SEC Filing | Topgolf Callaway Brands Corp.

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Callaway Golf Company

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

Commission file number 1-10962

Callaway Golf Company

(Exact name of registrant as specified in its charter)


Delaware		95-3797580
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2180 Rutherford Road, Carlsbad, CA 92008

(760) 931-1771

(Address, including zip code, and telephone number, including area code, of principal executive offices)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as of October 29, 2004 was 76,284,277.

Important Notice to Investors: Statements made in this report that relate to future plans, events, liquidity, financial results or performance including statements relating to future cash flows, as well as estimated charges to earnings, projected amortization expenses and contractual obligations, are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are based upon current information and expectations. Actual results may differ materially from those anticipated as a result of certain risks and uncertainties. For details concerning these and other risks and uncertainties, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Affecting Callaway Golf Company” contained in this report, as well as the Company’s other reports on Forms 10-K, 10-Q and 8-K subsequently filed with the Securities and Exchange Commission from time to time. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Investors should also be aware that while the Company from time to time does communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential commercial information. Furthermore, the Company has a policy against distributing or confirming financial forecasts or projections issued by analysts and any reports issued by such analysts are not the responsibility of the Company. Investors should not assume that the Company agrees with any report issued by any analyst or with any statements, projections, forecasts or opinions contained in any such report.

Callaway Golf Company Trademarks: The following marks and phrases, among others, are trademarks of Callaway Golf Company: A Passion For Excellence — Apex — Apex Edge — Apex Plus — Ben Hogan — BH design — Big Ben — Big Bertha — C design — CB1 — CTU 30 — Callaway — Callaway Connect — Callaway Golf — Chevron Device — Dawn Patrol — Daytripper — Demonstrably Superior and Pleasingly Different — Deuce — DOT — DFX — Divine Nine — Dual Force — Dual Zone — Eagle — Ely Would — ERC — Flying Lady — FTX — Fusion — Game Enjoyment System — Gems — GES — Ginty — Great Big Bertha — Hawk Eye — Heavenwood — Hogan — HX — Legacy — Legend — Magna — Molitor — Number One Putter In Golf — Odyssey — Pure Distance — RCH — Rossie — Rule 35 — S2H2 — Slickote — S.O.A.R. — Speed Slot — Steelhead — Strata — Stronomic — STS — T design — The Hawk — The Longest Balls — The Most Played Name In Golf — Trade In! Trade Up! — Top-Flite — Tour 100 — Tour Blue — Tour Edition — Tour Impact — Tour Straight — Tour Ultimate — TriForce — TriHot — Tru Bore — VFT — War Bird — Warbird — White Hot — White Steel — World’s Friendliest — X-12 — X-14 — X-16 — X-18 — XL — XL 2000 — XL 3000 — X-SPANN — XWT — Z-Balata.

CALLAWAY GOLF COMPANY

INDEX


PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Condensed Balance Sheets at September 30, 2004 and December 31, 2003	1
	Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2004 and 2003	2
	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2004 and 2003	3
	Consolidated Condensed Statement of Shareholders’ Equity for the nine months ended September 30, 2004	4
	Notes to Consolidated Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	46
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
EXHIBIT 10.47
EXHBIIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

CALLAWAY GOLF COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)


				September 30,			December 31,
				2004			2003

ASSETS
Current assets:
	Cash and cash equivalents			$	67,518		$	47,340
	Accounts receivable, net				114,857			100,664
	Inventories, net				161,462			185,389
	Deferred income taxes				38,643			36,707
	Income taxes receivable				26,982			—
	Other current assets				13,855			13,362

		Total current assets			423,317			383,462
Property, plant and equipment, net					139,707			164,763
Intangible assets, net					147,936			149,635
Goodwill					29,168			20,216
Deferred income taxes					—			12,289
Other assets					15,193			18,201

				$	755,321		$	748,566


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and accrued expenses			$	75,528		$	79,787
	Accrued employee compensation and benefits				25,990			25,544
	Accrued warranty expense				12,577			12,627
	Capital leases, current portion				53			240
	Income taxes payable				—			11,962

			Total current liabilities		114,148			130,160
Long-term liabilities:
	Deferred compensation				9,055			8,947
	Energy derivative valuation account				19,922			19,922
	Deferred income taxes				553			—
	Capital leases, long-term portion				28			154
Commitments and contingencies (Note 10)
Shareholders’ equity:
	Preferred Stock, $.01 par value, 3,000,000 shares authorized, none issued and outstanding at September 30, 2004 and December 31, 2003				—			—
	Common Stock, $.01 par value, 240,000,000 shares authorized, 83,781,944 and 83,710,094 issued at September 30, 2004 and December 31, 2003, respectively				838			837
	Paid-in capital				352,918			400,939
	Unearned compensation				(702	)		—
	Retained earnings				470,574			466,441
	Accumulated other comprehensive income				6,655			2,890
	Less: Grantor Stock Trust held at market value, 7,311,678 shares and 8,702,577 shares at September 30, 2004 and December 31, 2003, respectively				(77,284	)		(146,638	)

					752,999			724,469
	Less: Common Stock held in treasury, at cost, 8,497,667 and 8,144,667 shares at September 30, 2004 and December 31, 2003, respectively				(141,384	)		(135,086	)

			Total shareholders’ equity		611,615			589,383

				$	755,321		$	748,566

The accompanying notes are an integral part of these financial statements.

CALLAWAY GOLF COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)



			Three Months Ended										Nine Months Ended
			September 30,										September 30,


			2004					2003					2004					2003


Net sales			$	128,457		100	%	$	153,634		100	%	$	790,151		100	%	$	667,430	100	%
Cost of sales				102,386		80	%		83,414		54	%		470,053		59	%		332,878	50	%

	Gross profit			26,071		20	%		70,220		46	%		320,098		41	%		334,552	50	%
Operating expenses:
	Selling expenses			58,300		45	%		47,462		31	%		203,991		26	%		149,527	22	%
	General and administrative expenses			23,219		18	%		14,684		10	%		67,914		9	%		43,154	6	%
	Research and development expenses			7,855		6	%		7,734		5	%		23,523		3	%		20,648	3	%

		Total operating expenses		89,374		70	%		69,880		45	%		295,428		37	%		213,329	32	%

Income (loss) from operations				(63,303	)	(49)	%		340		0	%		24,670		3	%		121,223	18	%
Other income (expense), net				1,091					1,056					(230	)				1,345

Income (loss) before income taxes				(62,212	)	(48)	%		1,396		1	%		24,440		3	%		122,568	18	%
Provision for (benefit from) income taxes				(26,317	)				(938	)				6,075					43,613

Net income (loss)			$	(35,895	)	(28)	%	$	2,334		2	%	$	18,365		2	%	$	78,955	12	%

Earnings (loss) per common share:
	Basic		$	(0.53	)			$	0.04				$	0.27				$	1.20
	Diluted		$	(0.53	)			$	0.03				$	0.27				$	1.19
Weighted-average shares outstanding:
	Basic			67,847					66,261					67,641					65,936
	Diluted			67,847					66,808					68,235					66,295
Dividends declared per share			$	0.07				$	0.07				$	0.21				$	0.21

The accompanying notes are an integral part of these financial statements.

CALLAWAY GOLF COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



				Nine Months Ended
				September 30,

				2004			2003

Cash flows from operating activities:
	Net income			$	18,365		$	78,955
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			39,027			30,447
		Loss on disposal of long-lived assets			4,270			1,580
		Tax benefit (reversal of benefit) from exercise of stock options			1,882			(1,623	)
		Non-cash compensation			101			15
		Net non-cash foreign currency hedging losses			1,723			2,628
		Net losses from sale of marketable securities			—			98
		Deferred income taxes			12,254			422
		Changes in assets and liabilities, net of effects of acquisition:
			Accounts receivable, net		(13,710	)		(40,009	)
			Inventories, net		26,111			39,767
			Other assets		4,238			(1,290	)
			Accounts payable and accrued expenses		(9,286	)		1,272
			Accrued employee compensation and benefits		334			264
			Accrued warranty expense		(51	)		151
			Income taxes payable (receivable)		(39,234	)		26,598
			Deferred compensation		108			828

	Net cash provided by operating activities				46,132			140,103

Cash flows from investing activities:
	Business acquisitions, net of cash acquired				(9,204	)		(165,147	)
	Capital expenditures				(16,065	)		(4,826	)
	Proceeds from sale of capital assets				415			114
	Proceeds from sale of marketable securities				—			24

	Net cash used in investing activities				(24,854	)		(169,835	)

Cash flows from financing activities:
	Issuance of Common Stock				18,649			12,875
	Acquisition of Treasury Stock				(6,298	)		(3,220	)
	Dividends paid, net				(14,232	)		(13,863	)
	Payments on financing arrangements				—			(2,590	)

	Net cash used in financing activities				(1,881	)		(6,798	)

Effect of exchange rate changes on cash and cash equivalents					781			913

Net increase (decrease) in cash and cash equivalents					20,178			(35,617	)
Cash and cash equivalents at beginning of period					47,340			108,452

Cash and cash equivalents at end of period				$	67,518		$	72,835

Non-cash financing activities:
	Issuance of restricted stock			$	800		$	—
	Liabilities assumed in connection with acquisition			$	4,380		$	20,588

The accompanying notes are an integral part of these financial statements.

CALLAWAY GOLF COMPANY

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)


														Accumulated
	Common Stock													Other						Treasury Stock
					Paid-in			Unearned			Retained			Comprehensive
	Shares		Amount		Capital			Compensation			Earnings			Income			GST			Shares			Amount			Total

Balance, December 31, 2003		83,710	$	837	$	400,939		$	—		$	466,441		$	2,890		$	(146,638	)		(8,145	)	$	(135,086	)	$	589,383

Exercise of stock options		19		—		(3,713	)		—			—			—			17,705			—			—			13,992
Tax benefit from exercise of stock options		—		—		1,882			—			—			—			—			—			—			1,882
Issuance of restricted common stock		53		1		800			(801	)		—			—			—			—			—			—
Acquisition of treasury stock		—		—		—			—			—			—			—			(353	)		(6,298	)		(6,298	)
Compensatory stock and stock options		—		—		2			99			—			—			—			—			—			101
Employee stock purchase plan		—		—		(1,302	)		—			—			—			5,959			—			—			4,657
Cash dividends declared		—		—		—			—			(14,232	)		—			—			—			—			(14,232	)
Adjustment of Grantor Stock Trust shares to market value		—		—		(45,690	)		—			—			—			45,690			—			—			—
Equity adjustment from foreign currency translation		—		—		—			—			—			(16	)		—			—			—			(16	)
Unrealized gain on cash flow hedges, net of tax		—		—		—			—			—			3,781			—			—			—			3,781
Net income		—		—		—			—			18,365			—			—			—			—			18,365

Balance, September 30, 2004		83,782	$	838	$	352,918		$	(702	)	$	470,574		$	6,655		$	(77,284	)		(8,498	)	$	(141,384	)	$	611,615

The accompanying notes are an integral part of these financial statements.

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)


1.	Basis of Presentation

The accompanying unaudited interim financial statements have been prepared by Callaway Golf Company (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission. These consolidated condensed financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented. Interim operating results are not necessarily indicative of operating results for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. Certain prior period amounts have been reclassified to conform with the current period presentation.


2.	Business Acquisitions


	*FrogTrader Stock Purchase*

On May 28, 2004, the Company acquired all of the issued and outstanding shares of stock of FrogTrader, Inc. (“FrogTrader”). The Company’s consolidated statements of operations include the financial results of FrogTrader for the period from the acquisition date of May 28, 2004 through September 30, 2004. FrogTrader has partnered with Callaway Golf and its participating retailers for the past two years to develop the Trade In! Trade Up! program. The Company acquired FrogTrader to better position the Company to stimulate purchases of new clubs by growing the Trade In! Trade Up! program and to enable the Company to better manage the distribution of pre-owned golf clubs and the Callaway Golf brand.

The FrogTrader acquisition was accounted for as a purchase in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” Under SFAS No. 141, the aggregate cost of the acquired stock was $15,175,000, which included transactional costs of approximately $215,000, and was paid entirely in cash. The aggregate acquisition costs exceeded the estimated fair value of the net assets acquired. As a result, the Company has recorded goodwill of $8,863,000, none of which is deductible for tax purposes. In accordance with the applicable accounting rules, a full determination of the allocation of the aggregate acquisition costs will be made upon a final assessment of the estimated fair value of the acquired net assets. As of September 30, 2004, we have recorded the fair values of FrogTrader’s internally developed software and certain customer information based on a preliminary assessment from an outside valuation company received during the quarter. It is anticipated that the final assessment will be completed prior to the

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

end of 2004 and will not differ materially from the preliminary allocation. The preliminary allocation as of September 30, 2004 is as follows (in thousands):


Assets:
	Cash		$	5,971
	Accounts receivable			85
	Inventory			1,962
	Other current assets			312
	Property, plant and equipment			258
	Internally developed software			1,200
	Customer lists			904
	Goodwill			8,863
Liabilities:
	Current liabilities			(4,373	)
	Long-term liabilities			(7	)

		Total net assets acquired	$	15,175


	*Top-Flite Asset Purchase*

On September 15, 2003, the Company acquired through a court-approved sale substantially all of the golf-related assets of TFGC Estate Inc. (f/k/a The Top-Flite Golf Company, f/k/a Spalding Sports Worldwide, Inc.) and thereafter completed the valuation and settlement of certain additional assets related to the international operations of TFGC Estate Inc. (the “Top-Flite Acquisition”). The settlement of the international assets was effective October 1, 2003. Assets located in the United States were acquired by the Company’s newly-formed, wholly-owned subsidiary, The Top-Flite Golf Company. Foreign assets were acquired by the Company’s existing wholly-owned subsidiaries in the relevant countries.

The acquisition of the Top-Flite assets provided a unique opportunity to significantly increase the size and profitability of the Company’s golf ball business and the Company was able to purchase the acquired assets at less than their estimated fair value. The Company paid the cash purchase price for the Top-Flite Acquisition from cash on hand. The Company intends to continue the U.S. and foreign operations of the acquired golf assets, including the use of acquired assets in the manufacturing of golf balls and golf clubs and the commercialization of the Top-Flite and Ben Hogan brands, patents and trademarks.

The Company’s consolidated statements of operations include Top-Flite’s results of operations for the three and nine months ended September 30, 2004. For the three and nine month periods ended September 30, 2003, the Company’s consolidated statements of operations included only 15 days of Top-Flite’s results of operations in the U.S.

The Top-Flite Acquisition was accounted for as a purchase in accordance with SFAS No. 141. Under SFAS No. 141, the estimated aggregate cost of the acquired assets is $182,960,000, which includes cash paid of $154,145,000, transaction costs of approximately $6,331,000, and assumed liabilities of approximately $22,484,000. The estimated fair value of the net assets exceeded the estimated aggregate acquisition costs. As

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

a result, the Company was required to reduce the carrying value of the acquired long-term assets on a pro rata basis. The allocation of the aggregate acquisition costs as of September 30, 2004 is as follows (in thousands):


Assets Acquired:
	Accounts receivable		$	45,360
	Inventory			32,746
	Other assets			1,147
	Property, plant and equipment			55,775
	Intangible assets (Note 6)			47,932
Liabilities Assumed:
	Current liabilities			(17,398	)
	Long-term liabilities			(5,086	)

		Total net assets acquired	$	160,476

During the three and nine month periods ended September 30, 2004, the Company recorded pre-tax charges of $7,468,000 and $23,264,000, respectively, associated with the integration of the Callaway Golf and Top-Flite operations. The integration charges included $2,860,000 and $8,558,000 of accelerated depreciation for the three and nine month periods ended September 30, 2004, respectively, associated with golf ball manufacturing equipment that will no longer be in use upon completion of the Company’s integration efforts to consolidate the Callaway Golf and Top-Flite golf ball manufacturing operations. The integration charges also include employee severance and relocation costs, professional fees and building consolidation expenses.


3.	Accounting for Stock-Based Compensation

The Company accounts for its stock-based employee compensation plans using the recognition and measurement principles (intrinsic value method) of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company recorded compensation expense of $99,000 during the three and nine months ended September 30, 2004 as a result of restricted stock awards granted in connection with the FrogTrader acquisition. For the three and nine months ended September 30, 2003, the Company recorded compensation expense of $0 and $15,000 as a result of the restricted stock awards that were granted in 1998 and which vested in January 2003. All other employee stock-based awards were stock options which were granted with an exercise price equal to the market value of the underlying common stock on the date of grant and no compensation cost is reflected in net income from operations for those awards. Pro forma disclosures of net income (loss) and earnings (loss) per share, as if the fair value-based recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” had

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

been applied in measuring stock-based employee compensation expense, are as follows (in thousands, except per share data):



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2004			2003			2004			2003

Net income (loss), as reported		$	(35,895	)	$	2,334		$	18,365		$	78,955
	Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects		57			—			57			10
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(3,087	)		(2,351	)		(7,933	)		(6,968	)

Pro forma net income (loss)		$	(38,925	)	$	(17	)	$	10,489		$	71,997

Earnings (loss) per common share:
	Basic — as reported	$	(0.53	)	$	0.04		$	0.27		$	1.20
	Basic — pro forma	$	(0.57	)	$	0.00		$	0.16		$	1.09
	Diluted — as reported	$	(0.53	)	$	0.03		$	0.27		$	1.19
	Diluted — pro forma	$	(0.57	)	$	0.00		$	0.15		$	1.09

The pro forma amounts reflected above may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense as the options vest and additional options may be granted in future years. The fair value of employee stock options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2004		2003		2004		2003

Dividend yield		1.9%		1.8%		1.9%		1.8%
Expected volatility		42.1%		47.3%		42.1%		48.3%
Risk free interest rates		1.46%-4.09%		1.36%-2.18%		1.46%-4.09%		1.22%-3.93%
Expected lives		3-4 years		3-4 years		3-4 years		3-4 years

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of grants under the Company’s employee stock-based compensation plans.


4.	Marketable Securities and Other Investments

The Company determines the appropriate classification of its investments at the time of purchase and reevaluates such determination at each balance sheet date. Trading securities are carried at quoted fair value, with unrealized gains and losses included in earnings. Available-for-sale securities are carried at quoted fair value, with unrealized gains and losses reported in shareholders’ equity as a component of accumulated other comprehensive income. The Company held no marketable securities at September 30, 2004 or 2003. Investments in limited partnerships that do not have readily determinable fair values are stated at cost and are

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

reported in other assets. Realized gains and losses are determined using the specific identification method and are included in other income (expense), net.


5.	Inventories

Inventories, net are summarized below (in thousands):


	September 30,			December 31,
	2004			2003

Raw materials	$	68,515		$	76,122
Work-in-process		6,096			9,129
Finished goods		101,758			118,744

		176,369			203,995
Reserve for excess and obsolescence		(14,907	)		(18,606	)

Total inventories, net	$	161,462		$	185,389


6.	Goodwill and Intangible Assets

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” As a result of adopting SFAS No. 142, the Company’s goodwill and certain intangible assets are no longer amortized, but are subject to an annual impairment test. The following sets forth the intangible assets by major asset class (in thousands):



				September 30, 2004						December 31, 2003
		Useful
		Life				Accumulated		Net Book				Accumulated		Net Book
		(Years)		Gross		Amortization		Value		Gross		Amortization		Value

Non-amortizing:
	Trade name, trademark and trade dress⁽¹⁾⁽²⁾			$	121,794	$	—	$	121,794	$	120,605	$	—	$	120,605
Amortizing:
	Patents⁽³⁾		3-16		33,165		8,968		24,197		32,277		7,251		25,026
	Other⁽²⁾⁽⁴⁾		1-9		3,080		1,135		1,945		4,386		382		4,004

Total intangible assets				$	158,039	$	10,103	$	147,936	$	157,268	$	7,633	$	149,635


⁽¹⁾	Acquired through acquisition transactions.

⁽²⁾	Changes in gross value during the nine months ended September 30, 2004 were affected by the final assessment of the estimated fair value of the acquired Top-Flite assets. See Note 2.

⁽³⁾	The gross balance of patents at September 30, 2004 and December 31, 2003 acquired during business acquisition transactions was $19,853,000 and $19,114,000, respectively. The accumulated amortization balance of acquired patents at September 30, 2004 and December 31, 2003, was $4,104,000 and $3,131,000, respectively.

⁽⁴⁾	The gross balance of other intangibles at September 30, 2004 and December 31, 2003 acquired during business acquisition transactions was $2,987,000 and $4,293,000, respectively. The accumulated amortization balance of other acquired intangibles at September 30, 2004 and December 31, 2003 was $1,103,000 and $364,000, respectively.

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Intangible assets with definite lives are amortized using the straight-line method over periods ranging from 1 to 16 years. During the three months ended September 30, 2004 and 2003, aggregate amortization expense for such assets was approximately $705,000 and $352,000, respectively. During the nine months ended September 30, 2004 and 2003, aggregate amortization expense was approximately $2,470,000 and $1,055,000, respectively. Amortization expense related to intangible assets at September 30, 2004 in each of the next five fiscal years and beyond is estimated to be incurred as follows (in thousands):


Remainder of 2004	$	693
2005		2,754
2006		2,703
2007		2,700
2008		2,659
2009		2,456
Thereafter		12,177

	$	26,142

Changes in goodwill during the nine months ended September 30, 2004 were primarily due to the acquisition of FrogTrader (see Note 2 for further details) which resulted in approximately $8,863,000 of goodwill. The remaining change of $89,000 related to foreign currency exchange rate fluctuations.


7.	Financing Arrangements

At September 30, 2004, the Company had a $100,000,000 revolving line of credit with Bank of America, N.A. and certain other lenders (the “2003 Line of Credit”). At September 30, 2004, there were no borrowings outstanding under the 2003 Line of Credit and the Company was in compliance with all of the covenants and other terms thereof. The 2003 Line of Credit was scheduled to expire by its terms on November 9, 2004.

Effective November 5, 2004, the Company amended and restated the 2003 Line of Credit to provide for a new five year revolving line of credit from Bank of America, N.A. and certain other lenders, providing for revolving loans of up to $300,000,000, of which $250,000,000 consisted of commitments available at the closing and the balance of which are available to the Company upon the satisfaction of certain conditions. Actual borrowing availability under the new credit facility is limited effectively by the financial covenants set forth in the new credit facility. As of the date of this report, the maximum amount that could be borrowed under the new credit facility was approximately $134,000,000. As of the date of this report, no borrowings were outstanding under the new credit facility and the Company was in compliance with the covenants and other terms thereof.

In connection with the new credit facility, the Company is required to pay certain fees, including an unused commitment fee of between 17.5 to 35.0 basis points per annum of the unused commitment amount, with the exact amount determined based upon the Company’s consolidated leverage ratio and trailing four quarters EBITDA (each as defined in the new credit facility). Outstanding borrowings under the new credit facility accrue interest at the Company’s election, based upon the Company’s consolidated leverage ratio and trailing four quarters EBITDA, of (i) the higher of (a) the Federal Funds Rate plus 50.0 basis points or (b) Bank of America’s prime rate, and in either case plus a margin of 00.0 to 75.0 basis points or (ii) the Eurodollar Rate (as defined in the new credit facility) plus a margin of 75.0 to 200.0 basis points. The Company has agreed that repayment of amounts under the new credit facility will be guaranteed by certain of the Company’s domestic subsidiaries and will be secured by substantially all of the assets of the Company and such guarantor subsidiaries. The collateral (other than 65% of the stock of the Company’s foreign subsidiaries) will be released upon the satisfaction of certain financial conditions.

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The new credit facility agreement requires the Company to maintain certain financial covenants, including a maximum leverage ratio, a minimum asset coverage ratio, a maximum capitalization ratio, a minimum interest coverage ratio and a minimum consolidated EBITDA. The new credit facility agreement also includes certain other restrictions, including restrictions limiting additional indebtedness, dividends, stock repurchases, transactions with affiliates, capital expenditures, asset sales, acquisitions, mergers, liens and encumbrances and other restrictions that are customary in credit facility agreements of this type. The new credit facility also contains other customary provisions, including affirmative covenants, representations and warranties and events of default.

The above summary of the provisions of the new credit facility is qualified in its entirety by the terms of the new credit facility, as set forth in Exhibit 10.48 to this Form 10-Q.

In connection with the Top-Flite Acquisition, the Company assumed capital lease obligations which had an aggregate outstanding balance of $81,000 at September 30, 2004, related primarily to computer and telecommunication systems. The lease agreements expire in 2006.


8.	Product Warranty

The Company has a stated two-year warranty policy for its golf clubs, although the Company’s historical practice has been to honor warranty claims well after the two-year stated warranty period. The Company’s policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded. In estimating its future warranty obligations the Company considers various relevant factors, including the Company’s stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty. The following table provides a reconciliation of the activity related to the Company’s reserve for warranty expense (in thousands):



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2004			2003			2004			2003

Beginning balance		$	13,468		$	14,580		$	12,627		$	13,464
	Provision		2,123			2,440			9,270			10,141
	Claims paid/costs incurred		(3,014	)		(3,405	)		(9,320	)		(9,990	)

Ending balance		$	12,577		$	13,615		$	12,577		$	13,615


9.	Earnings Per Share

A reconciliation of the weighted average shares used in the basic and diluted earnings (loss) per common share computations for the three and nine months ended September 30, 2004 and 2003 is presented below (in thousands):



			Three Months Ended				Nine Months Ended
			September 30,				September 30,

			2004		2003		2004		2003

Weighted-average shares outstanding:
	Weighted-average shares outstanding — Basic			67,847		66,261		67,641		65,936
		Dilutive securities		—		547		594		359

	Weighted-average shares outstanding — Diluted			67,847		66,808		68,235		66,295

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Options with an exercise price in excess

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

of the average market value of the Company’s common stock during the period have been excluded from the calculation as their effect would be antidilutive. Additionally, potentially dilutive securities are excluded from the computation of earnings per share in periods in which a net loss is reported as their effect would be antidilutive. Thus, weighted–average shares outstanding — Diluted is the same as weighted-average shares outstanding — Basic in periods when a net loss is reported. For the three months ended September 30, 2004 and 2003, options outstanding totaling 13,049,000 and 9,846,000 shares, respectively, were excluded from the calculations, as their effect would have been antidilutive. For the nine months ended September 30, 2004 and 2003, options outstanding totaling 9,634,000 and 11,160,000 shares, respectively, were excluded from the calculations, as their effect would have been antidilutive.


10.	Commitments and Contingencies


	*Legal Matters*

In conjunction with the Company’s program of enforcing its proprietary rights, the Company has initiated or may initiate actions against alleged infringers under the intellectual property laws of various countries, including, for example, the U.S. Lanham Act, the U.S. Patent Act, and other pertinent laws. Defendants in these actions may, among other things, contest the validity and/or the enforceability of some of the Company’s patents and/or trademarks. Others may assert counterclaims against the Company. Historically, these matters individually and in the aggregate have not had a material adverse effect upon the financial position or results of operations of the Company. It is possible, however, that in the future one or more defenses or claims asserted by defendants in one or more of those actions may succeed, resulting in the loss of all or part of the rights under one or more patents, loss of a trademark, a monetary award against the Company or some other material loss to the Company. One or more of these results could adversely affect the Company’s overall ability to protect its product designs and ultimately limit its future success in the marketplace.

In addition, the Company from time to time receives information claiming that products sold by the Company infringe or may infringe patent or other intellectual property rights of third parties. It is possible that one or more claims of potential infringement could lead to litigation, the need to obtain licenses, the need to alter a product to avoid infringement, a settlement or judgment, or some other action or material loss by the Company.

In the fall of 1999 the Company adopted a unilateral sales policy called the “New Product Introduction Policy” (“NPIP”). The NPIP sets forth the terms on which Callaway Golf chooses to do business with its customers with respect to the introduction of new products. The NPIP has been the subject of several legal challenges. Currently pending cases, described below, include Lundsford v. Callaway Golf, Case No. 2001-24-IV, pending in Tennessee state court (“Lundsford I”); Foulston v. Callaway Golf, Case No. 02C3607, pending in Kansas state court; Murray v. Callaway Golf Sales Company, Case No. 3:04CV274-H, pending in the United States Court for the Western District of North Carolina; and Lundsford v. Callaway Golf, Civil Action No. 3:04-cv-442 (“Lundsford II”).

Lundsford I was filed on April 6, 2001, and seeks to assert a punitive class action by plaintiff on behalf of himself and on behalf of consumers in Tennessee and Kansas who purchased select Callaway Golf products covered by the NPIP on or after March 30, 2000. Plaintiff asserts violations of Tennessee and Kansas antitrust and consumer protection laws and is seeking damages, restitution and punitive damages. The court has not made any determination that the case may proceed in the form of a class action.

In Foulston, filed on November 4, 2002, plaintiff seeks to assert an alleged class action on behalf of Kansas consumers who purchased Callaway Golf products covered by the NPIP and seeks damages and restitution for the alleged class under Kansas law. The trial court in Foulston stayed the case in light of

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Lundsford I. The Foulston court has not made any determination that the case may proceed in the form of a class action.

The complaint in Murray was filed on May 14, 2004, alleging that a retail golf business was damaged by the alleged refusal of Callaway Golf Sales Company to sell certain products after the store violated the NPIP, and by the failure to permit plaintiff to sell Callaway Golf products on the internet. The proprietor seeks compensatory and punitive damages associated with the failure of his retail operation. Callaway Golf removed the case to the United States District Court for the Western District of North Carolina, and has answered the complaint denying liability.

Lundsford II was filed on September 28, 2004 in the United States District Court for the Eastern District of Tennessee. The complaint in Lundsford II asserts that the NPIP constitutes an unlawful resale price agreement and an attempt to monopolize golf club sales prohibited by federal antitrust law. The complaint also alleges a violation of the state antitrust laws of Tennessee, Kansas, South Carolina and Oklahoma. Lundsford II seeks to assert a nationwide class action consisting of all persons who purchased Callaway Golf clubs subject to the NPIP on or after March 30, 2000. Plaintiff seeks treble damages under the federal antitrust laws, compensatory damages under state law, and an injunction. The Lundsford II court has not made a determination that the case may proceed in the form of a class action.

On October 3, 2001, the Company filed suit in the United States District Court for the District of Delaware, Civil Action No. 01-669, against Dunlop Slazenger Group Americas, Inc., d/b/a Maxfli (“Maxfli”), for infringement of a golf ball aerodynamics patent owned by the Company, U.S. Patent No. 6,213,898 (the “Aerodynamics Patent”). The Company later amended its complaint to add a claim that Maxfli engaged in false advertising by claiming that its A10 golf balls were the “longest ball on tour.” Maxfli answered the complaint denying patent infringement and false advertising, and also filed a counterclaim asserting that former Maxfli employees hired by the Company had disclosed confidential Maxfli trade secrets to the Company, and that the Company had used that information to enter the golf ball business. In the counterclaim, Maxfli sought compensatory damages of $30,000,000; punitive damages equal to two times the compensatory damages; prejudgment interest; attorneys’ fees; a declaratory judgment; and injunctive relief. On November 12, 2003, pursuant to an agreement between the Company and Maxfli, the court dismissed the Company’s claim for infringement of the Aerodynamics Patent. On May 13, 2004, the Court granted the Company’s motion for summary judgment, eliminating a portion of Maxfli’s counterclaim and reducing Maxfli’s compensatory damages claim from approximately $30,000,000 to $18,500,000. The case was tried to a jury beginning on August 2, 2004. On August 12, 2004, the jury returned a verdict of $2,200,000 in favor of the Company based upon its finding that Maxfli willfully engaged in false advertising. The jury also rejected Maxfli’s counterclaim that the Company used any Maxfli trade secrets. Maxfli filed post-trial motions seeking to set aside the verdict and/or obtain a new trial. In post-trial motions Callaway Golf is seeking attorneys’ fees and prejudgment interest. It is expected that if Maxfli is unsuccessful, it will appeal the verdict. If Maxfli is successful with its post-trial motions, or an appeal of the verdict, and Maxfli’s counterclaims are ultimately resolved in Maxfli’s favor, such matters could have a significant adverse effect upon the Company’s results of operations, cash flows and financial position.

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

On December 20, 2002, the Company removed the case to the United States District Court for the Southern District of Florida, Case No. 02-14342. On April 29, 2003, the District Court denied plaintiffs’ motion to remand the case to state court. Plaintiffs are seeking compensatory damages ranging from $11,500,000 for alleged breach of contract to $206,000,000 for alleged unjust enrichment, plus punitive damages. The trial of the action is scheduled to commence in September 2005. An unfavorable resolution of plaintiffs’ claims could have a material adverse effect upon the Company’s results of operations, cash flows and financial position.

The Company and its subsidiaries, incident to their business activities, are parties to a number of legal proceedings, lawsuits and other claims, including the matters specifically noted above. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, management is unable to estimate the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance, or the financial impact with respect to these matters. Except as discussed above with regard to the Maxfli litigation, Perfect Putter litigation, or the cases challenging the NPIP, management believes at this time that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the Company’s consolidated annual results of operations, cash flows or financial position.


	*Supply of Electricity and Energy Contracts*

In the second quarter of 2001, the Company entered into an agreement with Pilot Power Group, Inc. (“Pilot Power”) as the Company’s energy service provider and in connection therewith entered into a long-term, fixed-priced, fixed-capacity, energy supply contract (the “Enron Contract”) with Enron Energy Services, Inc. (“EESI”), a subsidiary of Enron Corporation, as part of a comprehensive strategy to ensure the uninterrupted supply of energy while capping electricity costs in the volatile California energy market. The Enron Contract provided, subject to the other terms and conditions of the contract, for the Company to purchase nine megawatts of energy per hour from June 1, 2001 through May 31, 2006 (394,416 megawatts over the term of the contract). The total purchase price for such energy over the full contract term would have been approximately $43,484,000.

At the time the Company entered into the Enron Contract, nine megawatts per hour was in excess of the amount the Company expected to be able to use in its operations. The Company agreed to purchase this amount, however, in order to obtain a more favorable price than the Company could have obtained if the Company had purchased a lesser quantity. The Company expected to be able to sell any excess supply through Pilot Power.

On November 29, 2001, the Company notified EESI that, among other things, EESI was in default of the Enron Contract and that based upon such default, and for other reasons, the Company was terminating the Enron Contract effective immediately. At the time of termination, the contract price for the remaining energy to be purchased under the Enron Contract through May 2006 was approximately $39,126,000.

On November 30, 2001, EESI notified the Company that it disagreed that it was in default of the Enron Contract and that it was prepared to deliver energy pursuant to the Enron Contract. On December 2, 2001, EESI, along with Enron Corporation and numerous other related entities, filed for bankruptcy. Since November 30, 2001, the parties have not been operating under the Enron Contract and Pilot Power has been providing energy to the Company from alternate suppliers.

As a result of the Company’s notice of termination to EESI, and certain other automatic termination provisions under the Enron Contract, the Company believes that the Enron Contract has been effectively and appropriately terminated. There can be no assurance that EESI or another party will not assert a future claim against the Company or that a bankruptcy court or arbitrator will not ultimately nullify the Company’s termination of the Enron Contract. No provision has been made for contingencies or obligations, if any, under the Enron Contract beyond November 30, 2001.

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


	*Vendor Arrangements*

The Company is dependent on a limited number of suppliers for its clubheads and shafts, some of which are single-sourced. In addition, some of the Company’s products require specifically developed manufacturing techniques and processes which make it difficult to identify and utilize alternative suppliers quickly. The Company believes that suitable clubheads and shafts could be obtained from other manufacturers in the event its regular suppliers (because of financial difficulties or otherwise) are unable or fail to provide suitable components. However, any significant production delay or disruption caused by the inability of current suppliers to deliver or the transition to other suppliers could have a material adverse impact on the Company’s results of operations. The Company is also single-sourced or dependent on a limited number of suppliers for the materials it uses to make its golf balls. Many of the materials are customized for the Company. Any delay or interruption in such supplies could have a material adverse impact upon the Company’s golf ball business. If the Company did experience any such delays or interruptions, there is no assurance that the Company would be able to find adequate alternative suppliers at a reasonable cost or without significant disruption to its business.


	*Golf Professional Endorsement Contracts*

The Company establishes relationships with professional golfers in order to evaluate and promote Callaway Golf, Odyssey, Top-Flite and Ben Hogan branded products. The Company has entered into endorsement arrangements with members of the various professional tours, including the Champions Tour, the PGA Tour, the LPGA Tour, the PGA European Tour, the Japan Golf Tour and the Nationwide Tour. Many of these contracts provide incentives for successful performances using the Company’s products. For example, under these contracts, the Company could be obligated to pay a cash bonus to a professional who wins a particular tournament while playing the Company’s golf clubs or golf balls. It is not possible to predict with any certainty the amount of such performance awards the Company will be required to pay in any given year. Such expenses, however, are an ordinary part of the Company’s business and the Company does not believe that the payment of these performance awards will have a material adverse effect upon the Company.


	*Other Contingent Contractual Obligations*

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has made contractual commitments to certain employees providing for severance payments upon the occurrence of certain prescribed events. The Company also has consulting agreements that provide for payment of nominal fees upon the issuance of patents and/or the commercialization of research results. The Company has also issued a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain workers’ compensation insurance policies. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments the Company could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’s financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote that material payments will be required under the commitments and guarantees described above. The fair value of indemnities, commitments and guarantees that the Company

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

issued during the nine months ended September 30, 2004 was not material to the Company’s financial position, results of operations or cash flows.


	*Employment Contracts*

The Company has entered into employment contracts with each of the Company’s officers. These contracts generally provide for severance benefits, including salary continuation, if employment is terminated by the Company for convenience or by the officer for substantial cause. In addition, in order to assure that the officers would continue to provide independent leadership consistent with the Company’s best interests in the event of an actual or threatened change in control of the Company, the contracts also generally provide for certain protections in the event of such a change in control. These protections include the extension of employment contracts and the payment of certain severance benefits, including salary continuation, upon the termination of employment following a change in control. The Company is also generally obligated to reimburse such officers for the amount of any excise taxes associated with such benefits.


11.	Segment Information

The Company’s operating segments are organized on the basis of products and include Golf Clubs and Golf Balls. The Golf Clubs segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan woods, irons, wedges and putters as well as Odyssey putters and other golf-related accessories. The Golf Balls segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan golf balls that are designed, manufactured and sold by the Company. There are no significant intersegment transactions.

The table below contains information utilized by management to evaluate its operating segments for the interim periods presented (in thousands).



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2004			2003			2004			2003

Net sales⁽¹⁾
	Golf clubs	$	87,329		$	139,513		$	602,396		$	624,034
	Golf balls		41,128			14,121			187,755			43,396

		$	128,457		$	153,634		$	790,151		$	667,430

Income (loss) before income taxes⁽¹⁾
	Golf clubs	$	(36,320	)	$	17,436		$	88,237		$	170,192
	Golf balls⁽²⁾		(4,894	)		(6,982	)		(2,317	)		(17,081	)
	Reconciling items⁽³⁾		(20,998	)		(9,058	)		(61,480	)		(30,543	)

		$	(62,212	)	$	1,396		$	24,440		$	122,568

Additions to long-lived assets⁽⁴⁾
	Golf clubs	$	3,518		$	14,603		$	9,631		$	18,519
	Golf balls		4,808			87,024			6,434			87,064

		$	8,326		$	101,627		$	16,065		$	105,583


⁽¹⁾	The information presented in this table includes the operations of Top-Flite for the three and nine month periods ended September 30, 2004. As the Top-Flite Acquisition did not occur until the third quarter of 2003, the results reported for the three and nine months ended September 30, 2003 are primarily

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


	representative of the Callaway Golf Company and Odyssey brand operations, but also include 15 days of Top-Flite Golf operating results in the United States.

⁽²⁾	The Company’s 2004 income (loss) before income taxes includes the recognition of integration charges in the amount of approximately $3,310,000 and $10,379,000 for the three and nine months ended September 30, 2004, respectively, related to the integration of the Callaway Golf and Top-Flite golf ball operations.

⁽³⁾	Represents corporate general and administrative expenses and other income (expense) not utilized by management in determining segment profitability. The reconciling items include the recognition of non-allocated integration charges in the amount of approximately $4,158,000 and $12,885,000 for the three and nine months ended September 30, 2004, respectively, related to the integration of the Callaway Golf and Top-Flite operations. The increase in reconciling items for 2004 as compared to 2003 is primarily due to these integration charges and the addition of Top-Flite reconciling items in 2004.

⁽⁴⁾	Additions for the three and nine months ended September 30, 2003 include long-lived assets acquired as part of the Top-Flite golf operations in the United States.


12.	Derivatives and Hedging

The Company uses derivative financial instruments to manage its exposures to foreign exchange rates. The Company also utilized a derivative commodity instrument to manage its exposure to electricity rates in the volatile California energy market during the period of June 2001 through November 2001. The derivative instruments are accounted for pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” As amended, SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet, measure those instruments at fair value and recognize changes in the fair value of derivatives in earnings in the period of change unless the derivative qualifies as an effective hedge that offsets certain exposures.


	*Foreign Currency Exchange Contracts*

The Company enters into foreign exchange contracts to hedge against exposure to changes in foreign currency exchange rates. Such contracts are designated at inception to the related foreign currency exposures being hedged, which include anticipated intercompany sales of inventory denominated in foreign currencies, payments due on intercompany transactions from certain wholly-owned foreign subsidiaries, and anticipated sales by the Company’s wholly-owned European subsidiary for certain Euro-denominated transactions. Hedged transactions are denominated primarily in British Pounds, Euros, Japanese Yen, Korean Won, Canadian Dollars and Australian Dollars. To achieve hedge accounting, contracts must reduce the foreign currency exchange rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies. Pursuant to its foreign exchange hedging policy, the Company may hedge anticipated transactions and the related receivables and payables denominated in foreign currencies using forward foreign currency exchange rate contracts and put or call options. Foreign currency derivatives are used only to meet the Company’s objectives of minimizing variability in the Company’s operating results arising from foreign exchange rate movements. The Company does not enter into foreign exchange contracts for speculative purposes. Hedging contracts mature within twelve months from their inception.

At September 30, 2004 and 2003, the notional amounts of the Company’s foreign exchange contracts were approximately $33,530,000 and $87,714,000, respectively. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates, and records all

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

derivatives on the balance sheet at fair value. At September 30, 2004, the fair value of foreign currency-related derivatives were recorded as current assets of $187,000 and current liabilities of $671,000.

There were no notional amounts of the Company’s foreign exchange contracts designated as cash flow hedges at September 30, 2004. At September 30, 2003, the notional amounts of the Company’s foreign exchange contracts designated as cash flow hedges were approximately $42,886,000. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially recorded in accumulated other comprehensive income (“OCI”) as a separate component of shareholders’ equity and subsequently reclassified into earnings in the period during which the hedged transaction is recognized in earnings. During the three and nine months ended September 30, 2004 and 2003, the Company recorded the following activity in OCI (in thousands):



		Three Months
		Ended						Nine Months Ended
		September 30,						September 30,

		2004			2003			2004			2003

Beginning OCI balance related to cash flow hedges		$	(258	)	$	(561	)	$	(2,518	)	$	(1,362	)
	Add: Net gain/(loss) initially recorded in OCI		—			(1,076	)		810			(2,420	)
	Deduct: Net loss reclassified from OCI into earnings		(170	)		(475	)		(1,620	)		(2,620	)

Ending OCI balance related to cash flow hedges		$	(88	)	$	(1,162	)	$	(88	)	$	(1,162	)

During the three and nine months ended September 30, 2004, no gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges. As of September 30, 2004, $88,000 of deferred net losses related to derivative instruments designated as cash flow hedges were included in OCI. These derivative instruments hedge transactions that are expected to occur within the next twelve months. As the hedged transactions are completed, the related deferred net gain or loss is reclassified from OCI into earnings. The Company does not expect that such reclassifications will have a material effect on the Company’s earnings, as any gain or loss on the derivative instruments generally would be offset by the opposite effect on the related underlying transactions.

The ineffective portion of the gain or loss for derivative instruments that are designated and qualify as cash flow hedges is immediately reported as a component of other income (expense), net. For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedging effectiveness and are recorded currently in earnings as a component of other income (expense), net. During the three months ended September 30, 2004 no gains or losses were recorded on derivative instruments. During the three months ended September 30, 2003, the Company recorded net gains of $35,000 as a result of changes in the spot-forward differential. During the nine months ended September 30, 2004 and 2003, the Company recorded net losses of $103,000 and $50,000, respectively, as a result of changes in the spot-forward differential. Assessments of hedge effectiveness are performed using the dollar offset method and applying a hedge effectiveness ratio between 80% and 125%. Given that both the hedged item and the hedging instrument are evaluated using the same spot rate, the Company anticipates the hedges to be highly effective. The effectiveness of each derivative is assessed quarterly.

At September 30, 2004 and 2003, the notional amounts of the Company’s foreign exchange contracts used to hedge outstanding balance sheet exposures were approximately $33,530,000 and $44,828,000, respectively. The gains and losses on foreign currency contracts used to hedge balance sheet exposures are recognized as a component of other income (expense), net in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities and thus offset these gains and losses. During the three months ended September 30, 2004 and 2003, the Company recorded net losses of $915,000

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

and $716,000, respectively, due to net realized and unrealized gains and losses on contracts used to hedge balance sheet exposures. During the nine months ended September 30, 2004 and 2003, the Company recorded net losses of $282,000 and $5,021,000, respectively, due to net realized and unrealized losses on contracts used to hedge balance sheet exposures.


	*Energy Derivative*

In the second quarter of 2001, the Company entered into a long-term, fixed-price, fixed-capacity, energy supply contract as part of a comprehensive strategy to ensure the uninterrupted supply of electricity while capping costs in the volatile California electricity market. The contract was originally effective through May 2006. This derivative did not qualify for hedge accounting treatment under SFAS No. 133. Therefore, the Company recognized in earnings the changes in the estimated fair value of the contract based on current market rates as unrealized energy derivative losses. During the fourth quarter of 2001, the Company notified the energy supplier that, among other things, the energy supplier was in default of the energy supply contract and that based upon such default, and for other reasons, the Company was terminating the energy supply contract. As a result, the Company adjusted the estimated fair value of this contract through the date of termination. As the contract is terminated and neither party to the contract is performing pursuant to the terms of the contract, the terminated contract ceased to represent a derivative instrument in accordance with SFAS No. 133. The Company, therefore, no longer records future valuation adjustments for changes in electricity rates. The Company continues to reflect the derivative valuation account on its balance sheet, subject to periodic review, in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Any non-cash unrealized gains to be recognized upon extinguishment of the derivative valuation account would be reported as non-operating income.

As of the date of termination of the energy supply contract, the derivative valuation account reflected $19,922,000 of unrealized losses resulting from changes in the estimated fair value of the contract. The fair value of the contract was estimated at the time of termination based on market prices of electricity for the remaining period covered by the contract. The net differential between the contract price and estimated market prices for future periods was applied to the volume stipulated in the contract and discounted on a present value basis to arrive at the estimated fair value of the contract at the time of termination. The estimate was highly subjective because quoted market rates directly relevant to the Company’s local energy market and for periods extending beyond a 10- to 12-month horizon were not quoted on a traded market. In making the estimate, the Company instead had to rely upon near-term market quotations and other market information to determine an estimate of the fair value of the contract. In management’s opinion, there are no available contract valuation methods that provide a reliable single measure of the fair value of the energy derivative because of the lack of quoted market rates directly relevant to the terms of the contract and because changes in subjective input assumptions can materially affect the fair value estimates. See Note 10 for a discussion of contingencies related to the termination of the Company’s derivative energy supply contract.

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


13.	Comprehensive Income (Loss)

Comprehensive income (loss) is defined as all changes in a company’s net assets except changes resulting from transactions with shareholders. It differs from net income in that certain items currently recorded to equity would be a part of comprehensive income (loss). The following table sets forth the computation of comprehensive income (loss) for the periods presented (in thousands):



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2004			2003			2004			2003

Net income (loss)		$	(35,895	)	$	2,334		$	18,365		$	78,955
Other comprehensive income (loss):
	Foreign currency translation		1,152			1,335			(16	)		3,820
	Net unrealized gain (loss) on cash flow hedges, net of tax		470			(407	)		3,781			713
	Change in unrealized loss on marketable securities		—			—			—			92

Comprehensive income (loss)		$	(34,273	)	$	3,262		$	22,130		$	83,580


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

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 the inside cover of this report.

Regulation G Disclosure

The Company’s discussion and analysis of its results of operations, financial condition and liquidity set forth in this Item 2 have been derived from financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In addition to the GAAP results of operations, the Company has also provided additional information concerning the Company’s results that includes certain financial measures not prepared in accordance with GAAP. The non-GAAP financial measures included in this discussion are pro forma net income and earnings per share amounts that exclude charges associated with the integration of the Top-Flite business. This discussion also includes results of the Callaway Golf brand (including Odyssey) operations and Top-Flite brand (including Ben Hogan) operations on a stand-alone basis and/or excluding such integration charges, although such operations are not reportable business segments. These non-GAAP financial measures should not be considered a substitute for any measure derived in accordance with GAAP. These non-GAAP financial measures may also be inconsistent with the manner in which similar measures are derived or used by other companies. Management believes that the presentation of such non-GAAP financial measures, when considered in conjunction with the most directly comparable GAAP financial measures, provides useful information to investors by permitting additional relevant period-to-period comparisons of the historical operations of the Callaway Golf business excluding the operations of the recently acquired Top-Flite business, as well as information concerning operations excluding the effect of significant special charges such as the 2004 Top-Flite integration charges. The Company has included in this discussion supplemental information which reconciles those non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its results of operations, financial condition and liquidity are based upon the Company’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 the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions. On an on-going basis, the Company reviews its estimates to ensure that the estimates appropriately reflect changes in its business or as new information becomes available.

Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements:


	*Revenue Recognition*

Sales are recognized when both title and risk of loss transfer to the customer. Sales are recorded net of an allowance for sales returns and sales programs. Sales returns are estimated based upon historical returns, current economic trends, changes in customer demands and sell-through of products. The Company also records estimated reductions to revenue for sales programs such as incentive offerings. Sales program accruals are estimated based upon the attributes of the sales program, management’s forecast of future product demand, and historical customer participation in similar programs. If the actual costs of sales returns and sales programs significantly exceed the recorded estimated allowance, the Company’s sales would be significantly adversely affected.


	*Allowance for Doubtful Accounts*

The Company’s accounts receivable balance is recorded net of an allowance for estimated losses resulting from the failure of its customers to make required payments. An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends. If the actual uncollected amounts significantly exceed the estimated allowance, then the Company’s operating results would be significantly adversely affected.


	*Inventories*

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. The inventory balance, which includes material, labor and manufacturing overhead costs, is recorded net of an estimated allowance for obsolete or unmarketable inventory. The estimated allowance for obsolete or unmarketable inventory is based upon management’s understanding of market conditions and forecasts of future product demand. If the actual amount of obsolete or unmarketable inventory significantly exceeds the estimated allowance, the Company’s cost of sales, gross profit and net income would be significantly adversely affected.


	*Long-Lived Assets*

In the normal course of business, the Company acquires tangible and intangible assets. The Company periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property, plant and equipment, goodwill and other intangible assets) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted future cash flows estimated to be derived from an asset are less than its carrying amount. Impairments are recognized in operating earnings. The Company uses its best judgment based on the most current facts and circumstances surrounding its business when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset. Changes in assumptions used could have a significant impact on the Company’s assessment of recoverability.


	*Warranty*

The Company has a stated two-year warranty policy for its Callaway Golf clubs, although the Company’s historical practice has been to honor warranty claims well after the two-year stated warranty period. The Company’s policy is to accrue the estimated cost of satisfying future warranty claims at the time the sale is recorded. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company’s stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty. If the number of actual warranty claims or the cost of satisfying warranty claims significantly exceeds the estimated warranty reserve, the Company’s cost of sales, gross profit and net income would be significantly adversely affected.


	*Income Taxes*

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences resulting from temporary differences in the financial reporting and tax bases of assets and liabilities. The Company provides a valuation allowance for its deferred tax assets when, in the opinion of management, it is more likely than not that such assets will not be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or

part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Results of Operations

During the latter part of 2003, Callaway Golf Company completed the acquisition of substantially all of the golf-related assets of the Top-Flite Golf Company. Therefore, the results reported for the three and nine months ended September 30, 2003 are primarily representative of the Callaway Golf and Odyssey brand operations, but also include 15 days of Top-Flite Golf operating results in the United States.


	*Three-Month Periods Ended September 30, 2004 and 2003*

Net sales decreased 16% to $128.5 million for the three months ended September 30, 2004 as compared to $153.6 million for the comparable period in the prior year. The overall decrease in net sales was primarily due to a $60.9 million (48%) decrease in the sales of golf clubs partially offset by a $27.1 million (191%) increase in the sales of golf balls in the third quarter of 2004 as compared to the third quarter of 2003. The decrease in golf club sales was primarily due to a decline in Callaway Golf woods and irons and Odyssey putters as a result of lower sales volumes and declines in average selling prices. This decline was partially offset by a $12.5 million increase in Top-Flite and Ben Hogan golf club sales during the third quarter of 2004 as compared to the same period in 2003, resulting from the inclusion of sales for a full three months in 2004 compared to two weeks in 2003. The increase in golf ball sales was primarily due to the $20.7 million increase in Top-Flite and Ben Hogan golf ball sales also resulting from the inclusion of sales for a full three months in 2004 compared to two weeks in 2003. In addition, as compared to 2003, the translation of foreign currency sales into U.S. dollars for reporting purposes had a $3.8 million positive impact upon net sales for the third quarter of 2004, as measured by applying 2003 exchange rates to 2004 reported net sales.

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



		For the Three
		Months Ended
		September 30,				Growth/(Decline)

		2004		2003		Dollars			Percent

Net sales:
	Woods	$	14.3	$	44.0	$	(29.7	)		(67)	%
	Irons^(*)		36.3		56.1		(19.8	)		(35)	%
	Putters		15.6		27.0		(11.4	)		(42)	%
	Golf balls		41.2		14.1		27.1			191	%
	Accessories and other^(*)		21.1		12.4		8.7			70	%

		$	128.5	$	153.6	$	(25.1	)		(16)	%


^(*)	Beginning with the first quarter of 2004, the Company includes wedge sales with iron sales. Previously, wedge sales were included as a component of the accessories and other category and prior periods have been reclassified to conform with the current period presentation.

The $29.7 million (67%) decrease in net sales of woods to $14.3 million was primarily due to a decrease in sales of titanium and steel woods, partially offset by sales of the Company’s new fusion woods (woods comprised of multi-materials that are fused together). The overall decline in sales of woods during the quarter was primarily attributable to lower sales volumes combined with lower average selling prices as a result of increased competitive pressures.

The $19.8 million (35%) decrease in net sales of irons to $36.3 million was primarily due to the decline in sales of the Callaway Golf irons. This decline was expected as the Company’s higher priced steel iron products were in their second year of their product life cycle and such products generally sell better in the first year after introduction. The overall decrease was partially offset by the increase in sales of Top-Flite and Ben Hogan iron sales generated from a full quarter of sales in 2004 as compared to two weeks of sales in 2003.

The $11.4 million (42%) decrease in net sales of putters to $15.6 million is attributable to decreased sales of the Company’s Odyssey White Hot 2-ball putter (which is in its third year of sales) and DFX line of Odyssey putters, partially offset by the introduction of new putter products and the inclusion of a full quarter of sales of Top-Flite and Ben Hogan putters.

The $27.1 million (191%) increase in net sales of golf balls to $41.2 million was primarily attributable to the inclusion of a full quarter of sales of the Top-Flite and Ben Hogan golf ball products. Sales of the Top-Flite and Ben Hogan brand golf balls were $26.1 million for the three months ended September 30, 2004. Callaway Golf ball sales during the third quarter of 2004 were $15.1 million, an increase of $1.0 million (7%) from the third quarter of 2003.

The $8.7 million (70%) increase in sales of accessories and other products was primarily attributable to sales of pre-owned products through the recently acquired FrogTrader business combined with sales of Top-Flite and Ben Hogan bags, gloves and other accessories.

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



		For the Three
		Months Ended
		September 30,				Growth/(Decline)

		2004		2003		Dollars			Percent

Net sales:
	United States	$	71.4	$	77.7	$	(6.3	)		(8)	%
	Europe		21.9		29.8		(7.9	)		(27)	%
	Japan		10.1		23.0		(12.9	)		(56)	%
	Rest of Asia		9.9		15.3		(5.4	)		(35)	%
	Other foreign countries		15.2		7.8		7.4			95	%

		$	128.5	$	153.6	$	(25.1	)		(16)	%

Net sales in the United States decreased $6.3 million (8%) to $71.4 million during the third quarter of 2004 as compared to the third quarter of 2003. The Company’s net sales in regions outside of the United States decreased $18.8 million (25%) during the third quarter of 2004 to $57.1 million versus the same period in 2003. The decline in the United States and the regions outside of the United States was primarily attributable to lower sales volumes and declines in average selling prices as a result of increased competitive pressures. These declines were partially offset by the inclusion of sales of Top-Flite and Ben Hogan products in the amount of $27.1 million in the United States and $11.6 million in regions outside of the United States. In addition, as compared to 2003, the Company’s 2004 reported net sales in regions outside of the United States were positively affected by the translation of foreign currency sales into U.S. dollars based upon 2004 exchange rates. As compared to 2003, the translation of foreign currency sales into U.S. dollars for reporting purposes had a $3.8 million positive impact upon net sales for the third quarter of 2004, as measured by applying 2003 exchange rates to 2004 reported net sales.

For the third quarter of 2004, gross profit decreased $44.1 million to $26.1 million from $70.2 million in the third quarter of 2003. Gross profit as a percentage of net sales decreased to 20% of net sales in the third quarter of 2004 from 46% in the comparable period of 2003. This decline in the Company’s gross profit percentage was primarily attributable to lower sales volumes, lower average selling prices as a result of increased competitive pressures, and the costs related to the integration of the Top-Flite and Callaway Golf operations, partially offset by improved margins on the Callaway Golf ball business.

Selling expenses increased $10.8 million (23%) to $58.3 million in the third quarter of 2004 as compared to $47.5 million in the comparable period of 2003. As a percentage of sales, the expenses increased to 45% in the third quarter of 2004 from 31% in the third quarter of 2003. The dollar increase in expenses in the third quarter of 2004 was primarily due to the $11.3 million increase in Top-Flite selling expenses resulting from the inclusion of a full quarter of Top-Flite selling expenses in 2004 as compared to two weeks of selling expenses in 2003.

General and administrative expenses increased $8.5 million (58%) in the third quarter of 2004 to $23.2 million from $14.7 million in the third quarter of 2003. As a percentage of sales, the expenses increased to 18% in the third quarter of 2004 from 10% in the third quarter of 2003. The dollar increase was primarily due to the $4.2 million increase in Top-Flite general and administrative expenses resulting from the inclusion of a full quarter of Top-Flite general and administrative expenses in 2004 as compared to two weeks of general and administrative expenses in 2003, as well as a $2.5 million increase in legal fees primarily related to the Dunlop/ Maxfli litigation.

Research and development expenses increased $0.2 million (2%) in the third quarter of 2004 to $7.9 million from $7.7 million in the comparable period of 2003. As a percentage of sales, the expenses increased slightly to 6% from 5% in the prior year. The dollar increase was primarily due to the increase in Top-Flite research and development expenses of $1.2 million partially offset by a $0.4 million decline in consulting expenses.

Other income remained consistent at $1.1 million in the third quarter of 2004 as compared to the third quarter of 2003. This is primarily attributable to a $1.5 million increase in foreign currency transaction gains partially offset by a $0.2 million increase in foreign currency contract losses, a $0.6 million decrease attributable to a legal settlement received in 2003, a $0.3 million decrease in interest income and a $0.2 million increase in Top-Flite other expense.

During the third quarter of 2004, the Company recorded a $26.3 million benefit from income taxes as compared to a $0.9 million benefit for the comparable period of 2003. The income tax benefit in 2004 was primarily attributable to a loss in the third quarter of 2004, the positive impact of settlements reached with taxing authorities, and adjustments as a result of the Company’s finalization of its U.S. income tax return for 2003. The income tax benefit in 2003 was primarily attributable to a one-time export tax benefit in 2003 for certain prior year tax years.

Net loss for the third quarter of 2004 was $35.9 million as compared to net income of $2.3 million in the comparable period in 2003. Diluted loss per share for the third quarter of 2004 was $0.53 as compared to diluted earnings per share of $0.03 in the comparable period of 2003. Net loss and diluted loss per share in 2004 were negatively affected by after-tax charges relating to the integration of the Callaway Golf and Top-Flite operations in the amount of $4.4 million and $0.07 per share, respectively. Excluding these integration charges, (i) net loss would have been $31.5 million and (ii) diluted loss per share would have been $0.46 per share for the third quarter of 2004.

In order to assist with period over period comparisons of the Callaway Golf business and to provide additional insight into the effect that the acquisition and integration of the Top-Flite business had on the

Company’s results, the Company has provided the following reconciling information in accordance with Regulation G (in thousands, except per share data):



	Three Months Ended September 30,


	2004												*2003^()**

	Callaway			Top-Flite			Integration
	Golf			Golf			Charges			Total			Total

Net sales	$	89,788		$	38,669		$	—		$	128,457		$	153,634
Gross profit (loss)		22,107			8,784			(4,820	)		26,071			70,220
% of sales		25%			23%			n/a			20%			46%
Operating expenses		68,925			17,801			2,648			89,374			69,880

Income (loss) from operations		(46,818	)		(9,017	)		(7,468	)		(63,303	)		340
Other income (expense), net		1,319			(228	)		—			1,091			1,056

Income (loss) before income taxes		(45,499	)		(9,245	)		(7,468	)		(62,212	)		1,396
Income tax (benefit)		(19,650	)		(3,569	)		(3,098	)		(26,317	)		(938	)

Net income (loss)	$	(25,849	)	$	(5,676	)	$	(4,370	)	$	(35,895	)	$	2,334

Diluted earnings (loss) per share	$	(0.38	)	$	(0.08	)	$	(0.07	)	$	(0.53	)	$	0.03
Weighted-average shares outstanding		67,847			67,847			67,847			67,847			66,808


^(*)	During the latter part of 2003, Callaway Golf Company completed the acquisition of substantially all of the golf-related assets of the Top-Flite Golf Company. Therefore, the results reported for the quarter ended September 30, 2003 are primarily representative of the Callaway Golf and Odyssey brand operations, but also include 15 days of Top-Flite Golf operating results in the United States.


	*Nine-Month Periods Ended September 30, 2004 and 2003*

Net sales increased 18% to $790.2 million for the nine months ended September 30, 2004 as compared to $667.4 million for the comparable period in the prior year. The overall increase in net sales is primarily due to a $144.4 million (333%) increase in the sales of golf balls combined with a $38.0 million (77%) increase in sales of the Company’s accessories and other products. The significant increase in golf ball sales was due to the $112.2 million increase in net sales of Top-Flite and Ben Hogan golf ball products resulting from the inclusion of sales for a full nine months in 2004 as compared to two weeks in 2003 and a $32.2 million improvement in Callaway Golf brand golf ball sales. These increases were partially offset by a $36.4 million (31%) decrease in sales of putters and a $22.9 million (9%) decrease in sales of irons for the first nine months of 2004, as compared to the same period in 2003. As compared to the first nine months of 2003, the translation of foreign currency sales into U.S. dollars for reporting purposes had a $29.1 million positive impact upon net sales for the first nine months of 2004, as measured by applying 2003 exchange rates to 2004 reported net sales.

As compared to the first nine months of 2003, the Company’s net sales for the first nine months of 2004 were significantly affected by the inclusion of $175.6 million in sales of Top-Flite and Ben Hogan branded products. Excluding sales of Top-Flite and Ben Hogan branded products, sales of Callaway Golf and Odyssey branded products were $614.6 million for the first nine months of 2004, a $47.5 million (7%) decrease as compared to the first nine months of 2003. This decrease is primarily due to a decline in sales volumes due to a decrease in sales of products that were in their second and third years of their product life cycles as well as a decline in average selling prices as a result of increased competitive pressures.

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



		For the Nine
		Months Ended
		September 30,				Growth (Decline)

		2004		2003		Dollars			Percent

Net sales:
	Woods	$	213.6	$	213.9	$	(0.3	)		0	%
	Irons^(*)		219.8		242.7		(22.9	)		(9)	%
	Putters		81.7		118.1		(36.4	)		(31)	%
	Golf balls		187.8		43.4		144.4			333	%
	Accessories and other^(*)		87.3		49.3		38.0			77	%

		$	790.2	$	667.4	$	122.8			18	%


^(*)	Beginning with the first quarter of 2004, the Company includes wedge sales with iron sales. Previously, wedge sales were included as a component of the accessories and other category and prior periods have been reclassified to conform with the current period presentation.

The $0.3 million (0%) decrease in net sales of woods to $213.6 million was primarily due to a decrease in titanium woods offset by an increase in sales of the Company’s new fusion woods products and steel products. The decrease in sales of titanium woods is primarily due to increased competitive pressures resulting in a decline in units sold as well as lower average selling prices. The increase in fusion and steel woods was due to new product introductions.

The $22.9 million (9%) decrease in net sales of irons to $219.8 million was due primarily to a decline in sales of the Callaway Golf irons. This decline was expected as the Company’s higher priced steel iron products were in their second year of their product life cycle and such products generally sell better in the first year after introduction. The overall decrease was partially offset by the increase in sales of Top-Flite and Ben Hogan iron sales generated from a full nine months of sales in 2004 as compared to two weeks of sales in 2003.

The $36.4 million (31%) decrease in net sales of putters to $81.7 million was attributable to decreased sales of the Company’s Odyssey White Hot 2-ball putter (which is in its third year of sales) and DFX line of Odyssey putters, partially offset by the introduction of new putter products and the inclusion of a full nine months of sales of Top-Flite and Ben Hogan putters.

The $144.4 million (333%) increase in net sales of golf balls to $187.8 million was primarily attributable to the inclusion of sales of the Top-Flite and Ben Hogan golf ball products for a full nine months in 2004 as compared to two weeks in 2003, as well as strong sales for the newly released Callaway Golf balls. Sales of the Top-Flite and Ben Hogan brand golf balls were $116.7 million for the nine months ended September 30, 2004. Callaway Golf ball sales during the first nine months of 2004 were $71.1 million, an increase of $27.6 million (64%) from the first nine months of 2003. The increase in Callaway Golf ball sales during the first nine months of 2004 were positively affected by the addition of two new products to the product line for the current year and the absence of any new Callaway Golf ball product introductions in the first nine months of 2003.

The $38.0 million (77%) increase in sales of accessories and other products is primarily attributable to sales of Top-Flite and Ben Hogan bags, gloves and other accessories and sales of pre-owned products through the recently acquired FrogTrader business combined with an increase in sales of Callaway Golf shoes, travel bags and other accessories.

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



		For the Nine
		Months Ended
		September 30,				Growth (Decline)

		2004		2003		Dollars			Percent

Net sales:
	United States	$	460.4	$	370.2	$	90.2			24	%
	Europe		146.9		123.9		23.0			19	%
	Japan		58.4		77.5		(19.1	)		(25)	%
	Rest of Asia		43.1		48.9		(5.8	)		(12)	%
	Other foreign countries		81.4		46.9		34.5			74	%

		$	790.2	$	667.4	$	122.8			18	%

Net sales in the United States increased $90.2 million (24%) to $460.4 million during the first nine months of 2004 versus the first nine months of 2003. The Company’s sales in regions outside of the United States increased $32.6 million (11%) to $329.8 million during the first nine months of 2004 versus the same period of 2003. The increase in the United States and the regions outside of the United States was primarily attributable to the inclusion of Top-Flite and Ben Hogan sales for a full nine months in 2004 in the amount of $114.7 million in the United States and $60.9 million in regions outside of the United States. In addition, as compared to 2003, the Company’s 2004 reported net sales in regions outside of the United States were affected by the translation of foreign currency sales into U.S. dollars based upon 2004 exchange rates. As compared to 2003, the translation of foreign currency sales into U.S. dollars for reporting purposes had a $29.2 million positive impact upon net sales for the first nine months of 2004, as measured by applying 2003 exchange rates to 2004 reported net sales.

For the nine months ended September 30, 2004, gross profit decreased $14.5 million to $320.1 million from $334.6 million in the comparable period of 2003. Gross profit as a percentage of net sales decreased to 41% of net sales in the first nine months of 2004 from 50% in the comparable period of 2003. This decline in the Company’s gross profit percentage was primarily attributable to lower average selling prices as a result of increased competitive pressures and close-out products, lower margins in the Top-Flite business (as compared to the Callaway Golf business), lower sales volumes and the costs related to the integration of the Top-Flite and Callaway Golf operations, partially offset by improved margins on the Callaway Golf ball business.

Selling expenses increased $54.5 million (36%) in the first nine months of 2004 to $204.0 million from $149.5 million in the comparable period of 2003, and were 26% and 22% of net sales, respectively. The increase in expenses was primarily due to the $48.2 million increase in Top-Flite selling expenses resulting from the inclusion of a full nine months of Top-Flite selling expenses in 2004 as compared to two weeks of selling expenses in 2003. The increase was also due to an $11.1 million increase in Callaway Golf tour and promotional expenses, partially offset by a $7.6 million decrease in Callaway Golf advertising expenses. The majority of the increase in tour and promotional expenses was incurred during the first half of the year, primarily as a result of the Company’s strategy to increase its presence on golf’s major professional tours.

General and administrative expenses increased $24.8 million (57%) in the first nine months of 2004 to $67.9 million from $43.2 million in the first nine months of 2003. As a percentage of sales, the expenses increased to 9% in the first nine months of 2004 from 6% in the first nine months of 2003. The dollar increase was primarily due to the $16.3 million increase in Top-Flite general and administrative expenses resulting from the inclusion of a full nine months of Top-Flite general and administrative expenses in 2004 as compared to two weeks of general and administrative expenses in 2003, as well as a $4.2 million increase in legal fees primarily related to the Dunlop/Maxfli litigation and a $2.1 million increase in employee costs primarily related to severance costs.

Research and development expenses increased $2.9 million (14%) in the first nine months of 2004 to $23.5 million from $20.6 million in the comparable period of 2003. As a percentage of sales, the expenses remained consistent at 3.0%. The dollar increase was primarily due to the $3.4 million increase in Top-Flite

research and development expenses resulting from the inclusion of a full nine months of Top-Flite research and development expenses in 2004 as compared to two weeks of research and development expenses in 2003.

Other expense increased to $0.2 million in the first nine months of 2004 as compared to other income of $1.3 million in the first nine months of 2003. The $1.5 million of additional other expense is primarily attributable to a $5.5 million decrease in foreign currency transaction gains partially offset by a $4.7 million decrease in foreign currency contract losses.

During the first nine months of 2004, the Company recorded a provision for income taxes of $6.1 million as compared to a provision for income taxes of $43.6 million for the comparable period of 2003. The provision for income tax as a percentage of income before taxes was 25% in 2004 as compared to 36% in 2003. The 2004 tax rate was positively impacted by the resolution of certain prior tax audits. The 2003 tax rate was positively impacted by a one-time export tax benefit.

Net income for the first nine months of 2004 decreased 77% to $18.4 million from $79.0 million in the comparable period in 2003. Diluted earnings per share for the first nine months of 2004 decreased 77% to $0.27 from $1.19 in the comparable period in 2003. Net income and diluted earnings per share in 2004 were negatively affected by after-tax charges relating to the integration of the Callaway Golf and Top-Flite operations in the amount of $14.3 million and $0.20 per share, respectively. Excluding these integration charges, as compared to the first nine months of 2003, for the first nine months of 2004, (i) net income would have increased to $32.7 million and (ii) diluted earnings per share would have decreased to $0.47 per share.

In order to assist with period over period comparisons of the Callaway Golf business and to provide additional insight into the effect that the acquisition and the integration of the Top-Flite business had on the Company’s results, the Company has provided the following reconciling information in accordance with Regulation G (in thousands, except per share data):



	Nine Months Ended September 30,


	2004												*2003^()**

	Callaway			Top-Flite			Integration
	Golf			Golf			Charges			Total			Total

Net sales	$	614,557		$	175,594		$	—		$	790,151		$	667,430
Gross profit (loss)		278,490			55,766			(14,158	)		320,098			334,552
% of sales		45%			32%			n/a			41%			50%
Operating expenses		221,886			64,436			9,106			295,428			213,329

Income (loss) from operations		56,604			(8,670	)		(23,264	)		24,670			121,223
Other income (expense), net		(415	)		185			—			(230	)		1,345

Income (loss) before income taxes		56,189			(8,485	)		(23,264	)		24,440			122,568
Income tax provision (benefit)		18,362			(3,284	)		(9,003	)		6,075			43,613

Net income (loss)	$	37,827		$	(5,201	)	$	(14,261	)	$	18,365		$	78,955

Diluted earnings (loss) per share	$	0.55		$	(0.08	)	$	(0.20	)	$	0.27		$	1.19
Weighted-average shares outstanding		68,235			68,235			68,235			68,235			66,295


^(*)	During the latter part of 2003, Callaway Golf Company completed the acquisition of substantially all of the golf-related assets of the Top-Flite Golf Company. The results reported for the nine month period ended September 30, 2003 are primarily representative of the Callaway Golf and Odyssey brand operations, but also include 15 days of Top-Flite Golf operating results in the United States.

Financial Condition

Cash and cash equivalents increased $20.2 million (43%) to $67.5 million at September 30, 2004, from $47.3 million at December 31, 2003. The overall increase in cash primarily resulted from cash provided by

operating activities of $46.1 million partially offset by cash used in investing activities of $24.8 million and cash used in financing activities of $1.9 million. Cash flows provided by operating activities for the nine months ended September 30, 2004, reflect net income of $18.4 million, adjusted for depreciation and amortization of $39.0 million and a $26.1 million decrease in inventory. These cash inflows were partially offset by a net $13.7 million increase in accounts receivable, and a $39.2 million decrease in income taxes payable. Cash flows used in investing activities reflect the FrogTrader business acquisition (net of acquired cash) of $9.2 million and capital expenditures of $16.1 million. Cash flows used in financing activities are primarily attributable to the $14.2 million payment of dividends and the acquisition of treasury stock in the amount of $6.3 million partially offset by $18.6 million of proceeds from the issuance of common stock in connection with the exercise of employee stock options and purchases under the employee stock purchase plan.

At September 30, 2004, the Company’s net accounts receivable increased $14.2 million to $114.9 million from $100.7 million at December 31, 2003. The growth in receivables is primarily due to the general seasonality of the business (see below “Certain Factors Affecting Callaway Golf Company — Seasonality and Adverse Weather Conditions”). The Company’s net accounts receivable decreased $21.5 million at September 30, 2004 as compared to the Company’s net accounts receivable at September 30, 2003. This decrease is attributable to the overall decrease in sales for the quarter ended September 2004.

At September 30, 2004, the Company’s net inventory decreased $23.9 million to $161.5 million from $185.4 million at December 31, 2003. The decrease is consistent with seasonal trends (see below “Certain Factors Affecting Callaway Golf Company — Seasonality and Adverse Weather Conditions”). The Company’s net inventory increased $20.3 million as of September 30, 2004 as compared to the Company’s net inventory as of September 30, 2003. This increase is primarily attributable to an $18.1 million increase in Top-Flite net inventory. The Top-Flite inventory balance at September 30, 2003 consisted only of the U.S. portion of the inventory that was acquired in conjunction with the Top-Flite acquisition. All foreign inventory was acquired during the fourth quarter of 2003.

At September 30, 2004, the Company’s net property, plant and equipment decreased $25.1 million to $139.7 million from $164.8 million at December 31, 2003. This decrease is primarily due to depreciation of $36.5 million during the first nine months of 2004 and asset disposals of $4.3 million, partially offset by asset additions of $16.1 million during the same period.

Liquidity


	*Sources of Liquidity*

The Company’s principal sources of liquidity are cash flows provided by operations and the Company’s credit facilities in effect from time to time. The Company currently expects this to continue. At September 30, 2004, the Company had a $100 million revolving line of credit with Bank of America and certain other lenders (the “2003 Line of Credit”). At September 30, 2004, there were no borrowings outstanding under the 2003 Line of Credit. The 2003 Line of Credit was scheduled to expire by its terms on November 9, 2004.

Effective November 5, 2004, the Company amended and restated the 2003 Line of Credit to provide for a new five year revolving line of credit from Bank of America, N.A. and certain other lenders, providing for revolving loans of up to $300 million, of which $250 million consisted of commitments available at the closing and the balance of which are available to the Company upon the satisfaction of certain conditions. Actual borrowing availability under the new credit facility is limited effectively by the financial covenants set forth in the new credit facility. As of the date of this report, the maximum amount that could be borrowed under the new credit facility was approximately $134 million. As of the date of this report, no borrowings were outstanding under the new credit facility and the Company was in compliance with the covenants and other terms thereof. See Note 7 to the Company’s Consolidated Condensed Financial Statements for further details concerning the Company’s new line of credit.


	*Share Repurchases*

During the nine months ended September 30, 2004, the Company repurchased 353,000 shares of Callaway Golf common stock at a cost of $6.3 million. There were no repurchases of equity securities during the quarter ended September 30, 2004. All repurchases during the year were made pursuant to the $50.0 million stock repurchase program authorized and announced by the Board of Directors in May 2002. As of September 30, 2004 the remaining authority under this program authorizes the Company to repurchase approximately $8.0 million of Company stock.


	*Other Significant Cash and Contractual Obligations*

The following table provides, as of September 30, 2004 certain significant cash and contractual obligations that will affect the Company’s future liquidity (in millions):



		Payments Due By Period

				Less than						More than
		Total		1 Year		1-3 Years		4-5 Years		5 Years

Long-term debt obligations			—		—		—		—		—
Operating leases⁽¹⁾			18.6		6.1		8.1		2.4		2.0
Capital leases⁽²⁾			0.1		0.1		—		—		—
Unconditional purchase obligations⁽³⁾			135.3		43.8		49.7		35.6		6.2
Deferred compensation⁽⁴⁾			9.1		1.0		1.1		0.6		6.4

	Total⁽⁵⁾	$	163.1	$	51.0	$	58.9	$	38.6	$	14.6


⁽¹⁾	The Company leases certain warehouse, distribution and office facilities, vehicles as well as office equipment under operating leases. The amounts presented in this line item represent commitments for minimum lease payments under non-cancelable operating leases and include operating leases assumed as part of the Top-Flite Acquisition.

⁽²⁾	The Company acquired certain capital lease obligations as a result of the Top-Flite Acquisition primarily related to computer and telecommunications systems. The amounts presented in this line item represent commitments for minimum lease payments under non-cancelable capital leases.

⁽³⁾	During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, endorsement agreements with professional golfers and other endorsers, employment and consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements as they are subject to many variables including performance-based bonuses, reductions in payment obligations if designated minimum performance criteria are not achieved, and severance arrangements. The amounts listed are the approximate amounts of the minimum purchase obligations, base compensation, and guaranteed minimum royalty payments the Company is obligated to pay under these agreements. The actual amounts paid under some of these agreements may be higher or lower than the amounts included. In the aggregate, the actual amounts paid under these obligations is likely to be higher than the amounts listed as a result of the variable nature of these obligations. In addition, the Company also enters into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item.

⁽⁴⁾	The amounts presented in this line item represent the liability for the Company’s unfunded, non-qualified deferred compensation plan. The plan allows officers, certain other employees and directors of the Company to defer all or part of their compensation, to be paid to the participants or their designated beneficiaries after retirement, death or separation from the Company. To support the deferred compensation plan, the Company has elected to purchase Company-owned life insurance. The cash surrender value


	of the Company-owned insurance related to deferred compensation is included in other assets and was $8.9 million at September 30, 2004.

⁽⁵⁾	During the third quarter of 2001, the Company entered into a derivative commodity instrument to manage electricity costs in the volatile California energy market. The contract was originally effective through May 2006. During the fourth quarter of 2001, the Company notified the energy supplier that, among other things, the energy supplier was in default of the energy supply contract and that based upon such default and for other reasons, the Company was terminating the energy supply contract. The Company continues to reflect the $19.9 million derivative valuation account on its balance sheet, subject to periodic review, in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The $19.9 million represents unrealized losses resulting from changes in the estimated fair value of the contract and does not represent contractual cash obligations. The Company believes the energy supply contract has been terminated and, therefore, the Company does not have any further cash obligations under the contract. Accordingly, the energy derivative valuation account is not included in the table. There can be no assurance, however, that a party will not assert a future claim against the Company or that a bankruptcy court or arbitrator will not ultimately nullify the Company’s termination of the contract. No provision has been made for contingencies or obligations, if any, under the contract beyond November 2001. See below “Supply of Electricity and Energy Contracts.”

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company products or trademarks, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. The Company also has consulting agreements that provide for payment of nominal fees upon the issuance of patents and/or the commercialization of research results. The Company has also issued a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain workers’ compensation insurance policies. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments the Company could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’s financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote that material payments will be required under the commitments and guarantees described above. The fair value of indemnities, commitments and guarantees that the Company issued during the nine months ended September 30, 2004 was not material to the Company’s financial position, results of operations or cash flows.

In addition to the cash and contractual obligations listed above, the Company’s liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that the Company is subject to from time to time. See below “Part II, Item I — Legal Proceedings.”


	*Sufficiency of Liquidity*

Based upon its current operating plan, analysis of its consolidated financial position and projected future results of operations, the Company believes that its operating cash flows, together with its new credit facility, will be sufficient to finance current operating requirements, planned capital expenditures, contractual obligations and commercial commitments, for the next twelve months. There can be no assurance, however, that future industry specific or other developments, general economic trends or other matters will not adversely affect the Company’s operations or its ability to meet its future cash requirements. See below “Certain Factors Affecting Callaway Golf Company.”

Supply of Electricity and Energy Contracts

Beginning in the summer of 2000, the Company identified a future risk to ongoing operations as a result of the deregulation of the electricity market in California. In July 2000, the Company entered into a one-year supply agreement with Idaho Power Company (“Idaho Power”), a subsidiary of Idacorp, Inc., for the supply of electricity at $64 per megawatt hour. During the second quarter of 2001, Idaho Power advised the Company that it was unwilling to renew the contract upon expiration in July 2001 due to concerns surrounding the volatility of the California electricity market at that time.

As a result, in the second quarter of 2001, the Company entered into an agreement with Pilot Power Group, Inc. (“Pilot Power”) as the Company’s energy service provider and in connection therewith entered into a long-term, fixed-priced, fixed-capacity, energy supply contract (“Enron Contract”) with Enron Energy Services, Inc. (“EESI”), a subsidiary of Enron Corporation, as part of a comprehensive strategy to ensure the uninterrupted supply of electricity while capping costs in the volatile California electricity market. The Enron Contract provided, subject to the other terms and conditions of the contract, for the Company to purchase nine megawatts of energy per hour from June 1, 2001 through May 31, 2006 (394,416 megawatts over the term of the contract). The total purchase price for such energy over the full contract term would have been approximately $43.5 million.

Because the Enron Contract provided for the Company to purchase an amount of energy in excess of what it expected to be able to use in its operations, the Company accounted for the Enron Contract as a derivative instrument in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Enron Contract did not qualify for hedge accounting under SFAS No. 133. Therefore, the Company recognized changes in the estimated fair value of the Enron Contract currently in earnings. The estimated fair value of the Enron Contract was based upon a present value determination of the net differential between the contract price for electricity and the estimated future market prices for electricity as applied to the remaining amount of unpurchased electricity under the Enron Contract. Through September 30, 2001, the Company had recorded unrealized pre-tax losses of $19.9 million.

On November 30, 2001, EESI notified the Company that it disagreed that it was in default of the Enron Contract and that it was prepared to deliver energy pursuant to the Enron Contract. However, on December 2, 2001, EESI, along with Enron Corporation and numerous other related entities, filed for bankruptcy. Since November 30, 2001, the parties have not been operating under the Enron Contract and Pilot Power has been providing energy to the Company from alternate suppliers.

As a result of the Company’s notice of termination to EESI, and certain other automatic termination provisions under the Enron Contract, the Company believes that the Enron Contract has been terminated. As a result, the Company adjusted the estimated value of the Enron Contract through the date of termination, at which time the terminated Enron Contract ceased to represent a derivative instrument in accordance with SFAS No. 133. Because the Enron Contract is terminated and neither party to the contract is performing pursuant to the terms of the contract, the Company no longer records future valuation adjustments for changes in electricity rates. The Company continues to reflect on its balance sheet the derivative valuation account of $19.9 million, subject to periodic review, in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

The Company believes the Enron Contract has been terminated, and as of October 31, 2004, EESI has not asserted any claim against the Company. There can be no assurance, however, that EESI or another party will not assert a future claim against the Company or that a bankruptcy court or arbitrator will not ultimately nullify the Company’s termination of the Enron Contract. No provision has been made for contingencies or obligations, if any, under the Enron Contract beyond November 30, 2001.

Certain Factors Affecting Callaway Golf Company

The financial statements contained in this report and the related discussion describe and analyze the Company’s financial performance and condition for the periods presented. For the most part, this information is historical. The Company’s prior results, however, are not necessarily indicative of the Company’s future performance or financial condition. The Company has also included certain forward-looking statements concerning the Company’s future performance or financial condition. These forward-looking statements are based upon current information and expectations and actual results could differ materially. The Company therefore has included the following discussion of certain factors that could cause the Company’s future performance or financial condition to differ materially from its prior performance or financial condition or from management’s expectations or estimates of the Company’s future performance or financial condition. These factors, among others, should be considered in assessing the Company’s future prospects and prior to making an investment decision with respect to the Company’s stock.


	*Top-Flite Golf Company Asset Acquisition*

In September 2003, the Company acquired through a court-approved sale substantially all of the golf-related assets of the TFGC Estate Inc. (f/k/a The Top-Flite Golf Company, f/k/a Spalding Sports Worldwide, Inc.), which included golf ball manufacturing facilities, the Top-Flite and Ben Hogan brands, and all golf-related patents and trademarks. The Company faces certain challenges associated with this acquisition, including (i) reinvigorating the Top-Flite brands in the marketplace, (ii) the assimilation of the Top-Flite and Callaway Golf brands in the marketplace without negatively affecting the sales of either brand, (iii) the integration and consolidation of the Callaway Golf and Top-Flite golf ball manufacturing operations, (iv) the ability to maintain good customer relations and service as the Company integrates international Top-Flite sales and distribution operations with the Company’s existing foreign subsidiaries, (v) operating all or almost all of the golf ball manufacturing operations in a mature facility that is located in a harsh climate across the country from the Company’s principal executive offices and that has a unionized workforce, and (vi) the employee and other issues inherent in any consolidation. Furthermore, the integration and consolidation of the acquired assets will require a considerable amount of time and attention of senior management and others, which could have an adverse effect upon the Company’s club business.

In addition, in connection with the integration and consolidation of the golf ball manufacturing operations, the Company has incurred and expects to incur additional significant charges to earnings. During the fourth quarter of 2003, the Company recorded a charge of approximately $0.25 per share related to the disposal of certain golf ball manufacturing equipment. During the first nine months of 2004, the Company incurred additional pre-tax integration charges in the amount of approximately $23.3 million and on October 19, 2004 the Company announced that the total integration charges for 2004 (including the charges incurred during the first nine months) are estimated to be approximately $30 million. Additional integration charges in the amount of approximately $5 million to $10 million are estimated to be incurred in 2005.

Finally, the Company has spent a considerable amount of cash to complete the Top-Flite Acquisition and there is no assurance that the Company will realize a satisfactory return on its investment.


	*Terrorist Activity and Armed Conflict*

Terrorist activities and armed conflicts in recent years (such as the attacks on the World Trade Center and the Pentagon, the incidents of Anthrax poisoning and the military actions in the Middle East, including the war in Iraq), as well as the threat of future conflict, have had a significant adverse effect upon the Company’s business. Any such additional events would likely have an adverse effect upon the world economy

and would likely adversely affect the level of demand for the Company’s products as consumers’ attention and interest are diverted from golf and become focused on these events and the economic, political, and public safety issues and concerns associated with such events. Also, such events could adversely affect the Company’s ability to manage its supply and delivery logistics. If such events caused a significant disruption in domestic or international air, ground or sea shipments, the Company’s ability to obtain the materials necessary to produce and sell its products and to deliver customer orders also would be materially adversely affected. Furthermore, such events have negatively impacted tourism, and if this negative impact upon tourism continues, the Company’s sales to retailers at resorts and other vacation destinations would be materially adversely affected.


	*Pandemic Diseases*

The outbreak of a pandemic disease, such as Severe Acute Respiratory Syndrome (“SARS”) or the Avian Flu, could significantly adversely affect the Company’s business. A pandemic disease could significantly adversely affect both the demand for the Company’s products as well as the supply of the components used to make the Company’s products. Demand for golf products could be negatively affected as consumers in the affected regions restrict their recreational activities and as tourism to those areas declines. Moreover, the Company relies on many companies in Asia for its components. If the Company’s suppliers experienced a significant disruption in their business as a result of a pandemic disease, the Company’s ability to obtain the necessary components to make its products could be significantly adversely affected. In addition, the outbreak of any such disease generally restricts the travel to and from such countries making it more difficult in general to manage the Company’s international operations.


	*Adverse Global Economic Conditions*

The Company sells golf clubs, golf balls and golf accessories. These products are recreational in nature and are therefore discretionary purchases for consumers. Consumers are generally more willing to make discretionary purchases of golf products during favorable economic conditions and when consumers are feeling confident and prosperous. Adverse economic conditions in the United States or in the Company’s international markets (which represent almost half of the Company’s total sales), or a decrease in prosperity among consumers, or even a decrease in consumer confidence as a result of anticipated adverse economic conditions, could cause consumers to forgo or to postpone purchasing new golf products. Such forgone or postponed purchases could have a material adverse effect upon the Company.


	*Foreign Currency Risk*

Almost half of the Company’s sales are international sales. As a result, the Company conducts transactions in approximately 12 currencies worldwide. Conducting business in such various currencies increases the Company’s exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar. Changes in exchange rates may positively or negatively affect the Company’s financial results. Overall, the Company is generally negatively affected by a stronger U.S. dollar in relation to the foreign currencies in which the Company conducts business. Conversely, overall, the Company is generally positively affected by a weaker U.S. dollar relative to such foreign currencies. For the effect of foreign currencies on the Company’s financial results for the current reporting periods, see above “Results of Operations.”

The effects of foreign currency fluctuations can be significant. The Company therefore engages in certain hedging activities to mitigate the impact of foreign currency fluctuations over time on the Company’s financial results. The Company’s hedging activities reduce, but do not eliminate, the effects of such foreign currency fluctuations. Factors that could affect the effectiveness of the Company’s hedging activities include accuracy of sales forecasts, volatility of currency markets and the availability of hedging instruments. Since the hedging activities are designed to reduce volatility, they not only reduce the negative impact of a stronger U.S. dollar but they also reduce the positive impact of a weaker U.S. dollar. For the effect of the Company’s hedging activities during the current reporting periods, see below “Quantitative and Qualitative Disclosures about Market Risk.”

The Company’s future financial results could be significantly negatively affected if the value of the U.S. dollar increases relative to the foreign currencies in which the Company conducts business. The degree to which the Company’s financial results are affected will depend in part upon the effectiveness or ineffectiveness of the Company’s hedging activities.


	*Growth Opportunities*

Golf Clubs. In order for the Company to significantly grow its sales of golf clubs, the Company must either increase its share of the market for golf clubs or the market for golf clubs must grow. The Company already has a significant share of worldwide premium golf club sales and therefore opportunities for additional market share may be limited. The Company does not believe there has been any material increase in the number of golfers in the United States in over four years. Furthermore, the Company believes that since 1997 overall worldwide premium golf club sales have generally not experienced substantial growth in dollar volume from year to year. There is no assurance that the overall dollar volume of worldwide premium golf club sales will grow, or that it will not decline, in the future.

Golf Balls. In connection with the acquisition of the Top-Flite assets, the Company significantly increased its golf ball market share. Prior to the acquisition, however, both Callaway Golf’s and Top-Flite’s market shares had been declining. The Company’s ability to reverse such decline and to obtain the market share previously enjoyed will depend in part upon the Company’s ability to integrate the Top-Flite brands and operations with the Callaway Golf brands and operations. There is no assurance that the Company will be able to successfully or profitably integrate these brands or operations or maintain the combined market share previously enjoyed by the Top-Flite and Callaway Golf brands.


	*Manufacturing Capacity*

The Company plans its manufacturing capacity based upon the forecasted demand for its products. Actual demand for such products may exceed or be less than forecasted demand. The Company’s unique product designs often require sophisticated manufacturing techniques, which can require significant start-up expenses and/or limit the Company’s ability to quickly expand its manufacturing capacity to meet the full demand for its products. If the Company is unable to produce sufficient quantities of new products in time to fulfill actual demand, especially during the Company’s traditionally busy season, it could limit the Company’s sales and adversely affect its financial performance. On the other hand, the Company invests in manufacturing capacity and commits to components and other manufacturing inputs for varying periods of time, which can limit the Company’s ability to quickly react if actual demand is less than forecasted demand. This could result in less than optimum capacity usage and/or in excess inventories and related obsolescence charges that could adversely affect the Company’s financial performance. In addition, if the Company were to experience delays, difficulties or increased costs in its production of golf clubs or golf balls, including production of new products needed to replace current products, the Company’s future golf club or golf ball sales could be adversely affected.


	*Dependence on Energy Resources*

The Company’s golf club and golf ball manufacturing facilities in California use, among other resources, significant quantities of electricity to operate. In 2001, some companies in California, including the Company, experienced periods of blackouts during which electricity was not available. The Company has taken certain steps to provide access to alternative power supplies for certain of its operations, and believes that these measures could mitigate any impact resulting from possible future blackouts. The Company is currently purchasing for its California operations wholesale energy through the Company’s California energy service provider under short-term contracts. From time to time, legislation has been introduced that would restrict the Company’s ability to purchase wholesale energy through its energy service provider. If any such legislation were passed, the Company may be required to purchase energy from the local public utility, which could cause the Company’s cost of energy to increase. If the Company’s costs of energy were to increase as a result of such legislation or otherwise, the Company’s results of operations would be adversely affected.


	*Dependence on Certain Suppliers and Materials*

The Company is dependent on a limited number of suppliers for its clubheads and shafts, some of which are single-sourced. In addition, some of the Company’s products require specifically developed manufacturing techniques and processes which make it difficult to identify and utilize alternative suppliers quickly. The Company believes that suitable clubheads and shafts could be obtained from other manufacturers in the event its regular suppliers (because of financial difficulties or otherwise) are unable or fail to provide suitable components. However, there could be a significant production delay or disruption caused by the inability of current suppliers to deliver or the transition to other suppliers, which in turn could have a material adverse impact on the Company’s results of operations. The Company is also single-sourced or dependent on a limited number of suppliers for the materials it uses to make its golf balls. Many of the materials are customized for the Company. Any delay or interruption in such supplies could have a material adverse impact upon the Company’s golf ball business. If the Company did experience any such delays or interruptions, there is no assurance that the Company would be able to find adequate alternative suppliers at a reasonable cost or without significant disruption to its business.

The Company uses United Parcel Service (“UPS”) for substantially all ground shipments of products to its U.S. customers. The Company uses air carriers and ships for most of its international shipments of products. Any significant interruption in UPS, air carrier or ship services could have a material adverse effect upon the Company’s ability to deliver its products to its customers. If there were any significant interruption in such services, there is no assurance that the Company could engage alternative suppliers to deliver its products in a timely and cost-efficient manner. In addition, many of the components the Company uses to build its golf clubs, including clubheads and shafts, are shipped to the Company via air carrier and ship services. Any significant interruption in UPS services, air carrier services or shipping services into or out of the United States could have a material adverse effect upon the Company (see also below “International Risks”).

The Company’s size has made it a large consumer of certain materials, including steel, titanium alloys, carbon fiber and rubber. The Company does not make these materials itself, and must rely on its ability to obtain adequate supplies in the world marketplace in competition with other users of such materials. While the Company has been successful in obtaining its requirements for such materials thus far, there can be no assurance that it always will be able to do so at a reasonable price. An interruption in the supply of the materials used by the Company or a significant change in costs could have a material adverse effect on the Company.


	*Competition*

Golf Clubs. The golf club business is highly competitive, and is served by a number of well-established and well-financed companies with recognized brand names, as well as new companies with popular products. New product introductions, price reductions, consignment sales, extended payment terms and “close-outs” (including close-outs of products that were recently commercially successful) by competitors continue to generate increased market competition. Furthermore, continued price compression in the club industry for new clubs could have a significant adverse affect on the Company’s pre-owned club business as the gap between the cost of a new club and a pre-owned club lessens. There can be no assurance that successful marketing activities, discounted pricing, consignment sales, extended payment terms or new product introductions by competitors will not negatively impact the Company’s future sales.

Golf Balls. The golf ball business is also highly competitive and may be becoming even more competitive. There are a number of well-established and well-financed competitors, including one competitor with an estimated U.S. market share in excess of 50%. As competition in this business increases, many of these competitors are substantially discounting the prices of their products and/or increasing advertising, tour or other promotional support. This increased competition has resulted in significant expenses for the Company in both tour and advertising support and product development. Unless there is a change in competitive conditions, these pricing pressures and increased costs will continue to adversely affect the profitability of the Company’s golf ball businesses.

On a consolidated basis, no one customer that distributes the Company’s golf clubs or balls in the United States accounted for more than 4% of the Company’s revenues in 2003, 2002 or 2001. On a segment basis, the Company’s golf ball customer base is much more concentrated than its golf club customer base. In 2004, it is expected that the top five golf ball customers will account for over 25% of the Company’s total golf ball sales. A loss of one or more of these customers could have a significant adverse effect upon the Company’s golf ball sales.


	*Market Acceptance of Products*

A golf equipment manufacturer’s ability to compete is in part dependent upon its ability to satisfy the various subjective requirements of golfers, including a golf club’s and golf ball’s look and “feel,” and the level of acceptance that a golf club and ball has among professional and recreational golfers. The subjective preferences of golf club and ball purchasers are difficult to predict and may be subject to rapid and unanticipated changes. In addition, the Company’s products have tended to incorporate significant innovations in design and manufacture, which have often, but not always, resulted in higher prices for the Company’s products relative to other products in the marketplace. There can be no assurance that a significant percentage of the public will always be willing to pay premium prices for golf equipment or that the Company will be able to design and manufacture products that achieve market acceptance. In general, there can be no assurance as to whether or how long the Company’s golf clubs and golf balls will achieve and maintain market acceptance and therefore there can be no assurance that the demand for the Company’s products will permit the Company to experience growth in sales, or maintain historical levels of sales, in the future.


	*New Product Introduction and Product Cyclicality*

The Company believes that the introduction of new, innovative golf clubs and golf balls is important to its future success. A major portion of the Company’s revenues is generated by products that are less than two years old. The Company faces certain risks associated with such a strategy. For example, in the golf industry, new models and basic design changes in golf equipment are frequently met with consumer rejection. In addition, prior successful designs have been rendered obsolete within a relatively short period of time as new products are introduced into the marketplace. Further, any new products that retail at a lower price than prior products may negatively impact the Company’s revenues unless unit sales increase. The rapid introduction of new golf club or golf ball products by the Company has resulted in close-outs of existing inventories at both the wholesale and retail levels. Such close-outs have resulted in reduced margins on the sale of older products, as well as reduced sales of new products, given the availability of older products at lower prices.

The Company’s newly introduced golf club products generally, but not always, have a product life cycle of up to two years. These products generally sell significantly better in the first year after introduction as compared to the second year. In certain markets, such as Japan, the decline in sales occurs sooner in the product cycle and is more significant. The Company’s fusion woods generally sell at higher price points than its titanium metal woods, and its titanium metal woods generally sell at higher price points than its steel metal woods. Historically, the Company’s wood products generally have achieved better gross margins than its iron products. However, price compression in the woods market has made this differential less, and at times gross margins on woods may be less than other products. The Company’s sales and gross margins for a particular period may be negatively or positively affected by the mix of new products sold in such period.


	*Seasonality and Adverse Weather Conditions*

In addition to the effects of product cycles described above, the Company’s business is also subject to the effects of seasonal fluctuations. The Company’s first quarter sales generally represent the Company’s sell-in to the golf retail channel of its golf club products for the new golf season. Orders for many of these sales are received during the fourth quarter of the prior year. The Company’s second and third quarter sales generally represent re-order business for golf clubs. Sales of golf clubs during the second and third quarters therefore are significantly affected not only by the sell-through of the Company’s products that were sold into the channel during the first quarter but also by the sell-through of the products of the Company’s competitors. The Company’s sales of golf balls are generally associated with the level of rounds played in the areas where the

Company’s products are sold. Therefore, golf ball sales tend to be greater in the second and third quarters, when the weather is good in most of these areas and rounds played are up. Golf ball sales are also stimulated by product introductions as the retail channel takes on initial supplies. Like golf clubs, re-orders of golf balls depend on the rate of sell-through. Retailers are sometimes reluctant to re-order the Company’s products in significant quantity when they already have excess inventory of the Company’s or its competitors’ products. The Company’s sales during the fourth quarter are generally significantly less than the other quarters because in general in many of the Company’s principal markets less people are playing golf during that time of year due to cold weather. Furthermore, it previously was the Company’s practice to announce its new product line at the beginning of each calendar year. The Company has departed from that practice and now generally announces its new product line in the fourth quarter to allow retailers to plan better. Such early announcements of new products could cause golfers, and therefore the Company’s customers, to defer purchasing additional golf equipment until the Company’s new products are available. Such deferments could have a material adverse effect upon sales of the Company’s current products and/or result in close-out sales at reduced prices.

Because of these seasonal trends, the Company’s business can be significantly adversely affected by unusual or severe weather conditions. Unfavorable weather conditions generally result in less golf rounds played, which generally results in less demand for golf clubs and golf balls. Furthermore, catastrophic storms, such as the recent hurricanes in Florida and along the east coast, can negatively affect golf rounds played not only during the storms but also for a significant period of time afterwards as storm damaged golf courses are repaired and golfers focus on repairing the damage to their homes, businesses and communities. Consequently, sustained adverse weather conditions, especially during the warm weather months, could materially affect the Company’s sales.


	*Conformance with the Rules of Golf*

New golf club and golf ball products generally seek to satisfy the standards established by the USGA and R&A because these standards are generally followed by golfers within their respective jurisdictions. The USGA rules are generally followed in the United States, Canada and Mexico, and the R&A rules are generally followed in most other countries throughout the world.

The Rules of Golf as published by the R&A and the USGA are virtually the same except with respect to the regulation of “driving clubs.” The R&A rules currently permit driver clubheads with greater flexibility (as measured by a specific test) than are permitted under the USGA rules. As a result, in jurisdictions where the R&A rules are followed, the Company (like many of its competitors) has marketed and sold drivers that conform to the R&A rules but not the USGA rules (the “Plus Drivers”). In those jurisdictions where the USGA rules are followed the Company markets and sells its standard drivers that conform to both the R&A and the USGA rules. All of the Company’s other products are believed to conform to both the USGA and R&A rules.

Effective January 1, 2008, the more flexible clubheads such as those used for the Plus Drivers will not be conforming under the generally applicable Rules of Golf as published by the R&A. It is not clear what effect the change in rules will have upon demand for Plus Drivers in R&A jurisdictions as 2008 approaches or subsequent to the implementation of the new restrictions. It is possible that some jurisdictions and/or golfers will choose not to follow the R&A’s changes and will instead continue to use Plus drivers. This uncertainty adversely affects the Company’s research and development and manufacturing operations which must plan and commit resources years in advance of a new product release. If the Company does not accurately anticipate consumer reaction to the new rule changes, the Company’s sales in such jurisdictions could be adversely affected and the Company could be required to expend significant resources to change its product offerings at such time. The Company also believes that the general confusion created by the ruling bodies of golf as to what is a conforming or non-conforming driver and the limits imposed on new driver technology have hurt sales of drivers generally.

There is no assurance that the Company’s future products will satisfy USGA and/or R&A standards, or that existing USGA and/or R&A standards will not be altered in ways that adversely affect the sales of the

Company’s products or the Company’s brand. If a change in rules were adopted and caused one or more of the Company’s current products to be non-conforming, the Company’s sales of such products could be adversely affected. Furthermore, any such new rules could restrict the Company’s ability to develop new products.


	*Golf Professional Endorsements*

The Company establishes relationships with professional golfers in order to evaluate and promote Callaway Golf, Odyssey, Top-Flite and Ben Hogan branded products. The Company has entered into endorsement arrangements with members of the various professional tours, including the Champions Tour, the PGA Tour, the LPGA Tour, the PGA European Tour, the Japan Golf Tour and the Nationwide Tour. While most professional golfers fulfill their contractual obligations, some have been known to stop using a sponsor’s products despite contractual commitments. If certain of the Company’s professional endorsers were to stop using the Company’s products contrary to their endorsement agreements, the Company’s business could be adversely affected in a material way by the negative publicity or lack of endorsement.

The Company believes that professional usage of its golf clubs and golf balls contributes to retail sales. The Company therefore spends a significant amount of money to secure professional usage of its products. Many other companies, however, also aggressively seek the patronage of these professionals and offer many inducements, including significant cash rewards and specially designed products. There is a great deal of competition to secure the representation of tour professionals. As a result, it is becoming increasingly difficult and more expensive to attract and retain such tour professionals. The inducements offered by other companies could result in a decrease in usage of the Company’s products by professional golfers or limit the Company’s ability to attract other tour professionals. A decline in the level of professional usage of the Company’s products could have a material adverse effect on the Company’s sales and business.


	*Intellectual Property and Proprietary Rights*

The golf club industry, in general, has been characterized by widespread imitation of popular club designs. The Company has an active program of enforcing its proprietary rights against companies and individuals who market or manufacture counterfeits and “knock off” products, and asserts its rights against infringers of its copyrights, patents, trademarks, and trade dress. However, there is no assurance that these efforts will reduce the level of acceptance obtained by these infringers. Additionally, there can be no assurance that other golf club manufacturers will not be able to produce successful golf clubs which imitate the Company’s designs without infringing any of the Company’s copyrights, patents, trademarks, or trade dress.

An increasing number of the Company’s competitors have, like the Company itself, sought to obtain patent, trademark, copyright or other protection of their proprietary rights and designs for golf clubs and golf balls. As the Company develops new products, it attempts to avoid infringing the valid patents and other intellectual property rights of others. Before introducing new products, the Company’s legal staff evaluates the patents and other intellectual property rights of others to determine if changes are required to avoid infringing any valid intellectual property rights that could be asserted against the Company’s new product offerings. From time to time, others have contacted or may contact the Company to claim that they have proprietary rights that have been infringed by the Company and/or its products. The Company evaluates any such claims and, where appropriate, has obtained or sought to obtain licenses or other business arrangements. To date, there have been no interruptions in the Company’s business as a result of any claims of infringement. No assurance can be given, however, that the Company will not be adversely affected in the future by the assertion of intellectual property rights belonging to others. This effect could include alteration or withdrawal of existing products and delayed introduction of new products.

Various patents have been issued to the Company’s competitors in the golf ball industry. As the Company develops its golf ball products, it attempts to avoid infringing valid patents or other intellectual property rights. Despite these attempts, it cannot be guaranteed that competitors will not assert and/or a court will not find that the Company’s golf balls infringe certain patent or other rights of competitors. If the Company’s golf balls are found to infringe on protected technology, there is no assurance that the Company would be able to obtain

a license to use such technology, and it could incur substantial costs to redesign them and/or defend legal actions.

The Company has procedures to maintain the secrecy of its confidential business information. These procedures include criteria for dissemination of information and written confidentiality agreements with employees and suppliers. Suppliers, when engaged in joint research projects, are required to enter into additional confidentiality agreements. While these efforts are taken seriously, there can be no assurance that these measures will prove adequate in all instances to protect the Company’s confidential information.

The Company’s Code of Conduct prohibits misappropriation of trade secrets and confidential information of third parties. The Code of Conduct is contained in the Company’s Employee Handbook and available to all employees on the Company’s website. Employees also sign an Employee Invention and Confidentiality Agreement prohibiting disclosure of trade secrets and confidential information from third parties. Periodic training is provided to employees on this topic as well. Despite taking these steps, as well as others, the Company cannot guarantee that these measures will be adequate in all instances to prevent misappropriation of trade secrets from third parties or the accusation by a third party that such misappropriation has taken place.


	*Brand Licensing*

The Company licenses its trademarks to third party licensees who produce, market and sell their products bearing the Company’s trademarks. The Company chooses its licensees carefully and imposes upon such licensees various restrictions on the products, and on the manner, on which such trademarks may be used. Despite these restrictions, or if a licensee fails to adhere to these restrictions, the Company’s brand could be damaged by the use or misuse of the Company’s trademarks in connection with its licensees’ products.


	*Product Returns*

Golf Clubs. The Company supports all of its golf clubs with a limited two year written warranty. Since the Company does not rely upon traditional designs in the development of its golf clubs, its products may be more likely to develop unanticipated problems than those of many of its competitors that use traditional designs. For example, clubs have been returned with cracked clubheads, broken graphite shafts and loose medallions. While any breakage or warranty problems are deemed significant by the Company, the incidence of defective clubs returned to date has not been material in relation to the volume of clubs that have been sold.

The Company monitors the level and nature of any golf club breakage and, where appropriate, seeks to incorporate design and production changes to assure its customers of the highest quality available in the market. Significant increases in the incidence of breakage or other product problems may adversely affect the Company’s sales and image with golfers. The Company believes that it has adequate reserves for warranty claims. If the Company were to experience an unusually high incidence of breakage or other warranty problems in excess of these reserves, the Company’s financial results would be adversely affected. See above, “Critical Accounting Policies and Estimates — Warranty.”

Golf Balls. The Company has not experienced significant returns of defective golf balls, and in light of the quality control procedures implemented in the production of its golf balls, the Company does not expect a significant amount of defective ball returns. However, if future returns of defective golf balls were significant, it could have a material adverse effect upon the Company’s golf ball business.


	*“Gray Market” Distribution*

Some quantities of the Company’s products find their way to unapproved outlets or distribution channels. This “gray market” for the Company’s products can undermine authorized retailers and foreign wholesale distributors who promote and support the Company’s products, and can injure the Company’s image in the minds of its customers and consumers. On the other hand, stopping such commerce could result in a potential decrease in sales to those customers who are selling Callaway Golf products to unauthorized distributors and/or an increase in sales returns over historical levels. While the Company has taken some lawful steps to

limit commerce in its products in the “gray market” in both the U.S. and abroad, it has not stopped such commerce.


	*International Risks*

The Company’s management believes that controlling the distribution of its products in certain major markets in the world has been and will be an element in the future growth and success of the Company. The Company sells and distributes its products directly (as opposed to through third party distributors) in many key international markets in Europe, Asia, North America and elsewhere around the world. These activities have resulted and will continue to result in investments in inventory, accounts receivable, employees, corporate infrastructure and facilities. In addition, there are a limited number of suppliers of golf club components in the United States and the Company has increasingly become more reliant on suppliers and vendors located outside of the United States. The operation of foreign distribution in the Company’s international markets, as well as the management of relationships with international suppliers and vendors, will continue to require the dedication of management and other Company resources.

As a result of this international business, the Company is exposed to increased risks inherent in conducting business outside of the United States. In addition to foreign currency risks, these risks include (i) increased difficulty in protecting the Company’s intellectual property rights and trade secrets, (ii) unexpected government action or changes in legal or regulatory requirements, (iii) social, economic or political instability, (iv) the effects of any anti-American sentiments on the Company’s brands or sales of the Company’s products, (v) increased difficulty in controlling and monitoring foreign operations from the United States, including increased difficulty in identifying and recruiting qualified personnel for its foreign operations, and (vi) increased exposure to interruptions in air carrier or shipping services which interruptions could significantly adversely affect the Company’s ability to obtain timely delivery of components from international suppliers or to timely deliver its products to international customers. Although the Company believes the benefits of conducting business internationally outweigh these risks, any significant adverse change in circumstances or conditions could have a significant adverse effect upon the Company’s operations and therefore financial performance and condition.


	*Credit Risk*

The Company primarily sells its products to golf equipment retailers directly and through wholly-owned domestic and foreign subsidiaries, and to foreign distributors. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from these customers. Historically, the Company’s bad debt expense has been low. However, a downturn in the retail golf equipment market could result in increased delinquent or uncollectible accounts for some of the Company’s significant customers. In addition, as the Company integrates its foreign distribution its exposure to credit risks increases as it no longer sells to a few wholesalers but rather directly to many retailers. A failure by the Company’s customers to pay a significant portion of outstanding account receivable balances would adversely impact the Company’s performance and financial condition.


	*Information Systems*

All of the Company’s major operations, including manufacturing, distribution, sales and accounting, are dependent upon the Company’s information computer systems. The Callaway Golf business information systems and the acquired Top-Flite information systems are different and the Company is therefore currently operating multiple platforms. The Company is in the process of evaluating whether to integrate the two systems and the best manner of doing so. Any significant disruption in the operation of such systems, as a result of an internal system malfunction, infection from an external computer virus, or complications in connection with any attempted integration of the two systems, or otherwise, would have a significant adverse effect upon the Company’s ability to operate its business. Although the Company has taken steps to mitigate the effect of any such disruptions, there is no assurance that such steps would be adequate in a particular situation. Consequently, a significant or extended disruption in the operation of the Company’s information

systems could have a material adverse effect upon the Company’s operations and therefore financial performance and condition.


	*Change In Accounting Rules*

The Company currently and historically has accounted for its stock based compensation under Accounting Principles Board Opinion No. 25 (“APB No. 25”). Under APB No. 25, the Company is not required to record compensation expense for stock option grants to employees when the exercise price of the award is equal to the fair market value of the common stock on the date of grant. The Financial Accounting Standards Board has recently proposed rules which, if adopted as anticipated, would require the Company to begin recording compensation expense for such stock option awards based upon the fair value of such awards for all periods beginning after June 15, 2005. As a result, beginning in 2005, it is anticipated that the Company will be required to record compensation expense for any such awards granted in 2005 as well as awards granted prior to 2005 which vest on July 1, 2005 or thereafter. Such noncash compensation expense is anticipated to have a significant effect upon the Company’s reported earnings.

Although the Company has historically provided in the notes to its financial statements pro forma earnings information showing what the Company’s results would have been had the Company been recording compensation expense for such awards, the amount of such expense was not reflected in its financial results. Consequently, if the Company begins recording such compensation expense in 2005, the period over period comparisons will be significantly affected by the inclusion of such expense in 2005 and the absence of such expense from 2004 and prior periods. If investors do not appropriately consider these changes in accounting rules, the price at which the Company’s stock is traded could be significantly adversely affected.


	*Analyst Guidance, Media Reports and Market Volatility*

The Company’s stock is traded publicly, principally on the New York Stock Exchange. As a result, at any given time, there are usually various securities analysts which follow the Company and issue reports on the Company. These reports include information about the Company’s historical financial results as well as the analysts’ estimates of the Company’s future performance. The analysts’ estimates are based upon their own opinions and are often different from the Company’s own estimates or expectations. The Company has a policy against confirming financial forecasts or projections issued by analysts and any reports issued by such analysts are not the responsibility of the Company. Investors should not assume that the Company agrees with any report issued by any analyst or with any statements, projections, forecasts or opinions contained in any such report. In addition to analyst reports, the media also reports its opinion on the Company’s results. These media reports are often written quickly so as to be the first to the news wire and in an attempt to garner attention often lead with headlines that are not representative of the substance of the article. Furthermore, these media reports, which are often written by writers who are not financial experts, reflect only the writers’ views of the Company’s results. Investors should not assume that the Company agrees with such media reports or the manner in which the Company’s results are presented or characterized in such reports.

The price at which the Company’s stock is traded on the securities exchanges is based upon many factors. In the short-term, the price at which the Company’s stock is traded can be significantly affected, positively or negatively, by analysts’ reports and media reports, regardless of the accuracy of such reports. Over the long-term, the price at which the Company’s stock is traded should tend to reflect the Company’s performance irrespective of such reports.

The Company from time to time provides investors with estimates of anticipated revenues and earnings per share on an annual basis and reports on how the Company is progressing toward the achievement of those annual targets. The Company cannot predict its results with certainty. The Company’s estimates are based upon the information available and management’s expectations at the time such estimates are made and actual results could and often do differ materially. See “Important Notice to Investors” on the inside cover of this report.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*

The Company uses derivative financial instruments for hedging purposes to limit its exposure to changes in foreign exchange rates. Transactions involving these financial instruments are with credit-worthy firms. The use of these instruments exposes the Company to market and credit risk which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated. The Company also utilized a derivative commodity instrument, the Enron Contract, to manage electricity costs in the volatile California energy market during the period of June 2001 through November 2001. Pursuant to its terms, the Enron Contract was terminated. The Company is also exposed to interest rate risk from its credit facility.


	Foreign Currency Fluctuations

In the normal course of business, the Company is exposed to foreign currency exchange rate risks that could impact the Company’s results of operations. The Company’s risk management strategy includes the use of derivative financial instruments, including forward contracts and purchased options, to hedge certain of these exposures. The Company’s objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge them, thereby reducing volatility of earnings. The Company does not enter into any trading or speculative positions with regard to foreign currency related derivative instruments.

The Company is exposed to foreign currency exchange rate risk inherent primarily in its sales commitments, anticipated sales and assets and liabilities denominated in currencies other than the U.S. dollar. The Company transacts business in approximately 12 currencies worldwide, of which the most significant to its operations are the European currencies, Japanese Yen, Korean Won, Canadian Dollar, and Australian Dollar. For most currencies, the Company is a net receiver of foreign currencies and, therefore, benefits from a weaker U.S. dollar and is adversely affected by a stronger U.S. dollar relative to those foreign currencies in which the Company transacts significant amounts of business.

At September 30, 2004 and 2003, the notional amounts of the Company’s foreign exchange contracts were approximately $33.5 million and $87.7 million, respectively. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates, and records all derivatives on the balance sheet at fair value. At September 30, 2004, the fair value of foreign currency-related derivatives were recorded as current assets of $0.2 million and current liabilities of $0.7 million.

There were no notional amounts of the Company’s foreign exchange contracts designated as cash flow hedges at September 30, 2004. At September 30, 2003, the notional amounts of the Company’s foreign exchange contracts designated as cash flow hedges were approximately $42.9 million. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially recorded in accumulated other comprehensive income (“OCI”) as a separate component of shareholders’ equity and subsequently reclassified into earnings in the period during which the

hedged transaction is recognized in earnings. During the three and nine months ended September 30, 2004 and 2003, the Company recorded the following activity in OCI (in thousands):



		Three Months						Nine Months
		Ended						Ended
		September 30,						September 30,

		2004			2003			2004			2003

Beginning OCI balance related to cash flow hedges		$	(0.3	)	$	(0.6	)	$	(2.5	)	$	(1.4	)
	Add: Net gain/(loss) initially recorded in OCI		—			(1.1	)		0.8			(2.4	)
	Deduct: Net loss reclassified from OCI into earnings		(0.2	)		(0.5	)		(1.6	)		(2.6	)

Ending OCI balance related to cash flow hedges		$	(0.1	)	$	(1.2	)	$	(0.1	)	$	(1.2	)

During the three and nine months ended September 30, 2004, no gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges.

As of September 30, 2004, $0.1 million of deferred net losses related to derivative instruments designated as cash flow hedges were included in OCI. These derivative instruments hedge transactions that are expected to occur within the next twelve months. As the hedged transactions are completed, the related deferred net gain or loss is reclassified from OCI into earnings. The Company does not expect that such reclassifications will have a material effect on the Company’s earnings, as any gain or loss on the derivative instruments generally would be offset by the opposite effect on the related underlying transactions.

The ineffective portion of the gain or loss for derivative instruments that are designated and qualify as cash flow hedges is immediately reported as a component of other income (expense), net. For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedging effectiveness and are recorded currently in earnings as a component of other income (expense), net. During the three months ended September 30, 2004 and 2003, the Company recorded net losses of $0 and less than $0.1 million, respectively, as a result of changes in the spot-forward differential. During the nine months ended September 30, 2004 and 2003, the Company recorded net losses of $0.1 million and less than $0.1 million, respectively, as a result of changes in the spot-forward differential. Assessments of hedge effectiveness are performed using the dollar offset method and applying a hedge effectiveness ratio between 80% and 125%. Given that both the hedged item and the hedging instrument are evaluated using the same spot rate, the Company anticipates the hedges to be highly effective. The effectiveness of each derivative is assessed quarterly.

At September 30, 2004 and 2003, the notional amounts of the Company’s foreign exchange contracts used to hedge outstanding balance sheet exposures were approximately $33.5 million and $87.7 million, respectively. The gains and losses on foreign currency contracts used to hedge balance sheet exposures are recognized as a component of other income (expense), net in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities and thus offset these gains and losses. During the three months ended September 30, 2004 and 2003, the Company recorded net losses of $0.9 million and net losses of $0.7 million, respectively, due to net realized and unrealized gains and losses on contracts used to hedge balance sheet exposures. During the nine months ended September 30, 2004 and 2003, the Company recorded net losses of $0.3 million and net losses of $5.0 million, respectively, due to net realized and unrealized gains and losses on contracts used to hedge balance sheet exposures.

Sensitivity analysis is the measurement of potential loss in future earnings of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates or foreign currency values. The Company used a sensitivity analysis model to quantify the estimated potential effect of unfavorable movements of 10% in foreign currencies to which the Company was exposed at September 30, 2004 through its derivative financial instruments.

The sensitivity analysis model is a risk analysis tool and does not purport to represent actual losses in earnings that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and

losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors.

The estimated maximum one-day loss from the Company’s foreign-currency derivative financial instruments, calculated using the sensitivity analysis model described above, is $3.6 million at September 30, 2004. The portion of the estimated loss associated with the foreign exchange contracts that offset the remeasurement gain and loss of the related foreign currency denominated assets and liabilities is $3.6 million at September 30, 2004 and would impact earnings. There would be no impact to OCI. The Company believes that such a hypothetical loss from its derivatives would be offset by increases in the value of the underlying transactions being hedged.


	Electricity Price Fluctuations

During the second quarter of 2001, the Company entered into the Enron Contract to manage electricity costs in the volatile California energy market. This derivative did not qualify for hedge accounting treatment under SFAS No. 133. Therefore, the Company recognized the changes in the estimated fair value of the contract based on current market rates as unrealized energy derivative losses. During the fourth quarter of 2001, the Company notified the energy supplier that, among other things, the energy supplier was in default of the energy supply contract and that based upon such default, and for other reasons, the Company was terminating the energy supply contract. As a result, the Company adjusted the estimated value of this contract through the date of termination. Because the contract is terminated and neither party to the contract is performing pursuant to the terms of the contract, the terminated contract ceased to represent a derivative instrument in accordance with SFAS No. 133. The Company, therefore, no longer records future valuation adjustments for changes in electricity rates. The Company continues to reflect the derivative valuation account on its balance sheet, subject to periodic review, in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” See above “Supply of Electricity and Energy Contracts.”


	Interest Rate Fluctuations

Additionally, the Company is exposed to interest rate risk from its new credit facility (see Note 7 to the Company’s Consolidated Condensed Financial Statements). The credit facility is indexed to, at the Company’s election, based upon the Company’s consolidated leverage ratio and trailing four quarters EBITDA (each as defined in the new credit facility), of (i) the higher of (a) the Federal Funds Rate plus 50.0 basis points or (b) Bank of America’s prime rate, and in either case plus a margin of 00.0 to 75.0 basis points or (ii) the Eurodollar Rate (as defined in the new credit facility) plus a margin of 75.0 to 200.0 basis points.

Note 7 to the Company’s Consolidated Condensed Financial Statements outlines the principal amounts, if any, and other terms required to evaluate the expected cash flows and sensitivity to interest rate changes.


Item 4.	*Controls and Procedures*

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic filings with the Securities and Exchange Commission. During the third quarter of 2004, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

As a result of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules issued thereunder (collectively, the “Section 404 requirements”), the Company will be required to include in its Annual Report on Form 10-K for the year ending December 31, 2004, a report on management’s assessment of the effectiveness of the Company’s internal controls over financial reporting. The Company’s independent auditor will also be required to attest to and report on management’s assessment. The Company has maintained an internal audit function since 1994 and regularly tests and evaluates its internal controls, and therefore believes that it will be able to complete the assessment required by Section 404. There is no assurance, however, that future changes to the Section 404 requirements, changes in the business operations of the Company or other factors will not adversely affect the Company’s ability to complete the assessment by the date stipulated.

PART II. OTHER INFORMATION


Item 1.	*Legal Proceedings*

On October 3, 2001, the Company filed suit in the United States District Court for the District of Delaware, Civil Action No. 01-669, against Dunlop Slazenger Group Americas, Inc., d/b/a Maxfli (“Maxfli”), for infringement of a golf ball aerodynamics patent owned by the Company, U.S. Patent No. 6,213,898 (the “Aerodynamics Patent”). The Company later amended its complaint to add a claim that Maxfli engaged in false advertising by claiming that its A10 golf balls were the “longest ball on tour.” Maxfli answered the complaint denying patent infringement and false advertising, and also filed a counterclaim asserting that former Maxfli employees hired by the Company had disclosed confidential Maxfli trade secrets to the Company, and that the Company had used that information to enter the golf ball business. In the counterclaim, Maxfli sought compensatory damages of $30.0 million; punitive damages equal to two times the compensatory damages; prejudgment interest; attorneys’ fees; a declaratory judgment; and injunctive relief. On November 12, 2003, pursuant to an agreement between the Company and Maxfli, the court dismissed the Company’s claim for infringement of the Aerodynamics Patent. On May 13, 2004, the Court granted the Company’s motion for summary judgment, eliminating a portion of Maxfli’s counterclaim and reducing Maxfli’s compensatory damages claim from approximately $30.0 million to $18.5 million. The case was tried to a jury beginning on August 2, 2004. On August 12, 2004, the jury returned a verdict of $2.2 million in favor of the Company based upon its finding that Maxfli willfully engaged in false advertising. The jury also rejected Maxfli’s counterclaim that the Company used any Maxfli trade secrets. Maxfli filed post-trial motions seeking to set aside the verdict and/or obtain a new trial. In post-trial motions Callaway Golf is seeking attorneys’ fees and prejudgment interest. It is expected that if Maxfli is unsuccessful, it will appeal the verdict. If Maxfli is successful with its post-trial motions, or an appeal of the verdict, and Maxfli’s counterclaims are ultimately resolved in Maxfli’s favor, such matters could have a significant adverse effect upon the Company’s results of operations, cash flows and financial position.

On December 2, 2002, Callaway Golf Company was served with a complaint filed in the Circuit Court of the 19th Judicial District in and for Martin County, Florida, Case No. 935CA, by the Perfect Putter Co. and its principals. Plaintiffs sued Callaway Golf Company, Callaway Golf Sales Company and a Callaway Golf Sales Company sales representative. Plaintiffs alleged that the Company misappropriated certain alleged trade secrets and proprietary information of the Perfect Putter Co. and incorporated those purported trade secrets in the Company’s Odyssey White Hot 2-Ball Putter. Plaintiffs also allege that the Company made false statements and acted inappropriately during discussions with plaintiffs. Plaintiffs are seeking compensatory damages, exemplary damages, attorneys’ fees and costs, pre- and post-judgment interest and injunctive relief. On December 20, 2002, the Company removed the case to the United States District Court for the Southern District of Florida, Case No. 02-14342. On April 29, 2003, the District Court denied plaintiffs’ motion to remand the case to state court. Plaintiffs are seeking compensatory damages ranging from $11.5 million for alleged breach of contract to $206 million for alleged unjust enrichment, plus punitive damages. The trial of the action is scheduled to commence in September 2005. An unfavorable resolution of plaintiffs’ claims could have a material adverse effect upon the Company’s results of operations, cash flows and financial position.


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*

There were no repurchases of equity securities as reported on a settlement date basis during the quarter ended September 30, 2004.


Item 3.	*Defaults Upon Senior Securities*

None


Item 4.	*Submission of Matters to a Vote of Security Holders*

None


Item 5.	*Other Information*

On November 5, 2004, the Company amended and restated its line of credit with Bank of America, N.A. and certain other lenders to provide for a new five year revolving line of credit. The new credit facility provides for revolving loans of up to $300 million, of which $250 million consisted of commitments available at the closing and the balance of which are available to the Company upon the satisfaction of certain conditions. Actual borrowing availability under the new credit facility is limited effectively by the financial covenants set forth in the new credit facility. As of the date of this report, the maximum amount that could be borrowed under the new credit facility was approximately $134 million. As of the date of this report, no borrowings were outstanding under the new credit facility and the Company was in compliance with the covenants and other terms thereof.

In connection with the new credit facility, the Company is required to pay certain fees, including an unused commitment fee of between 17.5 and 35.0 basis points per annum of the unused commitment amount, with the exact amount determined based upon the Company’s consolidated leverage ratio and trailing four quarters EBITDA (each as defined in the new credit facility). Outstanding borrowings under the new credit facility accrue interest at the Company’s election, based upon the Company’s consolidated leverage ratio and trailing four quarters EBITDA, of (i) the higher of (a) the Federal Funds Rate plus 50.0 basis points or (b) Bank of America’s prime rate, and in either case plus a margin of 00.0 to 75.0 basis points or (ii) the Eurodollar Rate (as defined in the new credit facility) plus a margin of 75.0 to 200.0 basis points. The Company has agreed that repayment of amounts under the new credit facility will be guaranteed by certain of the Company’s domestic subsidiaries and will be secured by substantially all of the assets of the Company and such guarantor subsidiaries. The collateral (other than 65% of the stock of the Company’s foreign subsidiaries) will be released upon the satisfaction of certain financial conditions.

The above summary of the provisions of the new credit facility is qualified in its entirety by the terms of the new credit facility, as set forth in Exhibit 10.48 to this Form 10-Q.


Item 6.	*Exhibits*

Exhibits


3.1		Certificate of Incorporation, incorporated herein by this reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission (“Commission”) on July 1, 1999 (file no. 1-10962).
3.2		Third Amended and Restated Bylaws, as amended and restated as of December 3, 2003, incorporated herein by this reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Commission on March 15, 2004 (file no. 1-10962).
4.1		Dividend Reinvestment and Stock Purchase Plan, incorporated herein by this reference to the Prospectus in the Company’s Registration Statement on Form S-3, as filed with the Commission on March 29, 1994 (file no. 33-77024).
4.2		Rights Agreement by and between the Company and Mellon Investor Services LLC (f/k/a Chemical Mellon Shareholder Services) as Rights Agent, dated as of June 21, 1995, incorporated herein by this reference to Exhibit 4.0 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 1995, as filed with the Commission on August 12, 1995 (file no. 1-10962).
4.3		First Amendment to Rights Agreement, effective June 22, 2001, by and between the Company and Mellon Investor Services LLC, as Rights Agent, incorporated herein by this reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Commission on March 21, 2002 (file no. 1-10962).
10.48		Amended and Restated Credit Agreement, dated November 5, 2004, among the Company, each lender from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer.†
31.1		Certification of William C. Baker pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
31.2		Certification of Bradley J. Holiday pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†


(†)	Included with this Report.

SIGNATURES

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


	CALLAWAY GOLF COMPANY


	By:	/s/ BRADLEY J. HOLIDAY



	Bradley J. Holiday
	Senior Executive Vice President and
	Chief Financial Officer

Date: November 8, 2004

EXHIBIT INDEX


Exhibit			Description

	10	.48	Amended and Restated Credit Agreement, dated November 5, 2004, among the Company, each lender from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer.†
	31	.1	Certification of William C. Baker pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
	31	.2	Certification of Bradley J. Holiday pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
	32	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†



================================================================================

                                                                   Exhibit 10.48

                              AMENDED AND RESTATED
                                CREDIT AGREEMENT

                          Dated as of November 5, 2004

                                      Among

                             CALLAWAY GOLF COMPANY,
                                as the Borrower,

                             BANK OF AMERICA, N.A.,
           as Administrative Agent, Swing Line Lender and L/C Issuer,

                         UNION BANK OF CALIFORNIA, N.A.
                               BARCLAYS BANK PLC,
                             as Syndication Agents,

                              JPMORGAN CHASE BANK,
                             as Documentation Agent

                         U.S.BANK NATIONAL ASSOCIATION,
                                   as Co-Agent

                                       and

                         The Other Lenders Party Hereto

                         BANC OF AMERICA SECURITIES LLC,
                                       as
                   Sole Lead Arranger and Sole Book Manager

================================================================================



                               TABLE OF CONTENTS



   Section                                                                        Page
   -------                                                                        ----
                                                                               
ARTICLE I.     DEFINITIONS AND ACCOUNTING TERMS.............................       1
      1.01     Defined Terms................................................       1
      1.02     Other Interpretive Provisions................................      23
      1.03     Accounting Terms.............................................      23
      1.04     Rounding.....................................................      24
      1.05     References to Agreements and Laws............................      24
      1.06     Times of Day.................................................      24
      1.07     Letter of Credit Amounts.....................................      24

ARTICLE II.    THE COMMITMENTS AND CREDIT EXTENSIONS........................      24
      2.01     Committed Loans..............................................      24
      2.02     Borrowings, Conversions and Continuations of Committed
               Loans........................................................      24
      2.03     Letters of Credit............................................      26
      2.04     Swing Line Loans.............................................      34
      2.05     Prepayments..................................................      37
      2.06     Termination or Reduction of Commitments......................      38
      2.07     Repayment of Loans...........................................      38
      2.08     Interest.....................................................      38
      2.09     Fees.........................................................      39
      2.10     Computation of Interest and Fees.............................      39
      2.11     Evidence of Debt.............................................      40
      2.12     Payments Generally...........................................      40
      2.13     Sharing of Payments..........................................      42
      2.14     Increase in Aggregate Commitments............................      43

ARTICLE III.   TAXES, YIELD PROTECTION AND ILLEGALITY.......................      44
      3.01     Taxes........................................................      44
      3.02     Illegality...................................................      45
      3.03     Inability to Determine Rates.................................      46
      3.04     Increased Cost and Reduced Return; Capital Adequacy..........      46
      3.05     Funding Losses...............................................      47
      3.06     Matters Applicable to all Requests for Compensation..........      47
      3.07     Survival.....................................................      48

ARTICLE IV.    CONDITIONS PRECEDENT TO CREDIT EXTENSIONS....................      48
      4.01     Conditions of Initial Credit Extension.......................      48
      4.02     Conditions to all Credit Extensions..........................      49

ARTICLE V.     REPRESENTATIONS AND WARRANTIES...............................      50
      5.01     Existence, Qualification and Power; Compliance with Laws.....      50
      5.02     Authorization; No Contravention..............................      50
      5.03     Governmental Authorization; Other Consents...................      50
      5.04     Binding Effect...............................................      51
      5.05     Financial Statements; No Material Adverse Effect.............      51
      5.06     Litigation...................................................      51
      5.07     No Default...................................................      52
      5.08     Ownership of Property; Liens.................................      52


                                       i


                                                                               
      5.09     Environmental Compliance.....................................      52
      5.10     Insurance....................................................      52
      5.11     Taxes........................................................      52
      5.12     ERISA Compliance.............................................      52
      5.13     Subsidiaries.................................................      53
      5.14     Margin Regulations; Investment Company Act; Public
               Utility Holding Company Act..................................      53
      5.15     Disclosure...................................................      53
      5.16     Compliance with Laws.........................................      54
      5.17     Tax Shelter Regulations......................................      54
      5.18     Intellectual Property; Licenses, Etc.........................      54

ARTICLE VI.    AFFIRMATIVE COVENANTS........................................      54
      6.01     Financial Statements.........................................      55
      6.02     Certificates; Other Information..............................      55
      6.03     Notices......................................................      56
      6.04     Payment of Obligations.......................................      57
      6.05     Preservation of Existence, Etc...............................      57
      6.06     Maintenance of Properties....................................      57
      6.07     Maintenance of Insurance.....................................      58
      6.08     Compliance with Laws.........................................      58
      6.09     Books and Records............................................      58
      6.10     Inspection Rights............................................      58
      6.11     Use of Proceeds..............................................      58
      6.12     Further Assurances...........................................      58
      6.13     Collateral Release...........................................      59

ARTICLE VII.   NEGATIVE COVENANTS...........................................      60
      7.01     Liens........................................................      60
      7.02     Investments..................................................      61
      7.03     Indebtedness.................................................      63
      7.04     Fundamental Changes..........................................      64
      7.05     Dispositions.................................................      65
      7.06     Restricted Payments..........................................      65
      7.07     Change in Nature of Business.................................      66
      7.08     Transactions with Affiliates.................................      66
      7.09     Burdensome Agreements........................................      66
      7.10     Use of Proceeds..............................................      67
      7.11     Financial Covenants..........................................      67

ARTICLE VIII.  EVENTS OF DEFAULT AND REMEDIES...............................      67
      8.01     Events of Default............................................      67
      8.02     Remedies Upon Event of Default...............................      70
      8.03     Application of Funds.........................................      70

ARTICLE IX.    ADMINISTRATIVE AGENT.........................................      71
      9.01     Appointment and Authorization of Administrative Agent........      71
      9.02     Delegation of Duties.........................................      72
      9.03     Liability of Administrative Agent............................      72
      9.04     Reliance by Administrative Agent.............................      72



                                       ii


                                                                               
      9.05     Notice of Default............................................      73
      9.06     Credit Decision; Disclosure of Information by
               Administrative Agent.........................................      73
      9.07     Indemnification of Administrative Agent......................      73
      9.08     Administrative Agent in its Individual Capacity..............      74
      9.09     Successor Administrative Agent...............................      74
      9.10     Administrative Agent May File Proofs of Claim................      75
      9.11     Collateral and Guaranty Matters..............................      76
      9.12     Other Agents; Arrangers and Managers.........................      76

ARTICLE X.     MISCELLANEOUS................................................      76
      10.01    Amendments, Etc..............................................      76
      10.02    Notices and Other Communications; Facsimile Copies...........      78
      10.03    No Waiver; Cumulative Remedies...............................      79
      10.04    Attorney Costs, Expenses and Taxes...........................      79
      10.05    Indemnification by the Borrower..............................      80
      10.06    Payments Set Aside...........................................      80
      10.07    Successors and Assigns.......................................      81
      10.08    Confidentiality..............................................      84
      10.09    Set-off......................................................      85
      10.10    Interest Rate Limitation.....................................      85
      10.11    Counterparts.................................................      85
      10.12    Integration..................................................      85
      10.13    Survival of Representations and Warranties...................      86
      10.14    Severability.................................................      86
      10.15    Tax Forms....................................................      86
      10.16    Replacement of Lenders.......................................      88
      10.17    Governing Law................................................      88
      10.18    Waiver of Right to Trial by Jury.............................      89
      10.19    USA Patriot Act Notice.......................................      89



                                      iii


SCHEDULES

      1.01  Existing Letters of Credit
      2.01  Commitments and Pro Rata Shares
      7.01  Existing Liens
      7.03  Existing Indebtedness
      10.02 Administrative Agent's Office, Certain Addresses for Notices
      10.20 Existing Loan Documents

EXHIBITS

            FORM OF

      A     Committed Loan Notice
      B     Swing Line Loan Notice
      C     Note
      D     Compliance Certificate
      E     Assignment and Assumption
      F     Guaranty
      G     Opinion Matters
      H     Pledge Agreement
      I     Security Agreement

                                       iv


                              AMENDED AND RESTATED
                                CREDIT AGREEMENT

      This AMENDED AND RESTATED CREDIT AGREEMENT ("Agreement") is entered into
as of November 5, 2004 among CALLAWAY GOLF COMPANY, a Delaware corporation (the
"Borrower"), each lender from time to time party hereto (collectively, the
"Lenders" and individually, a "Lender"), and BANK OF AMERICA, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer.

      Pursuant to a Credit Agreement dated November 10, 2003 (as amended, the
"Existing Credit Agreement") among the Borrower, the Administrative Agent and
certain Lenders, the Lenders agreed to extend credit to the Borrower. The
parties to this Agreement desire to amend the Existing Credit Agreement and, for
the convenience of the parties, rather than amend, to restate the Existing
Credit Agreement in its entirety to read as set forth in this Agreement. From
and after the Closing Date, credit extended to the Borrower under the Existing
Credit Agreement shall continue to be outstanding subject to the terms and
conditions contained in this Agreement.

      In consideration of the mutual covenants and agreements herein contained,
the parties hereto agree that the Existing Credit Agreement is amended to read
as follows:

                                   ARTICLE I.
                        DEFINITIONS AND ACCOUNTING TERMS

      1.01 DEFINED TERMS. As used in this Agreement, the following terms shall
have the meanings set forth below:

      "Acquisition" means any transaction, or any series of related
transactions, consummated on or after the Closing Date, by which the Borrower,
directly or indirectly, acquires (a) any going business or all or substantially
all of the assets of any Person or division thereof, whether through purchase of
assets, merger, or otherwise or (b) in one transaction or as the most recent
transaction in a series of transactions, a majority (in number of votes) of the
Equity Interests of a Person which has ordinary voting power for the election of
directors or other similar management personnel of a Person (other than Equity
Interests having such power only by reason of the happening of a contingency) or
a majority of the outstanding Equity Interests of a Person.

      "Adjusted Net Domestic Accounts Receivable" means, as of any date,
accounts of the Borrower and its Domestic Subsidiaries reported on the books and
records of the Borrower and its Subsidiaries less reserves against such
accounts, all determined on a consolidated basis in accordance with GAAP.

      "Adjusted Net Domestic Inventory" means, as of any date, inventory of the
Borrower and its Domestic Subsidiaries that is located within the United States
as such inventory is reported on the books and records of the Borrower and its
Subsidiaries less (a) reserves against such inventory and less (b) "LIFO"
reserves against such inventory, all determined on a consolidated basis in
accordance with GAAP.

                                       1


      "Administrative Agent" means Bank of America in its capacity as
administrative agent under any of the Loan Documents, or any successor
administrative agent.

      "Administrative Agent's Office" means the Administrative Agent's address
and, as appropriate, account as set forth on Schedule 10.02, or such other
address or account as the Administrative Agent may from time to time notify the
Borrower and the Lenders.

      "Administrative Questionnaire" means an Administrative Questionnaire in a
form supplied by the Administrative Agent, a copy of which each Lender shall
deliver to both the Administrative Agent and the Borrower.

      "Affiliate" means, with respect to any Person, another Person that
directly or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified. "Control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of a Person, whether through the
ability to exercise voting power, by contract or otherwise. "Controlling" and
"Controlled" have meanings correlative thereto.

      "Agent-Related Persons" means the Administrative Agent, together with its
Affiliates (including, in the case of Bank of America in its capacity as the
Administrative Agent, the Arranger), and the officers, directors, employees,
agents and attorneys-in-fact of such Persons and Affiliates.

      "Aggregate Commitments" means the Commitments of all the Lenders.

      "Agreement" means this Credit Agreement.

      "Applicable Rate" means, from time to time, the following percentages per
annum (which percentages depend on whether the Consolidated LTM EBITDA for the
most recently ended four fiscal quarters is less than $35,000,000 as set forth
in any Compliance Certificate delivered pursuant to Section 6.02(a)) based upon
the Consolidated Leverage Ratio as set forth in the most recent Compliance
Certificate delivered pursuant to Section 6.02(a) below:



                                       APPLICABLE RATE
- ----------------------------------------------------------------------------------------------
                                                   Eurodollar Rate +
         Consolidated                              -----------------
Pricing    Leverage                                 Letter of Credit
 Level       Ratio           Commitment Fee               Fees                 Base Rate +
- ----------------------------------------------------------------------------------------------
                           LTM         LTM         LTM         LTM         LTM         LTM
                           EBITDA      EBITDA      EBITDA      EBITDA      EBITDA      EBITDA
                           > or = $35  < $35       > or = $35  < $35       > or = $35  < $35
                           Million     Million     Million     Million     Million     Million
- ----------------------------------------------------------------------------------------------
                                                                  
   1    > or = 2.00:1      0.300%      0.350%      1.75%       2.00%       0.50%       0.75%
   2    < 2.00:1 but       0.275%      0.325%      1.50%       1.75%       0.25%       0.50%
        > or = 1.50:1
   3    < 1.50:1 but       0.250%      0.300%      1.25%       1.50%       0.00%       0.25%
        > or = 1.00:1
   4    < 1.00:1 but       0.225%      0.275%      1.00%       1.25%       0.00%       0.25%
        > or = 0.50:1
   5    < 0.50:1           0.175%      0.225%      0.75%       1.00%       0.00%       0.25%


                                       2


      Any increase or decrease in the Applicable Rate resulting from a change in
the Consolidated Leverage Ratio or a change in the Consolidated LTM EBITDA shall
become effective as of the first Business Day immediately following the date a
Compliance Certificate is delivered pursuant to Section 6.02(a); provided,
however, that if a Compliance Certificate is not delivered when due in
accordance with such Section, then Pricing Level 1 shall apply as of the first
Business Day after the date on which such Compliance Certificate was required to
have been delivered. The Applicable Rate in effect from the Closing Date through
the first date on which there is a change in the Applicable Rate pursuant to the
preceding sentence shall be determined, in accordance with the financial
statements of the Borrower for the fiscal quarter ending June 30, 2004 delivered
under the Existing Credit Agreement, based upon Pricing Level 5.

      "Approved Fund" means any Fund that is administered or managed by (a) a
Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an
entity that administers or manages a Lender.

      "Arranger" means Banc of America Securities LLC, in its capacity as sole
lead arranger and sole book manager.

      "Assignment and Assumption" means an Assignment and Assumption
substantially in the form of Exhibit E.

      "Attorney Costs" means and includes all reasonable fees, expenses and
disbursements of any law firm or other external counsel and, without
duplication, the reasonable allocated cost of internal legal services and all
reasonable expenses and disbursements of internal counsel.

      "Attributable Indebtedness" means, on any date, (a) in respect of any
capital lease of any Person, the capitalized amount thereof that would appear on
a balance sheet of such Person prepared as of such date in accordance with GAAP,
and (b) in respect of any Off-Balance Sheet Liabilities, the capitalized amount
of the remaining lease payments under the relevant lease that would appear on a
balance sheet of such Person prepared as of such date in accordance with GAAP if
such lease were accounted for as a capital lease.

      "Audited Financial Statements" means the audited consolidated balance
sheet of the Borrower and its Subsidiaries for the fiscal year ended December
31, 2003, and the related consolidated statements of income or operations,
shareholders' equity and cash flows for such fiscal year of the Borrower and its
Subsidiaries, including the notes thereto.

      "Availability Period" means the period from and including the Closing Date
to the earliest of (a) the Maturity Date, (b) the date of termination of the
Aggregate Commitments pursuant to Section 2.06 or (c) the date of termination of
the commitment of each Lender to make Loans and of the obligation of the of the
L/C Issuer to make L/C Credit Extensions pursuant to Section 8.02.

                                       3


      "Bank of America" means Bank of America, N.A. and its successors.

      "Base Rate" means for any day a fluctuating rate per annum equal to the
higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest
in effect for such day as publicly announced from time to time by Bank of
America as its "prime rate." The "prime rate" is a rate set by Bank of America
based upon various factors including Bank of America's costs and desired return,
general economic conditions and other factors, and is used as a reference point
for pricing some loans, which may be priced at, above, or below such announced
rate. Any change in such rate announced by Bank of America shall take effect at
the opening of business on the day specified in the public announcement of such
change.

      "Base Rate Committed Loan" means a Committed Loan that is a Base Rate
Loan.

      "Base Rate Loan" means a Loan that bears interest based on the Base Rate.

      "Borrower" has the meaning specified in the introductory paragraph hereto.

      "Borrowing" means a Committed Borrowing or a Swing Line Borrowing, as the
context may require.

      "Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks are authorized to close under the Laws of, or are in fact
closed in, the state where the Administrative Agent's Office is located and, if
such day relates to any Eurodollar Rate Loan, means any such day on which
dealings in Dollar deposits are conducted by and between banks in the London
interbank eurodollar market.

      "Capitalization" means, as of any date, the sum of the Consolidated Funded
Indebtedness of the Borrower plus Shareholder's Equity.

      "Cash" means money, currency or a credit balance in any demand or deposit
account (as such term is defined in the Uniform Commercial Code).

      "Cash Collateralize" has the meaning specified in Section 2.03(g).

      "Change in Law" means the occurrence after the date of this Agreement, of
any of the following: (a) the adoption or taking effect of any law, rule,
regulation or treaty, (b) any change in any law, rule, regulation or treaty or
in the administration, interpretation or application thereof by any Governmental
Authority or (c) the making or issuance of any request, guideline or directive
(whether or not having the force of law) by any Governmental Authority.

      "Change of Control" means, with respect to any Person, an event or series
of events by which:

            (a) any "person" or "group" (as such terms are used in Sections
      13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any
      employee benefit plan of such person or its subsidiaries, and any person
      or entity acting in its capacity as trustee, agent or other fiduciary or
      administrator of any such plan) becomes the "beneficial owner" (as defined
      in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934,

                                       4


      except that a person or group shall be deemed to have "beneficial
      ownership" of all securities that such person or group has the right to
      acquire (such right, an "option right"), whether such right is exercisable
      immediately or only after the passage of time), directly or indirectly, of
      25% or more of the equity securities of such Person entitled to vote for
      members of the board of directors or equivalent governing body of such
      Person on a fully-diluted basis (and taking into account all such
      securities that such person or group has the right to acquire pursuant to
      any option right); or

            (b) during any period of 12 consecutive months, a majority of the
      members of the board of directors or other equivalent governing body of
      such Person cease to be composed of individuals (i) who were members of
      that board or equivalent governing body on the first day of such period,
      (ii) whose election or nomination to that board or equivalent governing
      body was approved by individuals referred to in clause (i) above
      constituting at the time of such election or nomination at least a
      majority of that board or equivalent governing body or (iii) whose
      election or nomination to that board or other equivalent governing body
      was approved by individuals referred to in clauses (i) and (ii) above
      constituting at the time of such election or nomination at least a
      majority of that board or equivalent governing body (excluding, in the
      case of both clause (ii) and clause (iii), any individual whose initial
      nomination for, or assumption of office as, a member of that board or
      equivalent governing body occurs as a result of an actual or threatened
      solicitation of proxies or consents for the election or removal of one or
      more directors by any person or group other than a solicitation for the
      election of one or more directors by or on behalf of the board of
      directors).

      "Closing Date" means the first date all the conditions precedent in
Section 4.01 are satisfied or waived in accordance with Section 10.01.

      "Code" means the Internal Revenue Code of 1986.

      "Collateral" means the Collateral on which the Administrative Agent shall
be granted a Lien pursuant to the Security Documents and the other Loan
Documents.

      "Commitment" means, as to each Lender, its obligation to (a) make
Committed Loans to the Borrower pursuant to Section 2.01, (b) purchase
participations in L/C Obligations, and (c) purchase participations in Swing Line
Loans, in an aggregate principal amount at any one time outstanding not to
exceed the amount set forth opposite such Lender's name on Schedule 2.01 or in
the Assignment and Assumption pursuant to which such Lender becomes a party
hereto, as applicable, as such amount may be adjusted from time to time in
accordance with this Agreement.

      "Committed Borrowing" means a borrowing consisting of simultaneous
Committed Loans of the same Type and, in the case of Eurodollar Rate Loans,
having the same Interest Period made by each of the Lenders pursuant to Section
2.01.

      "Committed Loan" has the meaning specified in Section 2.01.

      "Committed Loan Notice" means a notice of (a) a Committed Borrowing, (b) a
conversion of Committed Loans from one Type to the other, or (c) a continuation
of Eurodollar

                                       5


Rate Loans, pursuant to Section 2.02(a), which, if in writing, shall be
substantially in the form of Exhibit A.

      "Compliance Certificate" means a certificate substantially in the form of
Exhibit D.

      "Consolidated Asset Coverage Ratio" means, as of any date, the ratio of:

      (a) 85% of Adjusted Net Domestic Accounts Receivable plus 60% of Adjusted
Net Domestic Inventory to

      (b) Consolidated Funded Indebtedness.

      "Consolidated Capitalization Ratio" means, as of the end of any fiscal
quarter, the ratio of (a) Consolidated Funded Indebtedness to (b) such
Consolidated Funded Indebtedness plus Shareholders' Equity.

      "Consolidated EBITDA" means, for any period, for the Borrower and its
Subsidiaries on a consolidated basis, an amount equal to Consolidated Net Income
for such period plus (a) the following to the extent deducted in calculating
such Consolidated Net Income: (i) Consolidated Interest Charges for such period,
(ii) the provision for federal, state, local and foreign income taxes payable by
the Borrower and its Subsidiaries for such period, (iii) the amount of
depreciation and amortization expense for such period, (iv) losses on the sale
of fixed assets and (v) other expenses of the Borrower and its Subsidiaries
which do not represent a cash item (including, without limitation, amounts
related to any downsizing, restructuring or partial closure of any operations of
the Borrower or any of its Subsidiaries) and which reduce Consolidated Net
Income for any period ending on or before June 30, 2004 by not more than
$30,000,000, (vi) other expenses of the Borrower and its Subsidiaries which do
not represent a cash item (including, without limitation, amounts related to any
downsizing, restructuring or partial closure of any operations of the Borrower
or any of its Subsidiaries) and which reduce Consolidated Net Income after June
30, 2004 in an aggregate amount not to exceed $30,000,000 and, (vii) the amount
of any deduction to Consolidated Net Income as the result of any grant to
employees, directors, spokespersons, independent contractors, members of the
board of directors and other members of the management of the Borrower or its
Subsidiaries of any Equity Interests in the Borrower), and minus (b) the
following to the extent increasing such Consolidated Net Income (i) all non-cash
gains which have been added in determining Consolidated Net Income for such
period and (ii) gains on the sale of fixed assets.

      "Consolidated Funded Indebtedness" means, as of the end of any fiscal
quarter, for the Borrower and its Subsidiaries on a consolidated basis, the sum
of (a) the outstanding principal amount of all obligations, whether current or
long-term, for borrowed money (including Obligations hereunder) and all
obligations evidenced by bonds, debentures, notes, loan agreements or other
similar instruments, (b) all purchase money Indebtedness, (c) all direct
obligations arising under letters of credit (including standby and commercial),
bankers' acceptances, bank guaranties, surety bonds and similar instruments, (d)
all obligations in respect of the deferred purchase price of property or
services (other than trade accounts and accrued expenses payable in the ordinary
course of business), (e) Attributable Indebtedness in respect of capital leases
and Off-Balance Sheet Liabilities, (f) without duplication, all Guarantees with

                                       6


respect to outstanding Indebtedness of the types specified in clauses (a)
through (e) above of Persons other than the Borrower or any Subsidiary, and (g)
all Indebtedness of the types referred to in clauses (a) through (f) above of
any partnership or joint venture (other than a joint venture that is itself a
corporation or limited liability company) in which the Borrower or a Subsidiary
is a general partner or joint venturer, unless such Indebtedness is expressly
made non-recourse to the Borrower or such Subsidiary.

      "Consolidated Interest Charges" means, for any period, for the Borrower
and its Subsidiaries on a consolidated basis, the sum of (a) all interest,
premium payments, debt discount, fees, charges and related expenses of the
Borrower and its Subsidiaries in connection with borrowed money (including
capitalized interest) or in connection with the deferred purchase price of
assets, in each case to the extent treated as interest in accordance with GAAP,
and (b) the portion of rent expense of the Borrower and its Subsidiaries with
respect to such period under capital leases that is treated as interest in
accordance with GAAP.

      "Consolidated Interest Coverage Ratio" means, as of the end of any fiscal
quarter, the ratio of (a) Consolidated EBITDA for the period of the four prior
fiscal quarters ending on such date to (b) Consolidated Interest Charges for
such period.

      "Consolidated Leverage Ratio" means, as of any date of determination, the
ratio of (a) Consolidated Funded Indebtedness as of such date to (b)
Consolidated EBITDA for the period of the four fiscal quarters most recently
ended for which the Borrower has delivered financial statements pursuant to
Section 6.01(a) or (b).

      "Consolidated LTM EBITDA" means, as of the end of any fiscal quarter, the
Consolidated EBITDA of the Borrower for the four fiscal quarters just ended.

      "Consolidated Net Income" means, for any period, for the Borrower and its
Subsidiaries on a consolidated basis, the net income of the Borrower and its
Subsidiaries (excluding extraordinary gains but including extraordinary losses)
for that period.

       "Contractual Obligation" means, as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.

      "Control" has the meaning specified in the definition of "Affiliate."

      "Credit Extension" means each of the following: (a) a Borrowing and (b) an
L/C Credit Extension.

      "Debtor Relief Laws" means the Bankruptcy Code of the United States, the
Insolvency Act of 1986 of England and Wales, the Enterprise Act of 2002 of
England and Wales, the Bankruptcy and Insolvency Act of Canada, the Companies'
Creditors Arrangement Act of Canada, the Civil Rehabilitation Law of Japan, and
all other liquidation, conservatorship, bankruptcy, assignment for the benefit
of creditors, moratorium, rearrangement, receivership, insolvency,
reorganization, or similar debtor relief Laws of the United States or other
applicable jurisdictions as from time to time in effect and any successor Laws
and affecting the rights of creditors generally.

                                       7


      "Default" means any event or condition that constitutes an Event of
Default or that, with the giving of any notice, the passage of time, or both,
would be an Event of Default.

      "Default Rate" means an interest rate equal to (a) the Base Rate plus (b)
the Applicable Rate, if any, applicable to Base Rate Loans plus (c) 3% per
annum; provided, however, that with respect to a Eurodollar Rate Loan, the
Default Rate shall be an interest rate equal to the interest rate (including any
Applicable Rate) otherwise applicable to such Loan plus 3% per annum, in each
case to the fullest extent permitted by applicable Laws.

      "Defaulting Lender" means any Lender that (a) has failed to fund any
portion of the Committed Loans, participations in L/C Obligations or
participations in Swing Line Loans required to be funded by it hereunder within
one Business Day of the date required to be funded by it hereunder, (b) has
otherwise failed to pay over to the Administrative Agent or any other Lender any
other amount required to be paid by it hereunder within one Business Day of the
date when due, unless the subject of a good faith dispute, or (c) has been
deemed insolvent or become the subject of a bankruptcy or insolvency proceeding.

      "Disposition" or "Dispose" means the sale, transfer, license, lease or
other disposition (including any sale and leaseback transaction) of any property
by any Person, including any sale, assignment, transfer or other disposal, with
or without recourse, of any notes or accounts receivable or any rights and
claims associated therewith. The transfer of equipment to suppliers for the
purpose of facilitating production of product for the Borrower and its
Subsidiaries shall not constitute a "Disposition" for purposes of this
Agreement.

      "Dollar" and "$" mean lawful money of the United States.

      "Domestic Subsidiary" means any Subsidiary that is organized under the
laws of any political subdivision of the United States.

      "Eligible Assignee" has the meaning specified in Section 10.07(g).

      "Environmental Laws" means any and all Federal, state, local, and foreign
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses, agreements or governmental
restrictions relating to pollution and the protection of the environment or the
release of any materials into the environment, including those related to
hazardous substances or wastes, air emissions and discharges to waste or public
systems.

      "Equity Interests" means shares of capital stock, partnership interests,
membership interests in a limited liability company, beneficial interests in a
trust and other equity ownership interests in a Person.

      "ERISA" means the Employee Retirement Income Security Act of 1974.

      "ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Borrower within the meaning of
Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for
purposes of provisions relating to Section 412 of the Code).

                                       8


      "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan;
(b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension Plan
subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation
of operations that is treated as such a withdrawal under Section 4062(e) of
ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA
Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is
in reorganization; (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment as a termination under Sections 4041 or 4041A of
ERISA, or the commencement of proceedings by the PBGC to terminate a Pension
Plan or Multiemployer Plan; (e) an event or condition which constitutes grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the
imposition of any liability under Title IV of ERISA, other than for PBGC
premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower
or any ERISA Affiliate.

      "Eurodollar Rate" means for any Interest Period with respect to any
Eurodollar Rate Loan, a rate per annum determined by the Administrative Agent
pursuant to the following formula:

  Eurodollar Rate  =         Eurodollar Base Rate
                     ------------------------------------
                     1.00 - Eurodollar Reserve Percentage

            Where,

            "Eurodollar Base Rate" means, for such Interest Period (rounded
      upwards, as necessary, to the nearest 1/100 of 1%) the rate per annum
      equal to the British Bankers Association LIBOR Rate ("BBA LIBOR"), as
      published by Reuters (or other commercially available source providing
      quotations of BBA LIBOR as designated by Agent from time to time) at
      approximately 11:00 a.m., London time, two Business Days prior to the
      commencement of such Interest Period, for Dollar deposits (for delivery on
      the first day of such Interest Period) with a term equivalent to such
      Interest Period. If such rate is not available at such time for any
      reason, then the "Eurodollar Base Rate" for such Interest Period shall be
      the rate per annum determined by the Administrative Agent to be the rate
      at which deposits in Dollars for delivery on the first day of such
      Interest Period in same day funds in the approximate amount of the
      Eurodollar Rate Loan being made, continued or converted by Bank of America
      and with a term equivalent to such Interest Period would be offered by
      Bank of America's London Branch to major banks in the London interbank
      eurodollar market at their request at approximately 11:00 a.m. (London
      time) two Business Days prior to the commencement of such Interest Period.

            "Eurodollar Reserve Percentage" means, for any day during any
      Interest Period, the reserve percentage (expressed as a decimal, carried
      out to five decimal places) in effect on such day, whether or not
      applicable to any Lender, under regulations issued from time to time by
      the FRB for determining the maximum reserve requirement (including any
      emergency, supplemental or other marginal reserve requirement) with
      respect to Eurocurrency funding (currently referred to as "Eurocurrency
      liabilities"). The

                                       9


      Eurodollar Rate for each outstanding Eurodollar Rate Loan shall be
      adjusted automatically as of the effective date of any change in the
      Eurodollar Reserve Percentage.

      "Eurodollar Rate Loan" means a Committed Loan that bears interest at a
rate based on the Eurodollar Rate.

      "Event of Default" has the meaning specified in Section 8.01.

      "Excluded Domestic Subsidiaries" means (i) Callaway Golf Shell Company, a
California corporation, CGV, Inc., a California corporation, and All-American
Golf LLC, a California limited liability company; provided, however, that any
such Subsidiary of the Borrower shall cease to be an Excluded Domestic
Subsidiary if the Borrower or any of its Subsidiaries makes, or commits to make,
any Investment in such Subsidiary on or after the Closing Date and (ii) Tadpole
Golf Corporation, a Texas corporation; provided, however, that such Subsidiary
shall cease to be an Excluded Domestic Subsidiary if it is not dissolved or
merged into the Borrower or a Subsidiary of the Borrower prior to January 1,
2005.

      "Excluded Taxes" means, with respect to the Administrative Agent, any
Lender, the L/C Issuer or any other recipient of any payment to be made by or on
account of any obligation of the Borrower hereunder, (a) taxes imposed on or
measured by its overall net income (however denominated), and franchise taxes
imposed on it (in lieu of net income taxes), by the jurisdiction (or any
political subdivision there) under the laws of which such recipient is organized
or in which its principal office is located or, in the case of any Lender, in
which its Lending Office is located, (b) any branch profits taxes imposed by the
United States or any similar tax imposed by any other jurisdiction in which the
Borrower is located and (c) in the case of a Foreign Lender (other than an
assignee pursuant to a request by the Borrower under Section 10.16) any
withholding tax that is imposed on amounts payable to such Foreign Lender at the
time such Foreign Lender becomes a party hereto (or designates a new Lending
Office) or is attributable to such Foreign Lender's failure or inability (other
than as a result of a Change in Law) to comply with Section 3.01(e), except to
the extent that such Foreign Lender (or its assignee, if any) was entitled, at
the time of designation of a new Lending Office (or assignment), to receive
additional amounts from the Borrower with respect to such withholding tax
pursuant to Section 3.01(a).

      "Existing Credit Agreement" has the meaning given such term in the
Recitals to this Agreement.

      "Existing Letters of Credit" means any letters of credit outstanding under
the Existing Credit Agreement on the Closing Date as listed on Schedule 1.01 to
this Agreement.

      "Existing Loan Documents" has the meaning given such term in Section
10.20.

      "Federal Funds Rate" means, for any day, the rate per annum equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day; provided that (a) if such day is not a Business Day,
the Federal Funds Rate for such day shall be such rate on such transactions on
the next preceding Business Day as so published on the next succeeding Business
Day, and (b) if no such rate is so published on such next succeeding Business
Day, the Federal

                                       10


Funds Rate for such day shall be the average rate (rounded upward, if necessary,
to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on
such transactions as determined by the Administrative Agent.

      "Fee Letter" means the letter agreement, dated October 5, 2004, among the
Borrower, the Administrative Agent and the Arranger.

      "Financial Institution" means (i) a commercial bank organized under the
laws of the United States or any state thereof, (ii) a commercial bank organized
under the laws of any other country which is a member of the Organization for
Economic Cooperation and Development or a political subdivision of any such
country, (iii) any institution the business of which is engaging in financial
activities described in Section 4(i) of the Bank Holding Company Act of 1956,
(iv) any Affiliate of any Lender, or (v) any other entity approved by the
Administrative Agent.

      "Foreign Lender" has the meaning specified in Section 10.15(a)(i).

      "Foreign Subsidiary" means any Subsidiary of the Borrower that is not a
Domestic Subsidiary.

      "FRB" means the Board of Governors of the Federal Reserve System of the
United States.

      "Fund" means any Person (other than a natural person) that is (or will be)
engaged in making, purchasing, holding or otherwise investing in commercial
loans and similar extensions of credit in the ordinary course of its business.

      "GAAP" means generally accepted accounting principles in the United States
set forth in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or such other
principles as may be approved by a significant segment of the accounting
profession in the United States, that are applicable to the circumstances as of
the date of determination, consistently applied.

      "Governmental Authority" means any nation or government, any state or
other political subdivision thereof, any agency, authority, instrumentality,
regulatory body, court, administrative tribunal, central bank or other entity
exercising executive, legislative, judicial, taxing, regulatory or
administrative powers or functions of or pertaining to government (including any
supra-national bodies such as the European Union or the European Central Bank).

      "Granting Lender" has the meaning specified in Section 10.07(h).

      "GSOT" means the Callaway Golf Company Grantor Stock Trust established
pursuant to the Trust Agreement dated as of July 14, 1995 between the Borrower
and Sanwa Bank California, as amended from time to time. For purposes of this
Agreement, the GSOT is not an "Affiliate" or a "Subsidiary" of the Borrower.

      "Guarantee" means, as to any Person, any (a) any obligation, contingent or
otherwise, of such Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness or

                                       11


other obligation payable or performable by another Person (the "primary
obligor") in any manner, whether directly or indirectly, and including any
obligation of such Person, direct or indirect, (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or
other obligation, (ii) to purchase or lease property, securities or services for
the purpose of assuring the obligee in respect of such Indebtedness or other
obligation of the payment or performance of such Indebtedness or other
obligation, (iii) to maintain working capital, equity capital or any other
financial statement condition or liquidity or level of income or cash flow of
the primary obligor so as to enable the primary obligor to pay such Indebtedness
or other obligation, or (iv) entered into for the purpose of assuring in any
other manner the obligee in respect of such Indebtedness or other obligation of
the payment or performance thereof or to protect such obligee against loss in
respect thereof (in whole or in part), or (b) any Lien on any assets of such
Person securing any Indebtedness or other obligation of any other Person,
whether or not such Indebtedness or other obligation is assumed by such Person.
The amount of any Guarantee shall be deemed to be an amount equal to the stated
or determinable amount of the related primary obligation, or portion thereof, in
respect of which such Guarantee is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined by the
guaranteeing Person in good faith. The term "Guarantee" as a verb has a
corresponding meaning.

      "Guarantor" means each Domestic Subsidiary (other than Excluded Domestic
Subsidiaries) and any Material Foreign Subsidiary that is not a "controlled
foreign corporation" under Section 957 of the Code.

      "Guaranty" means each Guaranty made by a Guarantor in favor of the
Administrative Agent on behalf of the Lenders, substantially in the form of
Exhibit F or in such other form as shall be satisfactory to the Administrative
Agent.

      "Honor Date" has the meaning specified in Section 2.03(c)(i).

      "Immaterial Subsidiary" means, at any time, any Subsidiary of the Borrower
that is not a Material Subsidiary.

      "Indebtedness" means, as to any Person at a particular time, without
duplication, all of the following, whether or not included as indebtedness or
liabilities in accordance with GAAP:

            (a) all obligations of such Person for borrowed money and all
      obligations of such Person evidenced by bonds, debentures, notes, loan
      agreements or other similar instruments;

            (b) all direct or contingent obligations of such Person arising
      under letters of credit (including standby and commercial), bankers'
      acceptances, bank guaranties, surety bonds and similar instruments;

            (c) net obligations of such Person under any Swap Contract;

            (d) all obligations of such Person to pay the deferred purchase
      price of property or services (other than trade accounts payable and
      accrued expenses arising in the ordinary course of business);

                                       12


            (e) indebtedness (excluding prepaid interest thereon) secured by a
      Lien on property owned or being purchased by such Person (including
      indebtedness arising under conditional sales or other title retention
      agreements), whether or not such indebtedness shall have been assumed by
      such Person or is limited in recourse;

            (f) capital leases and Off-Balance Sheet Liabilities; and

            (g) all Guarantees of such Person in respect of any of the
      foregoing.

      For all purposes hereof, the Indebtedness of any Person shall include the
Indebtedness of any partnership or joint venture (other than a joint venture
that is itself a corporation or limited liability company) in which such Person
is a general partner or a joint venturer, unless such Indebtedness is expressly
made non-recourse to such Person. The amount of any net obligation under any
Swap Contract on any date shall be deemed to be the Swap Termination Value
thereof as of such date. The amount of any capital lease or Off-Balance Sheet
Liabilities as of any date shall be deemed to be the amount of Attributable
Indebtedness in respect thereof as of such date.

      "Indemnified Taxes" means Taxes other than Excluded Taxes.

      "Indemnitees" has the meaning specified in Section 10.05.

      "Intangible Assets" means assets that are considered to be intangible
assets under GAAP, including customer lists, goodwill, computer software,
copyrights, trade names, trademarks, patents, franchises, licenses, unamortized
deferred charges, unamortized debt discount and capitalized research and
development costs.

      "Interest Payment Date" means, (a) as to any Loan other than a Base Rate
Loan, the last day of each Interest Period applicable to such Loan, and the
Maturity Date; provided, however, that if any Interest Period for a Eurodollar
Rate Loan exceeds three months, the respective dates that fall every three
months after the beginning of such Interest Period shall also be Interest
Payment Dates; and (b) as to any Base Rate Loan (including a Swing Line Loan),
the last Business Day of each March, June, September and December and the
Maturity Date.

      "Interest Period" means, as to each Eurodollar Rate Loan, the period
commencing on the date such Eurodollar Rate Loan is disbursed or converted to or
continued as a Eurodollar Rate Loan and ending on the date one, two, three or
six months thereafter, as selected by the Borrower in its Committed Loan Notice;
provided that:

            (i) any Interest Period that would otherwise end on a day that is
      not a Business Day shall be extended to the next succeeding Business Day
      unless such Business Day falls in another calendar month, in which case
      such Interest Period shall end on the next preceding Business Day;

            (ii) any Interest Period that begins on the last Business Day of a
      calendar month (or on a day for which there is no numerically
      corresponding day in the calendar month at the end of such Interest
      Period) shall end on the last Business Day of the calendar month at the
      end of such Interest Period; and

                                       13


            (iii) no Interest Period for Loans shall extend beyond the Maturity
      Date, as in effect from time to time.

      "Investment" means, as to any Person, any direct or indirect acquisition
or investment by such Person, whether by means of (a) the purchase or other
acquisition of capital stock or other securities of another Person, (b) a loan,
advance or capital contribution to, Guarantee or assumption of debt of, or
purchase or other acquisition of any other debt or equity participation or
interest in, another Person, including any partnership or joint venture interest
in such other Person, or (c) the purchase or other acquisition (in one
transaction or a series of transactions) of assets of another Person that
constitute a business unit. For purposes of covenant compliance, the amount of
any Investment shall be the amount actually invested, without adjustment for
subsequent increases or decreases in the value of such Investment.

      "IRS" means the United States Internal Revenue Service.

      "ISP" means, with respect to any Letter of Credit, the "International
Standby Practices 1998" published by the Institute of International Bank Law &
Practice (or such later version thereof as may be in effect at the time of
issuance).

      "Issuer Documents" means, with respect to any Letter of Credit, the Letter
of Credit Application and any other document, agreement and instrument entered
into by the L/C Issuer and the Borrower (or any Subsidiary) or in favor of the
L/C Issuer and relating to any such Letter of Credit.

      "Joint Venture" means a corporation, partnership, limited liability
company, joint venture or other similar legal arrangement (whether created by
contract or conducted through a separate legal entity) which is not the Borrower
or a Subsidiary of any Loan Party and which is now or hereafter formed by any
Loan Party with another Person in order to conduct a common venture or
enterprise with such Person.

      "Laws" means, collectively, all international, foreign, Federal, state and
local statutes, treaties, rules, guidelines, regulations, ordinances, codes and
administrative or judicial precedents or authorities, including the
interpretation or administration thereof by any Governmental Authority charged
with the enforcement, interpretation or administration thereof, and all
applicable administrative orders, directed duties, requests, licenses,
authorizations and permits of, and agreements with, any Governmental Authority,
in each case whether or not having the force of law.

      "L/C Advance" means, with respect to each Lender, such Lender's funding of
its participation in any L/C Borrowing in accordance with its Pro Rata Share.

      "L/C Borrowing" means an extension of credit resulting from a drawing
under any Letter of Credit which has not been reimbursed on the date when made
or refinanced as a Committed Borrowing.

      "L/C Credit Extension" means, with respect to any Letter of Credit, the
issuance thereof or extension of the expiry date thereof, or the renewal or
increase of the amount thereof.

                                       14


      "L/C Issuer" means Bank of America in its capacity as issuer of Letters of
Credit hereunder, or any successor issuer of Letters of Credit hereunder.

      "L/C Obligations" means, as at any date of determination, the aggregate
undrawn amount of all outstanding Letters of Credit plus the aggregate of all
Unreimbursed Amounts, including all L/C Borrowings. For purposes of computing
the undrawn amount under any Letter of Credit, the amount of such Letter of
Credit shall be determined in accordance with Section 1.07. For all purposes of
this Agreement, if on any date of determination, a Letter of Credit has expired
by its terms, but any amount may still be drawn thereunder by reason of the
operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be
"outstanding" in the amount so remaining available to be drawn.

      "Lender" has the meaning specified in the introductory paragraph hereto
and, as the context requires, includes the L/C Issuer, the Swing Line Lender and
any Lender counterparty with the Borrower to a Swap Contract permitted and
contemplated hereby.

      "Lending Office" means, as to any Lender, the office or offices of such
Lender described as such in such Lender's Administrative Questionnaire, or such
other office or offices as a Lender may from time to time notify the Borrower
and the Administrative Agent.

      "Letter of Credit" means any letter of credit issued hereunder and shall
include any Existing Letters of Credit. A Letter of Credit may be a commercial
letter of credit or a standby letter of credit.

      "Letter of Credit Application" means an application and agreement for the
issuance or amendment of a Letter of Credit in the form from time to time in use
by the L/C Issuer.

      "Letter of Credit Expiration Date" means the day that is seven days prior
to the Maturity Date.

      "Letter of Credit Fee" has the meaning specified in Section 2.03(i).

      "Letter of Credit Sublimit" means an amount equal to the lesser of
$40,000,000 and the Aggregate Commitments. The Letter of Credit Sublimit is part
of, and not in addition to, the Aggregate Commitments.

      "Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge, or preference,
priority or other security interest or preferential arrangement of any kind or
nature whatsoever in respect of property (including any conditional sale or
other title retention agreement and any financing lease having substantially the
same economic effect as any of the foregoing).

      "Loan" means an extension of credit by a Lender to the Borrower under
Article II in the form of a Committed Loan or a Swing Line Loan.

      "Loan Documents" means this Agreement, each Note, the Fee Letter, the
Guaranties, the Security Documents, the Issuer Documents, the Existing Loan
Documents and each other

                                       15


document, agreement, and instrument as shall be executed or delivered in
connection herewith or therewith.

      "Loan Parties" means, collectively, the Borrower and each Guarantor.

      "Material Adverse Effect" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, condition
(financial or otherwise) or prospects of the Borrower or the Borrower and its
Subsidiaries taken as a whole; (b) a material impairment of the ability of any
Loan Party to perform its obligations under any Loan Document to which it is a
party; or (c) a material adverse effect upon the legality, validity, binding
effect or enforceability against any Loan Party of any Loan Document to which it
is a party.

      "Material Foreign Subsidiary" means, at any time, any Foreign Subsidiary
of the Borrower that is also a Material Subsidiary.

      "Material Subsidiary" means, at any time:

            (a) Any Subsidiary of the Borrower (i) in which the aggregate
      Investments made by the Borrower and its Subsidiaries (excluding
      Investments in the nature of inter-company receivables payable by such
      Subsidiary arising in the ordinary course of business for the sale of
      inventory and provision of services but, in the case of Investments in a
      Foreign Subsidiary, including Investments in Subsidiaries of such Foreign
      Subsidiary other than any such receivables) exceed Fifteen Million Dollars
      ($15,000,000) or (ii) that had net annual sales during the four fiscal
      quarters most recently ended (calculated on a Pro Forma Basis after giving
      effect to any Acquisition made during such period) of $50,000,000 or more;
      and

            (b) Any Domestic Subsidiary of the Borrower directly holding Equity
      Interests that are Pledged Equity Interests.

      "Maturity Date" means November 5, 2009.

      "Multiemployer Plan" means any employee benefit plan of the type described
in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate
makes or is obligated to make contributions, or during the preceding five plan
years, has made or been obligated to make contributions.

      "Note" means a promissory note made by the Borrower in favor of a Lender
evidencing Loans made by such Lender, substantially in the form of Exhibit C.

      "Obligations" means all advances to, and debts, liabilities, obligations,
covenants and duties of, any Loan Party arising under any Loan Document or
otherwise with respect to any Loan or Letter of Credit, or Swap Contract with a
Lender, whether direct or indirect (including those acquired by assumption),
absolute or contingent, due or to become due, now existing or hereafter arising
and including interest and fees that accrue after the commencement by or against
any Loan Party or any Affiliate thereof of any proceeding under any Debtor
Relief Laws naming such Person as the debtor in such proceeding, regardless of
whether such interest and fees are allowed claims in such proceeding.

                                       16


       "Off-Balance Sheet Liabilities" means, with respect to any Person, the
(a) monetary obligations of such Person under a so-called synthetic lease,
off-balance sheet or tax retention lease, if such obligations are considered
indebtedness for borrowed money for tax purposes but such lease is classified as
an operating lease under GAAP, but in any case excluding any obligations (i)
that are liabilities of any such Person as lessee under any operating lease so
long as the terms of such operating lease do not require any payment by or on
behalf of such Person at termination of such operating lease pursuant to a
required purchase by or on behalf of such Person of the property or assets
subject to such operating lease or (ii) under any arrangement pursuant to which
such Person guarantees or otherwise assures any other Person of the value of the
property or assets subject to such operating lease and (b) the monetary
obligations under any sale and leaseback transaction which does not create a
liability on the consolidated balance sheet of such Person.

      "Organization Documents" means, (a) with respect to any corporation, the
certificate or articles of incorporation and the bylaws (or equivalent or
comparable constitutive documents with respect to any non-U.S. jurisdiction);
(b) with respect to any limited liability company, the certificate or articles
of formation or organization and operating agreement; and (c) with respect to
any partnership, joint venture, trust or other form of business entity, the
partnership, joint venture or other applicable agreement of formation or
organization and any agreement, instrument, filing or notice with respect
thereto filed in connection with its formation or organization with the
applicable Governmental Authority in the jurisdiction of its formation or
organization and, if applicable, any certificate or articles of formation or
organization of such entity.

      "Other Taxes" means all present or future stamp or documentary taxes or
any other excise or property taxes, charges or similar levies arising from any
payment made hereunder or under any other Loan Document or from the execution,
delivery or enforcement of, or otherwise with respect to, this Agreement or any
other Loan Document.

      "Outstanding Amount" means (a) with respect to Committed Loans and Swing
Line Loans on any date, the aggregate outstanding principal amount thereof after
giving effect to any borrowings and prepayments or repayments of Committed Loans
and Swing Line Loans, as the case may be, occurring on such date; and (b) with
respect to any L/C Obligations on any date, the amount of such L/C Obligations
on such date after giving effect to any L/C Credit Extension occurring on such
date and any other changes in the aggregate amount of the L/C Obligations as of
such date, including as a result of any reimbursements of outstanding unpaid
drawings under any Letters of Credit or any reductions in the maximum amount
available for drawing under Letters of Credit taking effect on such date.

      "Participant" has the meaning specified in Section 10.07(d).

      "PBGC" means the Pension Benefit Guaranty Corporation.

      "Pension Plan" means any "employee pension benefit plan" (as such term is
defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is
subject to Title IV of ERISA and is sponsored or maintained by the Borrower or
any ERISA Affiliate or to which the

                                       17


Borrower or any ERISA Affiliate contributes or has an obligation to contribute,
or in the case of a multiple employer or other plan described in Section 4064(a)
of ERISA, has made contributions at any time during the immediately preceding
five plan years.

       "Permitted Acquisition" means any Acquisition by the Borrower or any of
its Subsidiaries where:

      (a) the Board of Directors or authorized management committee of the
Borrower or of the applicable Subsidiary and of the Person whose assets or
Equity Interests are being acquired has approved such Acquisition;

      (b) the business acquired in connection with such Acquisition is not
engaged, directly or indirectly, in any line of business other than the
businesses in which the Borrower and its Subsidiaries are engaged on the Closing
Date and any business activities that are substantially similar, related,
incidental, or complementary thereto;

      (c) both before and after giving effect to such Acquisition and the Loans
and Letters of Credit (if any) requested to be made in connection therewith,
each of the representations and warranties in the Loan Documents is true and
correct in all material respects (except (i) any such representation or warranty
which relates to a specified prior date and (ii) to the extent the
Administrative Agent has been notified in writing by the Borrower that any
representation or warranty is not correct and the Required Lenders have
explicitly waived in writing compliance with such representation or warranty)
and no Default or Event of Default exists, will exist, or would result
therefrom;

      (d) after giving effect to the Acquisition, the Borrower will continue to
be compliance with the covenants in this Agreement, determined on a Pro Forma
Basis;

      (e) the Investments made by the Borrower and it Subsidiaries in connection
with such Acquisition, when aggregated with all other Investments in Permitted
Acquisitions made during the current fiscal year will not, as of the date such
Investment is made, exceed (i) $40,000,000 in fiscal year 2004 (calculated
disregarding the Investment made by the Borrower during fiscal year 2004 and
prior to the Closing Date in connection with the Acquisition of FrogTrader,
Inc., a Texas corporation, and its Subsidiary, Tadpole Golf Corporation, a Texas
corporation) and (ii) thereafter, (A)$50,000,000 if the Consolidated LTM EBITDA
for the four fiscal quarters most recently ended was less than $90,000,000 or
(B) if the Consolidated LTM EBITDA for the four fiscal quarters most recently
ended was equal to or greater than $90,000,000, 100% of such Consolidated LTM
EBITDA; and

      (f) concurrently with such Acquisition, any Person required to become a
Guarantor or to execute or to deliver any Collateral, Security Document or other
Loan Document will do so in accordance with the requirements of this Agreement.

      "Permitted Lien" means each Lien permitted by Section 7.01.

      "Person" means any natural person, corporation, limited liability company,
trust, joint venture, association, company, partnership, Governmental Authority
or other entity.

                                       18


      "Plan" means any "employee benefit plan" (as such term is defined in
Section 3(3) of ERISA) established by the Borrower or, with respect to any such
plan that is subject to Section 412 of the Code or Title IV of ERISA, any ERISA
Affiliate.

      "Pledge Agreement" means the Pledge Agreement substantially in the form of
Exhibit H to this Agreement or otherwise acceptable to the Administrative Agent.

      "Pledge Documents" means (a) the Pledge Agreement, (b) the Supplemental
Agreement between the Borrower and the Administrative Agent dated as of November
10, 2003 governed by the law of Japan, (c) the Equitable Mortgage over
Securities between the Borrower and the Administrative Agent dated as of
November 10, 2003 governed by the Laws of England and Wales, (d) the Pledge
Agreement (Republic of Korea) between the Borrower and the Administrative Agent,
as attorney-in-fact for the Lenders, dated as of November 5, 2004 governed by
the laws of the Republic of Korea, and (e) stock powers, financing statements,
and each other document, agreement and instrument executed, delivered or filed
in connection with the forgoing or pursuant to the requirements of this
Agreement with respect to Pledged Equity Interests.

      "Pledged Equity Interests" means all Equity Interests in each Material
Foreign Subsidiary of the Borrower that is a "controlled foreign corporation"
under Section 957 of the Code and the certificates representing all such Equity
Interests; provided that the Pledged Equity Interests shall not include (a) more
than 65% of the issued and outstanding shares of voting stock (but shall include
100% of the issued and outstanding shares of non-voting stock) of any such
Foreign Subsidiary, (b) to the extent that applicable Law requires issuance of
directors' qualifying shares to satisfy national citizenship requirements, such
Equity Interests or (c) any Equity Interests held by a Subsidiary that is a
"controlled foreign corporation" under Section 957 of the Code.

      "Pro Forma Basis" means, with respect to compliance with any test or
covenant hereunder, compliance with such covenant or test after giving effect to
an Acquisition (including pro forma adjustments arising out of events which are
directly attributable to the Acquisition, are factually supportable, and are
expected to have a continuing impact, in each case determined on a basis
consistent with application of GAAP and Requirements of Law; such pro forma
adjustments may include cost savings resulting from head count reductions,
closure of facilities and similar restructuring charges or integration
activities or other adjustments certified as based on reasonable assumptions by
a Responsible Officer of the Borrower, together with such other pro forma
adjustments certified as based on reasonable assumptions by a Responsible
Officer of the Borrower as may be reasonably acceptable to the Lender using, for
purposes of determining such compliance, the historical financial statements of
the Borrower, its Subsidiaries and any Person so acquired).

      "Pro Rata Share" means, with respect to each Lender at any time, a
fraction (expressed as a percentage, carried out to the ninth decimal place),
the numerator of which is the amount of the Commitment of such Lender at such
time and the denominator of which is the amount of the Aggregate Commitments at
such time; provided that if the commitment of each Lender to make Loans and the
obligation of the L/C Issuer to make L/C Credit Extensions have been terminated
pursuant to Section 8.02, then the Pro Rata Share of each Lender shall be
determined based on the Pro Rata Share of such Lender immediately prior to such
termination and after giving effect

                                       19


to any subsequent assignments made pursuant to the terms hereof. The initial Pro
Rata Share of each Lender is set forth opposite the name of such Lender on
Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender
becomes a party hereto, as applicable.

      "Register" has the meaning set forth in Section 10.07(c).

      "Release Conditions" means the following conditions to the release of the
Lien securing the Obligations on the Security Agreement Collateral: (a) the
Consolidated LTM EBITDA shall have been not less than $90,000,000 for two
consecutive fiscal quarters as set forth in financial statements of the Borrower
delivered pursuant to Sections 6.01(a) or Section 6.01(b) and (b) the
Consolidated Leverage Ratio shall have been less than 2.00 to 1.00 as of the end
of each such two fiscal quarters.

      "Reportable Event" means any of the events set forth in Section 4043(c) of
ERISA, other than events for which the 30 day notice period has been waived.

      "Request for Credit Extension" means (a) with respect to a Borrowing,
conversion or continuation of Committed Loans, a Committed Loan Notice, (b) with
respect to an L/C Credit Extension, a Letter of Credit Application and (c) with
respect to a Swing Line Loan, a Swing Line Loan Notice.

      "Required Lenders" means, as of any date of determination, Lenders having
more than 50% of the Aggregate Commitments or, if the commitment of each Lender
to make Loans and the obligation of the L/C Issuer to make L/C Credit Extensions
have been terminated pursuant to Sections 2.14 or 8.02, Lenders holding in the
aggregate more than 50% of the Total Outstandings (with the aggregate amount of
each Lender's risk participation and funded participation in L/C Obligations and
Swing Line Loans being deemed "held" by such Lender for purposes of this
definition); provided that the Commitment of, and the portion of the Total
Outstandings held or deemed held by, any Defaulting Lender shall be excluded for
purposes of making a determination of Required Lenders.

      "Responsible Officer" means the chief executive officer, president, chief
financial officer, treasurer or assistant treasurer of a Loan Party.

      "Restricted Payment" means any dividend or other distribution (whether in
cash, securities or other property) with respect to any capital stock or other
equity interest of the Borrower or any Subsidiary, or any payment (whether in
cash, securities or other property), including any sinking fund or similar
deposit, on account of the purchase, redemption, retirement, acquisition,
cancellation or termination of any such capital stock or other equity interest
or of any option, warrant or other right to acquire any such capital stock or
other equity interest.

      "SEC" means the Securities and Exchange Commission, or any Governmental
Authority succeeding to any of its principal functions.

      "SEC Filings" means all annual registration statements of the Borrower
(other than exhibits thereto, pricing supplements and any registration
statements (a) on Form S-8 or its equivalent or (b) in connection with asset
securitization transactions) and reports on Forms 10-K,

                                       20


10Q and 8-K (or their equivalents) which the Borrower shall have filed with the
SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934.

      "Security Agreement" means a Security Agreement substantially in the form
of Exhibit I to this Agreement or otherwise acceptable to the Administrative
Agent.

      "Security Agreement Collateral" means Collateral securing the Obligations
pursuant to any Security Document other than the Pledge Documents.

      "Security Documents" means (a) the Security Agreement, (b) Pledge
Documents and (c) financing statements, and each other document, agreement and
instrument executed, delivered or filed in connection with the forgoing or
pursuant to the requirements of this Agreement with respect to the Security
Agreement.

      "Shareholders' Equity" means, as of any date of determination,
consolidated shareholders' equity of the Borrower and its Subsidiaries as of
that date determined in accordance with GAAP.

      "SPC" has the meaning specified in Section 10.07(h).

      "Subsidiary" of a Person means a corporation, partnership, joint venture,
limited liability company or other business entity of which a majority of the
shares of securities or other interests having ordinary voting power for the
election of directors or other governing body (other than securities or
interests having such power only by reason of the happening of a contingency)
are at the time beneficially owned, or the management of which is otherwise
controlled, directly, or indirectly through one or more intermediaries, or both,
by such Person. Unless otherwise specified, all references herein to a
"Subsidiary" or to "Subsidiaries" shall refer to a Subsidiary or Subsidiaries of
the Borrower.

      "Swap Contract" means (a) any and all rate swap transactions, basis swaps,
credit derivative transactions, forward rate transactions, commodity swaps,
commodity options, forward commodity contracts, equity or equity index swaps or
options, bond or bond price or bond index swaps or options or forward bond or
forward bond price or forward bond index transactions, interest rate options,
forward foreign exchange transactions, cap transactions, floor transactions,
collar transactions, currency swap transactions, cross-currency rate swap
transactions, currency options, spot contracts, or any other similar
transactions or any combination of any of the foregoing (including any options
to enter into any of the foregoing), whether or not any such transaction is
governed by or subject to any master agreement, and (b) any and all transactions
of any kind, and the related confirmations, which are subject to the terms and
conditions of, or governed by, any form of master agreement published by the
International Swaps and Derivatives Association, Inc., any International Foreign
Exchange Master Agreement, or any other master agreement (any such master
agreement, together with any related schedules, a "Master Agreement"), including
any such obligations or liabilities under any Master Agreement.

      "Swap Termination Value" means, in respect of any one or more Swap
Contracts, after taking into account the effect of any legally enforceable
netting agreement relating to such Swap Contracts, (a) for any date on or after
the date such Swap Contracts have been closed out and

                                       21


termination value(s) determined in accordance therewith, such termination
value(s), and (b) for any date prior to the date referenced in clause (a), the
amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as
determined based upon one or more mid-market or other readily available
quotations provided by any recognized dealer in such Swap Contracts (which may
include a Lender or any Affiliate of a Lender).

      "Swing Line" means the revolving credit facility made available by the
Swing Line Lender pursuant to Section 2.04.

      "Swing Line Borrowing" means a borrowing of a Swing Line Loan pursuant to
Section 2.04.

      "Swing Line Lender" means Bank of America in its capacity as provider of
Swing Line Loans, or any successor swing line lender hereunder.

      "Swing Line Loan" has the meaning specified in Section 2.04(a).

      "Swing Line Loan Notice" means a notice of a Swing Line Borrowing pursuant
to Section 2.04(b), which, if in writing, shall be substantially in the form of
Exhibit B.

      "Swing Line Sublimit" means an amount equal to the lesser of (a)
$15,000,000 and (b) the Aggregate Commitments. The Swing Line Sublimit is part
of, and not in addition to, the Aggregate Commitments.

      "Taxes" means all present or future taxes, levies, imposts, duties,
deductions, withholdings, assessments, fees and other charges imposed by any
Governmental Authority, including any interest, additions to tax or penalties
applicable thereto.

      "Threshold Amount" means, for purposes of Section 6.04 (payment of
obligations), 8.01(e) (cross-default), 8.01(h) (judgments) and 8.01(i) (ERISA),
$10,000,000.

      "Total Outstandings" means the aggregate Outstanding Amount of all Loans
and all L/C Obligations.

      "Type" means, with respect to a Committed Loan, its character as a Base
Rate Loan or a Eurodollar Rate Loan.

      "Unfunded Pension Liability" means the excess of a Pension Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Pension Plan's assets, determined in accordance with the assumptions used for
funding the Pension Plan pursuant to Section 412 of the Code for the applicable
plan year.

      "Uniform Commercial Code" means the Uniform Commercial Code as in effect
in each applicable jurisdiction.

      "United States" and "U.S." mean the United States of America.

      "Unreimbursed Amount" has the meaning set forth in Section 2.03(c)(i).

                                       22


      "Wholly Owned Subsidiary" means any Subsidiary in which 100% of the Equity
Interests are owned by the Borrower or a Subsidiary of the Borrower except for
those Equity Interests that applicable Law requires to be issued as directors'
qualifying shares to satisfy national citizenship requirements

      1.02  OTHER INTERPRETIVE PROVISIONS.  With reference to this Agreement and
each other Loan Document, unless otherwise specified herein or in such other
Loan Document:

      (a) The meanings of defined terms are equally applicable to the singular
and plural forms of the defined terms.

      (b) (i) The words "herein," "hereto," "hereof" and "hereunder" and words
of similar import when used in any Loan Document shall refer to such Loan
Document as a whole and not to any particular provision thereof.

            (ii) Article, Section, Exhibit and Schedule references are to the
      Loan Document in which such reference appears.

            (iii) The term "including" is by way of example and not limitation.

            (iv) The term "documents" includes any and all instruments,
      documents, agreements, certificates, notices, reports, financial
      statements and other writings, however evidenced, whether in physical or
      electronic form.

      (c) In the computation of periods of time from a specified date to a later
specified date, the word "from" means "from and including;" the words "to" and
"until" each mean "to but excluding;" and the word "through" means "to and
including."

      (d) Section headings herein and in the other Loan Documents are included
for convenience of reference only and shall not affect the interpretation of
this Agreement or any other Loan Document.

      1.03 ACCOUNTING TERMS. (a) All accounting terms not specifically or
completely defined herein shall be construed in conformity with, and all
financial data (including financial ratios and other financial calculations)
required to be submitted pursuant to this Agreement shall be prepared in
conformity with, GAAP applied on a consistent basis, as in effect from time to
time, applied in a manner consistent with that used in preparing the Audited
Financial Statements, except as otherwise specifically prescribed herein.

      (b) If at any time any change in GAAP would affect the computation of any
financial ratio or requirement set forth in any Loan Document, and either the
Borrower or the Required Lenders shall so request, the Administrative Agent, the
Lenders and the Borrower shall negotiate in good faith to amend such ratio or
requirement to preserve the original intent thereof in light of such change in
GAAP (subject to the approval of the Required Lenders); provided that, until so
amended, (i) such ratio or requirement shall continue to be computed in
accordance with GAAP prior to such change therein and (ii) the Borrower shall
provide to the Administrative Agent and the Lenders financial statements and
other documents required under this Agreement or as

                                       23


reasonably requested hereunder setting forth a reconciliation between
calculations of such ratio or requirement made before and after giving effect to
such change in GAAP.

      1.04 ROUNDING. Any financial ratios required to be maintained by the
Borrower pursuant to this Agreement shall be calculated by dividing the
appropriate component by the other component, carrying the result to one place
more than the number of places by which such ratio is expressed herein and
rounding the result up or down to the nearest number (with a rounding-up if
there is no nearest number).

      1.05 REFERENCES TO AGREEMENTS AND LAWS. Unless otherwise expressly
provided herein, (a) references to Organization Documents, agreements (including
the Loan Documents) and other contractual instruments shall be deemed to include
all subsequent amendments, restatements, extensions, supplements and other
modifications thereto, but only to the extent that such amendments,
restatements, extensions, supplements and other modifications are not prohibited
by any Loan Document; and (b) references to any Law shall include all statutory
and regulatory provisions consolidating, amending, replacing, supplementing or
interpreting such Law.

      1.06 TIMES OF DAY. Unless otherwise specified, all references herein to
times of day shall be references to Pacific time (daylight or standard, as
applicable).

      1.07 LETTER OF CREDIT AMOUNTS.

      Unless otherwise specified herein, the amount of a Letter of Credit at any
time shall be deemed to be the stated amount of such Letter of Credit in effect
at such time; provided, however, that with respect to any Letter of Credit that,
by its terms or the terms of any Issuer Document related thereto, provides for
one or more automatic increases in the stated amount thereof, the amount of such
Letter of Credit shall be deemed to be the maximum stated amount of such Letter
of Credit after giving effect to all such increases, whether or not such maximum
stated amount is in effect at such time.

                                  ARTICLE II.

                      THE COMMITMENTS AND CREDIT EXTENSIONS

      2.01 COMMITTED LOANS. Subject to the terms and conditions set forth
herein, each Lender severally agrees to make loans (each such loan, a "Committed
Loan") to the Borrower from time to time, on any Business Day during the
Availability Period, in an aggregate amount not to exceed at any time
outstanding the amount of such Lender's Commitment; provided, however, that
after giving effect to any Committed Borrowing, (i) the Total Outstandings shall
not exceed the Aggregate Commitments, and (ii) the aggregate Outstanding Amount
of the Committed Loans of any Lender, plus such Lender's Pro Rata Share of the
Outstanding Amount of all L/C Obligations, plus such Lender's Pro Rata Share of
the Outstanding Amount of all Swing Line Loans shall not exceed such Lender's
Commitment. Within the limits of each Lender's Commitment, and subject to the
other terms and conditions hereof, the Borrower may borrow under this Section
2.01, prepay under Section 2.05, and reborrow under this Section 2.01. Committed
Loans may be Base Rate Loans or Eurodollar Rate Loans, as further provided
herein.

      2.02 BORROWINGS, CONVERSIONS AND CONTINUATIONS OF COMMITTED LOANS.

                                       24


      (a) Each Committed Borrowing, each conversion of Committed Loans from one
Type to the other, and each continuation of Eurodollar Rate Loans shall be made
upon the Borrower's irrevocable notice to the Administrative Agent, which may be
given by telephone. Each such notice must be received by the Administrative
Agent not later than 11:00 a.m. (i) three Business Days prior to the requested
date of any Borrowing of, conversion to or continuation of Eurodollar Rate Loans
or of any conversion of Eurodollar Rate Loans to Base Rate Committed Loans, and
(ii) on the requested date of any Borrowing of Base Rate Committed Loans. Each
telephonic notice by the Borrower pursuant to this Section 2.02(b) must be
confirmed promptly by delivery to the Administrative Agent of a written
Committed Loan Notice, appropriately completed and signed by a Responsible
Officer of the Borrower. Each Borrowing of, conversion to or continuation of
Eurodollar Rate Loans shall be in a principal amount of $1,000,000 or a whole
multiple of $250,000 in excess thereof. Except as provided in Sections 2.03(c)
and 2.04(c), each Borrowing of or conversion to Base Rate Committed Loans shall
be in a principal amount of $100,000 or a whole multiple of $50,000 in excess
thereof. Each Committed Loan Notice (whether telephonic or written) shall
specify (i) whether the Borrower is requesting a Committed Borrowing, a
conversion of Committed Loans from one Type to the other, or a continuation of
Eurodollar Rate Loans, (ii) the requested date of the Borrowing, conversion or
continuation, as the case may be (which shall be a Business Day), (iii) the
principal amount of Committed Loans to be borrowed, converted or continued, (iv)
the Type of Committed Loans to be borrowed or to which existing Committed Loans
are to be converted, and (v) if applicable, the duration of the Interest Period
with respect thereto. If the Borrower fails to specify a Type of Committed Loan
in a Committed Loan Notice or if the Borrower fails to give a timely notice
requesting a conversion or continuation, then the applicable Committed Loans
shall be made as, or converted to, Base Rate Loans. Any such automatic
conversion to Base Rate Loans shall be effective as of the last day of the
Interest Period then in effect with respect to the applicable Eurodollar Rate
Loans. If the Borrower requests a Borrowing of, conversion to, or continuation
of Eurodollar Rate Loans in any such Committed Loan Notice, but fails to specify
an Interest Period, it will be deemed to have specified an Interest Period of
one month.

      (b) Following receipt of a Committed Loan Notice, the Administrative Agent
shall promptly notify each Lender of the amount of its Pro Rata Share of the
applicable Committed Loans, and if no timely notice of a conversion or
continuation is provided by the Borrower, the Administrative Agent shall notify
each Lender of the details of any automatic conversion to Base Rate Loans
described in the preceding subsection. In the case of a Committed Borrowing,
each Lender shall make the amount of its Committed Loan available to the
Administrative Agent in immediately available funds at the Administrative
Agent's Office not later than 1:00 p.m. on the Business Day specified in the
applicable Committed Loan Notice. Upon satisfaction of the applicable conditions
set forth in Section 4.02 (and, if such Borrowing is the initial Credit
Extension, Section 4.01), the Administrative Agent shall make all funds so
received available to the Borrower in like funds as received by the
Administrative Agent either by (i) crediting the account of the Borrower on the
books of Bank of America with the amount of such funds or (ii) wire transfer of
such funds, in each case in accordance with instructions provided to (and
reasonably acceptable to) the Administrative Agent by the Borrower; provided,
however, that if, on the date the Committed Loan Notice with respect to such
Borrowing is given by the Borrower, there are Swing Line Loans or L/C Borrowings
outstanding, then the proceeds of such Borrowing shall be applied, first, to the
payment in full of any such L/C Borrowings, second, to the payment in full of
any such Swing Line Loans, and third, to the Borrower as provided above.

                                       25


      (c) Except as otherwise provided herein, a Eurodollar Rate Loan may be
continued or converted only on the last day of an Interest Period for such
Eurodollar Rate Loan. During the existence of a Default, no Loans may be
requested as, converted to or continued as Eurodollar Rate Loans without the
consent of the Required Lenders.

      (d) The Administrative Agent shall promptly notify the Borrower and the
Lenders of the interest rate applicable to any Interest Period for Eurodollar
Rate Loans upon determination of such interest rate. The determination of the
Eurodollar Rate by the Administrative Agent shall be conclusive in the absence
of manifest error. At any time that Base Rate Loans are outstanding, the
Administrative Agent shall notify the Borrower and the Lenders of any change in
Bank of America's prime rate used in determining the Base Rate promptly
following the public announcement of such change.

      (e) After giving effect to all Committed Borrowings, all conversions of
Committed Loans from one Type to the other, and all continuations of Committed
Loans as the same Type, there shall not be more than ten (10) Interest Periods
in effect with respect to Committed Loans.

      2.03 LETTERS OF CREDIT.

      (a) The Letter of Credit Commitment.

            (i) Subject to the terms and conditions set forth herein, (A) the
      L/C Issuer agrees, in reliance upon the agreements of the other Lenders
      set forth in this Section 2.03, (1) from time to time on any Business Day
      during the period from the Closing Date until the Letter of Credit
      Expiration Date, to issue Letters of Credit for the account of the
      Borrower, and to amend or renew Letters of Credit previously issued by it,
      in accordance with subsection (b) below, and (2) to honor drawings under
      the Letters of Credit; and (B) the Lenders severally agree to participate
      in Letters of Credit issued for the account of the Borrower and any
      drawings thereunder; provided that after giving effect to any L/C Credit
      Extension with respect to any Letter of Credit, (x) the Total Outstandings
      shall not exceed the Aggregate Commitments, (y) the aggregate Outstanding
      Amount of the Committed Loans of any Lender, plus such Lender's Pro Rata
      Share of the Outstanding Amount of all L/C Obligations, plus such Lender's
      Pro Rata Share of the Outstanding Amount of all Swing Line Loans shall not
      exceed such Lender's Commitment, and (z) the Outstanding Amount of the L/C
      Obligations shall not exceed the Letter of Credit Sublimit. Within the
      foregoing limits, and subject to the terms and conditions hereof, the
      Borrower's ability to obtain Letters of Credit shall be fully revolving,
      and accordingly the Borrower may, during the foregoing period, obtain
      Letters of Credit to replace Letters of Credit that have expired or that
      have been drawn upon and reimbursed. All Existing Letters of Credit shall
      be deemed to have been issued pursuant hereto, and from and after the
      Closing Date shall be subject to and governed by the terms and conditions
      hereof.

            (ii) The L/C Issuer shall be under no obligation to issue any Letter
      of Credit if:

                  (A) any order, judgment or decree of any Governmental
            Authority or arbitrator shall by its terms purport to enjoin or
            restrain the L/C Issuer from issuing such Letter of Credit, or any
            Law applicable to the L/C Issuer or any

                                       26


            request or directive (whether or not having the force of law) from
            any Governmental Authority with jurisdiction over the L/C Issuer
            shall prohibit, or request that the L/C Issuer refrain from, the
            issuance of letters of credit generally or such Letter of Credit in
            particular or shall impose upon the L/C Issuer with respect to such
            Letter of Credit any restriction, reserve or capital requirement
            (for which the L/C Issuer is not otherwise compensated hereunder)
            not in effect on the Closing Date, or shall impose upon the L/C
            Issuer any unreimbursed loss, cost or expense which was not
            applicable on the Closing Date and which the L/C Issuer in good
            faith deems material to it;

                  (B) subject to Section 2.03(b)(iii) the expiry date of such
            requested Letter of Credit would occur more than twelve months after
            the date of issuance or last renewal, unless the Required Lenders
            have approved such expiry date;

                  (C) the expiry date of such requested Letter of Credit would
            occur after the Letter of Credit Expiration Date, and no such Letter
            of Credit shall be issued unless all the Lenders have approved such
            expiry date;

                  (D) the issuance of such Letter of Credit would violate one or
            more policies of the L/C Issuer;

                  (E) except as otherwise agreed by the Administrative Agent and
            L/C Issuer, such Letter of Credit is in an initial amount less than
            $100,000 or denominated in a currency other than Dollars; or

                  (F) a default of any Lender's obligations to fund under
            Section 2.03(c) exists or any Lender is at such time a Defaulting
            Lender hereunder, unless the L/C Issuer has entered into
            satisfactory arrangements with the Borrower or such Lender to
            eliminate the L/C Issuer's risk with respect to such Lender.

            (iii) The L/C Issuer shall be under no obligation to amend any
      Letter of Credit if (A) the L/C Issuer would have no obligation at such
      time to issue such Letter of Credit in its amended form under the terms
      hereof, or (B) the beneficiary of such Letter of Credit does not accept
      the proposed amendment to such Letter of Credit.

            (iv) The L/C Issuer shall act on behalf of the Lenders with respect
      to any Letters of Credit issued by it and the documents associated
      therewith, and the L/C Issuer shall have all of the benefits and
      immunities (A) provided to the Administrative Agent in Article IX with
      respect to any acts taken or omissions suffered by the L/C Issuer in
      connection with Letters of Credit issued by it or proposed to be issued by
      it and Issuer Documents pertaining to such Letters of Credit as fully as
      if the term "Administrative Agent" as used in Article IX included the L/C
      Issuer with respect to such acts or omissions and (B) as additionally
      provided herein with respect to the L/C Issuer.

                                       27


      (b) Procedures for Issuance and Amendment of Letters of Credit;
Auto-Renewal Letters of Credit.

            (i) Each Letter of Credit shall be issued or amended, as the case
      may be, upon the request of the Borrower delivered to the L/C Issuer (with
      a copy to the Administrative Agent) in the form of a Letter of Credit
      Application, appropriately completed and signed by a Responsible Officer
      of the Borrower. Such Letter of Credit Application must be received by the
      L/C Issuer and the Administrative Agent not later than 1:00 p.m. at least
      two Business Days (or such later date and time as the Administrative Agent
      and L/C Issuer may agree in a particular instance in its sole discretion)
      prior to the proposed issuance date or date of amendment, as the case may
      be. In the case of a request for an initial issuance of a Letter of
      Credit, such Letter of Credit Application shall specify in form and detail
      satisfactory to the L/C Issuer: (A) the proposed issuance date of the
      requested Letter of Credit (which shall be a Business Day); (B) the amount
      thereof; (C) the expiry date thereof; (D) the name and address of the
      beneficiary thereof; (E) the documents to be presented by such beneficiary
      in case of any drawing thereunder; (F) the full text of any certificate to
      be presented by such beneficiary in case of any drawing thereunder; and
      (G) such other matters as the L/C Issuer may require. In the case of a
      request for an amendment of any outstanding Letter of Credit, such Letter
      of Credit Application shall specify in form and detail satisfactory to the
      L/C Issuer (A) the Letter of Credit to be amended; (B) the proposed date
      of amendment thereof (which shall be a Business Day); (C) the nature of
      the proposed amendment; and (D) such other matters as the L/C Issuer may
      require. Additionally, the Borrower shall furnish to the L/C Issuer and
      the Administrative Agent such other documents and information pertaining
      to such requested Letter of Credit issuance or amendment, including any
      Issuer Documents, as the L/C Issuer or the Administrative Agent may
      reasonably require.

            (ii) Promptly after receipt of any Letter of Credit Application, the
      L/C Issuer will confirm with the Administrative Agent (by telephone or in
      writing) that the Administrative Agent has received a copy of such Letter
      of Credit Application from the Borrower and, if not, the L/C Issuer will
      provide the Administrative Agent with a copy thereof. Upon receipt by the
      L/C Issuer of confirmation from the Administrative Agent that the
      requested issuance or amendment is permitted in accordance with the terms
      hereof, then, subject to the terms and conditions hereof, the L/C Issuer
      shall, on the requested date, issue a Letter of Credit for the account of
      the Borrower or enter into the applicable amendment, as the case may be,
      in each case in accordance with the L/C Issuer's usual and customary
      business practices. Immediately upon the issuance of each Letter of
      Credit, each Lender shall be deemed to, and hereby irrevocably and
      unconditionally agrees to, purchase from the L/C Issuer a risk
      participation in such Letter of Credit in an amount equal to the product
      of such Lender's Pro Rata Share times the amount of such Letter of Credit.

            (iii) If the Borrower so requests in any applicable Letter of Credit
      Application, the L/C Issuer may, in its sole and absolute discretion,
      agree to issue a standby Letter of Credit that has automatic renewal
      provisions (each, an "Auto-Extension Letter of Credit"); provided that any
      such Auto-Extension Letter of Credit must permit the L/C Issuer to prevent
      any such renewal at least once in each twelve-month period

                                       28


      (commencing with the date of issuance of such Letter of Credit) by giving
      prior notice to the beneficiary thereof not later than a day (the
      "Nonextension Notice Date") in each such twelve-month period to be agreed
      upon at the time such Letter of Credit is issued. Unless otherwise
      directed by the L/C Issuer, the Borrower shall not be required to make a
      specific request to the L/C Issuer for any such renewal. Once an
      Auto-Extension Letter of Credit has been issued, the Lenders shall be
      deemed to have authorized (but may not require) the L/C Issuer to permit
      the renewal of such Letter of Credit at any time to an expiry date not
      later than the Letter of Credit Expiration Date; provided, however, that
      the L/C Issuer shall not permit any such renewal if (A) the L/C Issuer has
      determined that it would have no obligation at such time to issue such
      Letter of Credit in its renewed form under the terms hereof (by reason of
      the provisions of Section 2.03(a)(ii) or otherwise), (B) it has received
      notice (which may be by telephone or in writing) on or before the day that
      is five Business Days before the Nonextension Notice Date (1) from the
      Administrative Agent that the Required Lenders have elected not to permit
      such renewal or (2) from the Administrative Agent, any Lender or the
      Borrower that one or more of the applicable conditions specified in
      Section 4.02 is not then satisfied.

            (iv) If the Borrower so requests in any applicable Letter of Credit
      Application, the L/C Issuer may, in its sole and absolute discretion,
      agree to issue a Letter of Credit that permits the automatic reinstatement
      of all or a portion of the stated amount thereof after any drawing
      thereunder (each, an "Auto-Reinstatement Letter of Credit"). Unless
      otherwise directed by the L/C Issuer, the Borrower shall not be required
      to make a specific request to the L/C Issuer to permit such reinstatement.
      Once an Auto-Reinstatement Letter of Credit has been issued, except as
      provided in the following sentence, the Lenders shall be deemed to have
      authorized (but may not require) the L/C Issuer to reinstate all or a
      portion of the stated amount thereof in accordance with the provisions of
      such Letter of Credit. Notwithstanding the foregoing, if such
      Auto-Reinstatement Letter of Credit permits the L/C Issuer to decline to
      reinstate all or any portion of the stated amount thereof after a drawing
      thereunder by giving notice of such non-reinstatement within a specified
      number of days after such drawing (the "Non-Reinstatement Deadline"), the
      L/C Issuer shall not permit such reinstatement if it has received a notice
      (which may be by telephone or in writing) on or before the day that is
      five Business Days before the Non-Reinstatement Deadline (A) from the
      Administrative Agent that the Required Lenders have elected not to permit
      such reinstatement or (B) from the Administrative Agent, any Lender or the
      Borrower that one or more of the applicable conditions specified in
      Section 4.02 is not then satisfied (treating such reinstatement as an L/C
      Credit Extension for purposes of this clause) and, in each case, directing
      the L/C Issuer not to permit such reinstatement.

            (v) Promptly after its delivery of any Letter of Credit or any
      amendment to a Letter of Credit to an advising bank with respect thereto
      or to the beneficiary thereof, the L/C Issuer will also deliver to the
      Borrower and the Administrative Agent a true and complete copy of such
      Letter of Credit or amendment.

                                       29


      (c) Drawings and Reimbursements; Funding of Participations.

            (i) Upon receipt from the beneficiary of any Letter of Credit of any
      notice of a drawing under such Letter of Credit, the L/C Issuer shall
      notify the Borrower and the Administrative Agent thereof. Not later than
      1:00 p.m. on the date of any payment by the L/C Issuer under a Letter of
      Credit (each such date, an "Honor Date") or the next succeeding Business
      Day if notice of drawing was received by the Borrower after 11:00 a.m. on
      the Honor Date, the Borrower shall reimburse the L/C Issuer through the
      Administrative Agent in an amount equal to the amount of such drawing. If
      the Borrower fails to so reimburse the L/C Issuer by such time, the
      Administrative Agent shall promptly notify each Lender of the Honor Date
      (or the next succeeding Business Day, if applicable), the amount of the
      unreimbursed drawing (the "Unreimbursed Amount"), and the amount of such
      Lender's Pro Rata Share thereof. In such event, the Borrower shall be
      deemed to have requested a Committed Borrowing of Base Rate Loans to be
      disbursed on the Honor Date (or the next succeeding Business Day, if
      applicable) in an amount equal to the Unreimbursed Amount, without regard
      to the minimum and multiples specified in Section 2.02 for the principal
      amount of Base Rate Loans, but subject to the amount of the unutilized
      portion of the Aggregate Commitments and the conditions set forth in
      Section 4.02 (other than the delivery of a Committed Loan Notice). Any
      notice given by the L/C Issuer or the Administrative Agent pursuant to
      this Section 2.03(c)(i) may be given by telephone if immediately confirmed
      in writing; provided that the lack of such an immediate confirmation shall
      not affect the conclusiveness or binding effect of such notice.

            (ii) Each Lender (including the Lender acting as L/C Issuer) shall
      upon any notice pursuant to Section 2.03(c)(i) make funds available to the
      Administrative Agent for the account of the L/C Issuer at the
      Administrative Agent's Office in an amount equal to its Pro Rata Share of
      the Unreimbursed Amount not later than 1:00 p.m. on the Business Day
      specified in such notice by the Administrative Agent, whereupon, subject
      to the provisions of Section 2.03(c)(iii), each Lender that so makes funds
      available shall be deemed to have made a Base Rate Committed Loan to the
      Borrower in such amount. The Administrative Agent shall remit the funds so
      received to the L/C Issuer.

            (iii) With respect to any Unreimbursed Amount that is not fully
      refinanced by a Committed Borrowing of Base Rate Loans because the
      conditions set forth in Section 4.02 cannot be satisfied or for any other
      reason, the Borrower shall be deemed to have incurred from the L/C Issuer
      an L/C Borrowing in the amount of the Unreimbursed Amount that is not so
      refinanced, which L/C Borrowing shall be due and payable on demand
      (together with interest) and shall bear interest at the Default Rate. In
      such event, each Lender's payment to the Administrative Agent for the
      account of the L/C Issuer pursuant to Section 2.03(c)(ii) shall be deemed
      payment in respect of its participation in such L/C Borrowing and shall
      constitute an L/C Advance from such Lender in satisfaction of its
      participation obligation under this Section 2.03.

            (iv) Until each Lender funds its Committed Loan or L/C Advance
      pursuant to this Section 2.03(c) to reimburse the L/C Issuer for any
      amount drawn under any Letter

                                       30


      of Credit, interest in respect of such Lender's Pro Rata Share of such
      amount shall be solely for the account of the L/C Issuer.

            (v) Each Lender's obligation to make Committed Loans or L/C Advances
      to reimburse the L/C Issuer for amounts drawn under Letters of Credit, as
      contemplated by this Section 2.03(c), shall be absolute and unconditional
      and shall not be affected by any circumstance, including (A) any set-off,
      counterclaim, recoupment, defense or other right which such Lender may
      have against the L/C Issuer, the Borrower or any other Person for any
      reason whatsoever; (B) the occurrence or continuance of a Default, or (C)
      any other occurrence, event or condition, whether or not similar to any of
      the foregoing; provided, however, that each Lender's obligation to make
      Committed Loans pursuant to this Section 2.03(c) is subject to the
      conditions set forth in Section 4.02 (other than delivery by the Borrower
      of a Committed Loan Notice). No such making of an L/C Advance shall
      relieve or otherwise impair the obligation of the Borrower to reimburse
      the L/C Issuer for the amount of any payment made by the L/C Issuer under
      any Letter of Credit, together with interest as provided herein.

            (vi) If any Lender fails to make available to the Administrative
      Agent for the account of the L/C Issuer any amount required to be paid by
      such Lender pursuant to the foregoing provisions of this Section 2.03(c)
      by the time specified in Section 2.03(c)(ii), the L/C Issuer shall be
      entitled to recover from such Lender (acting through the Administrative
      Agent), on demand, such amount with interest thereon for the period from
      the date such payment is required to the date on which such payment is
      immediately available to the L/C Issuer at a rate per annum equal to the
      greater of the Federal Funds Rate from time to time in effect and a rate
      determined by the L/C Issuer in accordance with banking industry rules on
      interbank compensation. A certificate of the L/C Issuer submitted to any
      Lender (through the Administrative Agent) with respect to any amounts
      owing under this clause (vi) shall be conclusive absent manifest error.

      (d) Repayment of Participations.

            (i) At any time after the L/C Issuer has made a payment under any
      Letter of Credit and has received from any Lender such Lender's L/C
      Advance in respect of such payment in accordance with Section 2.03(c), if
      the Administrative Agent receives for the account of the L/C Issuer any
      payment in respect of the related Unreimbursed Amount or interest thereon
      (whether directly from the Borrower or otherwise, including proceeds of
      Cash Collateral applied thereto by the Administrative Agent), the
      Administrative Agent will distribute to such Lender its Pro Rata Share
      thereof (appropriately adjusted, in the case of interest payments, to
      reflect the period of time during which such Lender's L/C Advance was
      outstanding) in the same funds as those received by the Administrative
      Agent.

            (ii) If any payment received by the Administrative Agent for the
      account of the L/C Issuer pursuant to Section 2.03(c)(i) is required to be
      returned under any of the circumstances described in Section 10.06
      (including pursuant to any settlement entered into by the L/C Issuer in
      its discretion), each Lender shall pay to the Administrative Agent for the
      account of the L/C Issuer its Pro Rata Share thereof on demand of the

                                       31


      Administrative Agent, plus interest thereon from the date of such demand
      to the date such amount is returned by such Lender, at a rate per annum
      equal to the Federal Funds Rate from time to time in effect. The
      obligations of the Lenders under this clause shall survive the payment in
      full of the Obligations and termination of this Agreement.

      (e) Obligations Absolute. The obligation of the Borrower to reimburse the
L/C Issuer for each drawing under each Letter of Credit and to repay each L/C
Borrowing shall be absolute, unconditional and irrevocable, and shall be paid
strictly in accordance with the terms of this Agreement under all circumstances,
including the following:

            (i) any lack of validity or enforceability of such Letter of Credit,
      this Agreement, or any other Loan Document;

            (ii) the existence of any claim, counterclaim, set-off, defense or
      other right that the Borrower or any Subsidiary may have at any time
      against any beneficiary or any transferee of such Letter of Credit (or any
      Person for whom any such beneficiary or any such transferee may be
      acting), the L/C Issuer or any other Person, whether in connection with
      this Agreement, the transactions contemplated hereby or by such Letter of
      Credit or any agreement or instrument relating thereto, or any unrelated
      transaction;

            (iii) any draft, demand, certificate or other document presented
      under such Letter of Credit proving to be forged, fraudulent, invalid or
      insufficient in any respect or any statement therein being untrue or
      inaccurate in any respect; or any loss or delay in the transmission or
      otherwise of any document required in order to make a drawing under such
      Letter of Credit;

            (iv) any payment by the L/C Issuer under such Letter of Credit
      against presentation of a draft or certificate that does not strictly
      comply with the terms of such Letter of Credit; or any payment made by the
      L/C Issuer under such Letter of Credit to any Person purporting to be a
      trustee in bankruptcy, debtor-in-possession, assignee for the benefit of
      creditors, liquidator, receiver or other representative of or successor to
      any beneficiary or any transferee of such Letter of Credit, including any
      arising in connection with any proceeding under any Debtor Relief Law; or

            (v) any other circumstance or happening whatsoever, whether or not
      similar to any of the foregoing, including any other circumstance that
      might otherwise constitute a defense available to, or a discharge of, the
      Borrower or any Subsidiary.

      The Borrower shall promptly examine a copy of each Letter of Credit and
each amendment thereto that is delivered to it and, in the event of any claim of
noncompliance with the Borrower's instructions or other irregularity, the
Borrower will immediately notify the L/C Issuer. The Borrower shall be
conclusively deemed to have waived any such claim against the L/C Issuer and its
correspondents unless such notice is given as aforesaid.

      (f) Role of L/C Issuer. Each Lender and the Borrower agree that, in paying
any drawing under a Letter of Credit, the L/C Issuer shall not have any
responsibility to obtain any document (other than any sight draft, certificates
and documents expressly required by the Letter of Credit) or to ascertain or
inquire as to the validity or accuracy of any such document or the

                                       32


authority of the Person executing or delivering any such document. None of the
L/C Issuer, any Agent-Related Person nor any of the respective correspondents,
participants or assignees of the L/C Issuer shall be liable to any Lender for
(i) any action taken or omitted in connection herewith at the request or with
the approval of the Lenders or the Required Lenders, as applicable; (ii) any
action taken or omitted in the absence of gross negligence or willful
misconduct; or (iii) the due execution, effectiveness, validity or
enforceability of any document or instrument related to any Letter of Credit or
Letter of Credit Application. The Borrower hereby assumes all risks of the acts
or omissions of any beneficiary or transferee with respect to its use of any
Letter of Credit; provided, however, that this assumption is not intended to,
and shall not, preclude the Borrower's pursuing such rights and remedies as it
may have against the beneficiary or transferee at law or under any other
agreement. None of the L/C Issuer, any Agent-Related Person, nor any of the
respective correspondents, participants or assignees of the L/C Issuer, shall be
liable or responsible for any of the matters described in clauses (i) through
(v) of Section 2.03(e); provided, however, that anything in such clauses to the
contrary notwithstanding, the Borrower may have a claim against the L/C Issuer,
and the L/C Issuer may be liable to the Borrower, to the extent, but only to the
extent, of any direct, as opposed to consequential or exemplary, damages
suffered by the Borrower which the Borrower proves were caused by the L/C
Issuer's willful misconduct or gross negligence or the L/C Issuer's willful
failure to pay under any Letter of Credit after the presentation to it by the
beneficiary of a sight draft and certificate(s) strictly complying with the
terms and conditions of a Letter of Credit. In furtherance and not in limitation
of the foregoing, the L/C Issuer may accept documents that appear on their face
to be in order, without responsibility for further investigation, regardless of
any notice or information to the contrary, and the L/C Issuer shall not be
responsible for the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign a Letter of Credit or the rights
or benefits thereunder or proceeds thereof, in whole or in part, which may prove
to be invalid or ineffective for any reason.

      (g) Cash Collateral. Upon the request of the Administrative Agent or the
Required Lenders, (i) if the L/C Issuer has honored any full or partial drawing
request under any Letter of Credit and such drawing has resulted in an L/C
Borrowing, or (ii) if, as of the Letter of Credit Expiration Date, any L/C
Obligations for any reason remains outstanding, the Borrower shall immediately
Cash Collateralize the then Outstanding Amount of all L/C Obligations (in an
amount equal to such Outstanding Amount determined as of the date of such L/C
Borrowing (or the next succeeding Business Day, if applicable) or the Letter of
Credit Expiration Date, as the case may be). Sections 2.05 and 8.02(c) set forth
certain additional requirements to deliver Cash Collateral hereunder. For
purposes of this Section 2.03, Section 2.05 and Section 8.02(c), "Cash
Collateralize" means to pledge and deposit with or deliver to the Administrative
Agent, for the benefit of the L/C Issuer and the Lenders, as collateral for the
L/C Obligations, cash or deposit account balances pursuant to documentation in
form and substance satisfactory to the Administrative Agent and the L/C Issuer
(which documents are hereby consented to by the Lenders). Derivatives of such
term have corresponding meanings. The Borrower hereby grants to the
Administrative Agent, for the benefit of the L/C Issuer and the Lenders, a
security interest in all such cash, deposit accounts and all balances therein
and all proceeds of the foregoing. Cash collateral shall be maintained in
blocked, non-interest bearing deposit accounts at Bank of America.

                                       33


      (h) Applicability of ISP98 and UCP. Unless otherwise expressly agreed by
the L/C Issuer and the Borrower when a Letter of Credit is issued (including any
such agreement applicable to an Existing Letter of Credit), (i) the rules of the
ISP shall apply to each standby Letter of Credit, and (ii) the rules of the
Uniform Customs and Practice for Documentary Credits, as most recently published
by the International Chamber of Commerce at the time of issuance shall apply to
each commercial Letter of Credit.

      (i) Letter of Credit Fees. The Borrower shall pay to the Administrative
Agent for the account of each Lender in accordance with its Pro Rata Share a
Letter of Credit fee (the "Letter of Credit Fee") (i) for each commercial Letter
of Credit equal to the fee that the L/C Issuer would, from time to time,
ordinarily and customarily charge on account of such Letter of Credit issued by
the L/C Issuer for the account of its own customers and (ii) for each standby
Letter of Credit equal to the Applicable Rate times the daily maximum amount
available to be drawn under such Letter of Credit (whether or not such maximum
amount is then in effect under such Letter of Credit). For the purposes of
computing the daily amount available to be drawn under any Letter of Credit, the
amount of such Letter of Credit shall be determined in accordance with Section
1.07. Letter of Credit Fees shall be (i) computed on a quarterly basis in
arrears and (ii) due and payable on the first Business Day after the end of each
March, June, September and December, commencing with the first such date to
occur after the issuance of such Letter of Credit, on the Letter of Credit
Expiration Date and thereafter on demand. If there is any change in the
Applicable Rate during any quarter, the daily maximum amount of each standby
Letter of Credit shall be computed and multiplied by the Applicable Rate
separately for each period during such quarter that such Applicable Rate was in
effect. Notwithstanding anything to the contrary contained herein, upon the
request of the Required Lenders, while any Event of Default exists, all Letter
of Credit fees shall accrue at the Default Rate.

      (j) Fronting Fee and Documentary and Processing Charges Payable to L/C
Issuer. The Borrower shall pay directly to the L/C Issuer for its own account a
fronting fee with respect to each standby Letter of Credit in the amounts and at
the times specified in the Fee Letter. In addition, the Borrower shall pay
directly to the L/C Issuer for its own account the customary issuance,
presentation, amendment and other processing fees, and other standard costs and
charges, of the L/C Issuer relating to letters of credit as from time to time in
effect. Such customary fees and standard costs and charges are due and payable
on demand and are nonrefundable.

      (k) Conflict with Issuer Documents. In the event of any conflict between
the terms hereof and the terms of any Issuer Document, the terms hereof shall
control.

      2.04 SWING LINE LOANS.

      (a) The Swing Line. Subject to the terms and conditions set forth herein,
the Swing Line Lender agrees to make loans (each such loan, a "Swing Line Loan")
to the Borrower from time to time on any Business Day during the Availability
Period in an aggregate amount not to exceed at any time outstanding the amount
of the Swing Line Sublimit, notwithstanding the fact that such Swing Line Loans,
when aggregated with the Pro Rata Share of the Outstanding Amount of Committed
Loans and L/C Obligations of the Lender acting as Swing Line Lender, may exceed
the amount of such Lender's Commitment; provided, however, that after giving

                                       34


effect to any Swing Line Loan, (i) the Total Outstandings shall not exceed the
Aggregate Commitments, and (ii) the aggregate Outstanding Amount of the
Committed Loans of any Lender, plus such Lender's Pro Rata Share of the
Outstanding Amount of all L/C Obligations, plus such Lender's Pro Rata Share of
the Outstanding Amount of all Swing Line Loans shall not exceed such Lender's
Commitment, and provided, further, that the Borrower shall not use the proceeds
of any Swing Line Loan to refinance any outstanding Swing Line Loan. Within the
foregoing limits, and subject to the other terms and conditions hereof, the
Borrower may borrow under this Section 2.04, prepay under Section 2.05, and
reborrow under this Section 2.04. Each Swing Line Loan shall be a Base Rate
Loan. Immediately upon the making of a Swing Line Loan, each Lender shall be
deemed to, and hereby irrevocably and unconditionally agrees to, purchase from
the Swing Line Lender a risk participation in such Swing Line Loan in an amount
equal to the product of such Lender's Pro Rata Share times the amount of such
Swing Line Loan.

      (b) Borrowing Procedures. Each Swing Line Borrowing shall be made upon the
Borrower's irrevocable notice to the Swing Line Lender and the Administrative
Agent, which may be given by telephone. Each such notice must be received by the
Swing Line Lender and the Administrative Agent not later than 1:00 p.m. on the
requested borrowing date, and shall specify (i) the amount to be borrowed, which
shall be a minimum of $100,000 and (ii) the requested borrowing date, which
shall be a Business Day. Each such telephonic notice must be confirmed promptly
by delivery to the Swing Line Lender and the Administrative Agent of a written
Swing Line Loan Notice, appropriately completed and signed by a Responsible
Officer of the Borrower. Promptly after receipt by the Swing Line Lender of any
telephonic Swing Line Loan Notice, the Swing Line Lender will confirm with the
Administrative Agent (by telephone or in writing) that the Administrative Agent
has also received such Swing Line Loan Notice and, if not, the Swing Line Lender
will notify the Administrative Agent (by telephone or in writing) of the
contents thereof. Unless the Swing Line Lender has received notice (by telephone
or in writing) from the Administrative Agent (including at the request of any
Lender) prior to 2:00 p.m. on the date of the proposed Swing Line Borrowing (A)
directing the Swing Line Lender not to make such Swing Line Loan as a result of
the limitations set forth in the proviso to the first sentence of Section
2.04(a), or (B) that one or more of the applicable conditions specified in
Article IV is not then satisfied, then, subject to the terms and conditions
hereof, the Swing Line Lender will, not later than 3:00 p.m. on the borrowing
date specified in such Swing Line Loan Notice, make the amount of its Swing Line
Loan available to the Borrower at its office by crediting the account of the
Borrower on the books of the Swing Line Lender in immediately available funds.

      (c) Refinancing of Swing Line Loans.

            (i) The Swing Line Lender at any time in its sole and absolute
      discretion may request, on behalf of the Borrower (which hereby
      irrevocably authorizes the Swing Line Lender to so request on its behalf),
      that each Lender make a Base Rate Committed Loan in an amount equal to
      such Lender's Pro Rata Share of the amount of Swing Line Loans then
      outstanding. Such request shall be made in writing (which written request
      shall be deemed to be a Committed Loan Notice for purposes hereof) and in
      accordance with the requirements of Section 2.02, without regard to the
      minimum and multiples specified therein for the principal amount of Base
      Rate Loans, but subject to the unutilized portion of the Aggregate
      Commitments and the conditions set forth in Section 4.02. The Swing Line
      Lender shall furnish the Borrower with a copy of the applicable Committed
      Loan

                                       35


      Notice promptly after delivering such notice to the Administrative Agent.
      Each Lender shall make an amount equal to its Pro Rata Share of the amount
      specified in such Committed Loan Notice available to the Administrative
      Agent in immediately available funds for the account of the Swing Line
      Lender at the Administrative Agent's Office not later than 1:00 p.m. on
      the day specified in such Committed Loan Notice, whereupon, subject to
      Section 2.04(c)(ii), each Lender that so makes funds available shall be
      deemed to have made a Base Rate Committed Loan to the Borrower in such
      amount. The Administrative Agent shall remit the funds so received to the
      Swing Line Lender.

            (ii) If for any reason any Swing Line Loan cannot be refinanced by
      such a Committed Borrowing in accordance with Section 2.04(c)(i), the
      request for Base Rate Committed Loans submitted by the Swing Line Lender
      as set forth herein shall be deemed to be a request by the Swing Line
      Lender that each of the Lenders fund its risk participation in the
      relevant Swing Line Loan and each Lender's payment to the Administrative
      Agent for the account of the Swing Line Lender pursuant to Section
      2.04(c)(i) shall be deemed payment in respect of such participation.

            (iii) If any Lender fails to make available to the Administrative
      Agent for the account of the Swing Line Lender any amount required to be
      paid by such Lender pursuant to the foregoing provisions of this Section
      2.04(c) by the time specified in Section 2.04(c)(i), the Swing Line Lender
      shall be entitled to recover from such Lender (acting through the
      Administrative Agent), on demand, such amount with interest thereon for
      the period from the date such payment is required to the date on which
      such payment is immediately available to the Swing Line Lender at a rate
      per annum equal to the greater of the Federal Funds Rate from time to time
      in effect and a rate determined by the Swing Line Lender in accordance
      with banking industry rules on interbank compensation. A certificate of
      the Swing Line Lender submitted to any Lender (through the Administrative
      Agent) with respect to any amounts owing under this clause (iii) shall be
      conclusive absent manifest error.

            (iv) Each Lender's obligation to make Committed Loans or to purchase
      and fund risk participations in Swing Line Loans pursuant to this Section
      2.04(c) shall be absolute and unconditional and shall not be affected by
      any circumstance, including (A) any set-off, counterclaim, recoupment,
      defense or other right which such Lender may have against the Swing Line
      Lender, the Borrower or any other Person for any reason whatsoever, (B)
      the occurrence or continuance of a Default, or (C) any other occurrence,
      event or condition, whether or not similar to any of the foregoing;
      provided, however, that each Lender's obligation to make Committed Loans
      pursuant to this Section 2.04(c) is subject to the conditions set forth in
      Section 4.02. No such funding of risk participations shall relieve or
      otherwise impair the obligation of the Borrower to repay Swing Line Loans,
      together with interest as provided herein.

      (d) Repayment of Participations.

            (i) At any time after any Lender has purchased and funded a risk
      participation in a Swing Line Loan, if the Swing Line Lender receives any
      payment on account of such Swing Line Loan, the Swing Line Lender will
      distribute to such Lender its Pro Rata

                                       36


      Share of such payment (appropriately adjusted, in the case of interest
      payments, to reflect the period of time during which such Lender's risk
      participation was funded) in the same funds as those received by the Swing
      Line Lender.

            (ii) If any payment received by the Swing Line Lender in respect of
      principal or interest on any Swing Line Loan is required to be returned by
      the Swing Line Lender under any of the circumstances described in Section
      10.06 (including pursuant to any settlement entered into by the Swing Line
      Lender in its discretion), each Lender shall pay to the Swing Line Lender
      its Pro Rata Share thereof on demand of the Administrative Agent, plus
      interest thereon from the date of such demand to the date such amount is
      returned, at a rate per annum equal to the Federal Funds Rate. The
      Administrative Agent will make such demand upon the request of the Swing
      Line Lender. The obligations of the Lenders under this clause shall
      survive the payment in full of the Obligations and the termination of this
      Agreement.

      (e) Interest for Account of Swing Line Lender. The Swing Line Lender shall
be responsible for invoicing the Borrower for interest on the Swing Line Loans.
Until each Lender funds its Base Rate Committed Loan or risk participation
pursuant to this Section 2.04 to refinance such Lender's Pro Rata Share of any
Swing Line Loan, interest in respect of such Pro Rata Share shall be solely for
the account of the Swing Line Lender.

      (f) Payments Directly to Swing Line Lender. The Borrower shall make all
payments of principal and interest in respect of the Swing Line Loans directly
to the Swing Line Lender.

      2.05 PREPAYMENTS.

      (a) The Borrower may, upon notice to the Administrative Agent, at any time
or from time to time voluntarily prepay Committed Loans in whole or in part
without premium or penalty; provided that (i) such notice must be received by
the Administrative Agent not later than 11:00 a.m. (A) three Business Days prior
to any date of prepayment of Eurodollar Rate Loans and (B) on the date of
prepayment of Base Rate Committed Loans; (ii) any prepayment of Eurodollar Rate
Loans shall be in a principal amount of $1,000,000 or a whole multiple of
$250,000 in excess thereof; and (iii) any prepayment of Base Rate Committed
Loans shall be in a principal amount of $100,000 or a whole multiple of $50,000
in excess thereof or, in each case, if less, the entire principal amount thereof
then outstanding. Each such notice shall specify the date and amount of such
prepayment and the Type(s) of Committed Loans to be prepaid. The Administrative
Agent will promptly notify each Lender of its receipt of each such notice, and
of the amount of such Lender's Pro Rata Share of such prepayment. If such notice
is given by the Borrower, the Borrower shall make such prepayment and the
payment amount specified in such notice shall be due and payable on the date
specified therein. Any prepayment of a Eurodollar Rate Loan shall be accompanied
by all accrued interest thereon, together with any additional amounts required
pursuant to Section 3.05. Each such prepayment shall be applied to the Committed
Loans of the Lenders in accordance with their respective Pro Rata Shares.

      (b) The Borrower may, upon notice to the Swing Line Lender (with a copy to
the Administrative Agent), at any time or from time to time, voluntarily prepay
Swing Line Loans in whole or in part without premium or penalty; provided that
(i) such notice must be received by

                                       37


the Swing Line Lender and the Administrative Agent not later than 1:00 p.m. on
the date of the prepayment, and (ii) any such prepayment shall be in a minimum
principal amount of $100,000. Each such notice shall specify the date and amount
of such prepayment. If such notice is given by the Borrower, the Borrower shall
make such prepayment and the payment amount specified in such notice shall be
due and payable on the date specified therein.

      (c) If for any reason, prior to the Maturity Date, the Total Outstandings
at any time exceed the Aggregate Commitments then in effect, the Borrower shall
immediately prepay Loans and/or Cash Collateralize the L/C Obligations in an
aggregate amount equal to such excess; provided, however, that the Borrower
shall not be required to Cash Collateralize the L/C Obligations pursuant to this
Section 2.05(c) unless after the prepayment in full of the Committed Loans and
Swing Line Loans the Total Outstandings exceed the Aggregate Commitments then in
effect.

      2.06 TERMINATION OR REDUCTION OF COMMITMENTS. The Borrower may, upon
notice to the Administrative Agent, terminate the Aggregate Commitments, or from
time to time permanently reduce the Aggregate Commitments; provided that (i) any
such notice shall be received by the Administrative Agent not later than 11:00
a.m. five Business Days prior to the date of termination or reduction, (ii) any
such partial reduction shall be in an aggregate amount of $1,000,000 or any
whole multiple of $500,000 in excess thereof, (iii) the Borrower shall not
terminate or reduce the Aggregate Commitments if, after giving effect thereto
and to any concurrent prepayments hereunder, the Total Outstandings would exceed
the Aggregate Commitments, and (iv) if, after giving effect to any reduction of
the Aggregate Commitments, the Letter of Credit Sublimit or the Swing Line
Sublimit exceeds the amount of the Aggregate Commitments, such Sublimit shall be
automatically reduced by the amount of such excess. The Administrative Agent
will promptly notify the Lenders of any such notice of termination or reduction
of the Aggregate Commitments. Any reduction of the Aggregate Commitments shall
be applied to the Commitment of each Lender according to its Pro Rata Share. All
commitment fees accrued until the effective date of any termination of the
Aggregate Commitments shall be paid on the effective date of such termination.

      2.07 REPAYMENT OF LOANS.

      (a) The Borrower shall repay to the Lenders on the Maturity Date the
aggregate principal amount of Committed Loans outstanding on such date.

      (b) The Borrower shall repay each Swing Line Loan on the earlier to occur
of (i) the date five Business Days after such Loan is made and (ii) the Maturity
Date.

      2.08 INTEREST.

      (a) Subject to the provisions of subsection (b) below, (i) each Eurodollar
Rate Loan shall bear interest on the outstanding principal amount thereof for
each Interest Period at a rate per annum equal to the Eurodollar Rate for such
Interest Period plus the Applicable Rate; (ii) each Base Rate Committed Loan
shall bear interest on the outstanding principal amount thereof from the
applicable borrowing date at a rate per annum equal to the Base Rate plus the
Applicable Rate; and (iii) each Swing Line Loan shall bear interest on the
outstanding principal

                                       38


amount thereof from the applicable borrowing date at a rate per annum equal to
the Base Rate plus the Applicable Rate.

      (b) If any amount payable by the Borrower on any Loan is not paid when due
(without regard to any applicable grace periods), whether at stated maturity, by
acceleration or otherwise, such amount shall thereafter bear interest at a
fluctuating interest rate per annum at all times equal to the Default Rate to
the fullest extent permitted by applicable Laws. Furthermore, while any Event of
Default exists, the Borrower shall pay interest on the principal amount of all
outstanding Obligations hereunder at a fluctuating interest rate per annum at
all times equal to the Default Rate to the fullest extent permitted by
applicable Laws. Accrued and unpaid interest on past due amounts (including
interest on past due interest) shall be due and payable upon demand.

      (c) Interest on each Loan shall be due and payable in arrears on each
Interest Payment Date applicable thereto and at such other times as may be
specified herein. Subject, in each case, to applicable Law, interest hereunder
shall be due and payable in accordance with the terms hereof before and after
judgment, and before and after the commencement of any proceeding under any
Debtor Relief Law.

      2.09 FEES. In addition to certain fees described in subsections (i) and
(j) of Section 2.03:

      (a) Commitment Fee. The Borrower shall pay to the Administrative Agent for
the account of each Lender in accordance with its Pro Rata Share, a commitment
fee equal to the Applicable Rate times the actual daily amount by which the
Aggregate Commitments exceed the sum of (i) the Outstanding Amount of Committed
Loans and (ii) the Outstanding Amount of L/C Obligations. The commitment fee
shall accrue at all times during the Availability Period, including at any time
during which one or more of the conditions in Article IV is not met, and shall
be due and payable quarterly in arrears on the last Business Day of each March,
June, September and December, commencing with the first such date to occur after
the Closing Date, and on the Maturity Date. The commitment fee shall be
calculated quarterly in arrears, and if there is any change in the Applicable
Rate during any quarter, the actual daily amount shall be computed and
multiplied by the Applicable Rate separately for each period during such quarter
that such Applicable Rate was in effect.

      (b) Other Fees. (i) The Borrower shall pay to the Arranger and the
Administrative Agent for their own respective accounts fees in the amounts and
at the times specified in the Fee Letter. Such fees shall be fully earned when
paid and shall not be refundable for any reason whatsoever.

      (ii) The Borrower shall pay to the Lenders such fees as shall have been
separately agreed upon in writing in the amounts and at the times so specified.
Such fees shall be fully earned when paid and shall not be refundable for any
reason whatsoever.

      2.10 COMPUTATION OF INTEREST AND FEES. All computations of interest for
Base Rate Loans when the Base Rate is determined by Bank of America's "prime
rate" shall be made on the basis of a year of 365 or 366 days, as the case may
be, and actual days elapsed. All other

                                       39


computations of fees and interest shall be made on the basis of a 360-day year
and actual days elapsed (which results in more fees or interest, as applicable,
being paid than if computed on the basis of a 365-day year). Interest shall
accrue on each Loan for the day on which the Loan is made, and shall not accrue
on a Loan, or any portion thereof, for the day on which the Loan or such portion
is paid, provided that any Loan that is repaid on the same day on which it is
made shall, subject to Section 2.12(a), bear interest for one day.

      2.11 EVIDENCE OF DEBT.

      (a) The Credit Extensions made by each Lender shall be evidenced by one or
more accounts or records maintained by such Lender and by the Administrative
Agent in the ordinary course of business. The accounts or records maintained by
the Administrative Agent and each Lender shall be prima facie evidence of the
amount of the Credit Extensions made by the Lenders to the Borrower and the
interest and payments thereon. Any failure to so record or any error in doing so
shall not, however, limit or otherwise affect the obligation of the Borrower
hereunder to pay any amount owing with respect to the Obligations. In the event
of any conflict between the accounts and records maintained by any Lender and
the accounts and records of the Administrative Agent in respect of such matters,
the accounts and records of the Administrative Agent shall control in the
absence of manifest error. The Borrower shall execute and deliver to each Lender
(through the Administrative Agent) a Note, which shall evidence such Lender's
Loans in addition to such accounts or records. Each Lender may attach schedules
to its Note and endorse thereon the date, Type (if applicable), amount and
maturity of its Loans and payments with respect thereto.

      (b) In addition to the accounts and records referred to in subsection (a),
each Lender and the Administrative Agent shall maintain in accordance with its
usual practice accounts or records evidencing the purchases and sales by such
Lender of participations in Letters of Credit and Swing Line Loans. In the event
of any conflict between the accounts and records maintained by the
Administrative Agent and the accounts and records of any Lender in respect of
such matters, the accounts and records of the Administrative Agent shall be
conclusive evidence of such amount absent manifest error.

      2.12 PAYMENTS GENERALLY.

      (a) All payments to be made by the Borrower shall be made without
condition or deduction for any counterclaim, defense, recoupment or setoff.
Except as otherwise expressly provided herein, all payments by the Borrower
hereunder shall be made to the Administrative Agent, for the account of the
respective Lenders to which such payment is owed, at the Administrative Agent's
Office in Dollars and in immediately available funds not later than 2:00 p.m. on
the date specified herein. The Administrative Agent will promptly distribute to
each Lender its Pro Rata Share (or other applicable share as provided herein) of
such payment in like funds as received by wire transfer to such Lender's Lending
Office. All payments received by the Administrative Agent after 2:00 p.m. shall
be deemed received on the next succeeding Business Day and any applicable
interest or fee shall continue to accrue. If any payment to be made by the
Borrower shall come due on a day other than a Business Day, payment shall be
made on the next following Business Day, and such extension of time shall be
reflected in computing interest or fees, as the case may be.

                                       40


      (b) (i) Funding by Lenders; Presumption by Administrative Agent. Unless
the Administrative Agent shall have received notice from a Lender prior to the
proposed date of any Committed Borrowing that such Lender will not make
available to the Administrative Agent such Lender's share of such Committed
Borrowing, the Administrative Agent may assume that such Lender has made such
share available on such date in accordance with Section 2.02 and may, in
reliance upon such assumption, make available to the Borrower a corresponding
amount. In such event, if a Lender has not in fact made its share of the
applicable Committed Borrowing available to the Administrative Agent, then the
applicable Lender and the Borrower severally agree to pay to the Administrative
Agent forthwith on demand such corresponding amount in immediately available
funds with interest thereon, for each day from and including the date such
amount is made available to the Borrower to but excluding the date of payment to
the Administrative Agent, at (A) in the case of a payment to be made by such
Lender, the greater of the Federal Funds Rate and a rate determined by the
Administrative Agent in accordance with banking industry rules on interbank
compensation and (B) in the case of a payment to be made by the Borrower, the
interest rate applicable to Base Rate Loans. If the Borrower and such Lender
shall pay such interest to the Administrative Agent for the same or an
overlapping period, the Administrative Agent shall promptly remit to the
Borrower the amount of such interest paid by the Borrower for such period. If
such Lender pays its share of the applicable Committed Borrowing to the
Administrative Agent, then the amount so paid shall constitute such Lender's
Committed Loan included in such Committed Borrowing. Any payment by the Borrower
shall be without prejudice to any claim the Borrower may have against a Lender
that shall have failed to make such payment to the Administrative Agent.

      (ii) Payments by Borrower; Presumptions by Administrative Agent. Unless
the Administrative Agent shall have received notice from the Borrower prior to
the date on which any payment is due to the Administrative Agent for the account
of the Lenders or the L/C Issuer hereunder that the Borrower will not make such
payment, the Administrative Agent may assume that the Borrower has made such
payment on such date in accordance herewith and may, in reliance upon such
assumption, distribute to the Lenders or the L/C Issuer, as the case may be, the
amount due. In such event, if the Borrower has not in fact made such payment,
then each of the Lenders or the L/C Issuer, as the case may be, severally agrees
to repay to the Administrative Agent forthwith on demand the amount so
distributed to such Lender or the L/C Issuer, in immediately available funds
with interest thereon, for each day from and including the date such amount is
distributed to it to but excluding the date of payment to the Administrative
Agent, at the greater of the Federal Funds Rate and a rate determined by the
Administrative Agent in accordance with banking industry rules on interbank
compensation.

      A notice of the Administrative Agent to any Lender or the Borrower with
respect to any amount owing under this subsection (b) shall be conclusive
evidence of such amount absent manifest error.

      (c) Failure to Satisfy Conditions Precedent. If any Lender makes available
to the Administrative Agent funds for any Loan to be made by such Lender as
provided in the foregoing provisions of this Article II, and such funds are not
made available to the Borrower by the Administrative Agent because the
conditions to the applicable Credit Extension set forth in Article IV are not
satisfied or waived in accordance with the terms hereof, the Administrative

                                       41


Agent shall return such funds (in like funds as received from such Lender) to
such Lender, without interest.

      (d) Obligations of Lenders Several. The obligations of the Lenders
hereunder to make Committed Loans and to fund participations in Letters of
Credit and Swing Line Loans and to make payments pursuant to Section 9.07 are
several and not joint. The failure of any Lender to make any Committed Loan, to
fund any such participation on any date required hereunder or to make payments
pursuant to Section 9.07 shall not relieve any other Lender of its corresponding
obligation to do so on such date, and no Lender shall be responsible for the
failure of any other Lender to so make its Committed Loan, to purchase its
participation or to make its payment under Section 9.07.

      (e) Funding Source. Nothing herein shall be deemed to obligate any Lender
to obtain the funds for any Loan in any particular place or manner or to
constitute a representation by any Lender that it has obtained or will obtain
the funds for any Loan in any particular place or manner.

      2.13 SHARING OF PAYMENTS BY LENDERS. If, other than as expressly provided
elsewhere herein, any Lender shall obtain on account of the Committed Loans made
by it, or the participations in L/C Obligations or in Swing Line Loans held by
it, any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) in excess of its ratable share (or other share
contemplated hereunder) thereof, such Lender shall immediately (a) notify the
Administrative Agent of such fact, and (b) purchase from the other Lenders such
participations in the Committed Loans made by them and/or such subparticipations
in the participations in L/C Obligations or Swing Line Loans held by them, as
the case may be, as shall be necessary to cause such purchasing Lender to share
the excess payment in respect of such Committed Loans or such participations, as
the case may be, pro rata with each of them; provided, however, that if all or
any portion of such excess payment is thereafter recovered from the purchasing
Lender under any of the circumstances described in Section 10.06 (including
pursuant to any settlement entered into by the purchasing Lender in its
discretion), such purchase shall to that extent be rescinded and each other
Lender shall repay to the purchasing Lender the purchase price paid therefor,
together with an amount equal to such paying Lender's ratable share (according
to the proportion of (i) the amount of such paying Lender's required repayment
to (ii) the total amount so recovered from the purchasing Lender) of any
interest or other amount paid or payable by the purchasing Lender in respect of
the total amount so recovered, without further interest thereon. The Borrower
agrees that any Lender so purchasing a participation from another Lender may, to
the fullest extent permitted by law, exercise all its rights of payment
(including the right of set-off, but subject to Section 10.09) with respect to
such participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation. The Administrative Agent will keep
records (which shall be conclusive and binding in the absence of manifest error)
of participations purchased under this Section and will in each case notify the
Lenders following any such purchases or repayments. Each Lender that purchases a
participation pursuant to this Section shall from and after such purchase have
the right to give all notices, requests, demands, directions and other
communications under this Agreement with respect to the portion of the
Obligations purchased to the same extent as though the purchasing Lender were
the original owner of the Obligations purchased.

                                       42


      2.14 INCREASE IN COMMITMENTS.

      (a) Request for Increase. Provided there exists no Default, upon notice to
the Administrative Agent (which shall promptly notify the Lenders), the Borrower
may from time to time, request an increase in the Aggregate Commitments by an
amount (for all such requests) not exceeding $100,000,000; provided that (i) any
such request, except for the final request, for an increase shall be in a
minimum amount of $15,000,000 or, if less (in the case of the final such
request), the difference between $100,000,000 and the aggregate increases in the
Aggregate Commitments theretofor effectuated under this Agreement, and (ii) the
Borrower may not make more than one such request in any twelve month period. At
the time of sending such notice, the Borrower (in consultation with the
Administrative Agent) shall specify the time period within which each Lender is
requested to respond (which shall in no event be less than ten Business Days
from the date of delivery of such notice to the Lenders).

      (b) Lender Elections to Increase. Each Lender shall notify the
Administrative Agent within such time period whether or not it, in its sole
discretion, agrees to increase its Commitment and, if so, whether by an amount
equal to, greater than, or less than its Pro Rata Share of such requested
increase. Any Lender not responding within such time period shall be deemed to
have declined to increase its Commitment.

      (c) Notification by Administrative Agent; Additional Lenders. The
Administrative Agent shall notify the Borrower and each Lender of the Lenders'
responses to each request made hereunder. To achieve the full amount of a
requested increase and subject to the approval of the Administrative Agent and
the L/C Issuer (which approvals shall not be unreasonably withheld), the
Borrower may also invite additional Eligible Assignees to become Lenders
pursuant to a joinder agreement in form and substance satisfactory to the
Administrative Agent and its counsel.

      (d) Effective Date and Allocations. If the Aggregate Commitments are
increased in accordance with this Section, the Administrative Agent and the
Borrower shall determine the effective date (the "Increase Effective Date") and
the final allocation of such increase. The Administrative Agent shall promptly
notify the Borrower and the Lenders of the final allocation of such increase and
the Increase Effective Date.

      (e) Conditions to Effectiveness of Increase. As a condition precedent to
such increase, the Borrower shall deliver to the Administrative Agent a
certificate of each Loan Party dated as of the Increase Effective Date (in
sufficient copies for each Lender) signed by a Responsible Officer of such Loan
Party (i) certifying and attaching the resolutions adopted by such Loan Party
approving or consenting to such increase, and (ii) in the case of the Borrower,
certifying that, before and after giving effect to such increase, (A) the
representations and warranties contained in Article V and the other Loan
Documents are true and correct on and as of the Extension Effective Date, except
to the extent that such representations and warranties specifically refer to an
earlier date, in which case they are true and correct as of such earlier date,
and except that for purposes of this Section 2.14, the representations and
warranties contained in subsections (a) and (b) of Section 5.05 shall be deemed
to refer to the most recent statements

                                       43


furnished pursuant to clauses (a) and (b), respectively, of Section 6.01, and
(B) no Default exists. The Borrower shall prepay any Committed Loans outstanding
on the Increase Effective Date (and pay any additional amounts required pursuant
to Section 3.05) to the extent necessary to keep the outstanding Committed Loans
ratable with any revised Pro Rata Shares arising from any nonratable increase in
the Commitments under this Section.

      (f) Conflicting Provisions. This Section shall supersede any provisions in
Sections 2.13 or 10.01 to the contrary.

                                  ARTICLE III.
                    TAXES, YIELD PROTECTION AND ILLEGALITY

      3.01 TAXES.

      (a) Payment Free of Taxes. Any and all payments by the Borrower to or for
the account of the Administrative Agent or any Lender under any Loan Document
shall be made free and clear of and without deduction for any Indemnified Taxes
or Other Taxes, provided that if the Borrower shall be required by any Laws to
deduct any Indemnified Taxes or Other Taxes from or in respect of any sum
payable under any Loan Document to the Administrative Agent or any Lender, (i)
the sum payable shall be increased as necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section), each of the Administrative Agent and such Lender receives
an amount equal to the sum it would have received had no such deductions been
made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay
the full amount deducted to the relevant taxation authority or other authority
in accordance with applicable Laws, and (iv) within 30 days after the date of
such payment, the Borrower shall furnish to the Administrative Agent (which
shall forward the same to such Lender) the original or a certified copy of a
receipt evidencing payment thereof.

      (b) Payment of Other Taxes by Borrower. Without limiting the provision of
subsection (a) above, the Borrower shall timely pay any Other Taxes to the
relevant Governmental Authority in accordance with applicable law.

      (c) After-Tax Yield. If the Borrower shall be required to deduct or pay
any Indemnified Taxes or Other Taxes from or in respect of any sum payable under
any Loan Document to the Administrative Agent or any Lender, the Borrower shall
also pay to the Administrative Agent or to such Lender, as the case may be, at
the time interest is paid, such additional amount that the Administrative Agent
or such Lender specifies is necessary to preserve the after-tax yield (after
factoring in all taxes, including taxes imposed on or measured by net income)
that the Administrative Agent or such Lender would have received if such
Indemnified Taxes or Other Taxes had not been imposed.

      (d) Borrower Indemnification. The Borrower agrees to indemnify the
Administrative Agent and each Lender for (i) the full amount of Indemnified
Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by
any jurisdiction on amounts payable under this Section) paid by the
Administrative Agent and such Lender, (ii) amounts payable under Section 3.01(c)
and (iii) any liability (including additions to tax, penalties, interest and
expenses) arising therefrom or with respect thereto, in each case whether or not
such Indemnified Taxes or Other Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority.

                                       44


Payment under this subsection (d) shall be made within 30 days after the date
the Lender or the Administrative Agent makes a demand therefor.

      (e) Lenders to Mitigate. If the Borrower is required to pay additional
amounts to any Lender or the Administrative Agent pursuant to this Section 3.01,
such Lender or the Administrative Agent, as the case may be, shall use
reasonable efforts consistent with legal and regulatory restrictions to change
the jurisdiction of its Lending Office so as to reduce or eliminate any such
additional payment by the Borrower.

      (f) Refunds, etc. If the Borrower pays any additional amount in respect of
any Indemnified Taxes or Other Taxes pursuant to this Section 3.01 which result
in any Lender or the Administrative Agent actually receiving from the taxing
authority imposing such Taxes or Other Taxes a refund of all or any portion of
such Indemnified Taxes or Other Taxes, such Lender or the Administrative Agent,
as the case may be, shall, within 30 days of receipt of such refund, pay to the
Borrower an amount equal to the amount of such refund actually received by such
Lender or Administrative Agent, as the case may be, and reasonably attributable
to Indemnified Taxes and Other Taxes that have been paid by the Borrower
pursuant to this Section 3.01 with respect to such refund.

      (g) Payments to Lenders Failing to Deliver Certificate. The Borrower shall
not be required to make any payments under this Section 3.01 to any Lender, the
Administrative Agent, or any Participant that has failed to comply with the
applicable certification requirements set forth in Section 10.15.

      (h) Limitation on Compensation Obligations. Notwithstanding anything in
Sections 3.01(a), 3.01(b), 3.01(c), or 3.01(d), the Borrower shall not be
obligated to compensate any Lender or the Administrative Agent for any amount
arising or accruing before the earliest of (i) 180 days prior to the date on
which such Lender or the Administrative Agent, as the case may be, gives notice
to the Borrower under this Section 3.01 or (ii) the date such taxes arose or
began accruing (and such Lender or the Administrative Agent, as the case may be,
did not know such amount was arising or accruing).

      3.02 ILLEGALITY. If any Lender determines that any change in Law occurring
after the Closing Date has made it unlawful, or that any Governmental Authority
has asserted that it is unlawful, for any Lender or its applicable Lending
Office to make, maintain or fund Eurodollar Rate Loans, or to determine or
charge interest rates based upon the Eurodollar Rate or any Governmental
Authority has imposed material restrictions on the authority of such Lender to
purchase or sell or to take deposits of, Dollars in the London interbank market,
then, on notice thereof by such Lender to the Borrower through the
Administrative Agent, any obligation of such Lender to make or continue
Eurodollar Rate Loans or to convert Base Rate Committed Loans to Eurodollar Rate
Loans shall be suspended until such Lender notifies the Administrative Agent and
the Borrower that the circumstances giving rise to such determination no longer
exist. Upon receipt of such notice, the Borrower shall, upon demand from such
Lender (with a copy to the Administrative Agent), prepay or, if applicable,
convert all Eurodollar Rate Loans of such Lender to Base Rate Loans, either on
the last day of the Interest Period therefor, if such Lender may lawfully
continue to maintain such Eurodollar Rate Loans to such day, or immediately, if
such Lender may not lawfully continue to maintain such Eurodollar Rate Loans.
Upon any such

                                       45


prepayment or conversion, the Borrower shall also pay accrued interest on the
amount so prepaid or converted. Each Lender agrees to designate a different
Lending Office if such designation will avoid the need for such notice and will
not, in the good faith judgment of such Lender, otherwise be materially
disadvantageous to such Lender.

      3.03 INABILITY TO DETERMINE RATES. If the Required Lenders determine that
for any reason adequate and reasonable means do not exist for determining the
Eurodollar Rate for any requested Interest Period with respect to a proposed
Eurodollar Rate Loan, or that the Eurodollar Rate for any requested Interest
Period with respect to a proposed Eurodollar Rate Loan does not adequately and
fairly reflect the cost to such Lenders of funding such Loan, the Administrative
Agent will promptly so notify the Borrower and each Lender. Thereafter, the
obligation of the Lenders to make or maintain Eurodollar Rate Loans shall be
suspended until the Administrative Agent (upon the instruction of the Required
Lenders) revokes such notice. Upon receipt of such notice, the Borrower may
revoke any pending request for a Borrowing of, conversion to or continuation of
Eurodollar Rate Loans or, failing that, will be deemed to have converted such
request into a request for a Committed Borrowing of Base Rate Loans in the
amount specified therein.

      3.04 INCREASED COST AND REDUCED RETURN; CAPITAL ADEQUACY.

      (a) Effect of Change in Law. If any Lender determines that as a result of
any Change in Law there shall be any increase in the cost to such Lender of
agreeing to make or making, funding or maintaining Eurodollar Rate Loans or (as
the case may be) issuing or participating in Letters of Credit, or a reduction
in the amount received or receivable by such Lender in connection with any of
the foregoing (excluding for purposes of this subsection (a) any such increased
costs or reduction in amount resulting from (i) Indemnified Taxes or Other Taxes
(as to which Section 3.01 shall govern)), (ii) changes in the basis of taxation
of overall net income or overall gross income by the United States or any
foreign jurisdiction or any political subdivision of either thereof under the
Laws of which such Lender is organized or has its Lending Office, and (iii)
reserve requirements utilized in the determination of the Eurodollar Rate, then
from time to time within 15 days of demand by such Lender (with a copy of such
demand to the Administrative Agent) and subject to Section 3.04(c), the Borrower
shall pay to such Lender such additional amounts as will compensate such Lender
for such increased cost or reduction.

      (b) Capital Adequacy, etc. If any Lender determines that the introduction
of any Law regarding capital adequacy or any change therein or in the
interpretation thereof, or compliance by such Lender (or its Lending Office)
therewith, has the effect of reducing the rate of return on the capital of such
Lender or any corporation controlling such Lender as a consequence of such
Lender's obligations hereunder (taking into consideration its policies with
respect to capital adequacy and such Lender's desired return on capital), then
from time to time upon demand of such Lender (with a copy of such demand to the
Administrative Agent), the Borrower shall pay to such Lender such additional
amounts as will compensate such Lender for such reduction.

      (c) Notices Regarding Changes. Promptly after receipt of knowledge of any
change in law or other event that will entitle any Lender to compensation under
this Section 3.04, the Lender shall give notice thereof to the Borrower (with a
copy to the Administrative Agent) certifying the basis for such request for
compensation in accordance with Section 3.06(a) and

                                       46


designate a different Lending Office if such designation will avoid, or reduce,
the amount of compensation payable under this Section 3.04 and will not, in the
good faith judgment of such Lender, otherwise be materially disadvantageous to
such Lender. Notwithstanding anything in Sections 3.04(a) or 3.04(b) to the
contrary, the Borrower shall not be obligated to compensate any Lender for any
amount arising or accruing before the earlier of (i) 180 days prior to the date
on which such Lender gave notice to the Borrower under this Section 3.04(c) or
(ii) the date such amount arose or began accruing (and such Lender did not know
such amount was arising or accruing) as a result of the retroactive application
of any change in Law or other event giving rise the claim for compensation.

      3.05 FUNDING LOSSES. Upon demand of any Lender (with a copy to the
Administrative Agent) from time to time, the Borrower shall promptly compensate
such Lender for and hold such Lender harmless from any loss, cost or expense
incurred by it as a result of:

      (a) any continuation, conversion, payment or prepayment of any Loan other
than a Base Rate Loan on a day other than the last day of the Interest Period
for such Loan (whether voluntary, mandatory, automatic, by reason of
acceleration, or otherwise); or

      (b) any failure by the Borrower (for a reason other than the failure of
such Lender to make a Loan) to prepay, borrow, continue or convert any Loan
other than a Base Rate Loan on the date or in the amount notified by the
Borrower; or

      (c) any assignment of a Eurodollar Rate Loan on a day other than the last
day of the Interest Period therefor as a result of a request by the Borrower
pursuant to Section 10.16;

including (i) in the case of a conversion, payment, prepayment or failure to
prepay, borrow, continue or convert (except by reason of a suspension of the
availability of the Eurodollar Rate pursuant to Section 3.02 or Section 3.03 or
demand for prepayment or conversion on a date other than the last day of the
relevant Interest Period made by any Lender pursuant to Section 3.02), any loss
of anticipated profits and (ii) in all cases, any loss or expense arising from
the liquidation or reemployment of funds obtained by it to maintain such Loan or
from fees payable to terminate the deposits from which such funds were obtained.
The Borrower shall also pay any customary administrative fees charged by such
Lender in connection with the foregoing.

For purposes of calculating amounts payable by the Borrower to the Lenders under
this Section 3.05, each Lender shall be deemed to have funded each Eurodollar
Rate Loan made by it at the Eurodollar Base Rate used in determining the
Eurodollar Rate for such Loan by a matching deposit or other borrowing in the
London interbank eurodollar market for a comparable amount and for a comparable
period, whether or not such Eurodollar Rate Loan was in fact so funded.

      3.06 MATTERS APPLICABLE TO ALL REQUESTS FOR COMPENSATION.

      (a) A certificate of the Administrative Agent or any Lender claiming
compensation under this Article III and setting forth in reasonable detail the
additional amount or amounts to be paid to it hereunder shall be prima facie
evidence thereof. In determining such amount, the Administrative Agent or such
Lender may use any reasonable averaging and attribution methods.

                                       47


      (b) Upon any Lender's making a claim for compensation under Section 3.01
or 3.04 and/or upon the occurrence of the circumstances described in Section
3.02 with respect to such Lender, the Borrower may replace such Lender in
accordance with Section 10.16.

      (c) Prior to giving notice pursuant to Section 3.02 or to demanding
compensation or other payment pursuant to Section 3.01 or Section 3.04, a Lender
or the Administrative Agent shall consult with the Borrower with reference to
the circumstances giving rise thereto; provided that nothing in this Section
3.06(c) shall limit the right of any Lender or the Administrative Agent, as the
case may be, to require full performance by the Borrower of its obligations
under such Sections.

      3.07 SURVIVAL. All of the Borrower's obligations under this Article III
shall survive termination of the Aggregate Commitments and repayment of all
other Obligations hereunder.

                                  ARTICLE IV.
                  CONDITIONS PRECEDENT TO CREDIT EXTENSIONS

      4.01 CONDITIONS OF INITIAL CREDIT EXTENSION. The obligation of each Lender
to make its initial Credit Extension hereunder is subject to satisfaction of the
following conditions precedent:

      (a) The Administrative Agent's receipt of the following, each of which
shall be originals or facsimiles (followed promptly by originals) unless
otherwise specified, each properly executed by a Responsible Officer of the
signing Loan Party, each dated the Closing Date (or, in the case of certificates
of governmental officials, a recent date before the Closing Date) and each in
form and substance satisfactory to the Administrative Agent and its legal
counsel:

            (i) executed counterparts of this Agreement sufficient in number for
      distribution to the Administrative Agent, each Lender and the Borrower;

            (ii) a Note executed by the Borrower in favor of each Lender;

            (iii) a duly completed Compliance Certificate for the period ending
      June 30, 2004 signed by a Responsible Office of the Borrower;

            (iv) executed counterparts of the Security Agreement, the Pledge
      Agreement, the Guaranty from each Domestic Subsidiary (other than Excluded
      Domestic Subsidiaries) and any additional Security Document or Loan
      Document required by Section 6.12 of this Agreement or any other provision
      of this Agreement or reasonably requested by the Administrative Agent to
      carry out the purposes hereof and thereof, sufficient in number for
      distribution to the Administrative Agent and the Borrower;

            (v) such certificates of resolutions or other action, incumbency
      certificates and/or other certificates of Responsible Officers of each
      Loan Party as the Administrative Agent may require evidencing the
      identity, authority and capacity of each Responsible Officer thereof
      authorized to act as a Responsible Officer in connection with this
      Agreement and the other Loan Documents to which such Loan Party is a
      party;

                                       48


            (vi) such documents and certifications as the Administrative Agent
      may reasonably require to evidence that each Loan Party is duly organized
      or formed, and that each of the Borrower and the Guarantors is validly
      existing, in good standing and qualified to engage in business in the
      jurisdiction of its organization;

            (vii) favorable opinion of internal counsel to the Loan Parties and
      of Gibson, Dunn & Crutcher LLP, special counsel to the Loan Parties,
      addressed to the Administrative Agent and each Lender, as to the matters
      set forth in Exhibit G;

            (viii) a certificate of a Responsible Officer of each Loan Party
      either (A) attaching copies of all consents, licenses and approvals
      required in connection with the execution, delivery and performance by
      such Loan Party and the validity against such Loan Party of the Loan
      Documents to which it is a party, and such consents, licenses and
      approvals shall be in full force and effect, or (B) stating that no such
      consents, licenses or approvals are so required; and

            (ix) a certificate signed by a Responsible Officer of the Borrower
      certifying (A) that the conditions specified in Sections 4.02(a) and (b)
      have been satisfied, (B) except as disclosed in the Borrower's SEC Filings
      made prior to the Closing Date or as otherwise disclosed to the Lenders,
      that there has been no event or circumstance since the date of the Audited
      Financial Statements that has had or could be reasonably expected to have,
      either individually or in the aggregate, a Material Adverse Effect; and
      (C) a calculation of the Consolidated Leverage Ratio as of the last day of
      the fiscal quarter of the Borrower most recently ended prior to the
      Closing Date.

      (b) Any fees required to be paid by the Borrower to the Administrative
Agent, the Lenders or the Arranger on or before the Closing Date shall have been
paid.

      (c) Unless waived by the Administrative Agent, the Borrower shall have
paid all Attorney Costs of the Administrative Agent to the extent invoiced prior
to or on the Closing Date, plus such additional amounts of Attorney Costs as
shall constitute its reasonable estimate of Attorney Costs incurred or to be
incurred by it through the closing proceedings (provided that such estimate
shall not thereafter preclude a final settling of accounts between the Borrower
and the Administrative Agent).

      (d) The Closing Date shall have occurred on or before November 5, 2004.

      4.02 CONDITIONS TO ALL CREDIT EXTENSIONS. The obligation of each Lender to
honor any Request for Credit Extension (other than a Committed Loan Notice
requesting only a conversion of Committed Loans to the other Type, or a
continuation of Eurodollar Rate Loans) is subject to the following conditions
precedent:

      (a) The representations and warranties of the Borrower and each other Loan
Party contained in Article V or any other Loan Document, or which are contained
in any document furnished at any time under or in connection herewith or
therewith, shall be true and correct in all material respects on and as of the
date of such Credit Extension, except to the extent that such representations
and warranties specifically refer to an earlier date, in which case they shall
be true and correct as of such earlier date, and except that for purposes of
this Section 4.02, the

                                       49


representations and warranties contained in subsections (a) and (b) of Section
5.05 shall be deemed to refer to the most recent statements furnished pursuant
to clauses (a) and (b), respectively, of Section 6.01.

      (b) No Default shall exist, or would result from such proposed Credit
Extension.

      (c) The Administrative Agent and, if applicable, the L/C Issuer or the
Swing Line Lender shall have received a Request for Credit Extension in
accordance with the requirements hereof.

      Each Request for Credit Extension (other than a Committed Loan Notice
requesting only a conversion of Committed Loans to the other Type or a
continuation of Eurodollar Rate Loans) submitted by the Borrower shall be deemed
to be a representation and warranty that the conditions specified in Sections
4.02(a) and (b) have been satisfied on and as of the date of the applicable
Credit Extension.

                                   ARTICLE V.
                         REPRESENTATIONS AND WARRANTIES

      The Borrower represents and warrants to the Administrative Agent and the
Lenders that:

      5.01 EXISTENCE, QUALIFICATION AND POWER; COMPLIANCE WITH LAWS. Each Loan
Party (a) is a corporation duly organized or formed, validly existing and in
good standing under the Laws of the jurisdiction of its incorporation or
organization, (b) has all requisite power and authority and all requisite
governmental licenses, authorizations, consents and approvals to (i) own its
assets and carry on its business and (ii) execute, deliver and perform its
obligations under the Loan Documents to which it is a party, (c) is duly
qualified and is licensed and in good standing under the Laws of each
jurisdiction where its ownership, lease or operation of properties or the
conduct of its business requires such qualification or license, and (d) is in
compliance with all Laws; except in each case referred to in clause (b)(i), (c)
or (d), to the extent that failure to do so could not reasonably be expected to
have a Material Adverse Effect.

      5.02 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and
performance by each Loan Party of each Loan Document to which such Person is
party, have been duly authorized by all necessary corporate or other
organizational action, and do not and will not (a) contravene the terms of any
of such Person's Organization Documents; (b) conflict with or result in any
breach or contravention of, or the creation of any Lien (other than Liens in
favor of the Administrative Agent) under, (i) any Contractual Obligation to
which such Person is a party or by which it is bound, the termination or adverse
modification of which could reasonably be expected to have a Material Adverse
Effect, or (ii) any order, injunction, writ or decree of any Governmental
Authority or any arbitral award to which such Person or its property is subject;
or (c) violate any Law.

      5.03 GOVERNMENTAL AUTHORIZATION; OTHER CONSENTS. No approval, consent,
exemption, authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, any Loan Party of
this Agreement or any other Loan Document except

                                       50


for such approvals, consents, exemptions, authorizations, actions, notices and
filings which have been obtained, taken, given or made and are in full force and
effect.

      5.04 BINDING EFFECT. This Agreement has been, and each other Loan
Document, when delivered hereunder, will have been, duly executed and delivered
by each Loan Party that is party thereto. This Agreement constitutes, and each
other Loan Document when so delivered will constitute, a legal, valid and
binding obligation of such Loan Party, enforceable against each Loan Party that
is party thereto in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, or similar Laws affecting the
enforcement of creditors' rights generally or by equitable principles relating
to enforceability.

      5.05 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE EFFECT.

      (a) The Audited Financial Statements (i) were prepared in accordance with
GAAP consistently applied throughout the period covered thereby, except as
otherwise expressly noted therein; (ii) fairly present the financial condition
of the Borrower and its Subsidiaries as of the date thereof and their results of
operations for the period covered thereby in accordance with GAAP consistently
applied throughout the period covered thereby, except as otherwise expressly
noted therein; and (iii) show all material indebtedness and other liabilities,
direct or contingent, of the Borrower and its Subsidiaries as of the date
thereof, including liabilities for taxes, material commitments and Indebtedness,
to the extent required by GAAP to be shown on such financial statements.

      (b) The unaudited consolidated financial statements of the Borrower and
its Subsidiaries dated June 30, 2004, and the related consolidated statements of
income or operations, shareholders' equity and cash flows for the fiscal quarter
ended on that date (i) were prepared in accordance with GAAP consistently
applied throughout the period covered thereby, except as otherwise expressly
noted therein, and (ii) fairly present the financial condition of the Borrower
and its Subsidiaries as of the date thereof and their results of operations for
the period covered thereby, subject, in the case of clauses (i) and (ii), to the
absence of footnotes and to normal year-end audit adjustments. Such financial
statements and the SEC Filings delivered to the Lenders set forth all material
indebtedness and other liabilities, direct or contingent of the Borrower and its
consolidated Subsidiaries as of the date of such financial statements, including
liabilities for taxes, material commitments and Indebtedness, to the extent
required by GAAP to be shown on such financial statements.

      (c) Except as disclosed in the SEC Filings made by the Borrower on or
prior to the Closing Date or as otherwise disclosed to the Lenders by the
Borrower on or prior to the Closing Date, since the date of the Audited
Financial Statements, there has been no event or circumstance, either
individually or in the aggregate, that has had or could reasonably be expected
to have a Material Adverse Effect.

      5.06 LITIGATION. Except as disclosed in SEC Filings made by the Borrower
or as otherwise disclosed to the Lenders, prior to the Closing Date, there are
no actions, suits, proceedings, claims or disputes pending or, to the knowledge
of the Borrower, threatened or contemplated, at law, in equity, in arbitration
or before any Governmental Authority, by or against the Borrower or any of its
Subsidiaries or against any of their properties or revenues that

                                       51


(a) purport to affect or pertain to this Agreement or any other Loan Document,
or any of the transactions contemplated hereby, or (b) either individually or in
the aggregate, if determined adversely, could reasonably be expected to have a
Material Adverse Effect.

      5.07 NO DEFAULT. Neither the Borrower nor any Subsidiary is in default
under or with respect to any Contractual Obligation that could, either
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. No Default has occurred and is continuing or would result from
the consummation of the transactions contemplated by this Agreement or any other
Loan Document.

      5.08 OWNERSHIP OF PROPERTY; LIENS. Each of the Borrower and each
Subsidiary has good record and marketable title in fee simple to, or valid
leasehold interests in, all real property necessary or used in the ordinary
conduct of its business, except for such defects in title as could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. The property of the Borrower and its Subsidiaries is subject to
no Liens, other than Liens permitted by Section 7.01.

      5.09 ENVIRONMENTAL COMPLIANCE. The Borrower and its Subsidiaries conduct
in the ordinary course of business a review of the effect of existing
Environmental Laws and claims alleging potential liability or responsibility for
violation of any Environmental Law on their respective businesses, operations
and properties, and as a result thereof the Borrower has reasonably concluded
that, except as specifically disclosed in SEC Filings delivered to the Lenders,
such Environmental Laws and claims could not, individually or in the aggregate
reasonably be expected to have a Material Adverse Effect.

      5.10 INSURANCE. The properties of the Borrower and its Subsidiaries are
insured with financially sound and reputable insurance companies not Affiliates
of the Borrower, in such amounts (after giving effect to any self-insurance
compatible with the following standards), with such deductibles and covering
such risks as are customarily carried by companies engaged in similar businesses
and owning similar properties in localities where the Borrower or the applicable
Subsidiary operates.

      5.11 TAXES. The Borrower and its Subsidiaries have filed all Federal,
state and other material tax returns and reports required to be filed, and have
paid all Federal, state and other material taxes, assessments, fees and other
governmental charges levied or imposed upon them or their properties, income or
assets otherwise due and payable, except those which are being contested in good
faith by appropriate proceedings diligently conducted and for which adequate
reserves have been provided in accordance with GAAP. There is no proposed tax
assessment against the Borrower or any Subsidiary that would, if made, have a
Material Adverse Effect.

      5.12 ERISA COMPLIANCE.

      (a) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other Federal or state Laws. Each
Plan that is intended to qualify under Section 401(a) of the Code has received a
favorable determination letter from the IRS or an application for such a letter
is currently being processed by the IRS with respect thereto and, to the best
knowledge of the Borrower, nothing has occurred which would prevent, or cause
the

                                       52


loss of, such qualification. The Borrower and each ERISA Affiliate have made
all required contributions to each Plan subject to Section 412 of the Code, and
no application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code has been made with respect to any Plan.

      (b) There are no pending or, to the best knowledge of the Borrower,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan that could be reasonably be expected to have a Material
Adverse Effect. There has been no prohibited transaction or violation of the
fiduciary responsibility rules with respect to any Plan that has resulted or
could reasonably be expected to result in a Material Adverse Effect.

      (c) (i) No ERISA Event has occurred or is reasonably expected to occur;
(ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the
Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur,
any liability under Title IV of ERISA with respect to any Pension Plan (other
than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither
the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability (and no event has occurred which, with the giving of notice
under Section 4219 of ERISA, would result in such liability) under Sections 4201
or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the
Borrower nor any ERISA Affiliate has engaged in a transaction that could be
subject to Sections 4069 or 4212(c) of ERISA.

      5.13 SUBSIDIARIES. Except as disclosed in SEC Filings made by the Borrower
or as otherwise disclosed by the Borrower to the Lenders, the Borrower has no
Subsidiaries and has no Equity Interests in any other Person.

      5.14 MARGIN REGULATIONS; INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING
COMPANY ACT.

      (a) The Borrower is not engaged and will not engage, principally or as one
of its important activities, in the business of purchasing or carrying margin
stock (within the meaning of Regulation U issued by the FRB), or extending
credit for the purpose of purchasing or carrying margin stock. Following the
application of the proceeds of each Borrowing or drawing under each Letter of
Credit, not more than 25% of the value of the assets (either of the Borrower
only or of the Borrower and its Subsidiaries on a consolidated basis) subject to
the provisions of Section 7.01 or Section 7.05 or subject to any restriction
contained in any agreement or instrument between the Borrower and any Lender or
any Affiliate of any Lender relating to Indebtedness and within the scope of
Section 8.01(e) will be margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System).

      (b) None of the Borrower, any Person Controlling the Borrower, or any
Subsidiary (i) is a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," within the meaning of the Public Utility Holding Company
Act of 1935, or (ii) is or is required to be registered as an "investment
company" under the Investment Company Act of 1940.

      5.15 DISCLOSURE. No written report, financial statement, certificate or
other written information furnished by or on behalf of any Loan Party to the
Administrative Agent or any

                                       53


Lender in connection with the transactions contemplated hereby and the
negotiation of this Agreement or delivered hereunder (as modified or
supplemented by other information so furnished) taken as a whole contains any
material misstatement of fact or omits to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; provided that, with respect to projected financial
information, the Borrower represents only that such information was prepared in
good faith based upon assumptions believed to be reasonable at the time (it
being understood that projections are subject to significant uncertainties and
contingencies, many of which are beyond the Borrower's control, and that no
assurance can be given the projections will be realized).

      5.16 COMPLIANCE WITH LAWS. Each of the Borrower and each Subsidiary is in
compliance in all material respects with the requirements of all Laws and all
orders, writs, injunctions and decrees applicable to it or to its properties,
except in such instances in which (a) such requirement of Law or order, writ,
injunction or decree is being contested in good faith by appropriate proceedings
diligently conducted or (b) the failure to comply therewith, either individually
or in the aggregate, could not reasonably be expected to have a Material Adverse
Effect.

      5.17 INTELLECTUAL PROPERTY; LICENSES, ETC. To the best knowledge of the
Borrower and except as otherwise disclosed in the SEC Filings made by the
Borrower prior to the Closing Date or previously disclosed to the Lenders, the
Borrower and its Subsidiaries own, or possess the right to use, all of the
trademarks, service marks, trade names, copyrights, patents, patent rights,
franchises, licenses and other intellectual property rights that are reasonably
necessary for the operation of their respective businesses, without conflict
with the rights of any other Person. To the best knowledge of the Borrower, no
slogan or other advertising device, product, process, method, substance, part or
other material now employed by the Borrower or any Subsidiary infringes upon any
valid, proprietary rights held by any other Person that could result in a claim,
that, if successful, could reasonably be expected to have a Material Adverse
Effect. Except as disclosed in SEC Filings made by the Borrower prior to the
Closing Date or previously disclosed to the Lenders, no claim or litigation
regarding any of the foregoing is pending or, to the best knowledge of the
Borrower, threatened, which, either individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect.

      5.18 COLLATERAL. The provisions of this Agreement and the other Loan
Documents create legal, valid, perfected, enforceable and continuing security
interests in the Collateral in favor of the Administrative Agent for the benefit
of the Lenders, the Swing Line Lender and the L/C Issuer, having priority over
all other Liens on the Collateral except for Permitted Liens arising under, and
having priority pursuant to, applicable Law.

                                  ARTICLE VI.
                             AFFIRMATIVE COVENANTS

      So long as any Lender shall have any Commitment hereunder, any Loan or
other Obligation hereunder shall remain unpaid or unsatisfied, or any Letter of
Credit shall remain outstanding, the Borrower shall, and shall (except in the
case of the covenants set forth in Sections 6.01, 6.02, 6.03 and 6.11) cause
each Subsidiary to:

                                       54


      6.01 FINANCIAL STATEMENTS. Deliver to the Administrative Agent (with
sufficient copies for each Lender), in form and detail satisfactory to the
Administrative Agent and the Required Lenders:

      (a) as soon as available, but in any event within 90 days after the end of
each fiscal year of the Borrower, a consolidated balance sheet of the Borrower
and its Subsidiaries as at the end of such fiscal year, and the related
consolidated statements of income or operations, shareholders' equity and cash
flows for such fiscal year, setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail and prepared in
accordance with GAAP, audited and accompanied by a report and opinion of an
independent certified public accountant of nationally recognized standing, which
report and opinion shall be prepared in accordance with generally accepted
auditing standards and shall not be subject to any "going concern" or like
qualification or exception or any qualification or exception as to the scope of
such audit; and

      (b) as soon as available, but in any event within 45 days after the end of
each of the first three fiscal quarters of each fiscal year of the Borrower, a
consolidated balance sheet of the Borrower and its Subsidiaries as at the end of
such fiscal quarter, and the related consolidated statements of income or
operations, shareholders' equity and cash flows for such fiscal quarter and for
the portion of the Borrower's fiscal year then ended, setting forth in each case
in comparative form the figures for the corresponding fiscal quarter of the
previous fiscal year and the corresponding portion of the previous fiscal year,
all in reasonable detail, certified by a Responsible Officer of the Borrower as
fairly presenting the financial condition, results of operations, shareholders'
equity and cash flows of the Borrower and its Subsidiaries in accordance with
GAAP, subject only to normal year-end audit adjustments and the absence of
footnotes; and

      (c) concurrently with the delivery of the financial statements referred to
in subsections (a) and (b) above, consolidating balance sheets of the Borrower
and its Subsidiaries as of the end of the relevant fiscal year (in the case of
subsection (a)) or fiscal quarter (in the case of subsection (b)) and the
related consolidating statement of income for the fiscal year (in the case of
subsection (a)) or fiscal quarter (in the case of subsection (b)).

As to any information contained in materials furnished pursuant to Section
6.02(c), the Borrower shall not be separately required to furnish such
information under clause (a) or (b) above, but the foregoing shall not be in
derogation of the obligation of the Borrower to furnish the information and
materials described in subsections (a) and (b) above at the times specified
therein.

      6.02 CERTIFICATES; OTHER INFORMATION. Deliver to the Administrative Agent,
for delivery to each Lender, in form and detail satisfactory to the
Administrative Agent and the Required Lenders:

      (a) concurrently with the delivery of the financial statements referred to
in Sections 6.01(a) and (b), a duly completed Compliance Certificate signed by a
Responsible Officer of the Borrower;

                                       55


      (b) promptly after any request by the Administrative Agent or any Lender,
copies of any detailed audit reports, management letters or recommendations
submitted to the board of directors (or the audit committee of the board of
directors) of the Borrower by independent accountants in connection with the
accounts or books of the Borrower or any Subsidiary, or any audit of any of
them;

      (c) promptly after the same are available, copies of each annual report,
proxy or financial statement or other report or communication sent to the
stockholders of the Borrower, and copies of all annual, regular, periodic and
special reports and registration statements which the Borrower may file or be
required to file with the SEC under Section 13 or 15(d) of the Securities
Exchange Act of 1934, and not otherwise required to be delivered to the
Administrative Agent pursuant hereto;

      (d) promptly after the Borrower has notified the Administrative Agent of
any intention by the Borrower to treat the Loans and/or Letters of Credit and
related transactions as being a "reportable transaction" (within the meaning of
Treasury Regulation Section 1.6011-4), a duly completed copy of IRS Form 8886 or
any successor form; and

      (e) promptly, such additional information regarding the business,
financial or corporate affairs of the Borrower or any Subsidiary, or compliance
with the terms of the Loan Documents, as the Administrative Agent or any Lender
may from time to time reasonably request.

      Documents required to be delivered pursuant to Section 6.01(a) or (b) or
Section 6.02(c) (to the extent any such documents are included in materials
otherwise filed with the SEC) may be delivered electronically and if so
delivered, shall be deemed to have been delivered on the date (i) on which the
Borrower posts such documents, or provides a link thereto on the Borrower's
website on the Internet at the website address listed on Schedule 10.02; or (ii)
on which such documents are posted on the Borrower's behalf on
IntraLinks/IntraAgency or another relevant website, if any, to which each Lender
and the Administrative Agent have access (whether a commercial, third-party
website or whether sponsored by the Administrative Agent); provided that: (i) if
any Lender so requests, the Borrower shall deliver paper copies of such
documents to the Administrative Agent or any Lender that requests the Borrower
to deliver such paper copies until a written request to cease delivering paper
copies is given by the Administrative Agent or such Lender and (ii) the Borrower
shall notify (which may be by facsimile or electronic mail) the Administrative
Agent and each Lender of the posting of any such documents. Notwithstanding
anything contained herein, in every instance the Borrower shall be required to
provide paper copies of the Compliance Certificates required by Section 6.02(a)
to the Administrative Agent and each of the Lenders. Except for such Compliance
Certificates, the Administrative Agent shall have no obligation to request the
delivery or to maintain copies of the documents referred to above, and in any
event shall have no responsibility to monitor compliance by the Borrower with
any such request for delivery, and each Lender shall be solely responsible for
requesting delivery to it or maintaining its copies of such documents.

      6.03 NOTICES. Notify the Administrative Agent and each Lender:

                                       56


      (a) Within five (5) Business Days after the occurrence of a Default under
Section 8.01(e) and promptly after the occurrence of any other Default;

      (b) Promptly of any matter that has resulted or could reasonably be
expected to result in a Material Adverse Effect, including, if applicable (i)
breach or non-performance of, or any default under, a Contractual Obligation of
the Borrower or any Subsidiary; (ii) any dispute, litigation, investigation,
proceeding or suspension between the Borrower or any Subsidiary and any
Governmental Authority; or (iii) the commencement of, or any material
development in, any litigation or proceeding affecting the Borrower or any
Subsidiary, including pursuant to any applicable Environmental Laws;

      (c) Promptly of the occurrence of any ERISA Event; and

      (d) Promptly of any material change in accounting policies or financial
reporting practices by the Borrower or any Subsidiary.

      Each notice pursuant to this Section shall be accompanied by a statement
of a Responsible Officer of the Borrower setting forth details of the occurrence
referred to therein and stating what action the Borrower has taken and proposes
to take with respect thereto. Each notice pursuant to Section 6.03(a) shall
describe with particularity any and all provisions of this Agreement and any
other Loan Document that have been breached.

      6.04 PAYMENT OF OBLIGATIONS. Pay and discharge as the same shall become
due and payable, all its obligations and liabilities in an aggregate amount in
excess of the Threshold Amount, including (a) all tax liabilities, assessments
and governmental charges or levies upon it or its properties or assets, unless
the same are being contested in good faith by appropriate proceedings diligently
conducted and adequate reserves in accordance with GAAP are being maintained by
the Borrower or such Subsidiary; (b) all lawful claims which, if unpaid, would
by law become a Lien upon its property; and (c) all Indebtedness, as and when
due and payable, but subject to any subordination provisions contained in any
instrument or agreement evidencing such Indebtedness.

      6.05 PRESERVATION OF EXISTENCE, ETC. (a) Preserve, renew and maintain in
full force and effect its legal existence and good standing under the Laws of
the jurisdiction of its organization except in a transaction permitted by
Section 7.04 or 7.05; (b) take all reasonable action to maintain all rights,
privileges, permits, licenses and franchises necessary or desirable in the
normal conduct of its business, except to the extent that failure to do so could
not reasonably be expected to have a Material Adverse Effect; and (c) preserve
or renew all of its registered patents, trademarks, trade names and service
marks, the non-preservation of which could reasonably be expected to have a
Material Adverse Effect.

      6.06 MAINTENANCE OF PROPERTIES. (a) Except for any downsizing,
restructuring, closure or partial closure of the golf ball manufacturing
operations of the Borrower in existence on the Closing Date, maintain, preserve
and protect all of its material properties and material equipment necessary in
the operation of its business in good working order and condition, ordinary wear
and tear excepted; and (b) make all necessary repairs thereto and renewals and

                                       57

replacements thereof except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect.

      6.07 MAINTENANCE OF INSURANCE. Maintain with financially sound and
reputable insurance companies not Affiliates of the Borrower, insurance with
respect to its properties and business against loss or damage of the kinds
customarily insured against by Persons engaged in the same or similar business,
of such types and in such amounts (after giving effect to any self-insurance
compatible with the following standards) as are customarily carried under
similar circumstances by such other Persons.

      6.08 COMPLIANCE WITH LAWS. Comply in all material respects with the
requirements of all Laws and all orders, writs, injunctions and decrees
applicable to it or to its business or property, except in such instances in
which (a) such requirement of Law or order, write, injunction or decree is being
contested in good faith by appropriate proceedings diligently conducted; or (b)
the failure to comply therewith could not reasonably be expected to have a
Material Adverse Effect.

      6.09 BOOKS AND RECORDS. (a) Maintain proper books of record and account,
in which full, true and correct entries in conformity with GAAP consistently
applied shall be made of all financial transactions and matters involving the
assets and business of the Borrower or such Subsidiary, as the case may be; and
(b) maintain such books of record and account in material conformity with all
applicable requirements of any Governmental Authority having regulatory
jurisdiction over the Borrower or such Subsidiary, as the case may be.

      6.10 INSPECTION RIGHTS. Permit representatives and independent contractors
of the Administrative Agent and each Lender to visit and inspect any of its
properties, to examine its corporate, financial and operating records, and make
copies thereof or abstracts therefrom, and to discuss its affairs, finances and
accounts with its directors, officers, and independent public accountants, all
at the expense of the Borrower and at such reasonable times during normal
business hours and as often as may be reasonably desired, upon reasonable
advance notice to the Borrower; provided, however, that when an Event of Default
exists the Administrative Agent or any Lender (or any of their respective
representatives or independent contractors) may do any of the foregoing at the
expense of the Borrower at any time during normal business hours and without
advance notice.

      6.11 USE OF PROCEEDS. Use the proceeds of the Credit Extensions for
general corporate purposes not in contravention of any Law or of any Loan
Document, including any Permitted Acquisition.

      6.12 FURTHER ASSURANCES.

            (a) Execute and cause to be executed any and all further documents,
financing statements, agreements and instruments and take all further actions
(including filing financing statements under the Uniform Commercial Code) as may
be required under applicable law or that the Required Lenders or the
Administrative Agent may reasonably request in order to (i) create and maintain
the security interest of the Administrative Agent for the benefit of the Lenders
in the Collateral, (ii) perfect by filing a financing statement the security
interest of the

                                       58


Administrative Agent in Collateral of each Loan Party, (iii) perfect, in
accordance with the Pledge Agreement, the pledge of the security interest of the
Administrative Agent in the Pledged Equity Interests, (iv) perfect, in
accordance with the law of the jurisdiction in which the issuer of Pledged
Equity Interests is organized, the security interest of the Administrative Agent
in such Pledged Equity Interests, and (v) otherwise effectuate the transactions
contemplated by the Loan Documents and in order to grant, preserve, protect and
perfect the validity and priority of the security interests created or intended
to be created in the Collateral by the Security Documents.

      (b) Subject to the provisions of Section 6.13, cause the Obligations at
all times to be (i) secured by a security interest in Collateral of each Loan
Party perfected by filing a financing statement and (ii) secured by Pledged
Equity Interests validly pledged to the Administrative Agent, for the benefit of
the Lenders, and, to the extent certificated, delivered, accompanied by stock
powers endorsed in blank, to the Administrative Agent. Such security interests
and Liens will be created under the Security Documents and other security
agreements, mortgages and other instruments and documents in form and substance
satisfactory to the Administrative Agent. The Borrower shall deliver or cause to
be delivered to the Administrative Agent all such documents (including Lien
searches and legal opinions) as the Administrative Agent shall reasonably
request to evidence compliance with this Section 6.12.

      (c) Cause each Domestic Subsidiary (other than Excluded Domestic
Subsidiaries and Subsidiaries of Excluded Domestic Subsidiaries), any Material
Foreign Subsidiary that is not a "controlled foreign corporation" under Section
957 of the Code, and any Material Foreign Subsidiary that loses its status as a
"controlled foreign corporation" under Section 957 of the Code promptly to (i)
execute and delivery to the Administrative Agent a Guaranty, the Security
Agreement and each other applicable Security Document in favor of the
Administrative Agent, (ii) deliver to the Administrative Agent evidence
satisfactory to the Administrative Agent that (x) such Subsidiary has taken or
caused to be taken any other action, executed and delivered or caused to be
delivered any other agreement, document or instrument and made or caused to be
made any other filing or recording reasonably required by the Administrative
Agent to perfect its security interest securing the Obligations in accordance
with this Section 6.12 and the remainder of the Loan Documents, (iii) deliver to
the Administrative Agent such certificates of resolutions or other action,
incumbency certificates and/or other certificates of Responsible Officers of
such Subsidiary as the Administrative Agent may require evidencing the identity,
authority and capacity of each Responsible Officer thereof in connection with
the Security Documents to which such Subsidiary is a party and such additional
and other documents and certifications as the Administrative Agent may
reasonably require to evidence that such Subsidiary is duly organized or formed
and is validly existing, in good standing and qualified to engage in business in
jurisdictions reasonably identified by the Administrative Agent, and (iv)
deliver to the Administrative Agent favorable opinions of counsel to such
Subsidiary, all in form, content and scope reasonably satisfactory to the
Administrative Agent.

      6.13 COLLATERAL RELEASE.

      Notwithstanding anything the contrary in Section 6.12 or elsewhere in this
Agreement or any other Loan Document, (i) upon satisfaction of the Release
Conditions, the security interest of the Administrative Agent in the Security
Agreement Collateral shall automatically and without action of any party be
terminated and released, and the Administrative Agent shall, at the cost of

                                       59


the Borrower, terminate all financing statements, return any Security Agreement
Collateral delivered to it and take such other actions as shall be reasonably
required in connection with the termination and release of its security interest
in the Security Agreement Collateral and (ii) upon any Disposition of Collateral
permitted by this Agreement, the Administrative Agent shall, at the cost of the
Borrower, take such actions as shall be reasonably required to terminate its
security interest in Collateral of which the Loan Parties Dispose in a
Disposition permitted by this Agreement.

                                  ARTICLE VII.
                               NEGATIVE COVENANTS

      So long as any Lender shall have any Commitment hereunder, any Loan or
other Obligation hereunder shall remain unpaid or unsatisfied, or any Letter of
Credit shall remain outstanding, the Borrower shall not, nor shall it permit any
Material Subsidiary to, directly or indirectly:

      7.01 LIENS. Create, incur, assume or suffer to exist any Lien upon any of
its property, assets or revenues, whether now owned or hereafter acquired, other
than the following:

      (a) Liens pursuant to any Loan Document;

      (b) Liens existing on the date hereof that, to the best knowledge of the
Borrower, are listed on Schedule 7.01;

      (c) Liens for taxes, fees, assessments or other governmental charges not
yet due or which are being contested in good faith and by appropriate
proceedings diligently conducted, if adequate reserves with respect thereto are
maintained on the books of the applicable Person in accordance with GAAP or to
the extent that nonpayment thereof is permitted by Section 6.04;

      (d) carriers', warehousemen's, mechanics', materialmen's, repairmen's or
other like Liens arising in the ordinary course of business which are not
overdue for a period of more than 30 days or which are being contested in good
faith and by appropriate proceedings diligently conducted, if adequate reserves
with respect thereto are maintained on the books of the applicable Person;

      (e) pledges or deposits in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other social security
legislation, other than any Lien imposed by ERISA, and Liens imposed on deposits
and accounts maintained with banks and other financial institutions in
connection with banking and other financial services utilized by the Borrower
and its Subsidiaries in the ordinary course of business;

      (f) deposits or other Liens to secure the performance of bids, trade
contracts and leases (other than Indebtedness), statutory obligations, surety
bonds (other than bonds related to judgments or litigation), performance bonds
and other obligations of a like nature incurred in the ordinary course of
business;

                                       60


      (g) easements, rights-of-way, restrictions and other similar encumbrances
affecting real property which, in the aggregate, are not substantial in amount,
and which do not in any case materially detract from the value of the property
subject thereto or materially interfere with the ordinary conduct of the
business of the applicable Person;

      (h) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depository institution;

      (i) Liens securing judgments for the payment of money not constituting an
Event of Default under Section 8.01(h) or securing appeal or other surety bonds
related to such judgments;

      (j) Liens securing Indebtedness permitted under Section 7.03(e); provided
that (i) such Liens do not at any time encumber any property other than the
property financed by such Indebtedness and (ii) the Indebtedness secured thereby
does not exceed, on the date of acquisition, the cost or fair market value,
whichever is lower, of the property being acquired;

      (k) Liens on Collateral securing Indebtedness permitted under Section
7.03(g); provided that such Liens (i) do not at any time encumber any property
other than the property acquired and, if Equity Interests in a Person are
acquired, the assets of such Person, (ii) do not encumber any Collateral, (iii)
were not created in anticipation of such Permitted Acquisition and (iv) until
the date on which the Collateral Release Conditions are satisfied, do not at any
time, encumber any accounts or inventory of the Borrower or its Subsidiaries.

      (l) Liens on the Collateral in favor of the Administrative Agent;

      (m) extensions, renewals and replacements of Liens referred to in clauses
(a) through (k) above, provided that the property covered thereby is not
increased and any renewal or extension of the obligations secured or benefited
thereby is permitted by Section 7.03;

      (n) Liens arising under leases, subleases, licenses and rights to use
granted to others not otherwise prohibited by this Agreement that do not
materially adversely affect the conduct by the Borrower and by its Subsidiaries
of their core golf products business; and

      (o) Liens securing other Indebtedness of the Borrower and its Material
Subsidiaries not expressly permitted by subsections (a) through (n) above;
provided that the amount of Indebtedness secured by such Liens permitted by this
subsection (o) shall not exceed (i) prior to the date on which the Release
Conditions have been satisfied, $5,000,000 in the aggregate outstanding at any
one time and (ii) on and after the date on which the Release Conditions have
been satisfied, $15,000,000 in the aggregate outstanding at any one time.

      7.02 INVESTMENTS. Make any Investments, except:

      (a) Investments held by the Borrower or such Subsidiary in the form of (i)
cash equivalents and (ii) marketable securities classified as current assets
under GAAP;

                                       61


      (b) advances to officers, directors and employees of the Borrower and
Subsidiaries for travel, entertainment, relocation and analogous ordinary
business purposes;

      (c) Investments in existence on the Closing Date of the Borrower and its
Subsidiaries, including, without limitation, the Borrower's existing Investment
in the GSOT;

      (d) Investments of the Borrower in any Guarantor and Investments of any
Guarantor in another Guarantor;

      (e) Investments in the nature of intercompany loans (i) from any wholly
owned Subsidiary to the Borrower or any other wholly owned Subsidiary or (ii)
from the Borrower to any wholly owned Subsidiary; provided that (x) neither the
Borrower nor any Domestic Subsidiary may make loans to any Foreign Subsidiaries
of the Borrower pursuant to this subsection (e) and (y) any loans made by any
Foreign Subsidiaries to the Borrower or to any of its Domestic Subsidiaries
pursuant to this subsection (e) shall be subordinated to the obligations of the
Borrower and Guarantors pursuant to subordination provisions acceptable to the
Administrative Agent;

      (f) Investments consisting of extensions of credit in the nature of
accounts receivable or notes receivable arising from the grant of trade credit
in the ordinary course of business, and Investments received in satisfaction or
partial satisfaction thereof from financially troubled account debtors to the
extent reasonably necessary in order to prevent or limit loss;

      (g) Guarantees permitted by Section 7.03;

      (h) Investments made in connection with Permitted Acquisitions;

      (i) Investments in Foreign Subsidiaries that are Immaterial Subsidiaries;

      (j) Investments in Foreign Subsidiaries consisting of Indebtedness or
Equity Interests arising from or relating to the reclassification, exchange or
conversion of accounts receivable arising from the grant of trade credit in the
ordinary course of business;

      (k) Investments in Subsidiaries of the Borrower; provided that the
aggregate amount of all such Investments outstanding at any one time pursuant to
this clause (k) shall not exceed $10,000,000;

      (l) Investments pursuant to Swap Contracts otherwise permitted hereunder;
and

      (m) other Investments, including, without limitation, Investments in Joint
Ventures, made after the Closing Date and not otherwise permitted hereunder in
an aggregate amount outstanding at any one time not to exceed the sum of (i) (x)
prior to the date on which the Release Conditions have been satisfied,
$25,000,000 and (y) on and after the date on which the Release Conditions have
been satisfied, $50,000,000; provided, however, that each such Investment shall
be made in a business that is not engaged, directly or indirectly, in any line
of business other than (A) the businesses in which the Borrower and its
Subsidiaries are engaged on the Closing Date or (B) any business activities
related to the golf industry.

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      7.03 INDEBTEDNESS. Create, incur, assume or suffer to exist any
Indebtedness, except:

      (a) Indebtedness under the Loan Documents;

      (b) Indebtedness outstanding on the date hereof and listed on Schedule
7.03;

      (c) Guarantees of the Borrower or any Subsidiary in respect of
Indebtedness otherwise permitted hereunder of the Borrower or any Subsidiary;

      (d) Obligations (contingent or otherwise) of the Borrower or any
Subsidiary existing or arising under any Swap Contract, provided that such
obligations are (or were) entered into by such Person in the ordinary course of
business for the purpose of directly mitigating risks associated with
liabilities, commitments, investments, assets, or property held or reasonably
anticipated by such Person, or changes in the value of securities issued by such
Person, and not for purposes of speculation or taking a "market view;"

      (e) Indebtedness in respect of capital leases, Off-Balance Sheet
Liabilities and purchase money obligations for fixed or capital assets;
provided, however, that the aggregate amount of all such Indebtedness at any one
time outstanding shall not exceed $25,000,000;

      (f) Indebtedness to Financial Institutions (i) prior to the date on which
the Release Conditions have been satisfied, not to exceed $10,000,000 in the
aggregate outstanding at any one time and (ii) on and after the date on which
the Release Conditions have been satisfied, $50,000,000 in the aggregate
outstanding at any one time;

      (g) Indebtedness in an aggregate amount not in excess of $20,000,000
outstanding at any one time assumed in connection with Permitted Acquisitions
that was not created in anticipation of such Permitted Acquisitions;

      (h) Indebtedness to the Person, or the beneficial holders of Equity
Interests in the Person, whose assets or Equity Interests are acquired in a
Permitted Acquisition where such Indebtedness (i) is payable in full no sooner
than three years from the date of such Acquisition, (ii) is repayable in
installments of no more than one-third of the initial amount in any year after
the date of such Permitted Acquisition, and (iii) bears interest and fees that
are consistent with then available market rates for such Indebtedness;

      (i) Indebtedness of wholly owned Domestic Subsidiaries to each other
Indebtedness of Foreign Subsidiaries to each other and other Indebtedness of
Subsidiaries of the Borrower to the Borrower that is subordinated to the
Obligations on terms and conditions satisfactory to the Administrative Agent;

      (j) intercompany Indebtedness among the Borrower and its Subsidiaries
permitted by Section 7.02;

      (k) in addition to any Indebtedness permitted by the preceding subsection
(j) Indebtedness of any wholly owned Subsidiary to the Borrower or another
wholly owned Subsidiary constituting the purchase price in respect of
intercompany transfers of goods and

                                       63


services made in the ordinary course of business to the extent otherwise
permitted by Section 7.08 and not constituting Indebtedness for borrowed money;

      (l) Indebtedness of the Borrower or any Subsidiary in connection with
guaranties resulting from endorsement of negotiable instruments in the ordinary
course of business;

      (m) Indebtedness on account of surety bonds and appeal bonds in connection
with the enforcement of rights or claims of the Borrower or its Subsidiaries or
in connection with judgments not resulting in an Event of Default under Section
8.01(h);

      (n) any refinancings, refundings, renewals or extensions of Indebtedness
permitted pursuant to Sections 7.03(a), (b), and (e); provided that (i) the
amount of such Indebtedness is not increased at the time of such refinancing,
refunding, renewal or extension except by an amount equal to a reasonable
premium or other reasonable amount paid, and fees and expenses reasonably
incurred, in connection with such refinancing and by an amount equal to any
existing commitments unutilized thereunder and (ii) Indebtedness subordinated to
the Obligations is not refinanced except on subordination terms at least as
favorable to the Administrative Agent and the other Lenders and no more
restrictive on the Borrower and its Subsidiaries than the subordinated
Indebtedness being refinanced, and in an amount not less than the amount
outstanding at the time of refinancing; and

      (o) other Indebtedness incurred after the Closing Date and not otherwise
permitted hereunder in an aggregate amount at any one time outstanding not to
exceed (i) prior to the date which the Release Conditions have been satisfied,
$5,000,000 and (ii) on and after the date on which the Release Conditions have
been satisfied, $15,000,000.

      7.04 FUNDAMENTAL CHANGES. Merge, dissolve, liquidate, consolidate with or
into another Person, or Dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to or in favor of any Person, except that, so long as no
Default exists or would result therefrom:

      (a) any Subsidiary may merge with (i) the Borrower, provided that the
Borrower shall be the continuing or surviving Person, or (ii) any one or more
other Subsidiaries, provided that when any Guarantor is merging with another
Subsidiary, the Guarantor shall be the continuing or surviving Person or the
surviving Person shall become a Guarantor;

      (b) any Foreign Subsidiary may merge with (i) the Borrower, provided that
the Borrower shall be the continuing or surviving Person or (ii) any one or more
other Subsidiaries, provided that when any Foreign Subsidiary is merging with a
Domestic Subsidiary, the Domestic Subsidiary shall be the continuing or
surviving Person;

      (c) any Subsidiary may Dispose of all or substantially all of its assets
(upon voluntary liquidation or otherwise) to the Borrower or to another
Subsidiary; provided that if the transferor in such transaction is a Guarantor,
then the transferee must either be the Borrower or another Guarantor;

      (d) any Immaterial Subsidiary may be wound up, liquidated or dissolved;
and

                                       64


      (e) the Subsidiaries of the Borrower may merge or consolidate with any
Person pursuant to a Permitted Acquisition; and

      (f) the Borrower and its Subsidiaries may make those Dispositions
permitted by Section 7.05.

      7.05 DISPOSITIONS. Make any Disposition or enter into any agreement to
make any Disposition, except:

      (a) Dispositions of obsolete or worn out property, whether now owned or
hereafter acquired, in the ordinary course of business;

      (b) Dispositions of inventory in the ordinary course of business;

      (c) Dispositions of equipment or real property to the extent that (i) such
property is exchanged for credit against the purchase price of similar
replacement property or (ii) the proceeds of such Disposition are reasonably
promptly applied to the purchase price of such replacement property;

      (d) Dispositions of property by any Subsidiary to the Borrower or to a
Wholly Owned Subsidiary; provided that if the transferor of such property is a
Guarantor, the transferee thereof must either be the Borrower or a Guarantor;
and Dispositions of property by the Borrower to any Guarantor;

      (e) Dispositions permitted by Section 7.04;

      (f) leases, subleases, licenses and rights to use granted to others not
otherwise prohibited by this Agreement that do not materially adversely affect
the conduct by the Borrower and by its Subsidiaries of their core golf products
business;

      (g) Dispositions made in connection with the closure, downsizing,
restructuring, closure or partial closure of the golf ball manufacturing
operations of the Borrower; and

      (h) other Dispositions in an aggregate amount not to exceed $10,000,000;

provided, however, that any Disposition pursuant to clauses (a) through (g)
shall be for fair market value; provided, further, that the Borrower or any of
its Material Subsidiaries may enter into an agreement to make a Disposition
otherwise prohibited by this Section 7.05 if failure to consummate such
Disposition would not result in a liability or Indebtedness otherwise prohibited
by this Agreement and either (i) the aggregate amount of assets subject to such
agreement, when combined with assets subject to other such agreements, during
any fiscal year does not exceed $10,000,000 or (ii) the consummation of the
Disposition contemplated by such agreement is conditioned upon either the
termination of this Agreement or receipt of the prior written consent of the
Administrative Agent.

      7.06 RESTRICTED PAYMENTS. Declare or make, directly or indirectly, any
Restricted Payment, or incur any obligation (contingent or otherwise) to do so,
except that:

                                       65


      (a) each Subsidiary may make Restricted Payments to the Borrower and to
Wholly Owned Subsidiaries (and, in the case of a Restricted Payment by a
Subsidiary that is not a Wholly Owned Subsidiary, to the Borrower and any
Subsidiary and to each other owner of Equity Interests of such Subsidiary on a
pro rata basis based on their relative ownership interests);

      (b) the Borrower and each Subsidiary may declare and make dividend
payments or other distributions payable solely in the common stock or other
Equity Interests of such Person;

      (c) the Borrower and each Subsidiary may purchase, redeem or otherwise
acquire shares of its common stock or other Equity Interests or warrants or
options to acquire any such Equity Interests with the proceeds received from the
substantially concurrent issue of new shares of its common stock or other Equity
Interests;

      (d) the Borrower may purchase Equity Interests in any Loan Party or
options with respect to Equity Interests in any Loan Party held by employees or
management of any Loan Party in connection with the termination of employment of
such employees or management; and

      (e) so long as no Default would exist after giving effect thereto, the
Borrower may declare or pay cash dividends to its stockholders and purchase,
redeem or otherwise acquire shares of its capital stock or warrants, rights or
options to acquire any such shares for cash in an aggregate amount in any fiscal
year not to exceed (i) $25,000,000 during the period from the Closing Date
through December 31, 2004 and (ii) thereafter for each fiscal year beginning
with fiscal year 2005, (A) $30,000,000 if, as of the date cash dividends are
declared or any other Restricted Payment is paid, the Consolidated LTM EBITDA
for the four fiscal quarters most recently ended was less than $90,000,000 and
(B) if, as of the date cash dividends are declared or any other Restricted
Payment is paid, the Consolidated LTM EBITDA for the four fiscal quarters most
recently ended was equal to or greater than $90,000,000, 75% of Consolidated LTM
EBITDA for such period.

      7.07 CHANGE IN NATURE OF BUSINESS. Engage in any material line of business
substantially different from those lines of business conducted by the Borrower
and its Subsidiaries on the date hereof or any business substantially related or
incidental thereto.

      7.08 TRANSACTIONS WITH AFFILIATES. Enter into any transaction of any kind
with any Affiliate of the Borrower, whether or not in the ordinary course of
business, other than on fair and reasonable terms substantially as favorable to
the Borrower or such Subsidiary as would be obtainable by the Borrower or such
Subsidiary at the time in a comparable arm's length transaction with a Person
other than an Affiliate; provided that the foregoing restriction shall not apply
to transactions between or among the Borrower and any of its Wholly Owned
Subsidiaries or between and among any Wholly Owned Subsidiaries.

      7.09 BURDENSOME AGREEMENTS. Enter into any Contractual Obligation (other
than this Agreement or any other Loan Document) that limits the ability (i) of
any Subsidiary to make Restricted Payments to the Borrower or any Guarantor or
to otherwise transfer property to the Borrower or any Guarantor, (ii) of any
Subsidiary to Guarantee the Indebtedness of the Borrower owing to the
Administrative Agent or the Lenders, or (iii) of the Borrower or any Subsidiary
to

                                       66


grant to the Administrative Agent for the benefit of the Lenders, the L/C Issuer
and the Swing Line Lender a perfected security interest in any Collateral.

      7.10 USE OF PROCEEDS. Use the proceeds of any Credit Extension, whether
directly or indirectly, and whether immediately, incidentally or ultimately, to
purchase or carry margin stock (within the meaning of Regulation U of the FRB)
or to extend credit to others for the purpose of purchasing or carrying margin
stock or to refund indebtedness originally incurred for such purpose, except
that the Borrower may use Credit Extensions to make (i) Restricted Payments in
accordance with Section 7.06, (ii) Permitted Acquisitions in accordance with
Section 7.02(h) and (iii) Investments in accordance with Section 7.02(m).

      7.11 FINANCIAL COVENANTS.

      (a) Consolidated Leverage Ratio. Beginning on the earlier of (i) September
30, 2006 and (ii) the fiscal quarter end after the Closing Date when the
Consolidated LTM EBITDA equals or exceeds $90,000,000, permit the Consolidated
Leverage Ratio at any time during any period of four consecutive fiscal quarters
to exceed 2.75 to 1.00.

      (b) Consolidated Asset Coverage Ratio. Until the earlier of (i) September
30, 2006 and (ii) the fiscal quarter end after the Closing Date when the
Consolidated LTM EBITDA exceeds $90,000,000, permit the Consolidated Asset
Coverage Ratio to be less than 1.00 to 1.00.

      (c) Consolidated Capitalization Ratio. Permit the Consolidated
Capitalization Ratio to exceed 0.30 to 1.00.

      (d) Consolidated Interest Coverage Ratio. Permit the Consolidated Interest
Coverage Ratio to be less than 3.50 to 1.00.

      (e) Minimum Consolidated EBITDA. (i) Permit the Consolidated LTM EBITDA as
of December 31, 2005 to be less than $60,000,000 or (ii) permit the Consolidated
LTM EBITDA as of September 30, 2006 to be less than $90,000,000.

      7.12 CAPITAL EXPENDITURES. Make any expenditure in respect of the purchase
or other acquisition of any fixed or capital asset (excluding normal
replacements and maintenance which are properly charged to current operations),
except for capital expenditures in the ordinary course of business not
exceeding, in the aggregate for the Borrower and it Subsidiaries, to exceed
$40,000,000 in any fiscal year.

                                 ARTICLE VIII.
                         EVENTS OF DEFAULT AND REMEDIES

      8.01 EVENTS OF DEFAULT. Any of the following shall constitute an Event of
Default:

      (a) Non-Payment. The Borrower or any other Loan Party fails to pay (i)
when and as required to be paid herein, any amount of principal of any Loan or
any L/C Obligation, or (ii) within three days after the same becomes due, any
interest on any Loan or on any L/C

                                       67


Obligation, or any commitment or other fee due hereunder, or (iii) within five
days after the same becomes due, any other amount payable hereunder or under any
other Loan Document; or

      (b) Specific Covenants. The Borrower fails to perform or observe any term,
covenant or agreement contained in any of Sections 6.01, 6.02, 6.03, 6.05, 6.10,
6.11 or 6.12 or Article VII; or

      (c) Other Defaults. Any Loan Party fails to perform or observe any other
covenant or agreement (not specified in subsection (a) or (b) above) contained
in any Loan Document on its part to be performed or observed and such failure
continues for 30 days; or

      (d) Representations and Warranties. Any representation, warranty,
certification or statement of fact made or deemed made by or on behalf of the
Borrower or any other Loan Party herein, in any other Loan Document, or in any
document delivered in connection herewith or therewith shall be incorrect or
misleading in any material respect when made or deemed made; or

      (e) Cross-Default. (i) The Borrower or any Material Subsidiary (A) fails
to make any payment when due (whether by scheduled maturity, required
prepayment, acceleration, demand, or otherwise) in respect of any Indebtedness
or Guarantee (other than Indebtedness hereunder and Indebtedness under Swap
Contracts) having an aggregate principal amount (including undrawn committed or
available amounts and including amounts owing to all creditors under any
combined or syndicated credit arrangement) of more than the Threshold Amount, or
(B) fails to observe or perform any other agreement or condition relating to any
such Indebtedness or Guarantee or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event occurs, the effect
of which default or other event is to cause, or to permit the holder or holders
of such Indebtedness or the beneficiary or beneficiaries of such Guarantee (or a
trustee or agent on behalf of such holder or holders or beneficiary or
beneficiaries) to cause, with the giving of notice if required, such
Indebtedness to be demanded or to become due or to be repurchased, prepaid,
defeased or redeemed (automatically or otherwise), or an offer to repurchase,
prepay, defease or redeem such Indebtedness to be made, prior to its stated
maturity, or such Guarantee to become payable or cash collateral in respect
thereof to be demanded; or (ii) there occurs under any Swap Contract an Early
Termination Date (as defined in such Swap Contract) resulting from (A) any event
of default under such Swap Contract as to which the Borrower or any Subsidiary
is the Defaulting Party (as defined in such Swap Contract) or (B) any
Termination Event (as so defined) under such Swap Contract as to which the
Borrower or any Subsidiary is an Affected Party (as so defined) and, in either
event, the Swap Termination Value owed by the Borrower or such Subsidiary as a
result thereof is greater than the Threshold Amount; or

      (f) Insolvency Proceedings, Etc. Any Loan Party or any of its Material
Subsidiaries institutes or consents to the institution of any proceeding under
any Debtor Relief Law, or makes an assignment for the benefit of creditors; or
applies for or consents to the appointment of any receiver, trustee, custodian,
conservator, liquidator, rehabilitator or similar officer for it or for all or
any material part of its property; or any receiver, trustee, custodian,
conservator, liquidator, rehabilitator or similar officer is appointed without
the application or consent of such Person and the appointment continues
undischarged or unstayed for 60 calendar days; or any proceeding

                                       68


under any Debtor Relief Law relating to any such Person or to all or any
material part of its property is instituted without the consent of such Person
and continues undismissed or unstayed for 60 calendar days, or an order for
relief is entered in any such proceeding; or

      (g) Inability to Pay Debts; Attachment. (i) The Borrower or any Material
Subsidiary becomes unable or admits in writing its inability or fails generally
to pay its debts as they become due, or (ii) any writ or warrant of attachment
or execution or similar process for an amount in excess of the Threshold Amount
is issued or levied against all or any material part of the property of any such
Person and is not released, vacated or fully bonded within 30 days after its
issue or levy; or

      (h) Judgments. There is entered against the Borrower or any Material
Subsidiary (i) a final judgment or order for the payment of money in an
aggregate amount (to the extent not covered by independent third-party
insurance) exceeding (x) in respect of litigation not disclosed in SEC Filings
made prior to the Closing Date, the Threshold Amount or, (y) when aggregated
with final judgments or order for the payment of money entered in respect of
litigation disclosed in SEC Filings made prior to the Closing Date, $35,000,000
or (ii) any one or more non-monetary final judgments that have, or could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect and, in either case, (A) (X) in the case of a monetary judgment
or order, enforcement proceedings are commenced by any creditor upon non-payment
of any such monetary judgment or order and (Y) in the case of a nonmonetary
judgment or order, enforcement proceedings are commenced by any creditor upon
such judgment or order, or (B) there is a period of 30 consecutive days during
which a stay of enforcement of such judgment, by reason of a pending appeal or
otherwise, is not in effect; or

      (i) ERISA. (i) An ERISA Event occurs with respect to a Pension Plan or
Multiemployer Plan which has resulted or could reasonably be expected to result
in liability of the Borrower under Title IV of ERISA to the Pension Plan,
Multiemployer Plan or the PBGC in an aggregate amount in excess of the Threshold
Amount, or (ii) the Borrower or any ERISA Affiliate fails to pay when due, after
the expiration of any applicable grace period, any installment payment with
respect to its withdrawal liability under Section 4201 of ERISA under a
Multiemployer Plan in an aggregate amount in excess of the Threshold Amount; or

      (j) Invalidity of Loan Documents. Any Loan Document, at any time after its
execution and delivery and for any reason other than as expressly permitted
hereunder or satisfaction in full of all the Obligations, ceases to be in full
force and effect; or any Loan Party or any other Person contests in any manner
the validity or enforceability of any Loan Document; or any Loan Party denies
that it has any or further liability or obligation under any Loan Document, or
purports to revoke, terminate or rescind any Loan Document; or

      (k) Collateral. The Administrative Agent shall fail to have a first
priority perfected security interest in the Collateral.

      (l) Change of Control. There occurs any Change of Control with respect to
the Borrower.

                                       69


      8.02 REMEDIES UPON EVENT OF DEFAULT. If any Event of Default occurs and is
continuing, the Administrative Agent shall, at the request of, or may, with the
consent of, the Required Lenders, take any or all of the following actions:

      (a) declare the commitment of each Lender to make Loans and any obligation
of the L/C Issuer to make L/C Credit Extensions to be terminated, whereupon such
commitments and obligation shall be terminated;

      (b) declare the unpaid principal amount of all outstanding Loans, all
interest accrued and unpaid thereon, and all other amounts owing or payable
hereunder or under any other Loan Document to be immediately due and payable,
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Borrower;

      (c) require that the Borrower Cash Collateralize the L/C Obligations (in
an amount equal to the then Outstanding Amount thereof); and

      (d) exercise on behalf of itself and the Lenders all rights and remedies
available to it and the Lenders under the Loan Documents or applicable law;

provided, however, that upon the occurrence of an actual or deemed entry of an
order for relief with respect to the Borrower under the Bankruptcy Code of the
United States, the obligation of each Lender to make Loans and any obligation of
the L/C Issuer to make L/C Credit Extensions shall automatically terminate, the
unpaid principal amount of all outstanding Loans and all interest and other
amounts as aforesaid shall automatically become due and payable, and the
obligation of the Borrower to Cash Collateralize the L/C Obligations as
aforesaid shall automatically become effective, in each case without further act
of the Administrative Agent or any Lender.

      8.03 APPLICATION OF FUNDS. After the exercise of remedies provided for in
Section 8.02 (or after the Loans have automatically become immediately due and
payable and the L/C Obligations have automatically been required to be Cash
Collateralized as set forth in the proviso to Section 8.02), any amounts
received on account of the Obligations shall be applied by the Administrative
Agent in the following order:

      First, to payment of that portion of the Obligations constituting fees,
indemnities, expenses and other amounts (including Attorney Costs and amounts
payable under Article III) payable to the Administrative Agent in its capacity
as such;

      Second, to payment of that portion of the Obligations constituting fees,
indemnities and other amounts (other than principal and interest) payable to the
Lenders (including Attorney Costs and amounts payable under Article III),
ratably among them in proportion to the amounts described in this clause Second
payable to them;

      Third, to payment of that portion of the Obligations constituting accrued
and unpaid interest on the Loans and L/C Borrowings, ratably among the Lenders
in proportion to the respective amounts described in this clause Third payable
to them;

                                       70


      Fourth, to payment of that portion of the Obligations constituting unpaid
principal of the Loans and L/C Borrowings ratably among the Lenders in
proportion to the respective amounts described in this clause Fourth held by
them;

      Fifth, to the Administrative Agent for the account of the L/C Issuer, to
Cash Collateralize that portion of L/C Obligations comprised of the aggregate
undrawn amount of Letters of Credit;

      Sixth, to the payment of Obligations on any Swap Contract with any
Lender;

      Last, the balance, if any, after all of the Obligations have been
indefeasibly paid in full, to the Borrower or as otherwise required by Law.

Subject to Section 2.03(c), amounts used to Cash Collateralize the aggregate
undrawn amount of Letters of Credit pursuant to clause Fifth above shall be
applied to satisfy drawings under such Letters of Credit as they occur. If any
amount remains on deposit as Cash Collateral after all Letters of Credit have
either been fully drawn or expired, such remaining amount shall be applied to
the other Obligations, if any, in the order set forth above.

                        ARTICLE IX. ADMINISTRATIVE AGENT

      9.01 APPOINTMENT AND AUTHORIZATION OF ADMINISTRATIVE AGENT.

      (a) Each Lender hereby irrevocably appoints, designates and authorizes the
Administrative Agent to take such action on its behalf under the provisions of
this Agreement and each other Loan Document and to exercise such powers and
perform such duties as are expressly delegated to it by the terms of this
Agreement or any other Loan Document (including, without limitation, to act as
collateral agent, security trustee or in an analogous capacity) together with
such powers as are reasonably incidental thereto. Notwithstanding any provision
to the contrary contained elsewhere herein or in any other Loan Document, the
Administrative Agent shall not have any duties or responsibilities, except those
expressly set forth herein, nor shall the Administrative Agent have or be deemed
to have any fiduciary relationship with any Lender or participant, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Administrative Agent. Without limiting the
generality of the foregoing sentence, the use of the term "agent" or "security
trustee" herein and in the other Loan Documents with reference to the
Administrative Agent is not intended to connote any fiduciary or other implied
(or express) obligations arising under agency doctrine of any applicable Law.
Instead, such term is used merely as a matter of market custom, and is intended
to create or reflect only an administrative relationship between independent
contracting parties.

      (b) The L/C Issuer shall act on behalf of the Lenders with respect to any
Letters of Credit issued by it and the documents associated therewith, and the
L/C Issuer shall have all of the benefits and immunities (i) provided to the
Administrative Agent in this Article IX with respect to any acts taken or
omissions suffered by the L/C Issuer in connection with Letters of Credit issued
by it or proposed to be issued by it and the applications and agreements for
letters of credit pertaining to such Letters of Credit as fully as if the term
"Administrative Agent" as used in this Article IX and in the definition of
"Agent-Related Person" included the L/C Issuer

                                       71


with respect to such acts or omissions, and (ii) as additionally provided herein
with respect to the L/C Issuer.

      9.02 DELEGATION OF DUTIES. The Administrative Agent may execute any of its
duties under this Agreement or any other Loan Document by or through agents,
employees or attorneys-in-fact and shall be entitled to advice of counsel and
other consultants or experts concerning all matters pertaining to such duties.
The Administrative Agent shall not be responsible for the negligence or
misconduct of any agent or attorney-in-fact that it selects in the absence of
gross negligence or willful misconduct.

      9.03 LIABILITY OF ADMINISTRATIVE AGENT. No Agent-Related Person shall (a)
be liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct
in connection with its duties expressly set forth herein), or (b) be responsible
in any manner to any Lender or participant for any recital, statement,
representation or warranty made by any Loan Party or any officer thereof,
contained herein or in any other Loan Document, or in any certificate, report,
statement or other document referred to or provided for in, or received by the
Administrative Agent under or in connection with, this Agreement or any other
Loan Document, or the validity, effectiveness, genuineness, enforceability or
sufficiency of this Agreement or any other Loan Document, or for any failure of
any Loan Party or any other party to any Loan Document to perform its
obligations hereunder or thereunder. No Agent-Related Person shall be under any
obligation to any Lender or participant to ascertain or to inquire as to the
observance or performance of any of the agreements contained in, or conditions
of, this Agreement or any other Loan Document, or to inspect the properties,
books or records of any Loan Party or any Affiliate thereof.

      9.04 RELIANCE BY ADMINISTRATIVE AGENT.

      (a) The Administrative Agent shall be entitled to rely, and shall be fully
protected in relying, upon any writing, communication, signature, resolution,
representation, notice, consent, certificate, affidavit, letter, telegram,
facsimile, telex or telephone message, electronic mail message, statement or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons, and upon advice
and statements of legal counsel (including counsel to any Loan Party),
independent accountants and other experts selected by the Administrative Agent.
The Administrative Agent shall be fully justified in failing or refusing to take
any action under any Loan Document unless it shall first receive such advice or
concurrence of the Required Lenders as it deems appropriate and, if it so
requests, it shall first be indemnified to its satisfaction by the Lenders
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Administrative Agent shall
in all cases be fully protected in acting, or in refraining from acting, under
this Agreement or any other Loan Document in accordance with a request or
consent of the Required Lenders (or such greater number of Lenders as may be
expressly required hereby in any instance) and such request and any action taken
or failure to act pursuant thereto shall be binding upon all the Lenders.

      (b) For purposes of determining compliance with the conditions specified
in Section 4.01, each Lender that has signed this Agreement shall be deemed to
have consented to,

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approved or accepted or to be satisfied with, each document or other matter
required thereunder to be consented to or approved by or acceptable or
satisfactory to a Lender unless the Administrative Agent shall have received
written notice from such Lender prior to the proposed Closing Date specifying
its objection thereto.

      9.05 NOTICE OF DEFAULT. The Administrative Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default, except with respect
to defaults in the payment of principal, interest and fees required to be paid
to the Administrative Agent for the account of the Lenders, unless the
Administrative Agent shall have received written notice from a Lender or the
Borrower referring to this Agreement, describing such Default and stating that
such notice is a "notice of default." The Administrative Agent will notify the
Lenders of its receipt of any such notice. The Administrative Agent shall take
such action with respect to such Default as may be directed by the Required
Lenders in accordance with Article VIII; provided, however, that unless and
until the Administrative Agent has received any such direction, the
Administrative Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default as it shall deem
advisable or in the best interest of the Lenders.

      9.06 CREDIT DECISION; DISCLOSURE OF INFORMATION BY ADMINISTRATIVE AGENT.
Each Lender acknowledges that no Agent-Related Person has made any
representation or warranty to it, and that no act by the Administrative Agent
hereafter taken, including any consent to and acceptance of any assignment or
review of the affairs of any Loan Party or any Affiliate thereof, shall be
deemed to constitute any representation or warranty by any Agent-Related Person
to any Lender as to any matter, including whether Agent-Related Persons have
disclosed material information in their possession. Each Lender represents to
the Administrative Agent that it has, independently and without reliance upon
any Agent-Related Person and based on such documents and information as it has
deemed appropriate, made its own appraisal of and investigation into the
business, prospects, operations, property, financial and other condition and
creditworthiness of the Loan Parties and their respective Subsidiaries, and all
applicable bank or other regulatory Laws relating to the transactions
contemplated hereby, and made its own decision to enter into this Agreement and
to extend credit to the Borrower and the other Loan Parties hereunder. Each
Lender also represents that it will, independently and without reliance upon any
Agent-Related Person and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Loan Documents, and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations, property, financial
and other condition and creditworthiness of the Borrower and the other Loan
Parties. Except for notices, reports and other documents expressly required to
be furnished to the Lenders by the Administrative Agent herein, the
Administrative Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business, prospects,
operations, property, financial and other condition or creditworthiness of any
of the Loan Parties or any of their respective Affiliates which may come into
the possession of any Agent-Related Person.

      9.07 INDEMNIFICATION OF ADMINISTRATIVE AGENT. Whether or not the
transactions contemplated hereby are consummated, the Lenders shall indemnify
upon demand each Agent-Related Person (to the extent not reimbursed by or on
behalf of any Loan Party and without

                                       73


limiting the obligation of any Loan Party to do so), pro rata, and hold harmless
each Agent-Related Person from and against any and all Indemnified Liabilities
incurred by it; provided, however, that no Lender shall be liable for the
payment to any Agent-Related Person of any portion of such Indemnified
Liabilities to the extent determined in a final, nonappealable judgment by a
court of competent jurisdiction to have resulted from such Agent-Related
Person's own gross negligence or willful misconduct; provided, however, that no
action taken in accordance with the directions of the Required Lenders or, to
the extent expressly required by this Agreement, all Lenders shall be deemed to
constitute gross negligence or willful misconduct for purposes of this Section.
Without limitation of the foregoing, each Lender shall reimburse the
Administrative Agent upon demand for its ratable share of any costs or
out-of-pocket expenses (including Attorney Costs) incurred by the Administrative
Agent in connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Loan Document, or any document
contemplated by or referred to herein, to the extent that the Administrative
Agent is not reimbursed for such expenses by or on behalf of the Borrower. The
undertaking in this Section shall survive termination of the Aggregate
Commitments, the payment of all other Obligations and the resignation of the
Administrative Agent.

      9.08 ADMINISTRATIVE AGENT IN ITS INDIVIDUAL CAPACITY. Bank of America and
its Affiliates may make loans to, issue letters of credit for the account of,
accept deposits from, acquire equity interests in and generally engage in any
kind of banking, trust, financial advisory, underwriting or other business with
each of the Loan Parties and their respective Affiliates as though Bank of
America were not the Administrative Agent or the L/C Issuer hereunder and
without notice to or consent of the Lenders. The Lenders acknowledge that,
pursuant to such activities, Bank of America or its Affiliates may receive
information regarding any Loan Party or its Affiliates (including information
that may be subject to confidentiality obligations in favor of such Loan Party
or such Affiliate) and acknowledge that the Administrative Agent shall be under
no obligation to provide such information to them. With respect to its Loans,
Bank of America shall have the same rights and powers under this Agreement as
any other Lender and may exercise such rights and powers as though it were not
the Administrative Agent or the L/C Issuer, and the terms "Lender" and "Lenders"
include Bank of America in its individual capacity. In conducting its business,
each of the Lenders shall be accorded the same protections as are accorded to
the Administrative Agent by this section.

      9.09 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may resign
as Administrative Agent upon 30 days' notice to the Lenders and the Borrower;
provided that any such resignation by Bank of America shall also constitute its
resignation as L/C Issuer and Swing Line Lender. If the Administrative Agent
resigns under this Agreement, the Required Lenders shall, with the consent of
the Borrower so long as no Event of Default has occurred and is continuing
(which consent shall not be unreasonably withheld or delayed) appoint from among
the Lenders a successor administrative agent for the Lender. If no successor
administrative agent is appointed prior to the effective date of the resignation
of the Administrative Agent, the Administrative Agent may appoint, after
consulting with the Lenders and the Borrower, a successor administrative agent
from among the Lenders. Upon the acceptance of its appointment as successor
administrative agent hereunder, the Person acting as such successor
administrative agent shall succeed to all the rights, powers and duties of the
retiring Administrative Agent, L/C

                                       74


Issuer and Swing Line Lender and the respective terms "Administrative Agent,"
"L/C Issuer" and "Swing Line Lender" shall mean such successor administrative
agent, Letter of Credit issuer and swing line lender, and the retiring
Administrative Agent's appointment, powers and duties as Administrative Agent
shall be terminated and the retiring L/C Issuer's and Swing Line Lender's
rights, powers and duties as such shall be terminated, without any other or
further act or deed on the part of such retiring L/C Issuer or Swing Line Lender
or any other Lender, other than the obligation of the successor L/C Issuer to
issue letters of credit in substitution for the Letters of Credit, if any,
outstanding at the time of such succession or to make other arrangements
satisfactory to the retiring L/C Issuer to effectively assume the obligations of
the retiring L/C Issuer with respect to such Letters of Credit. After any
retiring Administrative Agent's resignation hereunder as Administrative Agent,
the provisions of this Article IX and Sections 10.04 and 10.05 shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement. If no successor administrative agent
has accepted appointment as Administrative Agent by the date which is 30 days
following a retiring Administrative Agent's notice of resignation, the retiring
Administrative Agent's resignation shall nevertheless thereupon become effective
and the Lenders shall perform all of the duties of the Administrative Agent
hereunder until such time, if any, as the Required Lenders appoint a successor
agent as provided for above.

      9.10 ADMINISTRATIVE AGENT MAY FILE PROOFS OF CLAIM. In case of the
pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding relative to any Loan Party, the Administrative Agent (irrespective of
whether the principal of any Loan or L/C Obligation shall then be due and
payable as herein expressed or by declaration or otherwise and irrespective of
whether the Administrative Agent shall have made any demand on the Borrower)
shall be entitled and empowered, by intervention in such proceeding or otherwise

            (a) to file and prove a claim for the whole amount of the principal
      and interest owing and unpaid in respect of the Loans, L/C Obligations and
      all other Obligations that are owing and unpaid and to file such other
      documents as may be necessary or advisable in order to have the claims of
      the Lenders and the Administrative Agent (including any claim for the
      reasonable compensation, expenses, disbursements and advances of the
      Lenders and the Administrative Agent and their respective agents and
      counsel and all other amounts due the Lenders and the Administrative Agent
      under Sections 2.03(i) and (j), 2.09 and 10.04) allowed in such judicial
      proceeding; and

            (b) to collect and receive any monies or other property payable or
      deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Lender to make such payments to the Administrative Agent and, in the event
that the Administrative Agent shall consent to the making of such payments
directly to the Lenders, to pay to the Administrative Agent any amount due for
the reasonable compensation, expenses, disbursements and advances of the
Administrative Agent and its agents and counsel, and any other amounts due the
Administrative Agent under Sections 2.09 and 10.04.

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      Nothing contained herein shall be deemed to authorize the Administrative
Agent to authorize or consent to or accept or adopt on behalf of any Lender any
plan of reorganization, arrangement, adjustment or composition affecting the
Obligations or the rights of any Lender or to authorize the Administrative Agent
to vote in respect of the claim of any Lender in any such proceeding.

      9.11 COLLATERAL AND GUARANTY MATTERS. The Lenders irrevocably authorize
the Administrative Agent, at its option and in its discretion,

            (a) to release any Lien on any property granted to or held by the
      Administrative Agent under any Loan Document (i) upon termination of the
      Aggregate Commitments and payment in full of all Obligations (other than
      contingent indemnification obligations) and the expiration or termination
      of all Letters of Credit, (ii) that is sold or to be sold as part of or in
      connection with any sale permitted hereunder or under any other Loan
      Document, or (iii) subject to Section 10.01, if approved, authorized or
      ratified in writing by the Required Lenders;

            (b) to subordinate any Lien on any property granted to or held by
      the Administrative Agent under any Loan Document to the holder of any Lien
      on such property that is permitted by Section 7.01(i); and

            (c) to release any Guarantor from its obligations under the Guaranty
      if such Person ceases to be a Subsidiary as a result of a transaction
      permitted hereunder.

      Upon request by the Administrative Agent at any time, the Required Lenders
will confirm in writing the Administrative Agent's authority to release or
subordinate its interest in particular types or items of property, or to release
any Guarantor from its obligations under the Guaranty pursuant to this Section
9.11.

      9.12 OTHER AGENTS; ARRANGERS AND MANAGERS. None of the Lenders or other
Persons identified on the facing page or signature pages of this Agreement as a
"syndication agent," "documentation agent," "co-agent," "book manager," "lead
manager," "arranger," "lead arranger," "co-arranger" or the like shall have any
right, power, obligation, liability, responsibility or duty under this Agreement
other than, in the case of such Lenders, those applicable to all Lenders as
such. Without limiting the foregoing, none of the Lenders or other Persons so
identified shall have or be deemed to have any fiduciary relationship with any
Lender. Each Lender acknowledges that it has not relied, and will not rely, on
any of the Lenders or other Persons so identified in deciding to enter into this
Agreement or in taking or not taking action hereunder.

                                   ARTICLE X.
                                 MISCELLANEOUS

      10.01 AMENDMENTS, ETC. No amendment or waiver of any provision of this
Agreement or any other Loan Document, and no consent to any departure by the
Borrower or any other Loan Party therefrom, shall be effective unless in writing
signed by the Required Lenders and the Borrower or the applicable Loan Party, as
the case may be, and acknowledged by the

                                       76


Administrative Agent, and each such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given; provided,
however, that no such amendment, waiver or consent shall:

      (a) waive any condition set forth in Section 4.01 without the written
consent of each Lender;

      (b) extend or increase the Commitment of any Lender (or reinstate any
Commitment terminated pursuant to Section 8.02) without the written consent of
such Lender;

      (c) postpone any date fixed by this Agreement or any other Loan Document
for any payment or mandatory prepayment of principal, interest, fees or other
amounts due to the Lenders (or any of them) or any scheduled or mandatory
reduction of the Aggregate Commitments hereunder or under any other Loan
Document without the written consent of each Lender directly affected thereby;

      (d) reduce the principal of, or the rate of interest specified herein on,
any Loan or L/C Borrowing, or (subject to clause (v) of the second proviso to
this Section 10.01) any fees or other amounts payable hereunder or under any
other Loan Document, or change the manner of computation of any financial ratio
(including any change in any applicable defined term) used in determining the
Applicable Rate that would result in a reduction of any interest rate on any
Loan or any fee payable hereunder without the written consent of each Lender
directly affected thereby; provided, however, that only the consent of the
Required Lenders shall be necessary (i) to amend the definition of "Default
Rate" or to waive any obligation of the Borrower to pay interest at the Default
Rate or (ii) to amend any financial covenant hereunder (or any defined term used
therein) even if the effect of such amendment would be to reduce the rate of
interest on any Loan or L/C Borrowing or to reduce any fee payable hereunder.

      (e) change Section 2.13, Section 8.03 or any other provision of this
Agreement expressly requiring the pro rata sharing of payments required thereby
in a manner that would alter the pro rata sharing of payments required thereby
without the written consent of each Lender;

      (f) change any provision of this Section or the definition of "Required
Lenders" or any other provision hereof specifying the number or percentage of
Lenders required to amend, waive or otherwise modify any rights hereunder or
make any determination or grant any consent hereunder, without the written
consent of each Lender;

      (g) except as otherwise contemplated by any Loan Document, release any
Guarantor from the Guaranty without the written consent of each Lender; or

      (h) except as otherwise contemplated by any Loan Document, release all or
substantially all of the Collateral without the written consent of each Lender;

      and, provided further, that (i) no amendment, waiver or consent shall,
unless in writing and signed by the L/C Issuer in addition to the Lenders
required above, affect the rights or duties of the L/C Issuer under this
Agreement or any Letter of Credit Application relating to any Letter of Credit
issued or to be issued by it; (ii) no amendment, waiver or consent shall, unless
in

                                       77


writing and signed by the Swing Line Lender in addition to the Lenders required
above, affect the rights or duties of the Swing Line Lender under this
Agreement; (iii) no amendment, waiver or consent shall, unless in writing and
signed by the Administrative Agent in addition to the Lenders required above,
affect the rights or duties of the Administrative Agent under this Agreement or
any other Loan Document; (iv) Section 10.07(h) may not be amended, waived or
otherwise modified without the consent of each Granting Lender all or any part
of whose Loans are being funded by an SPC at the time of such amendment, waiver
or other modification; and (v) the Fee Letter may be amended, or rights or
privileges thereunder waived, in a writing executed only by the parties thereto.
Notwithstanding anything to the contrary herein, no Defaulting Lender shall have
any right to approve or disapprove any amendment, waiver or consent hereunder,
except that the Commitment of such Lender may not be increased or extended and
no payments due to such Lender may be reduced without the consent of such
Lender.

      10.02 NOTICES AND OTHER COMMUNICATIONS; FACSIMILE COPIES.

      (a) General. Unless otherwise expressly provided herein, all notices and
other communications provided for hereunder shall be in writing (including by
facsimile transmission). All such written notices shall be mailed, faxed or
delivered to the applicable address, facsimile number or (subject to subsection
(c) below) electronic mail address, and all notices and other communications
expressly permitted hereunder to be given by telephone shall be made to the
applicable telephone number, as follows:

            (i) if to the Borrower, the Administrative Agent, the L/C Issuer or
      the Swing Line Lender, to the address, facsimile number, electronic mail
      address or telephone number specified for such Person on Schedule 10.02 or
      to such other address, facsimile number, electronic mail address or
      telephone number as shall be designated by such party in a notice to the
      other parties; and

            (ii) if to any other Lender, to the address, facsimile number,
      electronic mail address or telephone number specified in its
      Administrative Questionnaire or to such other address, facsimile number,
      electronic mail address or telephone number as shall be designated by such
      party in a notice to the Borrower, the Administrative Agent, the L/C
      Issuer and the Swing Line Lender.

All such notices and other communications shall be deemed to be given or made
upon the earlier to occur of (i) actual receipt by the relevant party hereto and
(ii) (A) if delivered by hand or by courier, when signed for by or on behalf of
the relevant party hereto; (B) if delivered by mail, four Business Days after
deposit in the mails, postage prepaid; (C) if delivered by facsimile, when sent
and receipt has been confirmed by telephone; and (D) if delivered by electronic
mail (which form of delivery is subject to the provisions of subsection (c)
below), when delivered; provided, however, that notices and other communications
to the Administrative Agent, the L/C Issuer and the Swing Line Lender pursuant
to Article II shall not be effective until actually received by such Person. In
no event shall a voicemail message be effective as a notice, communication or
confirmation hereunder.

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      (b) Effectiveness of Facsimile Documents and Signatures. Loan Documents
may be transmitted and/or signed by facsimile. The effectiveness of any such
documents and signatures shall, subject to applicable Law, have the same force
and effect as manually-signed originals and shall be binding on all Loan
Parties, the Administrative Agent and the Lenders. The Administrative Agent may
also require that any such documents and signatures be confirmed by a
manually-signed original thereof; provided, however, that the failure to request
or deliver the same shall not limit the effectiveness of any facsimile document
or signature.

      (c) Limited Use of Electronic Mail. Electronic mail and Internet and
intranet websites may be used only to distribute routine communications, such as
financial statements and other information as provided in Section 6.02, and to
distribute Loan Documents for execution by the parties thereto, and may not be
used for any other purpose.

      (d) Reliance by Administrative Agent and Lenders. The Administrative Agent
and the Lenders shall be entitled to rely and act upon any notices (including
telephonic Committed Loan Notices and Swing Line Loan Notices) purportedly given
by or on behalf of the Borrower even if (i) such notices were not made in a
manner specified herein, were incomplete or were not preceded or followed by any
other form of notice specified herein, or (ii) the terms thereof, as understood
by the recipient, varied from any confirmation thereof. The signature of a
Responsible Officer of a Loan Party on any certificate, notice or other document
delivered hereunder shall be prima facie evidence that the document has been
authorized by all necessary corporate, partnership and/or other action on the
party of such Loan Party. The Borrower shall indemnify each Agent-Related Person
and each Lender from all losses, costs, expenses and liabilities resulting from
the reliance by such Person on each notice purportedly given by or on behalf of
the Borrower. All telephonic notices to and other communications with the
Administrative Agent may be recorded by the Administrative Agent, and each of
the parties hereto hereby consents to such recording.

      10.03 NO WAIVER; CUMULATIVE REMEDIES. No failure by any Lender or the
Administrative Agent to exercise, and no delay by any such Person in exercising,
any right, remedy, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.

      10.04 ATTORNEY COSTS, EXPENSES AND TAXES. The Borrower agrees (a) to pay
or reimburse the Administrative Agent for all costs and expenses incurred in
connection with the development, preparation, negotiation and execution of this
Agreement and the other Loan Documents and any amendment, waiver, consent or
other modification of the provisions hereof and thereof (whether or not the
transactions contemplated hereby or thereby are consummated), and the
consummation and administration of the transactions contemplated hereby and
thereby, including all Attorney Costs, and (b) to pay or reimburse the
Administrative Agent and each Lender for all costs and expenses incurred in
connection with the enforcement, attempted enforcement, or preservation of any
rights or remedies under this Agreement or the other Loan Documents (including
all such costs and expenses incurred during any "workout" or restructuring in
respect of the Obligations and during any legal proceeding, including any

                                       79


proceeding under any Debtor Relief Law), including all Attorney Costs. The
foregoing costs and expenses shall include all search, filing, recording, title
insurance and appraisal charges and fees and taxes related thereto, and other
out-of-pocket expenses incurred by the Administrative Agent and the cost of
independent public accountants and other outside experts retained by the
Administrative Agent or any Lender. All amounts due under this Section 10.04
shall be payable within ten Business Days after demand therefor. The agreements
in this Section shall survive the termination of the Aggregate Commitments and
repayment of all other Obligations.

      10.05 INDEMNIFICATION BY THE BORROWER. Whether or not the transactions
contemplated hereby are consummated, the Borrower shall indemnify and hold
harmless each Agent-Related Person, each Lender and their respective Affiliates,
directors, officers, employees, counsel, agents and attorneys-in-fact
(collectively the "Indemnitees") from and against any and all liabilities,
obligations, losses, damages, penalties, claims, demands, actions, judgments,
suits, costs, expenses and disbursements (including Attorney Costs) of any kind
or nature whatsoever which may at any time be imposed on, incurred by or
asserted against any such Indemnitee in any way relating to or arising out of or
in connection with (a) the execution, delivery, enforcement, performance or
administration of any Loan Document or any other agreement, letter or instrument
delivered in connection with the transactions contemplated thereby or the
consummation of the transactions contemplated thereby, (b) any Commitment, Loan
or Letter of Credit or the use or proposed use of the proceeds therefrom
(including any refusal by the L/C Issuer to honor a demand for payment under a
Letter of Credit if the documents presented in connection with such demand do
not strictly comply with the terms of such Letter of Credit), or (c) any actual
or prospective claim, litigation, investigation or proceeding relating to any of
the foregoing, whether based on contract, tort or any other theory (including
any investigation of, preparation for, or defense of any pending or threatened
claim, investigation, litigation or proceeding) and regardless of whether any
Indemnitee is a party thereto (all the foregoing, collectively, the "Indemnified
Liabilities"); provided that such indemnity shall not, as to any Indemnitee, be
available to the extent that such liabilities, obligations, losses, damages,
penalties, claims, demands, actions, judgments, suits, costs, expenses or
disbursements are determined by a court of competent jurisdiction by final and
nonappealable judgment to have resulted from the gross negligence or willful
misconduct of such Indemnitee. No Indemnitee shall be liable for any damages
arising from the use by others of any information or other materials obtained
through IntraLinks or other similar information transmission systems in
connection with this Agreement, nor shall any Indemnitee have any liability for
any indirect or consequential damages relating to this Agreement or any other
Loan Document or arising out of its activities in connection herewith or
therewith (whether before or after the Closing Date). All amounts due under this
Section 10.05 shall be payable within ten Business Days after demand therefor.
The agreements in this Section shall survive the resignation of the
Administrative Agent, the replacement of any Lender, the termination of the
Aggregate Commitments and the repayment, satisfaction or discharge of all the
other Obligations.

      10.06 PAYMENTS SET ASIDE. To the extent that any payment by or on behalf
of the Borrower is made to the Administrative Agent or any Lender, or the
Administrative Agent or any Lender exercises its right of set-off, and such
payment or the proceeds of such set-off or any part thereof is subsequently
invalidated, declared to be fraudulent or preferential, set aside or required
(including pursuant to any settlement entered into by the Administrative Agent
or such Lender in its discretion) to be repaid to a trustee, receiver or any
other party, in connection with any

                                       80


proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of
such recovery, the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such set-off had not occurred, and (b) each Lender
severally agrees to pay to the Administrative Agent upon demand its applicable
share of any amount so recovered from or repaid by the Administrative Agent,
plus interest thereon from the date of such demand to the date such payment is
made at a rate per annum equal to the Federal Funds Rate from time to time in
effect.

      10.07 SUCCESSORS AND ASSIGNS.

      (a) The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
permitted hereby, except that the Borrower may not assign or otherwise transfer
any of its rights or obligations hereunder without the prior written consent of
each Lender and no Lender may assign or otherwise transfer any of its rights or
obligations hereunder except (i) to an Eligible Assignee in accordance with the
provisions of subsection (b) of this Section, (ii) by way of participation in
accordance with the provisions of subsection (d) of this Section, or (iii) by
way of pledge or assignment of a security interest subject to the restrictions
of subsection (f) or (i) of this Section or (iv) to an SPC in accordance with
the provisions of subsection (h) of this Section (and any other attempted
assignment or transfer by any party hereto shall be null and void). Nothing in
this Agreement, expressed or implied, shall be construed to confer upon any
Person (other than the parties hereto, their respective successors and assigns
permitted hereby, Participants to the extent provided in subsection (d) of this
Section and, to the extent expressly contemplated hereby, the Indemnitees) any
legal or equitable right, remedy or claim under or by reason of this Agreement.

      (b) Any Lender may at any time assign to one or more Eligible Assignees
all or a portion of its rights and obligations under this Agreement (including
all or a portion of its Commitment and the Loans (including for purposes of this
subsection (b), participations in L/C Obligations and in Swing Line Loans) at
the time owing to it); provided that (i) except in the case of an assignment of
the entire remaining amount of the assigning Lender's Commitment and the Loans
at the time owing to it or in the case of an assignment to a Lender or an
Affiliate of a Lender or an Approved Fund with respect to a Lender, the
aggregate amount of the Commitment (which for this purpose includes Loans
outstanding thereunder) subject to each such assignment, determined as of the
date the Assignment and Assumption with respect to such assignment is delivered
to the Administrative Agent or, if "Trade Date" is specified in the Assignment
and Assumption, as of the Trade Date, shall not be less than $5,000,000 unless
each of the Administrative Agent and, so long as no Event of Default has
occurred and is continuing, the Borrower otherwise consents (each such consent
not to be unreasonably withheld or delayed); (ii) each partial assignment shall
be made as an assignment of a proportionate part of all the assigning Lender's
rights and obligations under this Agreement with respect to the Loans or the
Commitment assigned, except that this clause (ii) shall not apply to rights in
respect of Swing Line Loans; (iii) any assignment of a Commitment must be
approved by the Administrative Agent, the L/C Issuer and the Swing Line Lender
unless the Person that is the proposed assignee is itself a Lender (whether or
not the proposed assignee would otherwise qualify as an Eligible Assignee); and
(iv) the parties to each assignment shall execute and deliver to the
Administrative Agent an Assignment and Assumption, together with a processing
and recordation fee of $3,500. Subject to acceptance and recording thereof by
the Administrative Agent pursuant to subsection

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(c) of this Section, from and after the effective date specified in each
Assignment and Assumption, the Eligible Assignee thereunder shall be a party to
this Agreement and, to the extent of the interest assigned by such Assignment
and Assumption, have the rights and obligations of a Lender under this
Agreement, and the assigning Lender thereunder shall, to the extent of the
interest assigned by such Assignment and Assumption, be released from its
obligations under this Agreement (and, in the case of an Assignment and
Assumption covering all of the assigning Lender's rights and obligations under
this Agreement, such Lender shall cease to be a party hereto but shall continue
to be entitled to the benefits of Sections 3.01, 3.04, 3.05, 10.04 and 10.05
with respect to facts and circumstances occurring prior to the effective date of
such assignment). Upon request, the Borrower (at its expense) shall execute and
deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of
rights or obligations under this Agreement that does not comply with this
subsection shall be treated for purposes of this Agreement as a sale by such
Lender of a participation in such rights and obligations in accordance with
subsection (d) of this Section.

      (c) The Administrative Agent, acting solely for this purpose as an agent
of the Borrower, shall maintain at the Administrative Agent's Office a copy of
each Assignment and Assumption delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the Commitments of,
and principal amounts of the Loans and L/C Obligations owing to, each Lender
pursuant to the terms hereof from time to time (the "Register"). The entries in
the Register shall be conclusive, and the Borrower, the Administrative Agent and
the Lenders may treat each Person whose name is recorded in the Register
pursuant to the terms hereof as a Lender hereunder for all purposes of this
Agreement, notwithstanding notice to the contrary. The Register shall be
available for inspection by the Borrower and any Lender, at any reasonable time
and from time to time upon reasonable prior notice.

      (d) Any Lender may at any time, without the consent of, or notice to, the
Borrower or the Administrative Agent, sell participations to any Person (other
than a natural person or the Borrower or any of the Borrower's Affiliates or
Subsidiaries) (each, a "Participant") in all or a portion of such Lender's
rights and/or obligations under this Agreement (including all or a portion of
its Commitment and/or the Loans (including such Lender's participations in L/C
Obligations and/or Swing Line Loans) owing to it); provided that (i) such
Lender's obligations under this Agreement shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations and (iii) the Borrower, the Administrative Agent
and the other Lenders shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under this
Agreement. Any agreement or instrument pursuant to which a Lender sells such a
participation shall provide that such Lender shall retain the sole right to
enforce this Agreement and to approve any amendment, modification or waiver of
any provision of this Agreement; provided that such agreement or instrument may
provide that such Lender will not, without the consent of the Participant, agree
to any amendment, waiver or other modification described in the first proviso to
Section 10.01 that directly affects such Participant. Subject to subsection (e)
of this Section, the Borrower agrees that each Participant shall be entitled to
the benefits of Sections 3.01, 3.04 and 3.05 to the same extent as if it were a
Lender and had acquired its interest by assignment pursuant to subsection (b) of
this Section. To the extent permitted by law, each Participant also shall be
entitled to the benefits of Section 10.09 as though it were a Lender, provided
such Participant agrees to be subject to Section 2.13 as though it were a
Lender.

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      (e) A Participant shall not be entitled to receive any greater payment
under Section 3.01 or 3.04 than the applicable Lender would have been entitled
to receive with respect to the participation sold to such Participant, unless
the sale of the participation to such Participant is made with the Borrower's
prior written consent. A Participant that would be a Foreign Lender if it were a
Lender shall not be entitled to the benefits of Section 3.01 unless the Borrower
is notified of the participation sold to such Participant and such Participant
agrees, for the benefit of the Borrower, to comply with Section 10.15 as though
it were a Lender.

      (f) Any Lender may at any time pledge or assign a security interest in all
or any portion of its rights under this Agreement (including under its Note, if
any) to secure obligations of such Lender, including any pledge or assignment to
secure obligations to a Federal Reserve Bank; provided that no such pledge or
assignment shall release such Lender from any of its obligations hereunder or
substitute any such pledgee or assignee for such Lender as a party hereto.

      (g) As used herein, the following terms have the following meanings:

            "Eligible Assignee" means (a) a Lender; (b) an Affiliate of a
      Lender; (c) an Approved Fund; and (d) any other Person (other than a
      natural person) approved by (i) the Administrative Agent, the L/C Issuer
      and the Swing Line Lender, and (ii) unless an Event of Default has
      occurred and is continuing, the Borrower (each such approval not to be
      unreasonably withheld or delayed); provided that notwithstanding the
      foregoing, "Eligible Assignee" shall not include the Borrower or any of
      the Borrower's Affiliates or Subsidiaries.

      (h) Notwithstanding anything to the contrary contained herein, any Lender
(a "Granting Lender") may grant to a special purpose funding vehicle identified
as such in writing from time to time by the Granting Lender to the
Administrative Agent and the Borrower (an "SPC") the option to provide all or
any part of any Committed Loan that such Granting Lender would otherwise be
obligated to make pursuant to this Agreement; provided that (i) nothing herein
shall constitute a commitment by any SPC to fund any Committed Loan, and (ii) if
an SPC elects not to exercise such option or otherwise fails to make all or any
part of such Committed Loan, the Granting Lender shall be obligated to make such
Committed Loan pursuant to the terms hereof. Each party hereto hereby agrees
that (i) neither the grant to any SPC nor the exercise by any SPC of such option
shall increase the costs or expenses or otherwise increase or change the
obligations of the Borrower under this Agreement (including its obligations
under Section 3.04), (ii) no SPC shall be liable for any indemnity or similar
payment obligation under this Agreement for which a Lender would be liable, and
(iii) the Granting Lender shall for all purposes, including the approval of any
amendment, waiver or other modification of any provision of any Loan Document,
remain the lender of record hereunder. The making of a Committed Loan by an SPC
hereunder shall utilize the Commitment of the Granting Lender to the same
extent, and as if, such Committed Loan were made by such Granting Lender. In
furtherance of the foregoing, each party hereto hereby agrees (which agreement
shall survive the termination of this Agreement) that, prior to the date that is
one year and one day after the payment in full of all outstanding commercial
paper or other senior debt of any SPC, it will not institute against, or join
any other Person in instituting against, such SPC any bankruptcy,
reorganization, arrangement, insolvency, or liquidation proceeding under the
laws of the United

                                       83


States or any State thereof. Notwithstanding anything to the contrary contained
herein, any SPC may (i) with notice to, but without prior consent of the
Borrower and the Administrative Agent and with the payment of a processing fee
of $3,500, assign all or any portion of its right to receive payment with
respect to any Committed Loan to the Granting Lender and (ii) disclose on a
confidential basis any non-public information relating to its funding of
Committed Loans to any rating agency, commercial paper dealer or provider of any
surety or Guarantee or credit or liquidity enhancement to such SPC.

      (i) Notwithstanding anything to the contrary contained herein, any Lender
that is a Fund may create a security interest in all or any portion of the Loans
owing to it and the Note, if any, held by it to the trustee for holders of
obligations owed, or securities issued, by such Fund as security for such
obligations or securities, provided that unless and until such trustee actually
becomes a Lender in compliance with the other provisions of this Section 10.07,
(i) no such pledge shall release the pledging Lender from any of its obligations
under the Loan Documents and (ii) such trustee shall not be entitled to exercise
any of the rights of a Lender under the Loan Documents even though such trustee
may have acquired ownership rights with respect to the pledged interest through
foreclosure or otherwise.

      (j) Notwithstanding anything to the contrary contained herein, if at any
time Bank of America assigns all of its Commitment and Loans pursuant to
subsection (b) above, Bank of America may, (i) upon 30 days' notice to the
Borrower and the Lenders, resign as L/C Issuer and/or (ii) upon 30 days' notice
to the Borrower, resign as Swing Line Lender. In the event of any such
resignation as L/C Issuer or Swing Line Lender, the Borrower shall be entitled
to appoint from among the Lenders a successor L/C Issuer or Swing Line Lender
hereunder; provided, however, that no failure by the Borrower to appoint any
such successor shall affect the resignation of Bank of America as L/C Issuer or
Swing Line Lender, as the case may be. If Bank of America resigns as L/C Issuer,
it shall retain all the rights and obligations of the L/C Issuer hereunder with
respect to all Letters of Credit outstanding as of the effective date of its
resignation as L/C Issuer and all L/C Obligations with respect thereto
(including the right to require the Lenders to make Base Rate Committed Loans or
fund risk participations in Unreimbursed Amounts pursuant to Section 2.03(c)).
If Bank of America resigns as Swing Line Lender, it shall retain all the rights
of the Swing Line Lender provided for hereunder with respect to Swing Line Loans
made by it and outstanding as of the effective date of such resignation,
including the right to require the Lenders to make Base Rate Committed Loans or
fund risk participations in outstanding Swing Line Loans pursuant to Section
2.04(c).

      10.08 CONFIDENTIALITY. Each of the Administrative Agent and the Lenders
agrees to maintain the confidentiality of the Information (as defined below),
except that Information may be disclosed (a) to its and its Affiliates'
directors, officers, employees and agents, including accountants, legal counsel
and other advisors (it being understood that the Persons to whom such disclosure
is made will be informed of the confidential nature of such Information and
instructed to keep such Information confidential), (b) to the extent requested
by any regulatory authority (including any self-regulatory authority, such as
the National Association of Insurance Commissioners), (c) to the extent required
by applicable laws or regulations or by any subpoena or similar legal process,
(d) to any other party hereto, (e) in connection with the exercise of any
remedies hereunder or under any other Loan Document or any action or proceeding
relating to this Agreement or any other Loan Document or the enforcement of
rights hereunder or

                                       84


thereunder, (f) subject to an agreement containing provisions substantially the
same as those of this Section, to (i) any assignee of or Participant in, or any
prospective assignee of or Participant in, any of its rights or obligations
under this Agreement or (ii) any actual or prospective counterparty (or its
advisors) to any swap or derivative transaction relating to the Borrower and its
obligations, (g) with the consent of the Borrower or (h) to the extent such
Information (x) becomes publicly available other than as a result of a breach of
this Section or (y) becomes available to the Administrative Agent or any Lender
on a nonconfidential basis from a source other than the Borrower. For purposes
of this Section, "Information" means all information received from any Loan
Party relating to any Loan Party or any of their respective businesses, other
than any such information that is available to the Administrative Agent or any
Lender on a nonconfidential basis prior to disclosure by any Loan Party.

      10.09 SET-OFF. In addition to any rights and remedies of the Lenders
provided by law, upon the occurrence and during the continuance of any Event of
Default, each Lender is authorized at any time and from time to time, without
prior notice to the Borrower or any other Loan Party, any such notice being
waived by the Borrower (on its own behalf and on behalf of each Loan Party) to
the fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held by,
and other indebtedness at any time owing by, such Lender to or for the credit or
the account of the respective Loan Parties against any and all Obligations owing
to such Lender hereunder or under any other Loan Document, now or hereafter
existing, irrespective of whether or not the Administrative Agent or such Lender
shall have made demand under this Agreement or any other Loan Document and
although such Obligations may be contingent or unmatured or denominated in a
currency different from that of the applicable deposit or indebtedness. Each
Lender agrees promptly to notify the Borrower and the Administrative Agent after
any such set-off and application made by such Lender; provided, however, that
the failure to give such notice shall not affect the validity of such set-off
and application.

      10.10 INTEREST RATE LIMITATION. Notwithstanding anything to the contrary
contained in any Loan Document, the interest paid or agreed to be paid under the
Loan Documents shall not exceed the maximum rate of non-usurious interest
permitted by applicable Law (the "Maximum Rate"). If the Administrative Agent or
any Lender shall receive interest in an amount that exceeds the Maximum Rate,
the excess interest shall be applied to the principal of the Loans or, if it
exceeds such unpaid principal, refunded to the Borrower. In determining whether
the interest contracted for, charged, or received by the Administrative Agent or
a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by
applicable Law, (a) characterize any payment that is not principal as an
expense, fee, or premium rather than interest, (b) exclude voluntary prepayments
and the effects thereof, and (c) amortize, prorate, allocate, and spread in
equal or unequal parts the total amount of interest throughout the contemplated
term of the Obligations hereunder.

      10.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

      10.12 INTEGRATION. This Agreement, together with the other Loan Documents,
comprises the complete and integrated agreement of the parties on the subject
matter hereof and

                                       85


thereof and supersedes all prior agreements, written or oral, on such subject
matter. In the event of any conflict between the provisions of this Agreement
and those of any other Loan Document, the provisions of this Agreement shall
control; provided that the inclusion of supplemental rights or remedies in favor
of the Administrative Agent or the Lenders in any other Loan Document shall not
be deemed a conflict with this Agreement. Each Loan Document was drafted with
the joint participation of the respective parties thereto and shall be construed
neither against nor in favor of any party, but rather in accordance with the
fair meaning thereof.

      10.13 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made hereunder and in any other Loan Document or other document
delivered pursuant hereto or thereto or in connection herewith or therewith
shall survive the execution and delivery hereof and thereof. Such
representations and warranties have been or will be relied upon by the
Administrative Agent and each Lender, regardless of any investigation made by
the Administrative Agent or any Lender or on their behalf and notwithstanding
that the Administrative Agent or any Lender may have had notice or knowledge of
any Default at the time of any Credit Extension, and shall continue in full
force and effect as long as any Loan or any other Obligation hereunder shall
remain unpaid or unsatisfied or any Letter of Credit shall remain outstanding.

      10.14 SEVERABILITY. If any provision of this Agreement or the other Loan
Documents is held to be illegal, invalid or unenforceable, (a) the legality,
validity and enforceability of the remaining provisions of this Agreement and
the other Loan Documents shall not be affected or impaired thereby and (b) the
parties shall endeavor in good faith negotiations to replace the illegal,
invalid or unenforceable provisions with valid provisions the economic effect of
which comes as close as possible to that of the illegal, invalid or
unenforceable provisions. The invalidity of a provision in a particular
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

      10.15 TAX FORMS. (a) (i) Each Lender that is not a "United States person"
within the meaning of Section 7701(a)(30) of the Code (a "Foreign Lender") shall
deliver to the Administrative Agent, prior to receipt of any payment subject to
withholding under the Code (or upon accepting an assignment of an interest
herein), two duly signed completed copies of either IRS Form W-8BEN or any
successor thereto (relating to such Foreign Lender and entitling it to an
exemption from, or reduction of, withholding tax on all payments to be made to
such Foreign Lender by the Borrower pursuant to this Agreement) or IRS Form
W-8ECI or any successor thereto (relating to all payments to be made to such
Foreign Lender by the Borrower pursuant to this Agreement) or such other
evidence satisfactory to the Borrower and the Administrative Agent that such
Foreign Lender is entitled to an exemption from, or reduction of, U.S.
withholding tax, including any exemption pursuant to Section 881(c) of the Code.
Thereafter and from time to time, each such Foreign Lender shall (A) promptly
submit to the Administrative Agent such additional duly completed and signed
copies of one of such forms (or such successor forms as shall be adopted from
time to time by the relevant United States taxing authorities) as may then be
available under then current United States laws and regulations to avoid, or
such evidence as is satisfactory to the Borrower and the Administrative Agent of
any available exemption from or reduction of, United States withholding taxes in
respect of all payments to be made to such Foreign Lender by the Borrower
pursuant to this Agreement, (B) promptly notify the Administrative Agent of any
change in circumstances which would modify or render invalid

                                       86


any claimed exemption or reduction, and (C) take such steps as shall not be
materially disadvantageous to it, in the reasonable judgment of such Lender, and
as may be reasonably necessary (including the re-designation of its Lending
Office) to avoid any requirement of applicable Laws that the Borrower make any
deduction or withholding for taxes from amounts payable to such Foreign Lender.

      (ii) Each Foreign Lender, to the extent it does not act or ceases to act
for its own account with respect to any portion of any sums paid or payable to
such Lender under any of the Loan Documents (for example, in the case of a
typical participation by such Lender), shall deliver to the Administrative Agent
on the date when such Foreign Lender ceases to act for its own account with
respect to any portion of any such sums paid or payable, and at such other times
as may be necessary in the determination of the Administrative Agent (in the
reasonable exercise of its discretion), (A) two duly signed completed copies of
the forms or statements required to be provided by such Lender as set forth
above, to establish the portion of any such sums paid or payable with respect to
which such Lender acts for its own account that is not subject to U.S.
withholding tax, and (B) two duly signed completed copies of IRS Form W-8IMY (or
any successor thereto), together with any information such Lender chooses to
transmit with such form, and any other certificate or statement of exemption
required under the Code, to establish that such Lender is not acting for its own
account with respect to a portion of any such sums payable to such Lender.

      (iii) No Loan Party shall be required to pay any additional amount to any
Foreign Lender under Section 3.01 (A) with respect to any Taxes required to be
deducted or withheld on the basis of the information, certificates or statements
of exemption such Lender transmits with an IRS Form W-8IMY pursuant to this
Section 10.15(a) or (B) if such Lender shall have failed to satisfy the
foregoing provisions of this Section 10.15(a); provided that if such Lender
shall have satisfied the requirement of this Section 10.15(a) on the date such
Lender became a Lender or ceased to act for its own account with respect to any
payment under any of the Loan Documents, nothing in this Section 10.15(a) shall
relieve any Loan Party of its obligation to pay any amounts pursuant to Section
3.01 in the event that, as a result of any change in any applicable law, treaty
or governmental rule, regulation or order, or any change in the interpretation,
administration or application thereof, such Lender is no longer properly
entitled to deliver forms, certificates or other evidence at a subsequent date
establishing the fact that such Lender or other Person for the account of which
such Lender receives any sums payable under any of the Loan Documents is not
subject to withholding or is subject to withholding at a reduced rate.

      (iv) The Administrative Agent may, without reduction, withhold any Taxes
required to be deducted and withheld from any payment under any of the Loan
Documents with respect to which the Borrower is not required to pay additional
amounts under this Section 10.15(a).

      (b) Upon the request of the Administrative Agent, each Lender that is a
"United States person" within the meaning of Section 7701(a)(30) of the Code
shall deliver to the Administrative Agent two duly signed completed copies of
IRS Form W-9. If such Lender fails to deliver such forms, then the
Administrative Agent may withhold from any interest payment to such Lender an
amount equivalent to the applicable back-up withholding tax imposed by the Code,
without reduction.

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      (c) If any Governmental Authority asserts that, except to the extent
resulting from the gross negligence or willful misconduct of the Administrative
Agent, the Administrative Agent did not properly withhold or backup withhold, as
the case may be, any tax or other amount from payments made to or for the
account of any Lender, such Lender shall indemnify the Administrative Agent
therefor, including all penalties and interest, any taxes imposed by any
jurisdiction on the amounts payable to the Administrative Agent under this
Section, and costs and expenses (including Attorney Costs) of the Administrative
Agent. The obligation of the Lenders under this Section shall survive the
termination of the Aggregate Commitments, repayment of all other Obligations
hereunder and the resignation of the Administrative Agent.

      10.16 REPLACEMENT OF LENDERS. Under any circumstances set forth herein
providing that the Borrower shall have the right to replace a Lender as a party
to this Agreement, the Borrower may, upon notice to such Lender and the
Administrative Agent, replace such Lender by causing such Lender to assign its
Commitment (with the assignment fee to be paid by the Borrower in such instance)
pursuant to Section 10.07(b) to one or more other Lenders or Eligible Assignees
procured by the Borrower; provided, however, that if the Borrower elects to
exercise such right with respect to any Lender pursuant to Section 3.06(b), it
shall be obligated to replace all Lenders that have made similar requests for
compensation pursuant to Section 3.01 or 3.04. The Borrower shall (x) pay in
full all principal, interest, fees and other amounts owing to such Lender
through the date of replacement (including any amounts payable pursuant to
Section 3.05), (y) provide appropriate assurances and indemnities (which may
include letters of credit) to the L/C Issuer and the Swing Line Lender as each
may reasonably require with respect to any continuing obligation to fund
participation interests in any L/C Obligations or any Swing Line Loans then
outstanding, and (z) release such Lender from its obligations under the Loan
Documents. Any Lender being replaced shall execute and deliver an Assignment and
Assumption with respect to such Lender's Commitment and outstanding Loans and
participations in L/C Obligations and Swing Line Loans.

      10.17 GOVERNING LAW.

      (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
the LAW OF THE STATE OF CALIFORNIA applicable to agreements made and to be
performed entirely within such State; PROVIDED THAT THE ADMINISTRATIVE Agent AND
EACH LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.

      (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA
SITTING IN SAN DIEGO, CALIFORNIA OR OF THE UNITED STATES FOR THE SOUTHERN
DISTRICT OF SUCH STATE, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE
BORROWER, THE ADMINISTRATIVE Agent AND EACH LENDER CONSENTS, FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. THE
BORROWER, THE ADMINISTRATIVE Agent AND EACH LENDER IRREVOCABLY WAIVES ANY
OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY ACTION

                                       88


OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF ANY LOAN DOCUMENT OR OTHER
DOCUMENT RELATED THERETO. THE BORROWER, THE ADMINISTRATIVE Agent AND EACH LENDER
WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE
MADE BY ANY OTHER MEANS PERMITTED BY THE LAW OF SUCH STATE.

      10.18 WAIVER OF RIGHT TO TRIAL BY JURY. EACH PARTY TO THIS AGREEMENT
HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH
OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM
WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT
OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR
A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

      10.19 USA PATRIOT ACT NOTICE. Each Lender and the Administrative Agent
(for itself and not on behalf of any Lender) hereby notifies the Borrower that,
pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56
(signed into law October 26, 2001) (the "Act")), it is required to obtain,
verify and record information that identifies the Borrower, which information
includes the name and address of the Borrower and other information that will
allow such Lender or the Administrative Agent, as applicable, to identify the
Borrower in accordance with the Act.

      10.20  EFFECT OF AMENDMENT AND RESTATEMENT.

            (a) The Borrower, the Administrative Agent and the Lenders hereby
agrees that, as of the Closing Date (i) the terms and conditions of the Existing
Credit Agreement shall be and hereby are amended, superseded and restated in
their entirety by the terms and conditions of this Agreement, (ii) neither the
Administrative Agent, any Lender nor the Borrower shall have any obligations
under the Existing Credit Agreement except to the extent that any such
obligations may be restated in this Agreement or the other Loan Documents and
(iii) the execution and delivery of this Agreement shall not constitute or
effect, or be deemed to constitute or effect, a novation, refinancing or
extinguishment of any of the "Obligations" (as defined in the Existing Credit
Agreement). The Borrower reaffirms, acknowledges and agrees that each of the
Loan Documents described in Schedule 10.20 to this Agreement (the "Existing Loan
Documents") is the valid, binding and enforceable obligation of each of the Loan
Parties party thereto.

            (b) All references to the Existing Credit Agreement and the Existing
Loan Documents in such documents shall be construed as references to this
Agreement and to the correlative terms hereof and of the Loan Documents. Each of
the parties hereto agrees that the grant of security interests in Collateral
pursuant to Security Documents under this Agreement is

                                       89


not intended to, nor shall it be construed, as constituting a release of any
prior security interest granted to the Administrative Agent under the Existing
Loan Documents but, rather, is intended to constitute a restatement and
confirmation of prior security interests together with a grant of a security
interest in such additional Collateral as may be contemplated by the Loan
Documents.

            (c) On the Closing Date, and without regard to any provisions of
Section 10.07 above to the contrary, Lenders holding loans and risk
participations in letters of credit under the Existing Credit Agreement shall
concurrently make assignments, and Lenders shall make purchases, thereof in
amounts such that, after giving effect thereto, all Loans and risk
participations under this Agreement are held by the Lenders proportionately as
contemplated by this Agreement.

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      IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.

                                    CALLAWAY GOLF COMPANY

                                    By:   /s/ WILLIAM C. BAKER
                                       ---------------------------------------
                                          William C. Baker , Chairman of the
                                          Board and Chief Executive Officer

                                    BANK OF AMERICA, N.A., as
                                    Administrative Agent

                                    By:   /s/ DORA A. BROWN
                                       ---------------------------------------
                                          Dora A. Brown, Vice President
                                          Agency Management Officer

                                    BANK OF AMERICA, N.A., as a Lender, L/C
                                    Issuer and Swing Line Lender

                                    By:   /s/ GORDON WIENS
                                       ---------------------------------------
                                          Gordon Wiens, Senior Vice President

                                    UNION BANK OF CALIFORNIA, N.A., as
                                    Syndication Agent and Lender

                                    By:   /s/ DOUGLAS S. LAMBELL
                                       ---------------------------------------
                                          Douglas S. Lambell, Vice President



                                    BARCLAYS BANK PLC, as Syndication Agent
                                    and Lender

                                    By:   /s/ JAMES ALLAN
                                       ---------------------------------------
                                          James Allan, Director

                                    JP MORGAN CHASE BANK, as Documentation
                                    Agent and Lender

                                    By:   /s/ STEPHEN C. PRICE
                                       ---------------------------------------
                                          Stephen C. Price, Managing Director

                                    U.S. BANK NATIONAL ASSOCIATION, as Co-Agent
                                    and Lender

                                    By:   /s/ SCOTT J. BELL
                                       ---------------------------------------
                                          Scott J. Bell, Senior Vice President

                                    COMERICA WEST INCORPORATED, as a
                                    Lender

                                    By:   /s/ ELISE M. WALKER
                                       ---------------------------------------
                                          Elise M. Walker, Vice President

                                    FIFTH THIRD BANK, as a Lender

                                    By:   /s/ GARY LOSEY
                                       ---------------------------------------
                                          Gary Losey, Relationship Manager


                                    CITIBANK (WEST), F.S.B., as a Lender

                                    By:   /s/ DENNIS J. JANS
                                       ---------------------------------------
                                          Dennis J. Jans, Vice President

exv31w1

Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, William C. Baker, certify that:
      1. I have reviewed this quarterly report on Form 10-Q of Callaway Golf Company;
      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 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)) 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) 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

      (c) 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 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.

/s/ WILLIAM C. BAKER

William C. Baker

Chairman and Chief Executive Officer

Dated: November 8, 2004
A signed original of this Certification has been provided to Callaway Golf Company and will be retained by Callaway Golf Company and furnished to the Securities and Exchange Commission or its staff upon request.
exv31w2

Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Bradley J. Holiday, certify that:
      1. I have reviewed this quarterly report on Form 10-Q of Callaway Golf Company;
      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 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)) 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) 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

      (c) 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 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.

/s/ BRADLEY J. HOLIDAY

Bradley J. Holiday

Senior Executive Vice President and

Chief Financial Officer

Dated: November 8, 2004
A signed original of this Certification has been provided to Callaway Golf Company and will be retained by Callaway Golf Company and furnished to the Securities and Exchange Commission or its staff upon request.
exv32w1

Exhibit 32.1
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

      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 Callaway Golf Company, a Delaware corporation (the “Company”), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2004, as filed with the Securities and Exchange Commission (the “10-Q Report”), that:

      (1) the 10-Q Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

      (2) the information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

      The undersigned have executed this Certification effective as of November 8, 2004.

/s/ WILLIAM C. BAKER

William C. Baker

Chairman and Chief Executive Officer

/s/ BRADLEY J. HOLIDAY

Bradley J. Holiday

Senior Executive Vice President and

Chief Financial Officer

A signed original of this Certification has been provided to Callaway Golf Company and will be retained by Callaway Golf Company and furnished to the Securities and Exchange Commission or its staff upon request.


	(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) 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

	(c) 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


	(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.


	/s/ WILLIAM C. BAKER

	William C. Baker
	Chairman and Chief Executive Officer


	(1) the 10-Q Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2) the information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company.