indemnify and hold harmless Seller and its directors, officers, employees, agents, successors, affiliates and assigns (the “SELLER PARTIES”) from and against, and to reimburse the Seller Parties on demand with respect to, any and all Damages incurred by a Seller Party by reason of or arising out of or in connection with (a) the breach of any representation or warranty contained in Section 4, or in any certificate expressly delivered by Tyco, Buyer and/or IP Buyer to Seller

27

under this Agreement; (b) the failure of Tyco, Buyer or IP Buyer to perform any agreement or covenant required by this Agreement to be performed by it; or (c) the failure of Tyco, Buyer or IP Buyer to pay, perform or discharge any of the Assumed Liabilities in accordance with the terms thereof.

9.4 GENERAL INDEMNIFICATION LIMITATIONS; REMEDIATION.

(a) No claim for indemnification by a Buyer Party pursuant to Section 9.2 or a Seller Party pursuant to Section 9.3 shall be asserted until (i) with respect to claims by a Buyer Party, the aggregate amount of all Damages incurred by the Buyer Parties under such indemnification provisions exceed $350,000 (the “BASKET AMOUNT”) (at which point only Damages in excess of such first $350,000 of Damages shall be paid) and (ii) with respect to claims by a Seller Party, the aggregate amount of all Damages incurred by the Seller Parties under such indemnification provisions exceed $350,000 (at which point only damages in excess of such $350,000 of Damages shall be paid). Seller’s liability in respect of all claims for breach of representations and warranties hereunder shall not exceed $5,000,000 in the aggregate (the “CAP”). The Basket Amount and the Cap shall not be applicable to claims arising under Sections 3.2, 3.3, 3.8.3 and 3.14 hereof or with respect to Excluded Liabilities, provided that the Basket Amount shall apply to obligations and liabilities in respect of products sold by the Division prior to the Closing Date and referred to in Section 2.3(i) hereof. The Basket Amount shall be reduced to the extent of any obligations and liabilities incurred by Buyer pursuant to the last sentence of Section 2.3 (i), above.

(b) Seller’s liability with respect to remediation of Hazardous Substances shall be limited to liability for remediation to standards required by any governmental authority with jurisdiction over Seller under applicable Environmental Laws, taking into account current and reasonably foreseeable uses of the property. Seller shall have the right to conduct and control any such remediation. Seller shall provide to Buyer copies of any correspondence, reports or other documents between Seller and any governmental authority, and any drilling logs and sample or other test results, regarding any such remediation. In undertaking any such remediation, Seller shall cause the work to be done by qualified employees, consultants and contractors who are reasonably acceptable to Buyer. Buyer shall provide Seller reasonable access to its property for that purpose; provided that all remediation shall be conducted in such a manner as to minimize the disruption to Buyer’s business, to the extent it is commercially reasonable to do so.

9.5 NOTICE OF CLAIMS. Whenever any claim shall arise for indemnification hereunder, the party entitled to indemnification (the “indemnified person”) shall promptly notify the other party (the “indemnifying person”) of the claim, such notice to be in writing and to describe (a) the Damages allegedly incurred, (b) the amount thereof, if known, (c) any complaints, subpoena or other documents served against the indemnified person in connection with such Damages, and (d) the method of computation of such Damages (but the failure so to notify an indemnifying person shall not relieve it from any liability which it may have under this Section 9 except to the extent that it has been prejudiced in any material respect by such failure or from any liability which it might otherwise have). An indemnified person shall not settle or compromise any claim by a third party for which such indemnified person is entitled to indemnification hereunder without the prior written consent (not to be unreasonably withheld) of

28

the indemnifying person, unless suit in respect of such claim shall have been instituted against the indemnified person, the indemnifying person shall not have taken control of such suit pursuant to Section 9.6 after notification thereof and the indemnifying person shall have received written notice of the proposed settlement and the terms thereof.

9.6 THIRD PARTY CLAIMS. In the case of any third party claim, action or suit as to which indemnification is sought, the indemnifying person shall have the right at any time to notify the indemnified person that it elects to conduct and control such action or suit. If the indemnifying person does not give the foregoing notice and/or until the indemnifying party gives such notice, the indemnified person shall have the right to defend and contest such action or suit in the exercise of its exclusive discretion and settle or compromise such suit, subject to the provisions of the last sentence of Section 9.5. The indemnifying person shall, upon request from any indemnified person, promptly pay to such indemnified person in accordance with the other terms of this Section 9 the amount of any Damages. If the indemnifying person gives the foregoing notice, the indemnifying person shall have the right to undertake, conduct and control, through counsel of its own choosing and at the sole expense of the indemnifying person, the conduct and settlement of such action or suit (other than a settlement which requires or prohibits any action on the part of, or involves any admission by, the indemnified person, in which event the consent of such indemnified person shall be required, but shall not be unreasonably withheld), and the indemnified person shall cooperate with the indemnifying person in connection with any such action or suit; provided, that (a) the indemnifying person shall permit the indemnified person to participate in such conduct or settlement through counsel chosen by the indemnified person, but the fees and expenses of such counsel shall be borne, after the indemnifying person has given notice that it elects to conduct and control such action or suit, by the indemnified person and (b) the indemnifying person shall agree promptly to reimburse to the extent required under this Section 9 the indemnified person for the full amount of any Damages resulting from such action or suit, except fees and expenses of counsel for the indemnified person incurred after the assumption of the conduct and control of such action or suit by the indemnifying person. So long as the indemnifying person is contesting any such action or suit in good faith, the indemnified person shall not pay or settle any such action or suit.

9.7 PAYMENTS. All payments made under this Section 9 shall be made by wire transfer in immediately available funds in U.S. dollars.

9.8 REMEDIES EXCLUSIVE. If the Closing occurs, the remedies provided in this Section 9 shall be the exclusive remedy for monetary damages (whether at law or in equity) with respect to this Agreement and the transactions contemplated herein.

9.9 CERTAIN DAMAGES. Notwithstanding anything else contained in this Section 9, no Buyer Party or Seller Party shall be entitled to consequential Damages hereunder.

10. TERMINATION OF AGREEMENT

10.1 EVENTS OF TERMINATION. This Agreement may be terminated and the transactions contemplated by it abandoned at any time prior to the Closing:

(a) by mutual agreement of Seller and Buyer; or

29

(b) by Buyer, following payment to Seller of the amount required by Section 11.8(b), on or before the expiration of 5 business days following the time on which Seller shall have provided Buyer access to the Sensitive Information, if based upon such review Buyer determines, in good faith, that the facts are materially different from those considered by it in determining to enter into this Agreement:

(c) by Buyer, if the conditions set forth in Section 8 shall not have been complied with or performed in any material respect and such noncompliance or nonperformance shall not have been cured or eliminated (or by its nature cannot be cured or eliminated) or if the Closing has not occurred within 75 days of the date of this Agreement; or

(d) by Seller, if the conditions set forth in Section 7 shall not have been complied with or performed in any material respect and such noncompliance or nonperformance shall not have been cured or eliminated (or by its nature cannot be cured or eliminated) or if the Closing has not occurred within 75 days of the date of this Agreement.

10.2 RIGHTS AND OBLIGATIONS ON TERMINATION. Except as otherwise provided in Section 11.8(b), any termination pursuant to Section 10.1 shall not affect any rights (at law or in equity) that any party may have against any other party hereto as a result of any breach by such other party of its obligations hereunder. If this Agreement is terminated and abandoned as provided in this Section 10, each party will redeliver all documents, work papers and other materials of any other party relating to the transactions contemplated by this Agreement, whether so obtained before or after the execution of this Agreement, to the party furnishing the same, and all information received by any party to this Agreement with respect to the business of any other party shall not at any time be used for the advantage of, or disclosed to third parties by, such party to the detriment of the party furnishing such information; provided, however, that the foregoing restriction shall not apply to any documents, work papers, material or information which is a matter of public knowledge or is otherwise in the public domain.

11. MISCELLANEOUS PROVISIONS.

11.1 CONSTRUCTION. This Agreement shall be construed and enforced in accordance with and governed by the internal laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

11.2 NOTICES. All notices, requests, demands and other communications called for or contemplated hereunder shall be in writing and shall be deemed to have been duly given when delivered to the party to whom addressed or when sent by telecopy, telegram, telex or wire (if promptly confirmed by registered or certified mail, return receipt requested, prepaid and addressed) to the parties, their successors in interest, or their assignees at the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to Buyer:

Ludlow Building Products, Inc.

10351 Verdon Road

P.O. Box 2002

Doswell, VA 23047

Fax: (804) 876-3139

Attention: President

30

With copies to:

Tyco International (US) Inc.

One Tyco Park

Exeter, NH 03833

Fax: (603) 778-2823

Attention: General Counsel

If to IP Buyer:

Tyco Plastics Services

AG Schwertstrasse-9 CH-8200

Schaffhausen, Switzerland

Fax: 41 52 633-0259

Attention: Managing Director

If to Seller:

K2 Inc.

4900 South Eastern Avenue Suite 200

Los Angeles, California 90040

Fax: (323) 724-0470

Attention: Richard M. Rodstein

With copies to:

Gibson, Dunn & Crutcher LLP

333 South Grand Avenue Suite 4800

Los Angeles, California 90071

Fax: (213) 229-7520

Attention: Andrew E. Bogen

11.3 ASSIGNMENT. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof nor any of the documents executed in connection herewith may be assigned by any party without the consent of the other parties; PROVIDED, HOWEVER, that either Buyer or IP Buyer may assign its rights and obligations, in whole or in part, to an affiliate without Seller’s consent. Nothing contained herein, express or implied, is intended to confer upon any person or entity other than the parties hereto and their successors in interest any rights or remedies under or by reason of this Agreement unless so stated herein to the contrary.

11.4 AMENDMENTS AND WAIVERS. This Agreement and all Exhibits and Schedules hereto may be modified only by a written instrument duly executed by each party. No condition to any party’s obligations and no breach of any covenant, agreement, warranty or

31

representation shall be deemed waived unless expressly waived in writing by the party whose obligations are subject to such condition or who might assert such breach. No waiver of any right hereunder shall operate as a waiver of any other right or of the same or a similar right on another occasion.

11.5 REMEDIES. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy. Each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder now or hereafter existing at law or in equity or by statute or otherwise, and the election by a party of one or more remedies shall not constitute a waiver of the party’s right to pursue any other available remedies.

11.6 ATTORNEYS’ FEES. In the event that any action or proceeding, including arbitration, is commenced by any party hereto for the purpose of enforcing any provision of this Agreement, the parties to such action, proceeding or arbitration may receive as part of any award, judgment, decision or other resolution of such action, proceeding or arbitration their costs and reasonable attorneys’ fees as determined by the person or body making such award, judgment, decision or resolution. Should any claim hereunder be settled short of the commencement of any such action or proceeding, including arbitration, the parties in such settlement shall be entitled to include as part of the damages alleged to have been incurred reasonable costs of attorneys or other professionals in investigating or counseling on such claim.

11.7 BINDING NATURE OF AGREEMENT. The Agreement includes each of the Schedules and Exhibits which are referred to herein or attached hereto, all of which are incorporated by reference herein. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective executors, heirs, legal representatives, successors and assigns.

11.8 EXPENSES.

(a) The costs and expenses of Seller, including the legal fees and disbursements of Gibson, Dunn & Crutcher LLP shall be borne by Seller. The costs and expenses of Buyer, including legal fees and disbursements, shall be borne by Buyer.

(b) In the event Buyer shall terminate this Agreement pursuant to Section 10.1(b), Buyer shall promptly make payment to Seller of the sum of $1,000,000 as full compensation to Seller for its costs and expenses in connection with this Agreement and the damage to its business which will result from a termination of this Agreement pursuant to Section 10.1(b).

11.9 ENTIRE AGREEMENT. This Agreement and the Confidentiality Agreement contain the entire understanding of the parties and supersede all prior agreements and understandings relating to the subject matter hereof.

11.10 SEVERABILITY. Any provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction.

32

11.11 COUNTERPARTS. This Agreement may be executed by the parties in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.

11.12 SECTION HEADINGS. The headings of each Section, subsection or other subdivision of this Agreement are for reference only and shall not limit or control the meaning thereof.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the date first above written.

SELLER:	K2 Inc., a Delaware corporation
	By:
	Name:
	Title:
TYCO:	Tyco International (US) Inc.
	By:
	Name:
	Title:
BUYER:	Ludlow Building Products, Inc.
	By:
	Name:
	Title:
IP BUYER:	Tyco Plastics Services AG a Swiss corporation
	By:
	Name:
	Title:

33

EX-12

EXHIBIT 12

K2 Inc.

Statement of Computation of Ratio of Earnings to Fixed Charges (1)

	Year Ended December 31,
	2005			2004		2003		2002		2001
	(Thousands, except ratios)
Earnings (loss) from continuing operations:
Earnings (loss) from continuing operations before taxes	$	(206,512	)	$	59,817	$	17,575	$	18,570	$	(11,975	)
Adjustments:
Fixed charges from continuing operations		35,458			24,804		11,516		9,928		14,432
	$	(171,054	)	$	84,621	$	29,091	$	28,498	$	2,457
Fixed charges from continuing operations:
Total interest expense, including interest expense on borrowings, amortization of debt discount and premium on all indebtedness and other	$	30,352		$	21,449	$	9,950	$	8,966	$	13,631
Interest included in rent		5,106			3,355		1,566		962		801
Total fixed charges from continuing operations	$	35,458		$	24,804	$	11,516	$	9,928	$	14,432
Ratio of earnings to fixed charges (excess of fixed charges over earnings)	$	(206,512	)		3.4x		2.5x		2.9x	$	(11,975	)

(1) K2 computed the ratio of earnings to fixed charges by dividing earnings (earnings from continuing operations before taxes, adjusted for fixed charges from continuing operations), by fixed charges from continuing operations for the periods indicated. Fixed charges from continuing operations include (i) interest expense and amortization of debt discount or premium on all indebtedness, and (ii) a reasonable approximation of the interest factor deemed to be included in rental expense. For years 2005 and 2001, earnings were inadequate to cover fixed charges. 2005 earnings loss included a non-cash intangible impairment charge of $253.2 million.

EX-21

EXHIBIT 21

SUBSIDIARIES OF K2 INC.

	Percentage of Voting Securities Owned or Subject to Voting Control By
	Company		Other
Shakespeare Conductive Fibers, LLC a Delaware limited liability company	100	%
K2 (Hong Kong) Ltd., a Hong Kong corporation	100	%
Shakespeare Company, LLC a Delaware limited liability company	100	%
Subsidiaries of Shakespeare Company, LLC:
Shakespeare All Star Acquisition LLC, a Delaware limited liability company			100	%
Shakespeare (Hong Kong) Ltd., a Hong Kong corporation			100	%
Pacific Rim Metallic Products Ltd., a Hong Kong corporation			100	%
Shakespeare Industries, Inc., a Delaware corporation			100	%
Shakespeare Europe BV, a Dutch corporation			100	%
Shakespeare (Australia) Pty. Ltd., an Australian corporation			100	%
K2 Ski Sport und Mode GmbH, a German corporation			100	%
Shakespeare Monofilament U.K. Ltd., a British corporation	1	%	99	%
Shakespeare International Ltd., a British corporation	1	%	99	%
Subsidiaries of Shakespeare International Ltd.:
Shakespeare Company (UK) Ltd., a British corporation			100	%
Subsidiary of Shakespeare Company (UK) Ltd.:
Expandpermit Limited, a British corporation			100	%
Subsidiary of Expandpermit Limited:
JRC Products Limited, a British corporation			100	%
K2 Worldwide Company, a Cayman Island corporation	100	%
K2 Bike, Inc., a Delaware corporation	100	%
Sitca Corporation, a Washington corporation	100	%
Subsidiaries of Sitca Corporation:
K-2 Corporation, an Indiana corporation			100	%
Subsidiaries of K-2 Corporation:
Earth Products, Inc., a California corporation			100	%
K-2 International, Inc., an Indiana corporation			100	%
K-2 Internet Company, LLC, a Delaware limited liability company			100	%
K2 Japan Corporation, a Japanese corporation			100	%
Madshus A.S., a Norwegian corporation			100	%
Katin, Inc., a Delaware corporation			100	%
Morrow Snowboards, a Delaware corporation			100	%
SMCA, Inc., a Minnesota corporation	100	%
Subsidiary of SMCA, Inc.:
Stearns Inc., a Minnesota corporation			100	%
Subsidiaries of Stearns Inc.:
SATV, LLC, a Delaware limited liability company			100	%
Sospenders LLC, a Delaware limited liability company			100	%
Ride, Inc., a Washington corporation	100	%
Subsidiaries of Ride, Inc.:
K2 Corporation of Canada, a Canadian corporation			100	%
Ride Snowboard Company, a Washington corporation			100	%
Ride Manufacturing, Inc, a California corporation			100	%
SMP Clothing, Inc., a Washington corporation			100	%
Smiley Hats, Inc., a Nevada corporation			100	%

	Percentage of Voting Securities Owned or Subject to Voting Control By
	Company		Other
Carve, Inc., a Washington corporation			100	%
Preston Binding Company, a Washington corporation			100	%
K2 Properties, Inc., a Delaware corporation	100	%
K2 Finance Company, LLC, a Delaware limited liability company			100	%
K2 Receivables Corporation, a Delaware corporation	100	%
Hilton Corporate Casuals, LLC a Delaware limited liability company	100	%
Rawlings Sporting Goods Company, a Delaware corporation	100	%
Subsidiaries of Rawlings Sporting Goods Company:
Rawlings Canada Inc., a Canadian corporation			100	%
Rawlings de Costa Rica, S.A., a Costa Rican corporation			100	%
Miken Sports, LLC a Delaware limited liability company			100	%
K2 Eyewear, LLC, a Delaware limited liability company	100	%
K2 Snowshoes, Inc., a Delaware corporation	100	%
K2 Licensed Products, Inc., a Delaware corporation	100	%
K2 Merchandising, Inc., a Delaware corporation	100	%
K2 (Switzerland) GmbH, a Swiss stock corporation	100	%
Brass Eagle, LLC, a Delaware limited liability company	100	%
Subsidiaries of Brass Eagle, LLC:
JT USA LLC, a Delaware limited liability company			100	%
Subsidiary of JT USA LLC:
JT Protective Gear LLC, a Delaware limited liability company			100	%
WGP, LLC, a Delaware limited liability company	100	%
Ex Officio LLC, a Delaware limited liability company	100	%
Subsidiary of Ex Officio LLC:
Ex Officio Internet Company, LLC, a Delaware limited liability company			100	%
Marmot Mountain, LLC, a Delaware limited liability company	100	%
Subsidiaries of Marmot Mountain, LLC:
Marmot Mountain Canada Ltd., a Canadian company			100	%
Marmot Mountain Europe GmbH, a German company			100	%
Marmot Mountain Overseas Ltd., a Hong Kong company			100	%
Sports Recreation Company Ltd., a Nevada corporation			100	%
Marker Völkl USA, Inc., a New Hampshire corporation	100	%
Cavoma Ltd., a Cayman Island corporation	100	%
Subsidiary of Cavoma Ltd.:
Cavoma LP, a Cayman Island limited partnership			100	%
Subsidiaries of Cavoma LP:
Clarance S.a.r.l., a Luxembourg corporation			100	%
Marker Völkl Sports Holding GmbH, a Swiss stock corporation			100	%
Subsidiaries of Marker Völkl Sports Holding GmbH:
Marker- Völkl -Austria GmbH, an Austrian company			100	%
Marker Technica Völkl GmbH, a German company			100	%
Zero Degree, a Swiss stock corporation			100	%
Völkl GmbH, a German company			100	%
Völkl Sports GmbH & Co. KG, a German company			100	%
Subsidiaries of Völkl Sports GmbH & Co. KG:
BIL Grudstucksverwaltungs-GmbH & Co. WEDA KG, a German company			95	%
Marker Völkl International GmbH, a Swiss company			100	%

	Percentage of Voting Securities Owned or Subject to Voting Control By
	Company		Other
Subsidiaries of Marker Völkl International GmbH:
Marker Japan, a Japanese corporation			100	%
Völkl Purchase & Service GmbH, a German company			100	%
Marker Deutschland GmbH, a German company			100	%
Subsidiary of Marker Deutschland GmbH:
Marker CZ s.r.o., a Czech company	100	%

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(1)	Registration Statement (Form S-3/A No. 333-104530) of K2 Inc.,
(2)	Registration Statement (Form S-3/A No. 333-108610) of K2 Inc.,
(3)	Registration Statement (Form S-3 No. 333-107631) of K2 Inc.,
(4)	Registration Statement (Form S-3 No. 333-114628) of K2 Inc.,
(5)	Registration Statement (Form S-4 No. 333-60448) of K2 Inc.,
(6)	Registration Statement (Form S-8 No. 333-126184) pertaining to the 2005 Long-Term Incentive Plan of K2 Inc.,
(7)	Registration Statement (Form S-8 No. 333-57137) pertaining to the 1994 Incentive Stock Option Plan of K2 Inc.,
(8)	Registration Statement (Form S-8 No. 333-89807) pertaining to the 1994 Stock Option Plan and Directors’ Non-Qualified Stock Option Plan of Ride, Inc.,
(9)	Registration Statement (Form S-8 No. 333-87744) pertaining to the 1999 Stock Option Plan of K2 Inc.,
(10)	Registration Statement (Form S-8 No. 333-104492) pertaining to the 2000 Non-Employee Directors’ Stock Option Plan of Rawlings Sporting Goods Company, Inc.,
(11)	Registration Statement (Form S-8 No. 333-104495) pertaining to the 1994 Long-Term Incentive Plan of Rawlings Sporting Goods Company, Inc.,
(12)	Registration Statement (Form S-8 No. 333-102590) pertaining to the 1994 Long-Term Incentive Plan, 1994 Non-Employee Directors’ Stock Plan, 2000 Non-Employee Directors’ Stock Plan and Amended and Restated Employment Agreement of Stephen M. O’Hara of Rawlings Sporting Goods Company, Inc.,
(13)	Registration Statement (Form S-8 No. 333-111549) pertaining to the 1997 Stock Option Plan and Employee Stock Purchase Plan of Brass Eagle Inc.,
(14)	Registration Statement (Form S-8 No. 333-112522) pertaining to 1998 Stock Option Plan of Fotoball USA, Inc.,
(15)	Registration Statement (Form S-8 No. 333-116518) pertaining to the 2004 Long-Term Incentive Plan of K2 Inc., and
(16)	Registration Statement (Form S-8 No. 333-118364) pertaining to the Incentive Stock Option Plan and 2000 Stock Option Plan of Marmot Mountain Ltd.;

of our reports dated March 9, 2006, with respect to the consolidated financial statements and schedule of K2 Inc., K2 Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of K2 Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

/S/ ERNST & YOUNG LLP

San Diego, California

March 9, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Richard J. Heckmann, Chairman and Chief Executive Officer of K2 Inc., certify that:

1. I have reviewed this annual report on Form 10-K of K2 Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2006

/s/  RICHARD J. HECKMANN

Richard J. Heckmann

Chairman and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Dudley W. Mendenhall, Senior Vice President and Chief Financial Officer of K2 Inc., certify that:

1. I have reviewed this annual report on Form 10-K of K2 Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2006

/s/  DUDLEY W. MENDENHALL

Dudley W. Mendenhall

Senior Vice President and Chief Financial Officer

EX-31.3

EXHIBIT 31.3

CERTIFICATION

I, J. Wayne Merck, President and Chief Operating Officer of K2 Inc., certify that:

1. I have reviewed this annual report on Form 10-K of K2 Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2006

/s/  J. WAYNE MERCK

J. Wayne Merck

President and Chief Operating Officer

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2005 of K2 Inc. (the “Company”) as filed with the U.S. Securities and Exchange Commission (the “Commission”) on the date hereof (the “Report”) and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of the Company certifies, that:

• the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 16, 2006	/s/  RICHARD J. HECKMANN
	Richard J. Heckmann
	Chairman and Chief Executive Officer
Date: March 16, 2006	/s/  DUDLEY W. MENDENHALL
	Dudley W. Mendenhall
	Senior Vice President and Chief Financial Officer
Date: March 16, 2006	/s/  J. WAYNE MERCK
	J. Wayne Merck
	President and Chief Operating Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Commission or its staff upon request.