The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this report. See also "Important Notice to Investors" on page 2 of this report.

Results of Operations

Overview of Business and Seasonality

The Company designs, manufactures and sells high quality golf clubs and golf balls and also sells golf and lifestyle apparel, golf footwear, golf bags, gloves, eyewear and other golf-related accessories. The Company designs its products to be technologically advanced and in this regard invests a considerable amount in research and development each year. The Company's golf products are designed for golfers of all skill levels, both amateur and professional.

The Company has two operating segments that are organized on the basis of products, namely the golf clubs segment and golf balls segment. The golf clubs segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters. This segment also includes other golf-related accessories described above and royalties from licensing of the Company's trademarks and service marks as well as sales of pre-owned golf clubs. The golf balls segment consists primarily of Callaway Golf and Top-Flite golf balls. As discussed in Note 15 "Segment Information" to the Notes to Consolidated Condensed Financial Statements, the Company's operating segments exclude a significant amount of corporate general administrative expenses and other income (expense) not utilized by management in determining segment profitability.

In most of the Company's key markets, the game of golf is played primarily on a seasonal basis. Weather conditions generally restrict golf from being played year-round, except in a few markets, with many of the Company's on-course customers closing for the cold weather months. The Company's business is therefore also subject to seasonal fluctuations. In general, during the first quarter, the Company begins selling its products into the golf retail channel for the new golf season. This initial sell-in generally continues into the second quarter. The Company's second quarter sales are also significantly affected by the amount of reorder business of the products sold during the first quarter. The Company's third quarter sales are generally dependent on reorder business but are generally less than the second quarter as many retailers begin decreasing their inventory levels in anticipation of the end of the golf season. The Company's fourth quarter sales are generally less than the other quarters due to the end of the golf season in many of the Company's key markets. However, fourth quarter sales can be affected from time to time by the early launch of product introductions related to the new golf season of the subsequent year. This seasonality, and therefore quarter to quarter fluctuations, can be affected by many factors, including the timing of new product introductions. In general, however, because of this seasonality, a majority of the Company's sales and most, if not all, of its profitability generally occurs during the first half of the year.

Approximately half of the Company's business is conducted outside of the United States and is conducted in currencies other than the U.S. dollar. For reporting purposes, transactions conducted in foreign currencies must be translated into U.S. dollars based upon applicable foreign currency exchange rates. Fluctuations in foreign currency rates therefore can have a significant effect on the Company's reported financial results. In general, the Company's financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which the Company conducts its business. The Company's hedging activities can mitigate but do not eliminate the effects of the foreign currency fluctuations. As a result of the recent strengthening of the U.S. dollar, the translation of foreign currency exchange rates had a negative impact on the Company's financial results during the first three months in 2009. If the dollar continues to strengthen as compared to the currencies in which the Company conducts business, the Company's future reported financial results would continue to be adversely affected.

Executive Summary

The Company's financial results for the first quarter of 2009 were adversely affected by the ongoing weak global economy. These economic conditions have resulted in an overall decline in consumer discretionary

purchasing activity, including a significant industry-wide decline in golf equipment purchases. These economic conditions, along with a decline in retail traffic, have also caused golf retailers to reduce their inventory levels, which adversely affected the Company's sales of its new product line during the first quarter of 2009. In addition to these economic pressures, the decline in the Company's results of operations was further exacerbated by an unfavorable shift in foreign currency exchange rates as a result of the overall continued strengthening of the U.S. dollar in 2009 as it related to the currencies in which the Company conducts its business. As a result of these factors, the Company reported a 26% decrease in net sales for the first quarter of 2009 compared to the first quarter of 2008.

The economic pressures experienced during the first three months in 2009 have also led to a more aggressive pricing environment in the U.S. and in some international markets, driven in part by a shift in consumer spending toward lower price point products. In response to these pressures, the Company has taken price reductions on some of its older golf products earlier in the golf season than in 2008, as well as offered some lower priced items in the current year product line. All of these factors, together with the decrease in sales volume, contributed to an overall decrease in the Company's gross margins during the first quarter of 2009 compared to the same period in the prior year, which decrease was partially offset by the continued benefits from the Company's gross margin initiatives.

In response to these economic pressures, the Company implemented a cost reduction plan at the beginning of 2009 that included a freeze on salaries, a reduction of paid time off benefits and the suspension of the 401(k) Company matching contributions. Additionally, in April 2009, the Company announced the elimination of approximately 10% of its global positions in order to further mitigate the negative impacts of the economy on the Company's results of operations for the remainder of 2009.

In addition to aggressively managing costs in 2009, the Company intends to take action to position the Company to take advantage of opportunities once the economy recovers. In this regard, the Company intends to continue to invest in its gross margin initiatives and to take advantage of its strong 2009 product line to increase market share, which has already increased during the first quarter in most product categories worldwide.

Three-Month Periods Ended March 31, 2009 and 2008

As a result of the weak economic conditions and unfavorable foreign currency exchange rates discussed above (collectively, the "unfavorable economic conditions"), net sales decreased $94.5 million (26%) to $271.9 million for the three months ended March 31, 2009 as compared to $366.4 million for the comparable period in the prior year. This decrease reflects a $83.5 million decline in net sales of the Company's golf clubs segment and a $11.0 million decline in net sales of the Company's golf balls segment as set forth below (dollars in millions):

                              Three Months Ended
                                   March 31,            Growth (Decline)
                               2009         2008      Dollars      Percent
               Net sales
               Golf clubs   $    224.5    $   308.0   $  (83.5 )       (27 )%
               Golf balls         47.4         58.4      (11.0 )       (19 )%

                            $    271.9    $   366.4   $  (94.5 )       (26 )%

For further discussion of each operating segment's results, see "Golf Club and Golf Ball Segments Results" below.

Net sales information by region is summarized as follows (in millions):

                                     Three Months Ended
                                          March 31,            Growth/(Decline)
                                      2009         2008      Dollars      Percent
         Net sales:
         United States             $    141.3    $   184.4   $  (43.1 )       (23 )%
         Europe                          43.0         66.1      (23.1 )       (35 )%
         Japan                           47.4         53.3       (5.9 )       (11 )%
         Rest of Asia                    16.6         26.5       (9.9 )       (37 )%
         Other foreign countries         23.6         36.1      (12.5 )       (35 )%

                                   $    271.9    $   366.4   $  (94.5 )       (26 )%

Net sales in the United States decreased $43.1 million to $141.3 million during the first quarter of 2009 compared to the same period in the prior year. The Company's sales in regions outside of the United States decreased $51.4 million (28%) to $130.6 million during the first quarter of 2009 compared to the same quarter in 2008. This decrease in net sales in the United States and internationally is primarily attributable to the unfavorable economic conditions, including a $22.5 million decline in net sales as a result of unfavorable changes in foreign currency rates, primarily in Europe.

For the first quarter of 2009, gross profit decreased $59.3 million to $116.2 million from $175.5 million in the first quarter of 2008. Gross profit as a percentage of net sales ("gross margin") decreased to 43% in the first quarter of 2009 compared to 48% in the first quarter of 2008. This decline in gross margin is primarily attributable to the unfavorable economic conditions and the resulting reduction in sales volume as well as the impact of unfavorable changes in foreign currency rates. In addition, gross margin was affected by price reductions taken during the first quarter in 2009 on older golf clubs products combined with a shift in product mix within the golf club operating segment as a result of sales of lower priced golf club products during the first quarter of 2009 compared to the first quarter of 2008. This decline in gross margin was partially offset by cost reductions on golf club component costs as well as an overall improvement in manufacturing efficiencies as a result of the Company's gross margin improvement initiatives. See "Segment Profitability" below for further discussion of gross margins. Gross profit for the first quarter of 2009 was negatively affected by charges of $1.6 million related to the Company's gross margin improvement initiatives compared to $1.1 million for the comparable period in 2008.

Selling expenses decreased $5.5 million (7%) to $74.7 million in the first quarter of 2009 compared to $80.2 million in the same period of 2008. As a percentage of net sales, selling expenses increased to 27% in the first quarter of 2009 compared to 22% in the first quarter of 2008. The dollar decrease in selling expenses was primarily due a decrease of $1.7 million in employee incentive compensation expense as well as cost reductions taken by the Company during the first quarter in 2009, which included decreases of $0.9 million in employee costs, $1.3 million in travel and entertainment and $0.9 million in advertising and promotional activities. In addition, sales commissions decreased by $0.9 million as a result of the decline in net sales during the first three months in 2009 compared to the same time period in the prior year.

General and administrative expenses decreased $2.5 million (11%) to $20.0 million in the first quarter of 2009 compared to $22.5 million in the same period of 2008. As a percentage of net sales, general and administrative expenses increased to 7% in the first quarter of 2009 compared to 6% in the first quarter of 2008. The dollar decrease was primarily due to a decrease of $1.9 million in employee incentive compensation expense as well as cost reductions taken by the Company during the first quarter of 2009, including $0.7 million in employee costs.

Research and development expenses increased $0.2 million (2%) to $8.1 million in the first quarter of 2009 compared to $7.9 million in the comparable period of 2008. As a percentage of sales, research and development expenses increased to 3% in the first quarter of 2009 compared to 2% in the first quarter of 2008. The dollar increase was primarily due to research and development expenditures related to the Company's entrance into the golf electronics market through the acquisition of uPlay, LLC which was completed in December 2008.

Other income (expense) decreased by $3.1 million in the first quarter of 2009 to other expense of $2.4 million compared to other income of $0.7 million in the comparable period of 2008. This decline is primarily attributable to a decrease of $4.2 million as a result of net foreign currency losses reported for the first quarter of 2009 compared to net foreign currency gains reported in the first quarter of 2008. This decline was partially offset by a $0.7 million decrease in interest expense as a result of a decline in interest rates during the first quarter of 2009 compared to the same time period in the prior year.

Net income for the first quarter of 2009 decreased to $6.8 million from net income of $39.7 million in the comparable period of 2008. Diluted earnings per share declined to $0.11 per share in the first quarter of 2009 compared to $0.61 per share in the first quarter of 2008.

Golf Clubs and Golf Balls Segments Results for the Three Months Ended March 31, 2009 and 2008

The decrease in net sales during the first quarter of 2009 was primarily due to the unfavorable economic factors discussed above and its adverse effects on consumer confidence and retailer demand. This decline in net sales was further exacerbated by an unfavorable shift in foreign currency rates due to the continued strengthening of the U.S. dollar against the foreign currencies in which the Company conducts its business.

Golf Clubs Segment

Net sales information by product category is summarized as follows (in
millions):



                                    Three Months Ended
                                         March 31,            Growth/(Decline)
                                     2009         2008      Dollars      Percent
          Net sales:
          Woods                   $     79.9    $   116.6   $  (36.7 )       (31 )%
          Irons                         65.2         96.5      (31.3 )       (32 )%
          Putters                       27.7         34.6       (6.9 )       (20 )%
          Accessories and other         51.8         60.3       (8.5 )       (14 )%

                                  $    224.6    $   308.0   $  (83.4 )       (27 )%

The $36.7 million (31%) decrease in net sales of woods to $79.9 million for the three months ended March 31, 2009 was primarily attributable to the unfavorable economic conditions as defined above, which resulted in both a decrease in sales volume and a decrease in average selling prices in the first quarter of 2009 compared to the same period in the prior year. In addition, consumer spending shifted toward lower priced products during the first quarter of 2009, which negatively affected sales of the current year, higher-priced FT-iQ and FT-9 drivers. Average selling prices were negatively affected by price reductions taken on the Company's older Fusion Technology drivers, fairway woods and hybrids during the first quarter of 2009.

The $31.3 million (32%) decrease in net sales of irons to $65.2 million for the three months ended March 31, 2009 was primarily attributable to the unfavorable economic conditions as defined above, which resulted in a decrease in both sales volume and average selling prices in the first quarter of 2009 compared to the same period in the prior year. The decrease in sales volume was also affected by fewer irons products offered during the first quarter of 2009 compared to the same time period in 2008. The decrease in average selling prices was primarily due to price reductions taken on the Company's older irons products that were in the second year

of their product lifecycles, primarily Big Bertha irons. Average selling prices were also negatively affected by an unfavorable shift in product mix from sales of the more premium Fusion irons during the first quarter of 2008 to sales of lower priced X-series irons during the first quarter of 2009.

The $6.9 million (20%) decrease in net sales of putters to $27.7 million for the three months ended March 31, 2009 was primarily attributable to the unfavorable economic conditions as defined above, which resulted in a reduction in both sales volume and average selling prices in the first quarter of 2009 compared to the same period in the prior year. The decrease in sales volume was also affected by fewer putter models launched during the first quarter of 2009 compared to the first quarter of 2008. The decrease in average selling prices was primarily attributable an unfavorable shift in product mix from sales of the more premium Black Series putters during the first quarter of 2008 to sales of the lower priced Crimson putters during the first quarter of 2009.

The $8.5 million (14%) decrease in net sales of accessories and other products to $51.8 million was primarily attributable to the unfavorable economic conditions as defined above. This decrease was also affected by a decline in sales of Callaway Golf packaged junior golf club sets and Top-Flite packaged recreational sets, which were both launched during the first quarter of 2008, as well as decreases in sales of golf bags and footwear. These decreases were partially offset by sales of the Company's new uPro GPS on-course measurement device introduced in 2009.

Golf Balls Segment

Net sales information for the golf balls segment is summarized as follows
(dollars in millions):



                               Three Months Ended
                                   March 31,             Growth/(Decline)
                               2009          2008      Dollars      Percent
               Net sales:
               Golf balls   $     47.3    $     58.4   $  (11.1 )       (19 )%

The $11.1 million (19%) decrease in net sales of golf balls to $47.3 million for the three months ended March 31, 2009 was primarily due to decreases of $6.4 million in Callaway Golf ball sales and $4.6 million in Top-Flite golf balls sales. These decreases were primarily due to the unfavorable economic conditions as defined above, which resulted in a decrease in sales volume and average selling prices for both Callaway Golf and Top-Flite golf balls. The decrease in average selling prices resulted from a shift in mix to sales of lower priced golf ball models in 2009 for both the Callaway Golf and Top-Flite golf ball brands, compared to sales of higher priced golf balls for both brands during the same time period in 2008.

Segment Profitability

Profitability by operating segment is summarized as follows (dollars in
millions):



                                                  Three Months Ended
                                                       March 31,                      Growth (Decline)
                                               2009                2008            Dollars        Percent
Income before provision for income taxes
Golf clubs                                   $    28.3          $     76.2         $  (47.9 )         (63 )%
Golf balls                                        (1.7 )               4.4             (6.1 )        (139 )%

                                             $    26.6 (1)      $     80.6 (1)     $  (54.0 )         (67 )%

(1) Amounts shown are before the deduction of corporate general and administration expenses and other income (expenses) of $15.5 million and $15.0 million for the three months ended March 31, 2009 and 2008, respectively, which are not utilized by management in determining segment profitability. For further information on segment reporting see Note 15 to the Consolidated Condensed Financial Statements- "Segment Information" in this Form 10-Q.

Pre-tax income in the Company's golf clubs operating segment decreased to $28.3 million for the quarter ended March 31, 2009 from $76.2 million for the comparable period in the prior year. The decrease in the golf clubs operating segment pre-tax income was primarily attributable to a decline in net sales as discussed above combined with a decline in gross margin. The decline in gross margin is primarily due to price reductions taken during the first quarter in 2009 on second year woods products, a less favorable club product mix in 2009 as compared to 2008, and unfavorable changes in foreign currency rates during the first quarter of 2009 compared to the same time period in the prior year. These decreases in gross margin were partially offset by cost savings provided by the Company's gross margin improvement initiatives, including cost reductions on club components as a result of improved product designs, an increase in labor efficiencies and a favorable shift in golf club production to more cost efficient regions outside the U.S. In addition, operating expenses related to the golf club segment decreased as a result of cost reductions taken by the Company, primarily related to employee costs, travel and entertainment expenses and marketing activities during the first quarter in 2009.

Pre-tax income in the Company's golf balls operating segment decreased to a pre-tax loss of $1.7 million for the quarter ended March 31, 2009 from pre-tax income of $4.4 million for the comparable period in the prior year. The decrease in the golf balls operating segment pre-tax income is primarily due to a decline in net sales as discussed above as well as a decline in gross margin. The decline in gross margin was primarily due to an increase in golf ball material costs period over period combined with the absorption of fixed costs on lower golf ball production volumes during the first quarter of 2009 compared to the first quarter of 2008.

The Company has continued to actively implement the gross margin improvement initiatives, which were announced during the fourth quarter of 2006. As a result of these initiatives, the Company's golf clubs and golf balls operating segments absorbed charges of $1.2 million and $0.4 million, respectively, during the first quarter of 2009 and $0.8 million and $0.3 million, respectively, during the comparable period in 2008.

Financial Condition

The Company's cash and cash equivalents decreased $18.8 million (49%) to $19.5 million at March 31, 2009, from $38.3 million at December 31, 2008. Most of this decrease is due to the general seasonality of the Company's business. Generally, during the first quarter, the Company will rely more heavily on its credit facilities to fund operations as cash inflows from operations begin to increase during the second quarter as a result of cash collections from customers. During the three months ended March 31, 2009, the Company used its cash and cash equivalents as well as proceeds from its credit facilities of $57.1 million to fund cash used in operating activities of $65.7 million as well as approximately $10.0 million in capital expenditures. Management expects to fund the Company's future operations from cash provided by its operating activities combined with borrowings from its credit facilities, as deemed necessary (see further information on the Company's credit line below).

The Company's accounts receivable balance fluctuates throughout the year as a result of the general seasonality of the Company's business. The Company's accounts receivable balance will generally be at its highest during the first and second quarters and decline significantly during the third and fourth quarters as a result of an increase in cash collections and lower sales. As of March 31, 2009, the Company's net accounts receivable increased $119.1 million to $239.2 million from $120.1 million as of December 31, 2008. The increase in accounts receivable is primarily attributable to net sales of $271.9 million during the first quarter of 2009 compared to net sales of $171.3 million during the fourth quarter of 2008. The Company's net accounts receivable decreased $61.3 million as of March 31, 2009 compared to the Company's net accounts receivable as of March 31, 2008. This decrease was primarily attributable to a $94.6 million decrease in net sales during the first quarter of 2009 compared to the same period in the prior year.

The Company's inventory balance also fluctuates throughout the year as a result of the general seasonality of the Company's business. Generally, the Company's buildup of inventory levels begins during the fourth quarter and continues heavily into the first quarter as well as into the beginning of the second quarter in order to

meet demand during the height of the golf season. Inventory levels start to decline toward the end of the second quarter and are at their lowest during the third quarter. The Company's net inventory increased $4.8 million to $262.0 million as of March 31, 2009 compared to $257.2 million as of December 31, 2008. This increase is consistent with the seasonality of the Company's business, as it continues to prepare for increased demand into the second quarter during the peak of the golf season. The Company's net inventory decreased $2.3 million as of March 31, 2009 compared to the Company's net inventory as of March 31, 2008. Net inventories as a percentage of the trailing twelve months net sales increased to 25.6% as of March 31, 2009 from 22.9% as of March 31, 2008. The Company believes this increase is reasonable given the decline in net sales as a result of the unfavorable economic conditions as discussed in the results of operations above, combined with the general buildup of inventory during the first quarter in order to support demand during the upcoming golf season.

Liquidity and Capital Resources

Sources of Liquidity

The Company's principal sources of liquidity are cash flows provided by operations and the Company's credit facilities. The Company's cash flows from operations can be affected by many factors, including sales levels, inventory management, foreign currency exchange rates, and the collection of customer accounts. To the extent that the unfavorable global economic conditions result in a further decrease in sales, increased obsolete or excess inventory, or an increase in uncollectible customer accounts, or if the turmoil in the foreign currency markets results in unfavorable foreign currency exchange rates, the Company's cash flow liquidity would be negatively affected and the Company would need to obtain its required liquidity from its credit facilities or other sources.

. . .