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, including uPro GPS on-course measurement devices. 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 16 "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 six 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

Market conditions remained soft in the second quarter of 2009, resulting in a significant industry-wide decline in golf equipment purchases as compared to the second quarter of 2008. These conditions, along with unfavorable foreign currency exchange rates and a continued reduction in retail inventory levels, adversely affected the Company's second quarter net sales, which decreased 17% as compared to the second quarter of 2008. Despite these challenging macroeconomic conditions, the Company was able to gain market share in almost all product categories.

As a result of these market conditions, the aggressive pricing and promotional environment experienced in the U.S. and in some international markets during the first quarter of 2009 continued into the second quarter. In response to these conditions and a continued shift in consumer spending toward lower price point products, the Company implemented certain promotional sales programs and reduced prices on some of its products earlier in the season than in 2008. These actions, together with the decrease in sales volume, resulted in a decrease in the Company's gross profit as a percentage of net sales from 46.7% in the second quarter of 2008 to 36.3% in the second quarter of 2009. This decrease was partially offset by the continued benefits from the Company's gross margin initiatives.

In order to offset the decline in sales and gross margins, the Company continued to tightly manage its operating expenses. Despite an increase in operating expenses related to the Company's uPro acquisition, severance costs related to the previously announced reduction in force, and international expansion, the Company was still able to reduce its overall operating expenses by approximately 10% as compared to the second quarter of 2008. This decrease in operating expenses, however, only partially offset the effect of the macroeconomic conditions on the Company's sales and gross margins, and the Company's earnings for the second quarter of 2009 decreased to approximately $0.10 per share as compared to $0.58 per share in the second quarter of 2008.

In response to the weak global economic conditions, the Company has taken and will continue to take action to maximize its liquidity and to position the Company to take advantage of opportunities as the economy and golf industry recover. During the second quarter of 2009, the Company sold 1.4 million shares of its 7.50% Series B Cumulative Perpetual Convertible Preferred Stock and realized gross proceeds of $140 million. The Company used the proceeds to pay down its line of credit, which allowed the Company to remain in compliance with the financial covenants under the line of credit. The additional capital will also provide the Company with operational and financial flexibility to manage its business. Furthermore, while the economy is recovering, the Company intends to aggressively manage its variable costs, continue its gross margin initiatives, and take advantage of the strength of its 2009 product line to increase market share.

Three-Month Periods Ended June 30, 2009 and 2008

As a result of the weak global economy and its continued adverse effects on the golf industry in general, in addition to unfavorable foreign currency exchange rates, net sales decreased $63.8 million (17%) to $302.2 million for the three months ended June 30, 2009 compared to $366.0 million for the comparable period in the prior year. This decrease reflects a $47.8 million decline in net sales of the Company's golf clubs segment and a $16.0 million decline in net sales of the Company's golf balls segment as indicated below (dollars in millions):

                             Three Months Ended
                                  June 30,             Growth (Decline)
                              2009         2008      Dollars       Percent
              Net sales
              Golf clubs   $    244.0    $   291.8   $  (47.8 )        (16 )%
              Golf balls         58.2         74.2      (16.0 )        (22 )%

                           $    302.2    $   366.0   $  (63.8 )        (17 )%

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
                                         June 30,             Growth/(Decline)
                                     2009         2008      Dollars       Percent
        Net sales:
        United States             $    163.7    $   176.1   $  (12.4 )         (7 )%
        Europe                          42.5         71.8      (29.3 )        (41 )%
        Japan                           37.1         46.5       (9.4 )        (20 )%
        Rest of Asia                    21.3         22.1       (0.8 )         (4 )%
        Other foreign countries         37.6         49.5      (11.9 )        (24 )%

                                  $    302.2    $   366.0   $  (63.8 )        (17 )%

Net sales in the United States decreased $12.4 million to $163.7 million during the second 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 (27%) to $138.5 million during the second quarter of 2009 compared to the same quarter in 2008. The decrease in net sales in the United States and internationally is primarily attributable to the unfavorable economic conditions, including a $19.1 million decline in net sales as a result of unfavorable changes in foreign currency rates, primarily in Europe.

For the second quarter of 2009, gross profit decreased $61.3 million to $109.8 million from $171.1 million in the second quarter of 2008. Gross profit as a percentage of net sales ("gross margin") decreased to 36% in the second quarter of 2009 compared to 47% in the second 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 negatively affected by sales promotions, price reductions, and a shift in product mix to lower priced, lower margin golf products during the second quarter of 2009 compared to the second quarter of 2008. This decline in gross margin was partially offset by cost reductions on golf club component costs combined with more cost efficient golf club designs, 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 second quarter of 2009 was negatively affected by charges of $1.8 million related to the Company's gross margin improvement initiatives compared to $4.7 million for the comparable period in 2008, as well as $1.1 million in charges recognized in connection with the work force reductions announced in April 2009.

Selling expenses decreased $8.1 million (10%) to $72.4 million in the second quarter of 2009 compared to $80.5 million in the comparable period of 2008. As a percentage of net sales, selling expenses increased to 24% in the second quarter of 2009 compared to 22% in the second quarter of 2008. The dollar decrease in selling expenses was primarily due to cost reductions taken by the Company during the second quarter of 2009, which included decreases of $4.0 million in advertising and promotional activities, $1.1 million in employee costs and $1.2 million in travel and entertainment. In addition, employee incentive compensation expense decreased by $1.4 million.

General and administrative expenses decreased $3.4 million (15%) to $19.4 million in the second quarter of 2009 compared to $22.8 million in the comparable period of 2008. As a percentage of net sales, general and administrative expenses remained consistent at 6% in the second quarter of 2009 and 2008. The dollar decrease was primarily due to a decrease of $1.1 million in employee incentive compensation expense and $0.9 million in bad debt expense in addition to cost reductions taken by the Company during the second quarter of 2009, including a $0.9 million in employee costs.

Research and development expenses increased $0.3 million (4%) to $7.8 million in the second quarter of 2009 compared to $7.5 million in the comparable period of 2008. As a percentage of sales, research and development expenses increased to 3% in the second quarter of 2009 compared to 2% in the second quarter of 2008. The dollar increase was primarily due to increases in salaries and wages as a result of the Company's entrance into the golf electronics market through the acquisition of uPlay, LLC, which was completed in December 2008.

Other income (expense) improved by $3.1 million in the second quarter of 2009 to other income of $0.5 million compared to other expense of $2.6 million in the comparable period of 2008. This improvement is primarily attributable to an increase of $2.3 million as a result of net foreign currency gains reported for the second quarter of 2009 compared to net foreign currency losses reported in the second quarter of 2008. In addition, interest expense decreased by $0.4 million as a result of a decline in interest rates during the second quarter of 2009 compared to the same period in the prior year.

Net income for the second quarter of 2009 decreased to $6.9 million from net income of $37.1 million in the comparable period of 2008. Diluted earnings per share declined to $0.10 per share in the second quarter of 2009 compared to $0.58 per share in the second quarter of 2008. Net income and earnings per share for the three months ended June 30, 2009 and 2008 were negatively affected by after-tax charges of $1.1 million ($0.02 per share) and $3.0 million ($0.05 per share), respectively, as a result of costs incurred in connection with the Company's gross margin initiatives. In addition, net income and earnings per share were negatively affected by after-tax charges of $1.7 million ($0.03 per share) incurred during the second quarter of 2009 as a result of the workforce reductions announced in April 2009.

Golf Clubs and Golf Balls Segments Results for the Three Months Ended June 30, 2009 and 2008

The decrease in net sales during the second quarter of 2009 was primarily due to the weak global economy as discussed above and its adverse effects on consumer confidence and retailer demand, which negatively affected sales volumes and average selling prices as further discussed below. This decline in net sales was further exacerbated by an unfavorable shift in foreign currency rates due to the continued overall 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
                                        June 30,             Growth/(Decline)
                                    2009         2008      Dollars       Percent
         Net sales:
         Woods                   $     76.0    $    86.0   $  (10.0 )        (12 )%
         Irons                         72.2        100.0      (27.8 )        (28 )%
         Putters                       26.4         33.0       (6.6 )        (20 )%
         Accessories and other         69.4         72.8       (3.4 )         (5 )%

                                 $    244.0    $   291.8   $  (47.8 )        (16 )%

The $10.0 million (12%) decrease in net sales of woods to $76.0 million for the quarter ended June 30, 2009 was primarily attributable to a decrease in average selling prices partially offset by an increase in sales volume. The decease in average selling prices and the increase in sales volume was primarily due to a sales promotion where consumers could purchase selected fairway woods or hybrid club products for $1 dollar with the purchase of certain new 2009 driver products. In addition, average selling prices were negatively affected by sales of the current year FT-9 and FT-iQ drivers, which were offered at lower prices than their predecessors, the FT-5 and FT-i drivers, respectively, during the comparable period in the prior year.

The $27.8 million (28%) decrease in net sales of irons to $72.2 million for the quarter ended June 30, 2009 was primarily attributable to a decrease in both sales volume and average selling prices. The decrease in sales volume was affected by fewer irons products offered during the second quarter of 2009 compared to the same period in 2008. The decrease in average selling prices was primarily due to price reductions taken on the Company's older irons products, primarily Big Bertha irons, which were in the second year of their product lifecycles. Average selling prices were also negatively affected by an unfavorable shift in product mix from sales of the more premium Fusion irons during the second quarter of 2008 to sales of lower priced X-series irons during the second quarter of 2009.

The $6.6 million (20%) decrease in net sales of putters to $26.4 million for the quarter ended June 30, 2009 was primarily attributable to a reduction in both sales volume and average selling prices. The decrease in sales volume was affected by fewer putter models launched during 2009 compared to 2008. The decrease in average selling prices was primarily attributable to an unfavorable shift in product mix from sales of the higher priced Black Series putters during the second quarter of 2008 to sales of the lower priced Crimson putters during the second quarter of 2009.

The $3.4 million (5%) decrease in net sales of accessories and other products to $69.4 million was primarily attributable to a decline in sales of Callaway Golf apparel, golf bags and golf gloves, partially offset by sales of the Company's new uPro GPS on-course measurement device introduced in 2009 as well as an increase in sales of the Callaway Golf collection line of accessories.

Golf Balls Segment

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



                              Three Months Ended
                                   June 30,             Growth/(Decline)
                              2009          2008      Dollars       Percent
              Net sales:
              Golf balls   $     58.2    $     74.2   $  (16.0 )        (22 )%

The $16.0 million (22%) decrease in net sales of golf balls to $58.2 million for the quarter ended June 30, 2009 consisted of decreases of $12.3 million in Callaway Golf ball sales and $3.6 million in Top-Flite golf ball sales. These decreases were primarily due to 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 as a result of the launch of moderately priced golf balls in 2009 compared to more premium golf balls in 2008 for both the Callaway Golf and Top-Flite golf ball brands.

Segment Profitability

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



                                                 Three Months Ended
                                                      June 30,                        Growth (Decline)
                                             2009                 2008             Dollars         Percent
Income (loss) before provision for
income taxes
Golf clubs                                 $    25.4           $     67.2          $  (41.8 )          (62 )%
Golf balls                                      (1.0 )                8.3              (9.3 )         (112 )%

                                           $    24.4 (1)       $     75.5 (1)      $  (51.1 )          (68 )%

(1) Amounts shown are before the deduction of corporate general and administration expenses and other income (expenses) of $13.6 million and $17.8 million for the three months ended June 30, 2009 and 2008,

Pre-tax income in the Company's golf clubs operating segment decreased to $25.4 million for the quarter ended June 30, 2009 from $67.2 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 (i) sales promotions initiated during the second quarter of 2009, (ii) price reductions taken in 2009 on second year drivers, irons and fairway woods products, (iii) an unfavorable shift in product mix particularly within the irons and woods categories, and (iv) the impact of unfavorable changes in foreign currency rates during the second quarter of 2009 compared to the same 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, a favorable shift in golf club production to more cost efficient regions outside the U.S and an increase in labor efficiencies.

Pre-tax income in the Company's golf balls operating segment decreased to a pre-tax loss of $1.0 million for the quarter ended June 30, 2009 from pre-tax income of $8.3 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 various sales programs initiated during the second quarter of 2009 that offered extra golf ball products for the price of a regular dozen, partially offset by a favorable shift in golf ball production to more cost efficient regions outside the U.S.

Operating expenses related to both the golf club and golf ball segments decreased during the second quarter of 2009 compared to the same period in 2008 as a result of cost reductions taken by the Company, primarily related to advertising and promotional activities, employee costs, and travel and entertainment expenses as well as a decrease in employee incentive compensation expense.

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 pre-tax charges of $1.4 million and $0.4 million, respectively, during the second quarter of 2009 and $1.4 million and $3.4 million, respectively, during the comparable period in 2008. In addition, in connection with the workforce reductions announced in April 2009, the Company recorded pre-tax charges of $2.8 million, of which $2.2 million and $0.6 million were absorbed by the Company's golf clubs and golf balls operating segments, respectively, during the three months ended June 30, 2009.

Six-Month Periods Ended June 30, 2009 and 2008

As a result of the weak global economy and its continued adverse effects on the golf industry in general, in addition to unfavorable foreign currency exchange rates, net sales decreased $158.4 million (22%) to $574.1 million for the six months ended June 30, 2009 compared to a record $732.5 million for the comparable period in the prior year. This decrease reflects a $131.3 million decline in net sales of the Company's golf clubs segment and a $27.1 million decline in net sales of the Company's golf balls segment as indicated below (dollars in millions):

                              Six Months Ended
                                  June 30,             Growth (Decline)
                              2009         2008      Dollars       Percent
              Net sales
              Golf clubs   $    468.5   $    599.8   $ (131.3 )        (22 )%
              Golf balls        105.6        132.7      (27.1 )        (20 )%

                           $    574.1   $    732.5   $ (158.4 )        (22 )%

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):

                                     Six Months Ended
                                         June 30,             Growth/(Decline)
                                     2009         2008      Dollars       Percent
        Net sales:
        United States             $    305.0   $    360.5   $  (55.5 )        (15 )%
        Europe                          85.5        137.9      (52.4 )        (38 )%
        Japan                           84.4         99.9      (15.5 )        (16 )%
        Rest of Asia                    37.9         48.5      (10.6 )        (22 )%
        Other foreign countries         61.3         85.7      (24.4 )        (28 )%

                                  $    574.1   $    732.5   $ (158.4 )        (22 )%

Net sales in the United States decreased $55.5 million (15%) to $305.0 million during the six months ended June 30, 2009 compared to the same period in the prior year. The Company's sales in regions outside of the United States decreased $102.9 million (28%) to $269.1 million during the first half of 2009 compared to the same period in 2008. This decrease in net sales in the United States and internationally is primarily attributable to the adverse effects of the weak global economy, including a $41.6 million decline in net sales as a result of unfavorable changes in foreign currency rates, primarily in Europe.

For the six months ended June 30, 2009, gross profit decreased $120.6 million to $226.0 million from $346.6 million in the comparable period of 2008. Gross margin decreased to 39% in the first half of 2009 compared to 47% in the first half 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 during the first half of 2009 was affected by various golf club and golf ball sales promotions, price reductions taken on older golf clubs products combined with a shift in product mix to lower margin products within the golf club operating segment during the first half of 2009 compared to . . .