View:

Download DOC

Download PDF

Download XLS

Table of Contents

FORM 10-K

		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the fiscal year ended December 31, 2000

OR

		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

Commission file number 1-10962

CALLAWAY GOLF COMPANY

2180 Rutherford Road

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

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

     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    No 

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

     As of February 28, 2001, the aggregate market value of the Registrant’s Common Stock held by nonaffiliates of the Registrant was $1,584,995,240 based on the closing sales price of the Registrant’s Common Stock as reported on the New York Stock Exchange. Such amount was calculated by excluding all shares held by directors and executive officers and the Company’s grantor stock trust without conceding that any of the excluded parties are “affiliates” of the Registrant for purposes of the federal securities laws.

     As of March 26, 2001, the number of shares of the Registrant’s Common Stock outstanding was 76,546,813, and there were no shares of the Registrant’s Preferred Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Parts I, II and IV incorporate certain information by reference from the Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2000.

     Parts I and III incorporate certain information by reference from the Registrant’s definitive Proxy Statement for the annual meeting of shareholders to be held on May 2, 2001, as filed with the Commission on March 28, 2001 pursuant to Regulation 14A, which information is incorporated herein by reference.

     Disclaimer: Statements made in this report that relate to future plans, events, financial results or performance 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 below Part I, Item 1 — Certain Factors Affecting Callaway Golf Company, as well as the Company’s other periodic reports on Forms 10-K, 10-Q and 8-K subsequently filed with the Securities and Exchange Commission from time to time. Readers 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 republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I

Item 1. Business

      Callaway Golf Company (the “Company” or “Callaway Golf”) was incorporated in California in 1982 and reincorporated in Delaware on July 1, 1999. The Company has the following direct wholly-owned operating subsidiaries: Callaway Golf Sales Company, Callaway Golf Europe Ltd., Callaway Golf K.K, Callaway Golf Korea Ltd., Callaway Golf Canada Ltd. and Callaway Golf South Pacific PTY Ltd. During 2000, the Company consolidated its golf ball and golf club operations, and in connection with such consolidation, it merged its wholly-owned subsidiary, Callaway Golf Ball Company, into the Company.

      The Company, together with its subsidiaries, designs, develops, manufactures and markets high quality, innovative golf clubs (drivers, fairway woods, irons and putters) and golf balls. The Company also sells golf accessories such as golf bags, towels, headwear, and travel accessories. The Company generally sells its products to golf retailers, directly and through its wholly-owned subsidiaries, and to third party distributors. The Company’s products are designed for the enjoyment of both amateur and professional golfers. Golfers generally purchase the Company’s products on the basis of performance, ease of use and appearance.

      During 2000, the Company introduced some significant additions to its product line. In early 2000, the Company launched its Rule 35® golf balls as well as its new Big Bertha® ERC™ Forged Titanium Drivers, Steelhead Plus™ Stainless Steel Woods and Steelhead™ X-14® Irons and Odyssey® White Hot® Putters. In October of 2000, the Company announced its new Big Bertha® ERC II™ Forged Titanium Drivers, Big Bertha® Hawk Eye® VFT™ Titanium Drivers and Fairway Woods, Steelhead™ X-14® Pro Series Irons, and the Odyssey® TriHot™ line of putters. All of these new products, as well as the Company’s other products, are believed to conform to the Rules of Golf as published by the Royal and Ancient Golf Club of St. Andrews (“R&A”). All of the Company’s products are believed to conform to the Rules of Golf as published by the United States Golf Association (“USGA”), except for the Company’s ERC II™ Forged Titanium Driver and its predecessor the ERC™ Forged Titanium Driver.

      On October 18, 2000, the Company announced that it intended to sell its ERC II™ Forged Titanium Driver in the United States despite the fact that is has been ruled to be non-conforming by the USGA. Historically, the Company has only sold products that it believed were conforming with the Rules of Golf as published by both the R&A and the USGA. The Company believes it is the first large, premium brand golf equipment company to sell non-conforming equipment in the United States. By undertaking this approach, the Company hopes to expand participation in the game of golf in the United States by making the game more enjoyable and accessible for more people, including those who play golf primarily for fun, enjoyment and recreation. For further discussion of the risks and benefits of this strategy, see below, “Certain Factors Affecting Callaway Golf Company — Conformance with Rules of Golf.”

Golf Ball Company

      In 1996, the Company formed Callaway Golf Ball Company for the purpose of designing, manufacturing and selling golf balls. In February 2000, Callaway Golf Ball Company released its new Rule 35® golf balls. These golf balls were the product of more than three years of research and development. The Company

1

Table of Contents

Financial Information about Segments and Geographic Areas

      Information regarding the Company’s segments and geographic areas in which the Company operates is contained in Note 16 to the Consolidated Financial Statements (“Consolidated Financial Statements”) in the Company’s Annual Report to Shareholders for the year ended December 31, 2000 (“2000 Annual Report to Shareholders”), which note is incorporated herein by this reference and is included as part of Exhibit 13.1 to this Form 10-K.

Restructuring

      During the fourth quarter of 1998, the Company recorded a restructuring charge of $54.2 million resulting from a number of cost reduction actions and operational improvements. For additional information regarding the actions taken in connection with, and the effect of, such restructuring, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Restructuring” and Note 14 to the Consolidated Financial Statements in the 2000 Annual Report to Shareholders, both of which are incorporated herein by this reference and are included as part of Exhibit 13.1 to this Form 10-K.

Products

      The following table sets forth the contribution to net sales attributable to the product groups for the periods indicated (dollars in thousands).*

     Variable Face Thickness Technology

      All of the Company’s current drivers, fairway woods and irons use the Company’s patented Variable Face Thickness Technology. This technology allows Callaway Golf designers to adjust the amount of material that is used in key areas of the clubface. The face area is made thickest near the center and thinner around the perimeter. This helps transfer substantially more energy to the ball at impact than clubheads that are not enhanced with this technology.

2

Table of Contents

      The Company’s principal products are described below.

     Drivers and Fairway Woods

     Big Bertha® ERC II™ Forged Titanium Driver

      The ERC II™ Forged Titanium Driver is the largest most forgiving driver the Company has ever produced. The ERC II™ incorporates the Company’s Variable Face Thickness Technology. It also is nearly as deep as it is wide, which further increases the efficiency provided by this technology and provides a larger “sweet spot.” In addition to the Variable Face Thickness Technology, the ERC II™ has a forged “cup face” design which extends the face section of the club into the crown and sole. This forged club face, together with the Variable Face Thickness Technology, results in a more efficient transfer of energy from club to ball and therefore greater ball speed off the club face. The Company offers this driver in lofts ranging from 7 to 12 degrees.

      As discussed above, on October 18, 2000 the Company announced it would begin selling its ERC II^TM Forged Titanium Driver in the United States despite that the USGA has ruled it to be non-conforming. The ERC II,^TM however, does conform to the Rules of Golf as published by the R&A.

     Big Bertha® Hawk Eye® VFT™ Drivers and Fairway Woods

      On October 18, 2000, the Company introduced its new Big Bertha® Hawk Eye® VFT™ Drivers and Fairway Woods. These were designed to replace the Company’s Great Big Bertha® Hawk Eye® Titanium Drivers and Fairway Woods. The new drivers are approximately 15% larger, and have a new clubhead shape, as compared to the original Hawk Eye® Drivers they replace. The new Hawk Eye® Drivers and Fairway Woods incorporate the Company’s Variable Face Thickness Technology and are the most forgiving cast titanium metal woods the Company has ever made. They were fine-tuned to meet, but not exceed, the limits imposed by the USGA. The Hawk Eye® VFT™ Drivers are generally offered in lofts ranging from 7 to 12 degrees and the Hawk Eye® VFT™ Fairway Woods are generally offered in a 2-wood, 3-wood, 4-wood, 5-wood, 7-wood and 9-wood. The Hawk Eye® VFT™ Drivers and Fairway Woods are also offered in a Pro Series line.

     Big Bertha® Steelhead Plus™ Drivers and Fairway Woods

      In January 2000, the Company introduced and began delivery of significant quantities of Big Bertha® Steelhead Plus™ Stainless Steel Drivers and Fairway Woods, which were based upon and designed to replace the Company’s Big Bertha® Steelhead™ Stainless Steel Drivers and Fairway Woods. The new Big Bertha® Steelhead Plus™ Stainless Steel Drivers and Fairway Woods also incorporate the Company’s Variable Face Thickness Technology. These clubheads are made of a lightweight forged crown plate, a relatively heavy body and a precision-cast weight chip. The weight chip is situated in a specific location for each driver and fairway wood, creating a low deep center of gravity for maximum performance. The Company generally offers the Big Bertha® Steelhead Plus™ Stainless Steel Drivers in lofts ranging from 6 to 12 degrees. Big Bertha® Steelhead Plus™ Stainless Steel Fairway Woods are available in a 2-wood, Strong 3-wood, 3-wood, Strong 4-wood, 4-wood, 5-wood, 7-wood, 9-wood, and 11-wood.

     Irons

     Big Bertha® Hawk Eye® Tungsten Injected™ Titanium Irons

      The Company’s Hawk Eye® Tungsten Injected™ Titanium Irons are injected with the Company’s Tungsten Weight Matrix, which is a mixture of tungsten spheres and heavy molten metal. The Weight Matrix is fine-tuned in each individual iron to ensure a precisely positioned center of gravity and to create the optimal ball flight for that iron. They also incorporate a modified version of the Variable Face Thickness Technology to provide a better feel and extra forgiveness. The oversized clubheads provide a large effective hitting area. These irons are offered in 1 through 9, and pitch, approach, sand, and lob wedges.

3

Table of Contents

     Big Bertha® Steelhead™ X-14® and Steelhead™ X-14® Pro Series Stainless Steel Irons

      In January 2000, the Company announced the introduction of its new Big Bertha® Steelhead™ X-14™ Stainless Steel Irons and in October 2000, it introduced its Big Bertha® Steelhead™ X-14® Pro Series Irons. These new irons incorporate the Company’s exclusive Variable Face Thickness Technology. Using this technology, the face of the irons is tapered along two planes — from top to bottom and from heel to toe. The thickness variations are optimized in each iron, creating the desired center of gravity for that iron. The Steelhead™ X-14® Pro Series Irons are for golfers who prefer less off-set and prefer to play with irons that are blade-like in appearance. Both the Steelhead™ X-14 and Steelhead™ X-14® Pro Series are offered in 1 through 9, and pitch, approach, sand, and lob wedges.

     Putters

      The Odyssey® brand putters sold by the Company include the new TriHot™ Putters announced in October 2000, the White Hot® Putters introduced in February 2000, and the Company’s classic Dual Force® Putters, including the Rossie® mallet putters and blade style putters. The new TriHot™ and White Hot® Putters feature a high-performance insert made from the proprietary cover material of the Company’s Rule 35® golf balls. Through the use of advanced tungsten-weighting technology, the center of gravity in the TriHot™ series of putters has been moved back and away from the face, which creates better ball roll than similar-shaped clubs. The Company’s Dual Force® Putters contain a black trapezoidal Stronomic® insert for better feel and forgiveness.

     Golf Balls

      On February 4, 2000, Callaway Golf Ball Company introduced its highly anticipated new golf balls. The golf balls, named “Rule 35®” come in two models — Firmfeel™ and Softfeel.^TM Both balls are solid 3-piece balls that feature a proprietary thermoset urethane cover that is among the thinnest ever produced. The primary difference between the two balls is the feel of the balls when struck. The balls are offered in a five-ball sleeve and a ten-ball pack. On January 26, 2001, the Company announced the addition of its new CB1™ Red golf ball. This ball is a two-piece ball that is designed to provide maximum distance. The CB1™ ball is generally offered in a three-ball sleeve and a 12-ball pack. The Company expects the CB1^TM balls to be available in stores in the second quarter of 2001.

     Accessories

      In addition to its golf clubs and balls, Callaway Golf offers golf-related equipment and supplies manufactured by other companies bearing the Callaway Golf® logo, including golf bags, travel bags, head covers, hats, umbrellas and other accessories.

Product Design and Development

      Product design at Callaway Golf is a result of the integrated efforts of its product development, manufacturing and sales departments, all of which work together to generate new ideas for golf equipment. The Company has not limited itself in its research efforts by trying to duplicate designs that are traditional or conventional and believes it has created an environment in which new ideas are valued and explored. In 2000, 1999, and 1998, the Company expended on research and development $34,579,000, $34,002,000, and $36,848,000, respectively. The Company intends to continue to invest substantial amounts in its research and development activities in 2001 and beyond. In addition to development of new golf club equipment, these investments will continue to include, among others, significant expenditures in support of the Company’s efforts to develop and market new golf ball products.

      Callaway Golf has the ability to create and modify golf club designs by using computer aided design (“CAD”) software, computer aided manufacturing (“CAM”) software and computer numerical control (“CNC”) milling equipment. CAD software enables designers to develop computer models of new clubhead and shaft designs. CAM software is then used by engineers to translate the digital output from CAD computer models so that physical prototypes can be produced. Through the use of this technology, Callaway Golf has

4

Table of Contents

Sales and Marketing

     Sales in the United States

      Approximately 54%, 58% and 63% of the Company’s net sales were derived from sales for distribution within the United States in 2000, 1999 and 1998, respectively. The Company targets both on-course and off-course golf retailers who sell professional quality golf products and provide a level of customer service appropriate for the sale of such products. No one customer that distributes golf clubs or balls in the United States accounted for more than 6% of the Company’s revenues in 2000, 1999 or 1998.

      The Company, through its subsidiary Callaway Golf Sales Company, currently employs full-time regional field representatives, in-house telephone salespersons and customer service representatives in connection with golf club, ball and accessory sales. Each geographic region is covered by both a field representative and a telephone salesperson who work together to initiate and maintain relationships with customers through frequent telephone calls and in-person visits. The Company believes that this tandem approach of utilizing field representatives and telephone salespersons provides the Company a competitive advantage. In connection with the Company’s consolidation of its golf club and golf ball operations, the Company reorganized its sales force in the United States. Prior to the consolidation, the golf club and ball businesses each had their own sales teams which generally solicited sales from the same customers. As a result of the consolidation, the outside sales representatives are now assigned to a specific geographic territory and now sell both golf clubs and golf balls to the customers in their territory.

      In addition, the sales representatives call on corporate customers who want their corporate logo placed on the Company’s golf balls or putters. Unlike many of its competitors, the Company does not use third parties to provide the corporate logo products. The Company imprints the logos on its golf balls and putters in the same facility in which it manufactures them, thereby retaining control over the quality of the process and final product. The Company also pays an agency fee to certain on- and off-course professionals and retailers with whom it has a relationship for corporate sales that originate through such professionals and retailers.

      The Company also has a separate team of sales, manufacturing and customer service representatives that focus on the Company’s custom club sales.

     Sales Outside of the United States

      Approximately 46%, 42% and 37% of the Company’s net sales were derived from sales for distribution outside of the United States in 2000, 1999 and 1998, respectively. The majority of the Company’s international sales were made through its foreign subsidiaries and the rest through third party distributors. The Company does business (either directly or through its subsidiaries and distributors) in more than 70 countries around the world. 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 has been actively pursuing a reorganization of its international operations, including the acquisition of distribution rights in certain key countries in Europe, Asia and elsewhere around the world. The Company continued this strategy in the beginning of 2001 with the acquisition of distribution rights in Australia, New Zealand, Italy, Portugal and Spain.

      As a result of these acquisitions, the Company sells its products throughout Europe through its subsidiary Callaway Golf Europe Ltd. The Company sells its products in Japan through its subsidiary Callaway Golf K.K. The Company sells its products in Korea through its subsidiary Callaway Golf Korea Ltd. The Company currently sells its products in Canada through its subsidiary, Callaway Golf Canada Ltd. The Company sells its products in Australia and New Zealand through its subsidiary Callaway Golf South Pacific PTY Ltd.

5

Table of Contents

      In addition to sales through its subsidiaries, the Company also currently has third party distribution arrangements covering sales of the Company’s products in over 40 foreign countries, including Singapore and Hong Kong, South Africa and various countries in South America. Prices of golf clubs and balls for sales outside of the United States generally receive an export pricing discount to compensate international distributors for selling, advertising and distribution costs. A change in the Company’s relationship with significant distributors could negatively impact the volume of the Company’s international sales. For additional risks related to the Company’s international operations, see below, “Certain Factors Affecting Callaway Golf Company — International Distribution.”

     Advertising and Promotion

      Within the United States, the Company has focused its advertising efforts mainly on a combination of television commercials during golf telecasts and printed advertisements in national magazines, such as Golf Digest, Golf Magazine, Golfweek, Golf World and Sports Illustrated’s Golf Plus. Advertising of the Company’s products outside of the United States is typically handled by the Company’s subsidiaries as well as distributors and resellers of the products in a particular country.

      In addition, the Company establishes relationships with professional golfers in order to promote the Company’s products. The Company has entered into endorsement arrangements with members of the various professional tours to promote the Company’s golf club and ball products. For certain risks associated with such endorsements, see below, “Certain Factors Affecting Callaway Golf Company — Golf Professional Endorsements.”

      The Company’s advertising, promotional and endorsement related expenses, including compensation to professional golfers, were approximately $77.7 million, $55.4 million and $79.1 million for 2000, 1999 and 1998, respectively.

     Competition

      The golf club markets in which the Company does business are highly competitive, and are served by a number of well-established and well-financed companies with recognized brand names, as well as new companies with popular products. With respect to metal woods and irons, the Company’s major domestic competitors are Taylor Made, Titleist, Spalding and Ping. In 1998, Orlimar and Adams emerged as new competitors. For putters, the Company’s major domestic competitors are Ping and Titleist. The Company believes that it is the leader, or one of the leaders, in every golf club market in which it competes.

      The premium golf ball business is also highly competitive with a number of well-established and well-financed competitors, including Titleist, Spalding, Sumitomo Rubber Industries (Srixon), Bridgestone (Precept), Maxfli and others. In addition, there have been several recent entrants into the golf ball market, including Nike. These competitors have established market share in the golf ball business, with Titleist having an estimated market share in excess of 50% of the premium golf ball business. The Company has only been in the golf ball market for approximately one year and therefore does not yet have a substantial market share of the golf ball market.

      For both golf clubs and golf balls, the Company generally competes on the basis of technology, price, quality, performance and customer service. For risks relating to competition, see below, “Certain Factors Affecting Callaway Golf — Competition.”

Handling of Materials

      In the ordinary course of its manufacturing process, the Company uses paints and chemical solvents which are stored on-site. The waste created by use of these materials is transported off-site on a regular basis by registered waste haulers. As a standard procedure, a comprehensive audit of the treatment, storage, and disposal facility with which the Company contracts for the disposal of hazardous waste is performed annually by the Company. To date, the Company has not experienced any material environmental compliance problems, although there can be no assurance that such problems will not arise in the future.

6

Table of Contents

Intellectual Property

      The Company is the owner of over 1,800 U.S. and foreign trademark registrations and over 600 U.S. and foreign patents relating to the Company’s products, product designs, manufacturing processes and research and development concepts. Other patent and trademark applications are pending and await registration. In addition, the Company owns various other protectable rights under copyright, trade dress, and other statutory and common laws. These rights are very important to the Company and the Company seeks to protect its intellectual property rights through the registration of trademarks and utility and design patents, the maintenance of trade secrets and the creation of trade dress. When necessary and appropriate, the Company enforces it rights through litigation against those who are infringing the Company’s rights.

      In the United States, the Company’s patents are generally in effect for up to 20 years from the date of the filing of the patent application. The Company’s trademarks are generally valid as long as they are in use and their registrations are properly maintained and have not been found to become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. See below, “Certain Factors Affecting Callaway Golf Company — Intellectual Property and Proprietary Rights.”

Licensing

      The Company’s brand is very strong in the golf industry and the Company receives requests from time to time from others to license the Company’s trademarks for use on other products such as apparel, sunglasses and other items that have some relationship to golf. The Company is very protective of its brand and evaluates such requests carefully. In limited circumstances, the Company grants rights to others to use its trademarks in exchange for a royalty fee.

Employees

      As of December 31, 2000, the Company and its subsidiaries had approximately 2,600 full-time employees, including approximately 700 employed in sales and marketing, approximately 200 employed in research and development and product engineering and approximately, 1,100 employed in production. The remaining full-time employees are administrative and support staff.

      The Company considers its employee relations to be good. None of the Company’s employees are represented by unions. The Company’s commitment to the development of new products and the seasonal nature of its business may result in fluctuations in production levels. The Company attempts to manage these fluctuations to maintain employee morale and avoid disruption. However, it is possible that such fluctuations could strain employee relations in the future.

Certain Factors Affecting Callaway Golf Company

      The financial statements incorporated into this report and related discussion report and analyze the Company’s financial performance and condition for the periods indicated. 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 therefore has included the following discussion of certain factors which could affect the Company’s future performance or financial condition. These factors 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.

     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. An adverse change in economic conditions in the United States or in the Company’s international markets (which represent almost

7

Table of Contents

     Growth Opportunities

      Golf Clubs. In order for the Company to grow significantly 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 the worldwide premium golf club market and therefore opportunities for additional market share may be limited. Furthermore, the Company believes that since 1997 the overall worldwide premium golf club market has generally not experienced substantial growth in dollar volume from year to year. There is no assurance that the overall dollar volume of the worldwide premium golf club market will grow, or that it will not decline, in the future. The Company’s future club sales growth therefore may be limited unless there is growth in the worldwide premium golf club market.

      Golf Balls. The Company only began selling its golf balls in February 2000 and therefore it does not have as significant of a market share as it does in the club business. Although opportunities exist for additional market share in the golf ball market, such market share is currently held by some well-established and well-financed competitors. There is no assurance that the Company will be able to increase its market share in this very competitive golf ball market. If the Company is unable to obtain additional market share, its golf ball sales growth may be limited.

     Golf Ball Costs

      The cost of entering the golf ball business has been higher than the Company first anticipated. Much of these higher costs are attributable to higher than expected production costs as a result of yield and other ramp-up issues. To date, the development of the Company’s golf ball business has had a significant negative impact on the Company’s cash flows, financial position and results of operations. Although the Company believes it generally has resolved these issues, there is no assurance that the Company will be able to achieve the sales or production efficiencies necessary to make its golf ball business profitable. Until the golf ball business becomes profitable, the Company’s results of operations, cash flows and financial position will continue to be negatively affected.

     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 forecast. As in 1998, 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 use, among other resources, significant quantities of electricity to operate. The State of California is currently experiencing a severe shortage of electricity. The shortage may worsen during the summer months when demand for electricity is at its peak.

8

Table of Contents

      Furthermore, the shortage of electricity is also resulting in increased prices for electricity. The Company has tried to mitigate fluctuations in electricity prices by entering into long-term contracts at fixed rates. The Company’s current contract expires this summer and the Company is currently negotiating a new contract. The Company expects that the new contracted rate will be higher than its current rate. If the Company is unable to enter into a new contract for a reasonable rate, the Company’s expenses for electricity could increase significantly. Such an increase could have a significant adverse affect upon the Company’s cost of goods sold and results of operations.

      In addition to electricity, the Company also uses natural gas to run the golf club and golf ball manufacturing facilities. There is currently a shortage of natural gas which has caused prices to increase significantly. The Company expects this shortage to continue at least through the cold weather months when demand for gas is greatest. Although the Company does not expect any interruptions in its supply of natural gas, if the prices continue to increase, such increased prices could have a significant adverse affect upon the Company’s cost of goods sold and results of operations.

     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 are unable to provide 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, including the golf ball cover, 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 is continually reviewing alternative methods of ground shipping to supplement its use and reduce its reliance on UPS. To date, a limited number of alternative suppliers have been identified and are being used by the Company. Nevertheless, any interruption in UPS services could have a material adverse effect on the Company’s sales and results of operations.

      The Company’s size has made it a large consumer of certain materials, including titanium alloys and carbon fiber. 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. An interruption in the supply of such materials or a significant change in costs could have a material adverse effect on the Company.

     Competition

      Golf Clubs. The worldwide market for premium golf clubs 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 and “close-outs” by competi-

9

Table of Contents

      Golf Balls. The premium 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 market share in excess of 50% of the premium golf ball business. There are also several recent entrants into the golf ball business, including Nike. Many of these competitors have introduced or will introduce golf ball designs that directly compete with the Company’s products. The Company will need to penetrate the market share held by existing competitors while competing with the other new entrants in order for its golf ball business to be successful. There can be no assurance that the Company’s golf balls will obtain the market acceptance necessary to be commercially successful.

     Market Acceptance of Products

      A golf 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 may be subject to rapid and unanticipated changes. There can be no assurance as to how long the Company’s golf clubs and balls will maintain market acceptance and therefore 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

      The Company believes that the introduction of new, innovative golf clubs and golf balls is important to its future success. 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 may be 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 Company’s new products have tended to incorporate significant innovations in design and manufacture, which have often resulted in higher prices for the Company’s products relative to other products in the marketplace. For example, the Company’s Rule 35® golf balls are premium golf balls and there are many lower priced non-premium golf balls sold by others. There can be no assurance that a significant percentage of the public will always be willing to pay such premium prices for golf equipment or that the Company will be able to continue to design and manufacture premium products that achieve market acceptance in the future.

      The rapid introduction of new golf club or golf ball products by the Company could result in close-outs of existing inventories at both the wholesale and retail levels. Such close-outs can result 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 experienced some of these effects in 1999 with respect to golf clubs and could experience similar effects in future years as the Company from time to time introduces new golf club or golf ball products or misjudges demand.

      It previously was the Company’s practice to announce its new product line at the beginning of each calendar year. The Company recently departed from that practice and now 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.

10

Table of Contents

     Conformance with Rules of Golf

      New golf club and golf ball products generally seek to satisfy the standards established by the United States Golf Association (“USGA”) and the Royal and Ancient Golf Club of St. Andrews (“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.

      Currently, 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.” In 1998, the USGA adopted a so-called “spring-like effect test” that limits the coefficient of restitution (“COR”) of drivers. The R&A has announced that it does not believe that such a limitation is needed or in the best interests of the game of golf, and has not adopted such a test or other performance limitation on drivers.

      Some countries, such as Japan and Canada, have local golf associations that exert some control over the game of golf within their jurisdictions. The Royal Canadian Golf Association (“RCGA”) has announced that it will generally follow the USGA with respect to equipment rules. So far, no other local organization within the R&A’s general jurisdiction has deviated from the R&A’s position with respect to equipment rules. Currently, all of the Company’s products are believed to be “conforming” under the Rules of Golf as published by the R&A. In addition, all of the Company’s products with the exception of the Company’s ERC II™ Forged Titanium Driver (together with its predecessor, the ERC™ Forged Titanium Driver, the “ERC Drivers”), are believed to be “conforming” under the Rules of Golf as published by the USGA and RCGA. Although the ERC Drivers conform to all existing R&A equipment rules, and most existing USGA and RCGA equipment rules, they do not conform to the USGA’s so-called “spring-like effect” test protocol. There is no assurance that new designs 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.

      On October 18, 2000, the Company announced that it intended to sell its ERC II™ Forged Titanium Driver in the U.S. despite the fact that it has been ruled to be non-conforming by the USGA. On December 8, 2000, the USGA announced that scores in rounds played with clubs that do not conform to USGA rules, such as the ERC II™ Forged Titanium Driver, may not be posted for USGA handicap purposes. To the Company’s knowledge, it is the first large, premium brand golf equipment company to sell non-conforming equipment in the U.S. By undertaking this approach, the Company hopes to expand participation in the game of golf in the United States — the source of approximately 54% of the Company’s revenues — by making the game more enjoyable and accessible for more people, including those people who play the game primarily for fun, enjoyment and recreation.

      While the Company believes that this is the best strategy for the Company and its shareholders, and one that is good for the game of golf as well, the strategy is not without risk. It is possible that a significant number of U.S. retailers may decline to carry a non-conforming product such as the ERC II™ Driver. It is also possible that a significant number of U.S. golfers may decide that they do not wish to purchase a driver that may not be used in competitions in the U.S. played subject to USGA rules or that may not be used for handicap purposes. Retailer and/or consumer backlash against the introduction of a non-conforming product may injure sales of other, conforming products, or otherwise damage the brand. These negative effects, if they materialize, could materially reduce U.S. sales of ERC II™ Drivers and other products in 2001 and in future years, and could even negatively affect in a material way the strength of the brand and the Company’s business overseas despite the fact that the ERC II™ Driver fully conforms with the R&A’s Rules. On the other hand, if the Company is correct in its belief that there are a large number of American golfers who do not play in tournaments subject to the USGA’s Rules and are prepared to purchase an exceptional non-conforming driver for use in recreational play, and/or the Company’s strategy is successful over time in attracting more people to the game of golf in the U.S., then the beneficial effects could be significant.

     Golf Professional Endorsements

      The Company establishes relationships with professional golfers in order to evaluate and promote Callaway Golf® and Odyssey® branded products. The Company has entered into endorsement arrangements

11

Table of Contents

      Golf Clubs. Many professional golfers throughout the world use the Company’s golf clubs even though they are not contractually bound to do so and do not grant any endorsement to the Company. The Company previously created cash pools that rewarded such usage. In 2001, the Company is discontinuing these pools, as it believes it is better to allocate these resources to other tour programs. In addition, many other companies are aggressively seeking the patronage of these professionals, and are offering many inducements, including specially designed products and significant cash rewards. In the past, the Company has experienced an exceptional level of club usage on the world’s major professional tours, and the Company has heavily advertised that fact. The Company’s lack of cash inducements for non-staff golfers could result in a decrease in usage of the Company’s clubs by professional golfers. While it is not clear to what extent professional usage contributes to retail sales, it is possible that 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.

      Golf Balls. Many golf ball manufacturers, including the leading U.S. manufacturer of premium golf balls, have focused a great deal of their marketing efforts on promoting the fact that tour professionals use their balls. Some of these golf ball competitors spend large amounts of money to secure professional endorsements, and the market leader has obtained a very high degree of tour penetration. While almost all of the Company’s staff professionals, as well as other professionals who are not on the Company’s staff, have decided to use the Company’s golf balls in play, there is no assurance they will continue to do so. Furthermore, there are many other professionals who are already under contract with other golf ball manufacturers or who, for other reasons, may not choose to play the Company’s golf ball products. The Company does not plan to match the endorsement spending levels of the leading manufacturer, and will instead rely more heavily upon the performance of the ball and other factors to attract professionals to the product. In the future the Company may or may not increase its tour spending in support of its golf ball. It is not clear to what extent use by professionals is important to the commercial success of the Company’s golf balls, but it is possible that the results of the Company’s golf ball business could be significantly affected by its success or lack of success in securing acceptance on the professional tours.

     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 aggressively 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. From time to time others have 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.

12

Table of Contents

      Various patents have been issued to the Company’s competitors in the golf ball industry. As the Company developed its golf ball products, it attempted 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.

     Seasonality and Adverse Weather Conditions

      In the golf club and golf ball industries, sales to retailers are generally seasonal due to lower demand in the retail market during cold weather months. The Company’s golf club business has generally experienced these seasonal fluctuations and the Company expects this to continue generally for both its golf club and golf ball businesses. Furthermore, unusual or severe weather conditions generally result in less golf rounds played, which generally results in less demand for golf clubs and golf balls. Consequently, sustained adverse weather conditions, especially during the warm weather months, could materially affect the Company’s sales.

     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 to the Company, the incidence of 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. While the Company believes that it has sufficient reserves for warranty claims, there can be no assurance that these reserves will be sufficient if the Company were to experience an unusually high incidence of breakage or other product problems.

      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. For example, the Company experienced a decline in sales in the U.S. in 1998, and believes the decline was due, in part, to a decline in “gray market” shipments to Asia and Europe. 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.

13

Table of Contents

     International Distribution

      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 has reorganized a substantial portion of its international operations, including the acquisition of distribution rights in certain key countries in Europe, Asia and North America. These efforts have resulted and will continue to result in additional investments in inventory, accounts receivable, employees, corporate infrastructure and facilities. The integration of foreign distribution into the Company’s international sales operations will continue to require the dedication of management and other Company resources. The integration of foreign distribution also could result in disruptions in the distribution of the Company’s products in some areas. There can be no assurance that the acquisition and integration of the Company’s foreign distribution channels will be successful, and the Company’s attempts to do so may adversely affect the Company’s business. Additionally, the Company’s plan to integrate foreign distribution increases the Company’s exposure to fluctuations in exchange rates for various foreign currencies which could result in losses and, in turn, could adversely impact the Company’s results of operations. There can be no assurance that the Company will be able to mitigate this exposure in the future through its management of foreign currency transactions.

     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, like the one experienced in 1998 and 1999, primarily in the U.S., 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 of a significant portion of the Company’s customers to meet their obligations to the Company would adversely impact the Company’s performance and financial condition.

     Information Systems

      Many of the countries in which the Company sells its products are Member States of the Economic and Monetary Union (“EMU”). Beginning January 1, 1999, Member States of the EMU have the option of trading in either their local currencies or the euro, the official currency of EMU participating Member States. Parties are free to choose the unit they prefer in contractual relationships until 2002 when their local currencies will be phased out. The current version of the Company’s enterprise-wide business system does not support transactions denominated in euro. The Company is in the process of upgrading its business systems to support transactions denominated in euro. The Company intends to enable the euro functionality of its upgraded system no later than the end of its third quarter in 2001. Until such time as the upgrade has occurred and the euro functionality has been enabled, transactions denominated in euro will be processed manually. To date, the Company has not experienced, and does not anticipate in the near future, a large demand from its customers to transact in euro. Additionally, the Company does not believe that it will incur material costs specifically associated with manually processing data or preparing its business systems to operate in either the transitional period or beyond. However, there can be no assurance that the conversion of EMU Member States to euro will not have a material adverse effect on the Company and its operations.

Item 2. Properties.

      The Company and its subsidiaries conduct operations in both owned and leased properties, located primarily near the Company’s headquarters in Carlsbad, California. The 10 buildings utilized in the Company’s Carlsbad operations include corporate offices, manufacturing, research and development, warehousing and distribution facilities, and comprise approximately 769,000 square feet of space. Eight of these properties, representing approximately 604,000 square feet of space, are owned by the Company; an additional two properties, representing approximately 165,000 square feet of space, are leased. In addition, the Company

14

Table of Contents

Item 3. Legal Proceedings.

      The Company, incident to its business activities, is often the plaintiff in legal proceedings, both domestically and abroad, in various stages of development. 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. Based upon the Company’s experience, the Company believes that the outcome of these matters individually and in the aggregate will not have 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 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. To date, the Company has not experienced any material expense or disruption associated with any such potential infringement matters. It is possible, however, that one or more claims of potential infringement could lead to litigation, the need to obtain additional licenses, the need to alter a product to avoid infringement, or some other action or loss by the Company.

      On July 24, 2000, Bridgestone Sports Co., Ltd. (“Bridgestone”) filed a complaint for patent infringement in the United States District Court for the Northern District of Georgia, Civil Action No. 100-CV-1871, against Callaway Golf Company, Callaway Golf Ball Company (collectively “Callaway Golf”), and a golf retailer located in Georgia (the “U.S. Action”). Bridgestone alleges in the U.S. Action that the manufacture and sale of the Company’s Rule 35® golf ball infringes four U.S. golf ball patents owned by Bridgestone. Bridgestone is seeking unspecified damages and injunctive relief. On September 12, 2000, Callaway Golf answered the Complaint, and asserted affirmative counterclaims against Bridgestone seeking a judicial declaration that Callaway Golf does not infringe the Bridgestone patents, that the patents are invalid, and that Bridgestone engaged in inequitable conduct in the United States Patent and Trademark Office. On October 13, 2000, Bridgestone and the retailer defendant entered into a consent judgment discontinuing the action against the retailer. The parties are engaged in discovery. No trial date has been set by the District Court.

      On December 14, 2000, Bridgestone filed an action in the Tokyo, Japan District Court asserting patent infringement against Callaway Golf’s wholly-owned subsidiary, Callaway Golf K.K., based on its sale of Rule 35® Softfeel^TM golf balls in Japan (the “Japan Action”). Only one of the Bridgestone patents at issue in the U.S. Action has issued in Japan. Callaway Golf has denied the claims asserted in the Japan Action and has filed an invalidity proceeding with the Japanese Patent Office to invalidate the Bridgestone Patent.

      The Company and its subsidiaries, incident to their business activities, are parties to a number of legal proceedings, lawsuits and other claims, including the Bridgestone matters specifically noted above. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, management is unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance, or the financial impact with respect to these matters as of December 31, 2000. However, 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 annual consolidated financial position, results of operations or cash flows.

15

Table of Contents

Item 4. Submission of Matters to a Vote of Securities Holders.

      None.

Executive Officers of the Registrant

      Biographical information concerning certain of the Company’s officers is set forth below.

      ELY CALLAWAY, Founder, is Chairman, President and Chief Executive Officer of the Company. He has served his current term as Chief Executive Officer since October 1998, and also has served as Chairman of the Board of the Company since the Company’s formation in 1982. In November 2000, Mr. Callaway was appointed as President of the Company and had previously served as President from October 1998 until August 1999. He was Chief Executive Officer from 1982 to May 1996, and Chief of Advertising, Press and Public Relations from April 1997 to October 1998. Mr. Callaway also currently serves on the Finance Committee and as Chairman of the Stock Option Committee (Non-Employee Plans). From 1974 to 1981, Mr. Callaway founded and operated Callaway Vineyard and Winery in Temecula, California, until it was sold. From 1946 to 1973, Mr. Callaway worked in the textile industry, where he served as a Divisional President of several major divisions of Burlington Industries, Inc., and in 1968 was elected Corporate President and Director of Burlington, which at the time was the world’s largest textile company. Prior to 1945, Mr. Callaway served a five-year tour of duty in the U.S. Army Quartermaster Corps. Mr. Callaway is a 1940 graduate of Emory University.

      CHARLES J. YASH, is a Director and Senior Executive Vice President, Growth in Golf of the Company. He has served as a Director of the Company since July 1996 and currently serves as Vice Chairman of the Board and as a member of the Finance Committee. He has served as Senior Executive Vice President, Growth in Golf since November 2000. He served as President of the Company from August 1999 to November 2000. Mr. Yash was Senior Executive Vice President of the Company from February 1999 to August 1999 and Executive Vice President from February 1998 to February 1999. He also served as President and Chief Executive Officer of Callaway Golf Ball Company, a wholly-owned subsidiary of the Company, from June 1996 until its merger with Callaway Golf Company in 2000. From 1992 to June 1996, Mr. Yash was President and Chief Executive Officer and a Director of Taylor Made Golf Company. From 1979 to 1992, Mr. Yash was employed in various marketing positions with the golf products division of Spalding Sports Worldwide, including Corporate Vice President and General Manager-Golf Products, from 1988 to 1992. From 1970 to 1975, Mr. Yash served in the United States Navy in various positions. Mr. Yash completed the Advanced Executive Program at the University of Massachusetts in 1982, received his M.B.A. in 1977 from Harvard Business School and graduated with a Bachelor of Science degree from the U.S. Naval Academy in 1970.

      RONALD A. DRAPEAU, is Senior Executive Vice President, Manufacturing of the Company and has served in such capacity since February 1999. He was President and Chief Executive Officer of Odyssey Golf, Inc., a wholly-owned subsidiary of the Company, from August 1997 until its dissolution in December 1999. Mr. Drapeau served as Executive Vice President of the Company from August 1997 to February 1999, and served as a consultant to the company from November 1996 to August 1997. From April 1993 to September 1996, Mr. Drapeau served as Chief Executive Officer of Lynx Golf, Inc., a subsidiary of Zurn Industries, Inc.,

16

Table of Contents

      RICHARD C. HELMSTETTER, is Senior Executive Vice President, Chief of New Products of the Company and has served his current term in such capacity since August 2000. He served as Senior Executive Vice President, Chief of New Golf Club Products since January 1998 and previously served as Senior Executive Vice President, Chief of New Products from April 1993 to January 1998. Mr. Helmstetter served as President from 1990 to 1993 and as Executive Vice President from 1986 to 1990. From 1967 to 1986, Mr. Helmstetter served as President of Adam Ltd., a pool cue manufacturing and merchandising company which he founded and operated in Japan. During 1982 and 1983, Mr. Helmstetter also consulted extensively for several Japanese, European and American companies, including Bridgestone Corporation’s strategic planning group. Mr. Helmstetter is a 1966 graduate of the University of Wisconsin.

      STEVEN C. MCCRACKEN, is Senior Executive Vice President, Chief Legal Officer and Secretary of the Company and has served in such capacity since August 2000. He served as Executive Vice President, Licensing and Chief Legal Officer from April 1997 to August 2000. He has served as an Executive Vice President since April 1996 and served as General Counsel from April 1994 to April 1997. He served as Vice President from April 1994 to April 1996. He has served as Secretary since April 1994. Prior to joining the Company, Mr. McCracken was a partner at Gibson, Dunn & Crutcher for 11 years, and had been in the private practice of law for over 18 years. During part of that period, he provided legal services to the Company. Mr. McCracken received a B.A., magna cum laude, from the University of California at Irvine in 1972 and a J.D. from the University of Virginia in 1975.

      MICHAEL W. MCCORMICK, is Executive Vice President, Global Sales of the Company and has served in such capacity since January 10, 2000. Previously, he had been with Nike, Inc. since 1992, serving as Eastern Regional Sales Manager; Director of Golf Sales, Southern Regional Sales Manager; and Director of National Sales. From 1989 to 1992 he was Vice President Operations and Merchandising for Las Vegas Golf and Tennis, a nationally recognized franchisor of golf club and golf ball retailers. Mr. McCormick owned and operated a golf equipment retail store in Tucson, Arizona, from 1985 to 1988.

      BRADLEY J. HOLIDAY, is Executive Vice President and Chief Financial Officer of the Company and has served is such capacity since August 2000. Mr. Holiday most recently served as Vice President — Financial Planning & Analysis for Gateway, Inc. Prior to Gateway, Inc., Mr. Holiday was with Nike, Inc. in various capacities, including Chief Financial Officer — Golf Company, where he directed all global financial initiatives and strategic planning for Nike, Inc.’s golf business. Prior to Nike, Inc., Mr. Holiday served in various financial positions with Pizza Hut, Inc. and General Mills, Inc. Mr. Holiday has an MBA in Finance from the University of St. Thomas and a BS in Accounting from Iowa State University.

      IAN B. ROWDEN, is Executive Vice President, Global Advertising of the Company and has served in such capacity since October 16, 2000. Previously Mr. Rowden served as Vice President and Director of Worldwide Advertising for The Coca-Cola Company in Atlanta. Prior to moving to Atlanta with Coca-Cola in 1996, Mr. Rowden served as Vice President of Marketing for Coca-Cola’s China Division in Hong Kong from 1993 to 1995. He began his career with the Coca-Cola Company in Australia in the early 1980s, holding various sales and marketing positions. Mr. Rowden left Coca-Cola in 1988 to serve as General Manager, Marketing of the Power Brewing Company in Brisbane and later became a director and managing partner of DDB Needham, Sydney. He returned to Coca-Cola in 1992 as Vice President of Marketing for the Company’s South Pacific Region based in Sydney, Australia.

      Information with respect to the Company’s employment agreements with Messrs. Callaway, Drapeau, Helmstetter, McCormick and Yash is contained on pages 12 – 15 of the Company’s definitive Proxy Statement under the caption “Compensation of Executive Officers — Employment Agreements and Termination of Employment Arrangements,” as filed with the Securities and Exchange Commission on March 28, 2001 pursuant to Regulation 14A, which information is incorporated herein by this reference. In addition, the Company currently has employment agreements with Messrs. McCracken, Holiday and Rowden for terms expiring on December 31, 2003, December 31, 2002 and December 31, 2003, respectively.

17

Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

      Information in response to Item 5 is contained on page 43 of the Company’s 2000 Annual Report to Shareholders, which information is incorporated herein by this reference and is included as part of Exhibit 13.1 to this Form 10-K.

Item 6. Selected Financial Data.

      Information in response to Item 6 is contained on page 12 of the Company’s 2000 Annual Report to Shareholders, which information is incorporated herein by this reference and is included as part of Exhibit 13.1 to this Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

      Information in response to Item 7 is contained on pages 13 through 23 of the Company’s 2000 Annual Report to Shareholders, which information is incorporated herein by this reference and is included as part of Exhibit 13.1 to this Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

      Information in response to Item 7A is contained on page 23 of the Company’s 2000 Annual Report to Shareholders, which information is incorporated herein by this reference and is included as part of Exhibit 13.1 to this Form 10-K.

Item 8. Financial Statements and Supplementary Data.

      Information in response to Item 8 is contained on pages 24 through 43 of the Company’s 2000 Annual Report to Shareholders, which information is incorporated herein by this reference and is included as part of Exhibit 13.1 to this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

      None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

      Certain information concerning the Company’s executive officers is included under the caption “Executive Officers of the Registrant” following Part I, Item 4 of this Form 10-K.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers, directors and greater than 10% shareholders to file initial reports of ownership (on Form 3) and periodic reports of changes in ownership (on Forms 4 and 5) of Company securities with the Securities and Exchange Commission (the “Commission”) and the New York Stock Exchange. Based solely on its review of copies of such forms (and any amendments to such forms) and such written representations regarding compliance with such filing requirements as were received from its executive officers, directors and greater than 10% shareholders (if any), the Company believes that all such Section 16(a) reports were filed on a timely basis in 2000.

      Other information required by Item 10 has been included in the Company’s definitive Proxy Statement under the caption “Board of Directors” as filed with the Commission on March 28, 2001 pursuant to Regulation 14A, which information is incorporated herein by this reference.

18

Table of Contents

Item 11. Executive Compensation.

      The Company maintains employee benefit plans and programs in which its executive officers are participants. Copies of certain of these plans and programs are set forth or incorporated by reference as Exhibits to this Report. Information required by Item 11 has been included in the Company’s definitive Proxy Statement under the captions “Compensation of Executive Officers,” “Report of the Compensation and Management Succession Committee and the Stock Option Committee (Employee Plans) of the Board of Directors,” “Performance Graph” and “Board of Directors,” as filed with the Commission on March 28, 2001 pursuant to Regulation 14A, which information is incorporated herein by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

      The information required by Item 12 has been included in the Company’s definitive Proxy Statement under the caption “Beneficial Ownership of the Company’s Securities,” as filed with the Commission on March 28, 2001 pursuant to Regulation 14A, which information is incorporated herein by this reference.

Item 13. Certain Relationships and Related Transactions.

      The information required by Item 13 has been included in the Company’s definitive Proxy Statement under the captions “Compensation of Executive Officers — Compensation Committee Interlocks and Insider Participation” as filed with the Commission on March 28, 2001 pursuant to Regulation 14A, which information is incorporated herein by this reference.

19

Table of Contents

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

      (a)  Documents filed as part of this report:

           3. Exhibits.

20

Table of Contents

21

Table of Contents

22

Table of Contents

23

Table of Contents

24

Table of Contents

      (b)  Reports on Form 8-K:

           None.

25

Table of Contents

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:  March 27, 2001

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

26

Table of Contents

Report of Independent Accountants on

To the Board of Directors

Our audits of the consolidated financial statements referred to in our report dated March 19, 2001 appearing in the 2000 Annual Report to Shareholders of Callaway Golf Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP

SAN DIEGO, CALIFORNIA

27

Table of Contents

SCHEDULE II

CALLAWAY GOLF COMPANY

CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

28

Table of Contents

EXHIBIT INDEX

   1
                                                                    EXHIBIT 10.2



                               FIRST AMENDMENT TO
                     EXECUTIVE OFFICER EMPLOYMENT AGREEMENT


        This First Amendment to Executive Officer Employment Agreement ("First
Amendment") is effective as of November 13, 2000 by and between CALLAWAY GOLF
COMPANY, a Delaware corporation (the "Company") and ELY CALLAWAY ("Mr.
Callaway").

        A. The Company and Mr. Callaway are parties to a certain Executive
Officer Employment Agreement entered into as of January 1, 2000 (the
"Agreement").

        B. In light of certain development, the Company and Mr. Callaway desire
to amend the Agreement, pursuant to Section 16 of the Agreement, in the manner
set forth herein.

        NOW, THEREFORE, in consideration of the foregoing and other
consideration, the value and sufficiency of which are hereby acknowledged, the
Company and Mr. Callaway hereby agree as follows:

        1. Section 2(a) of the Agreement is hereby amended to read as follows:

                      (a) Mr. Callaway shall serve as Chief Executive Officer
        and President of Callaway Golf Company until such time as he chooses to
        retire from one or both positions. Upon his retirement as Chief
        Executive Officer of Callaway Golf Company, Mr. Callaway shall assume
        the title of Founder of Callaway Golf Company and Chief Executive
        Officer Emeritus. Mr. Callaway's duties shall be the usual and customary
        duties of the offices in which he serves. As Founder of the Company and
        CEO Emeritus, Mr. Callaway shall advise and consult with management on
        such matters as may be requested by the CEO or the Board. Mr. Callaway
        shall report to the Board of Directors of Callaway Golf Company.

        2. This First Amendment is subject to the approval of the Compensation
and Management Succession Committee of the Board of Directors of the Company.
But for the amendment contained herein, and any other written amendments
properly executed by the parties, the Agreement shall otherwise remain
unchanged.

        IN WITNESS WHEREOF, the Company and Mr. Callaway have caused this First
Amendment to be executed effective as of the date set forth above.

MR. CALLAWAY                                COMPANY

                                            Callaway Golf Company,
                                            a Delaware corporation



                                            By:
- -----------------------------------            ---------------------------------
Ely Callaway

   1
                                                                    EXHIBIT 10.8



                     EXECUTIVE OFFICER EMPLOYMENT AGREEMENT


        This Executive Officer Employment Agreement ("Agreement") is entered
into as of September 1, 2000, by and between CALLAWAY GOLF EUROPE LTD., a United
Kingdom corporation (the "Company") and wholly owned subsidiary of Callaway Golf
Company, a Delaware corporation ("Callaway Golf"), and IAN B. ROWDEN
("Employee"). This Agreement is subject to the approval of the Board of
Directors of Callaway Golf.

        1. TERM. The Company hereby employs Employee and Employee hereby accepts
employment pursuant to the terms and provisions of this Agreement for the period
commencing September 1, 2000 and terminating December 31, 2003, unless this
Agreement is earlier terminated as hereinafter provided. Employee agrees to
report to work at the Company on or before September 1, 2000.

        2. SERVICES.

               (a) Employee shall serve as Executive Vice President, Global
Advertising of the Company. Employee's duties shall be the usual and customary
duties of the offices in which he serves. Employee shall report to the Managing
Director of the Company. The Chief Executive Officer of Callaway Golf Company
may change Employee's title, position and/or duties at any time commensurate
with Employee's training and experience; provided, however, that such change
shall not result in a material diminishment in the title, position, duties,
responsibilities or status of the Employee or make it unreasonably difficult for
Employee to maintain the principal residence he had immediately preceding the
change. It is anticipated that Employee will travel to the United States during
the first few months of his employment for training in various areas including
corporate procedures, products, and current advertising strategies of Callaway
Golf. Employee will assist the Company with the new product launch in
mid-October 2000.

               (b) Employee shall be required to comply with all policies and
procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.

        3. SERVICES TO BE EXCLUSIVE. During the term hereof, Employee agrees to
devote his or her full productive time and best efforts to the performance of
Employee's duties hereunder pursuant to the supervision and direction of the
Managing Director. Employee further agrees, as a condition to the performance by
the Company of each and all of its obligations hereunder, that so long as
Employee is employed by the Company or otherwise receiving compensation or other
consideration from the Company, Employee will not directly or indirectly render
services of any nature to, otherwise become employed by, or otherwise
participate or engage in any other business without the Company's prior written
consent. Employee further agrees to execute such secrecy, non-disclosure,
patent, trademark, copyright and other proprietary rights agreements, if any, as
the Company may from time to time reasonably require. Nothing herein contained
shall be deemed to preclude Employee from having outside personal investments
and involvement with appropriate community activities, and from devoting a
reasonable amount of time to such matters, provided that this shall in no manner
interfere with or derogate from Employee's work for the Company.

        4. COMPENSATION.

               (a) The Company agrees to pay Employee a base salary at the rate
of Pound Sterling264,920 per year, prorated for the year 2000.


   2

               (b) Signing Bonus. Company shall pay Employee a one-time signing
bonus of Pound Sterling66,230, which is to be paid to Employee on the date
Employee actually commences employment pursuant to this Agreement.

               (c) The Company shall provide Employee an opportunity to earn an
annual bonus based upon participation in Callaway Golf's officer bonus plan as
it may or may not exist from time to time. Employee acknowledges that all
bonuses are discretionary, that the current officer bonus plan does not include
any nondiscretionary bonus plan, and that the Company does not contemplate
establishing any nondiscretionary bonus plan applicable to Employee. For the
year 2000, the Company guaranties Employee a minimum bonus of Pound
Sterling26,492, to be paid at the time of payment of all officer bonuses for the
year 2000. For the year 2001, the Company guaranties Employee a minimum bonus of
Pound Sterling66,230, provided bonus payments to officers of the Company are
approved for the year 2001 by Callaway Golf's Board of Directors.

               (d) Employee is responsible for payment of taxes on income earned
while employed by the Company. The Tax Department at Callaway Golf will assist
Employee with any tax issues that may arise.

        5. EXPENSES AND BENEFITS.

               (a) Reasonable and Necessary Expenses. In addition to the
compensation provided for in Section 4 hereof, the Company shall reimburse
Employee for all reasonable, customary, and necessary expenses incurred in the
performance of Employee's duties hereunder. Employee shall first account for
such expenses by submitting a signed statement itemizing such expenses prepared
in accordance with the policy set by the Company for reimbursement of such
expenses. The amount, nature, and extent of such expenses shall always be
subject to the control, supervision, and direction of the Company and its
Managing Director.

               (b) Vacation. Employee shall receive four (4) weeks paid vacation
for each twelve (12) month period of employment with the Company. The vacation
may be taken any time during the year subject to prior approval by the Company,
such approval not to be unreasonably withheld. Any unused vacation will be
carried forward from year to year. The maximum vacation time Employee may accrue
shall be three times Employee's annual vacation benefit. The Company reserves
the right to pay Employee for unused, accrued vacation benefits in lieu of
providing time off.

               (c) Benefits. During Employee's employment with the Company
pursuant to this Agreement, the Company shall provide for Employee to:

                      (i) participate in the Company's health insurance as the
same may be modified from time to time;

                      (ii) if Employee elects to purchase a personal term life
insurance policy in the face amount of up to Pound Sterling662,300, and is
insurable under usual underwriting standards, the Company will reimburse
Employee for the cost of said policy, unless and until the Company can provide
term life insurance for the same face amount; and

                      (iii) participate in any other benefit plans the Company
provides from time to time to executive officers. It is understood that benefit
plans within the meaning of this subsection do not include compensation or bonus
plans.



                                       2
   3
               (d) Stock Options. Pursuant to a separate stock option agreement
and subject to the approval of the Stock Option Committee (Employee Plans) of
the Board of Directors of Callaway Golf ("Stock Option Committee"), Employee
shall be provided options to purchase up to 300,000 shares of the common stock
of Callaway Golf, which options shall vest, provided Employee is then currently
employed by the Company or its affiliates, and not in breach of this Agreement,
as follows:

                      100,000 shares on December 31, 2000;
                      100,000 shares on December 31, 2001; and
                      100,000 shares on December 31, 2002.

The options shall be granted as of the date Employee reports to work at the
Company. The option price per share shall be the NYSE closing price of Callaway
Golf common stock on the date Employee reports to work at the Company. The
options will be subject to the terms and conditions of a separate written stock
option agreement.

                      The options will contain such reasonable restrictions as
determined by the Stock Option Committee, including without limitation,
cancellation of options or forfeiture of gain upon exercise, if Employee
discloses the confidential information of the Company or Callaway Golf and its
subsidiaries, or competes with the business of the Company or Callaway Golf and
its subsidiaries.

        6. PENSION. Employee will be permitted to participate in the Company's
Pension Scheme as adopted and modified from time to time.

        7. NONCOMPETITION.

               (a) Other Business. To the fullest extent permitted by law,
Employee agrees that, while employed by the Company or otherwise receiving
compensation or other consideration from the Company, Employee will not,
directly or indirectly (whether as agent, consultant, holder of a beneficial
interest, creditor, or in any other capacity), engage in any business or venture
which engages directly or indirectly in competition with the business of the
Company or any of its affiliates, or have any interest in any person, firm,
corporation, or venture which engages directly or indirectly in competition with
the business of the Company or any of its affiliates. For purposes of this
section, the ownership of interests in a broadly based mutual fund shall not
constitute ownership of the stocks held by the fund.

               (b) Other Employees. Except as may be required in the performance
of his duties hereunder, Employee shall not cause or induce, or attempt to cause
or induce, any person now or hereafter employed by the Company or any of its
affiliates to terminate such employment, nor shall Employee directly or
indirectly employ any person who is now or hereafter employed by the Company or
any of its affiliates for a period of one (1) year from the date Employee ceases
to be employed by the Company.

               (c) Suppliers. While employed by the Company, and for one (1)
year thereafter, Employee shall not cause or induce, or attempt to cause or
induce, any person or firm supplying goods, services or credit to the Company or
any of its affiliates to diminish or cease furnishing such goods, services or
credit.

               (d) Conflict of Interest. While employed by the Company, Employee
shall not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Employee's duties and obligations
to the Company.



                                       3
   4

               (e) Non-Interference. While employed by the Company, and for one
(1) year thereafter, Employee shall not in any way undertake to harm, injure or
disparage the Company, its officers, directors, employees, agents, affiliates,
vendors, products, or customers, or their successors, or in any other way
exhibit an attitude of hostility toward them. Employee understands that it is
the policy of the Company that only the Managing Director and the Chief
Executive Officer or President of Callaway Golf and their specific designees may
speak to the press or media about the Company or its business, and agrees not to
interfere with the Company's press and public relations by violating this
policy.

        8. TERMINATION.

               (a) Termination at the Company's Convenience. Employee's
employment under this Agreement may be terminated by the Company at its
convenience at any time. In the event of a termination by the Company for its
convenience, Employee shall be entitled to receive (i) any compensation accrued
and unpaid as of the date of termination; and (ii) the immediate vesting of all
unvested stock options held by Employee as of the date of such termination. In
addition to the foregoing, and subject to the provisions of Section 20, Employee
shall be entitled to Special Severance equal to (i) severance payments equal to
Employee's former base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to the greater of
the remainder of the term of this Agreement or twelve (12) months from the date
of termination; (ii) the payment of premiums owed for COBRA insurance benefits
for a period of time equal to twelve (12) months from the date of termination;
and (iii) no other severance.

               (b) Termination by the Company for Substantial Cause. Employee's
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) no other severance.
"Substantial cause" shall mean for purposes of this subsection failure by
Employee to substantially perform his or her duties, breach of this Agreement,
or misconduct, including but not limited to, dishonesty, theft, use or
possession of illegal drugs during work and/or felony criminal conduct.

               (c) Termination by Employee for Substantial Cause. Employee's
employment under this Agreement may be terminated immediately by Employee for
substantial cause at any time. In the event of a termination by Employee for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) the immediate vesting
of all unvested stock options held by Employee as of the date of such
termination. In addition to the foregoing, and subject to the provisions of
Section 20, Employee shall be entitled to Special Severance equal to (i)
severance payments equal to Employee's former base salary at the same rate and
on the same schedule as in effect at the time of termination for a period of
time equal to the greater of the remainder of the term of this Agreement or
twelve (12) months from the date of termination; (ii) the payment of premiums
owed for COBRA insurance benefits for a period of time equal to twelve (12)
months from the date of termination; and (iii) no other severance. "Substantial
cause" shall mean for purposes of this subsection a material breach of this
Agreement by the Company.

               (d) Termination Due to Permanent Disability. Subject to all
applicable laws, Employee's employment under this Agreement may be terminated
immediately by the Company in the event Employee becomes permanently disabled.
Permanent disability shall be defined as Employee's failure to perform or being
unable to perform all or substantially all of Employee's duties under this
Agreement for a continuous period of more than six (6) months on account of any
physical or mental disability, either as mutually agreed to by the parties or as
reflected in the



                                       4
   5

opinions of three qualified physicians, one of which has been selected by the
Company, one of which has been selected by Employee, and one of which has been
selected by the two other physicians jointly. In the event of a termination by
the Company due to Employee's permanent disability, Employee shall be entitled
to (i) any compensation accrued and unpaid as of the date of termination; (ii)
severance payments equal to Employee's former base salary at the same rate and
on the same schedule as in effect at the time of termination for a period of
time equal to the greater of the remainder of the term of this Agreement or
twelve (12) months from the date of termination; (iii) the immediate vesting of
outstanding but unvested stock options held by Employee as of such termination
date in a prorated amount based upon the number of days in the option vesting
period that elapsed prior to Employee's termination; (iv) the payment of
premiums owed for COBRA insurance benefits for a period of time equal to twelve
(12) months from the date of termination; and (v) no other severance. The
Company shall be entitled to take, as an offset against any amounts due pursuant
to subsections (i) and (ii) above, any amounts received by Employee pursuant to
disability or other insurance, or similar sources, provided by the Company.

               (e) Termination Due to Death. Employee's employment under this
Agreement shall be terminated immediately by the Company in the event of
Employee's death. In the event of a termination due to Employee's death,
Employee's estate shall be entitled to (i) any compensation accrued and unpaid
as of the date of death; (ii) severance payments equal to Employee's former base
salary at the same rate and on the same schedule as in effect at the time of
death for a period of time equal to the greater of the remainder of the term of
this Agreement or twelve (12) months from the date of death; (iii) the immediate
vesting of outstanding but unvested stock options held by Employee as of the
date of death in a prorated amount based upon the number of days in the option
vesting period that elapsed prior to Employee's death; and (iv) no other
severance.

               (f) Any severance payments shall be subject to usual and
customary employee payroll practices and all applicable withholding
requirements. Except for such severance pay and other amounts specifically
provided pursuant to this Section 8, Employee shall not be entitled to any
further compensation, bonus, damages, restitution, relocation benefits, or other
severance benefits upon termination of employment. The amounts payable to
Employee pursuant to this Section 8 shall not be treated as damages, but as
severance compensation to which Employee is entitled by reason of termination of
employment under the applicable circumstances. The Company shall not be entitled
to set off against the amounts payable to Employee hereunder any amounts earned
by Employee in other employment after termination of his or her employment with
the Company pursuant to this Agreement, or any amounts which might have been
earned by Employee in other employment had Employee sought such other
employment. The provisions of this Section 8 shall not limit Employee's rights
under or pursuant to any other agreement or understanding with the Company
regarding any pension, profit sharing, insurance or other employee benefit plan
of the Company to which Employee is entitled pursuant to the terms of such plan.

               (g) Termination By Mutual Agreement of the Parties. Employee's
employment pursuant to this Agreement may be terminated at any time upon the
mutual agreement in writing of the parties. Any such termination of employment
shall have the consequences specified in such agreement.

               (h) Pre-Termination Rights. The Company shall have the right, at
its option, to require Employee to vacate his office or otherwise remain off the
Company's premises and to cease any and all activities on the Company's behalf
without such action constituting a termination of employment or a breach of this
Agreement.



                                       5
   6

        9. RIGHTS UPON A CHANGE IN CONTROL.

               (a) If a Change in Control of the parent company, Callaway Golf
Company, (as defined in Exhibit A hereto) occurs before the termination of
Employee's employment hereunder, then this Agreement shall be extended (the
"Extended Employment Agreement") in the same form and substance as in effect
immediately prior to the Change in Control, except that the termination date, as
specified pursuant to Section 1 of this Agreement, shall be three (3) years from
the effective date of the Change in Control.

               (b) Notwithstanding anything in this Agreement to the contrary,
if upon or at any time within one (1) year following any Change in Control that
occurs during the term of this Agreement there is a Termination Event (as
defined below), Employee shall be treated as if he had been terminated for the
convenience of the Company pursuant to Section 8(a), and Employee shall be
entitled to receive the same compensation and other benefits and entitlements as
are described in Section 8(a), as appropriate, of this Agreement. Furthermore,
the provisions of Section 8 shall continue to apply during the term of the
Extended Employment Agreement except that, in the event of a conflict between
Section 8 and the rights of Employee described in this Section 9, the provisions
of this Section 9 shall govern.

               (c) A "Termination Event" shall mean the occurrence of any one or
more of the following, and in the absence of the Employee's permanent disability
(defined in Section 8(d)), Employee's death, and any of the factors enumerated
in Section 8(b) providing for termination by the Company for substantial cause:

                      (i) the termination or material breach of this Agreement
by the Company;

                      (ii) a failure by the Company to obtain the assumption of
this Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;

                      (iii) any material diminishment in the title, position,
duties, responsibilities or status that Employee had with the Company
immediately prior to the Change in Control;

                      (iv) any reduction, limitation or failure to pay or
provide any of the compensation, reimbursable expenses, stock options, incentive
programs, or other benefits or perquisites provided to Employee under the terms
of this Agreement or any other agreement or understanding between the Company
and Employee, or pursuant to the Company's policies and past practices as of the
date immediately prior to the Change in Control; or

                      (v) any requirement that Employee relocate or any
assignment to Employee of duties that would make it unreasonably difficult for
Employee to maintain the principal residence he or she had immediately prior to
the Change in Control.

        10. SURRENDER OF EQUIPMENT, BOOKS AND RECORDS. Employee understands and
agrees that all equipment, books, records, customer lists and documents
connected with the business of the Company and/or its affiliates are the
property of and belong to the Company. Under no circumstances shall Employee
remove from the Company's facilities any of the Company's and/or its affiliates'
equipment, books, records, documents, lists or any copies of the same without
the Company's permission, nor shall Employee make any copies of the Company's
and/or its affiliates' books, records, documents or lists for use outside the


                                       6
   7

Company's office except as specifically authorized by the Company. Employee
shall return to the Company and/or its affiliates all equipment, books, records,
documents and customer lists belonging to the Company and/or its affiliates upon
termination of Employee's employment with the Company.

        11. GENERAL RELATIONSHIP. Employee shall be considered an employee of
the Company within the meaning of all applicable laws and regulations.

        12. TRADE SECRETS AND CONFIDENTIAL INFORMATION.

               (a) As used in this Agreement, the term "Trade Secrets and
Confidential Information" means information, whether written or oral, not
generally available to the public, regardless of whether it is suitable to be
patented, copyrighted and/or trademarked, which is received from the Company
and/or its affiliates, either directly or indirectly, including but not limited
to (i) concepts, ideas, plans and strategies involved in the Company's and/or
its affiliates' products, (ii) the processes, formulae and techniques disclosed
by the Company and/or its affiliates to Employee or observed by Employee, (iii)
the designs, inventions and innovations and related plans, strategies and
applications which Employee develops during the Term of this Agreement in
connection with the work performed by Employee for the Company and/or its
affiliates; and (iv) third party information which the Company and/or its
affiliates has/have agreed to keep confidential.

               (b) Notwithstanding the provisions of subsection 12(a), the term
"Trade Secrets and Confidential Information" does not include (i) information
which, at the time of disclosure or observation, had been previously published
or otherwise publicly disclosed; (ii) information which is published (or
otherwise publicly disclosed) after disclosure or observation, unless such
publication is a breach of this Agreement or is otherwise a violation of
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Employee; or (iii) information which, subsequent to disclosure or
observation, is obtained by Employee from a third person who is lawfully in
possession of such information (which information is not acquired in violation
of any contractual, legal, or fiduciary obligation owed to the Company with
respect to such information, and is known by Employee) and who is not required
to refrain from disclosing such information to others.

               (c) While employed by the Company, Employee will have access to
and become familiar with various Trade Secrets and Confidential Information.
Employee acknowledges that the Trade Secrets and Confidential Information are
owned and shall continue to be owned solely by the Company and/or its
affiliates. Employee agrees that Employee will not, at any time, whether during
or subsequent to Employee's employment by the Company and/or its affiliates, use
or disclose Trade Secrets and Confidential Information for any competitive
purpose or divulge the same to any person other than the Company or persons with
respect to whom the Company has given its written consent, unless Employee is
compelled to disclose it by governmental process. In the event Employee believes
that Employee is legally required to disclose any Trade Secrets or Confidential
Information, Employee shall give reasonable notice to the Company prior to
disclosing such information and shall assist the Company in taking such legally
permissible steps as are reasonable and necessary to protect the Trade Secrets
or Confidential Information, including, but not limited to, execution by the
receiving party of a non-disclosure agreement in a form acceptable to the
Company.

               (d) The provisions of this Section 12 shall survive the
termination or expiration of this Agreement, and shall be binding upon Employee
in perpetuity.



                                       7
   8

        13. ASSIGNMENT OF RIGHTS.

               (a) As used in this Agreement, "Designs, Inventions and
Innovations," whether or not they have been patented, trademarked, or
copyrighted, include, but are not limited to designs, inventions, innovations,
ideas, improvements, processes, sources of and uses for materials, apparatus,
plans, systems and computer programs relating to the design, manufacture, use,
marketing, distribution and management of the Company's and/or its affiliates'
products.

               (b) As a material part of the terms and understandings of this
Agreement, Employee agrees to assign to the Company and/or Callaway Golf all
Designs, Inventions and Innovations developed, conceived and/or reduced to
practice by Employee, alone or with anyone else, in connection with the work
performed by Employee for the Company during Employee's employment with the
Company, regardless of whether they are suitable to be patented, trademarked
and/or copyrighted.

               (c) Employee agrees to disclose in writing to the Managing
Director of the Company any Design, Invention or Innovation relating to the
business of the Company and/or its affiliates, which Employee develops,
conceives and/or reduces to practice in connection with any work performed by
Employee for the Company, either alone or with anyone else, while employed by
the Company and/or within twelve (12) months of the termination of employment.
Employee shall disclose all Designs, Inventions and Innovations to the Company,
even if Employee does not believe that he or she is required under this
Agreement to assign his or her interest in such Design, Invention or Innovation
to the Company. If the Company and Employee disagree as to whether or not a
Design, Invention or Innovation is included within the terms of this Agreement,
it will be the responsibility of Employee to prove that it is not included.

               (d) The obligation to assign as provided in this Agreement does
not apply to any Design, Invention or Innovation that Employee developed
entirely on Employee's own time without using the Company's equipment, supplies,
facilities or Trade Secrets and Confidential Information except those Designs,
Inventions or Innovations that either:

                      (i) Relate at the time of conception or reduction to
practice to the Company's and/or its affiliates' business, or actual or
demonstrably anticipated research of the Company and/or its affiliates; or

                      (ii) Result from any work performed by Employee for the
Company and/or its affiliates.

               (e) Employee agrees that any Design, Invention and/or Innovation
which is required under the provisions of this Agreement to be assigned to the
Company and/or Callaway Golf shall be the sole and exclusive property of the
Company and/or Callaway Golf. Upon the Company's request, at no expense to
Employee, Employee shall execute any and all proper applications for patents,
copyrights and/or trademarks, assignments to the Company and/or Callaway Golf,
and all other applicable documents, and will give testimony when and where
requested to perfect the title and/or patents in all Designs, Inventions and
Innovations belonging to the Company and/or Callaway Golf.

               (f) The provisions of this Section 13 shall survive the
termination or expiration of this Agreement, and shall be binding upon Employee
in perpetuity.

        14. ASSIGNMENT. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and the successors and assigns of the Company.
Employee shall



                                       8
   9

have no right to assign his rights, benefits, duties, obligations or other
interests in this Agreement, it being understood that this Agreement is personal
to Employee. The Company shall have the right to assign this Agreement to
Callaway Golf.

        15. ATTORNEYS' FEES AND COSTS. If any arbitration or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute
or default in connection with any of its provisions, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees
incurred in such action or proceeding.

        16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Employee or the Company. This Agreement shall
not be modified, amended or terminated except by another instrument in writing
executed by the parties hereto. This Agreement replaces and supersedes any and
all prior understandings or agreements between Employee and the Company
regarding employment.

        17. NOTICES. Any notice, request, demand, or other communication
required or permitted hereunder, shall be deemed properly given when actually
received or within five (5) days of mailing by certified or registered mail,
postage prepaid, to Employee at his last known residence address and to the
Company, as follows:

               Company:      Callaway Golf Europe Ltd.
                             Attention:  Patrice Hutin, Managing Director
                             Units A27
                             Barwell Business Park
                             Leatherhead Road
                             Chessington, Surrey KT92NY

or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.

        18. MISCELLANEOUS.

               (a) Headings. The headings of the several sections and paragraphs
of this Agreement are inserted solely for the convenience of reference and are
not a part of and are not intended to govern, limit or aid in the construction
of any term or provision hereof.

               (b) Waiver. Failure of either party at any time to require
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the waiver
by either party of any breach of any provision hereof be held to be a waiver of
any succeeding breach of any provision or a waiver of the provision itself.

               (c) Applicable Law. This Agreement shall constitute a contract
under the internal laws of England and shall be governed and construed in
accordance with the laws of England as to both interpretation and performance.

               (d) Severability. In the event any provision or provisions of
this Agreement is or are held invalid, the remaining provisions of this
Agreement shall not be affected thereby.

               (e) Advertising Waiver. Employee agrees to permit the Company
and/or its affiliates, and persons or other organizations authorized by the
Company and/or its affiliates, to use, publish and distribute advertising or
sales promotional literature concerning the products of



                                       9
   10

the Company and/or its affiliates, or the machinery and equipment used in the
manufacture thereof, in which Employee's name and/or pictures of Employee taken
in the course of Employee's provision of services to the Company and/or its
affiliates, appear. Employee hereby waives and releases any claim or right
Employee may otherwise have arising out of such use, publication or
distribution.

               (f) Counterparts. This Agreement may be executed in one or more
counterparts which, when fully executed by the parties, shall be treated as one
agreement.

        19. DEFINITION OF AFFILIATES. As defined herein, "affiliate" means any
company:

               (a) which directly or indirectly controls the Company; or

               (b) which is directly or indirectly controlled by the Company; or

               (c) which is directly or indirectly controlled by a third party
which directly or indirectly controls the Company.

        20. CONDITIONS ON SPECIAL SEVERANCE. Notwithstanding anything else to
the contrary, it is expressly understood that any obligation of the Company to
pay Special Severance pursuant to this Agreement shall be subject to:

               (a) Employee's continued compliance with the terms and conditions
of Sections 7(a), 7(b), 7(c), 7(e), 12 and 13;

               (b) Employee must not, directly or indirectly (whether as agent,
consultant, holder of a beneficial interest, creditor, or in any other
capacity), engage in any business which engages directly or indirectly in
competition with the businesses of the Company or any of its affiliates, or have
any interest, direct or indirect, in any person, firm, corporation, or venture
which directly or indirectly competes with the businesses of the Company or any
of its affiliates. For purposes of this section, the ownership of interests in a
broadly based mutual fund shall not constitute ownership of the stocks held by
the fund; and

               (c) Employee must not, directly, indirectly, or in any other way,
disparage the Company, its officers or employees, vendors, customers, products
or activities, or otherwise interfere with the Company's press, public and media
relations.


        21. CONDITIONS UPON TERMINATION OF EMPLOYMENT. It is recognized that
during the term of this Agreement, Employee's employment with the Company may be
terminated by the Company for any reason or for no reason and that there are no
representations or understandings regarding future employment, in any capacity,
beyond the term of this Agreement. Upon the termination of Employee's
employment, unless either (a) Employee and the Company, or one of the Company's
affiliates, have agreed in a signed writing to a continuing employment
relationship beyond the term of this Agreement; or (b) the parties have
otherwise mutually agreed in a signed writing, the following shall occur:

               (a) Employee shall resign as an employee of the Company,
effective immediately and will accept four (4) weeks pay as payment in lieu of
notice; and



                                       10
   11

               (b) Employee hereby irrevocably waives any right to make a claim
for a statutory redundancy payment and/or to make a claim for unfair dismissal.

        IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective the date first written above.

EMPLOYEE                               COMPANY

                                       Callaway Golf Europe Ltd.,
                                       a United Kingdom corporation



- -----------------------------         By:
                                          --------------------------------------
Ian B. Rowden                          Charles J. Yash, Chairman




                                       11
   12

                                    EXHIBIT A

                                CHANGE IN CONTROL


        A "Change in Control" means the following and shall be deemed to occur
if any of the following events occurs:

        1. Any person, entity or group, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), but excluding
Callaway Golf Company and its affiliates and any employee benefit or stock
ownership plan of Callaway Golf Company or its affiliates, and also excluding an
underwriter or underwriting syndicate that has acquired Callaway Golf Company's
securities solely in connection with a public offering thereof (such person,
entity or group being referred to herein as a "Person") becomes the beneficial
owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
30% or more of either the then outstanding shares of Common Stock or the
combined voting power of Callaway Golf Company's then outstanding securities
entitled to vote generally in the election of directors; or

        2. Individuals who, as of the effective date hereof, constitute the
Board of Directors of Callaway Golf Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of the Board of Directors of
Callaway Golf Company, provided that any individual who becomes a director after
the effective date hereof whose election, or nomination for election by Callaway
Golf Company's shareholders, is approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered to be a member
of the Incumbent Board unless that individual was nominated or elected by any
Person having the power to exercise, through beneficial ownership, voting
agreement and/or proxy, 20% or more of either the outstanding shares of Common
Stock or the combined voting power of Callaway Golf Company's then outstanding
voting securities entitled to vote generally in the election of directors, in
which case that individual shall not be considered to be a member of the
Incumbent Board unless such individual's election or nomination for election by
Callaway Golf Company's shareholders is approved by a vote of at least
two-thirds of the directors then comprising the Incumbent Board; or

        3. Consummation by Callaway Golf Company of the sale or other
disposition by Callaway Golf Company of all or substantially all of Callaway
Golf Company's assets or a reorganization or merger or consolidation of Callaway
Golf Company with any other person, entity or corporation, other than

               (a) a reorganization or merger or consolidation that would result
in the voting securities of Callaway Golf Company outstanding immediately prior
thereto (or, in the case of a reorganization or merger or consolidation that is
preceded or accomplished by an acquisition or series of related acquisitions by
any Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of
Callaway Golf Company, immediately prior to such acquisition or the first
acquisition in such series of acquisitions) continuing to represent, either by
remaining outstanding or by being converted into voting securities of another
entity, more than 50% of the combined voting power of the voting securities of
Callaway Golf Company or such other entity outstanding immediately after such
reorganization or merger or consolidation (or series of related transactions
involving such a reorganization or merger or consolidation), or

               (b) a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of Callaway Golf Company (or
similar transaction) that does



                                       12
   13

not result in a material change in beneficial ownership of the voting securities
of Callaway Golf Company or its successor; or

        4. Approval by the shareholders of Callaway Golf Company or an order by
a court of competent jurisdiction of a plan of liquidation of Callaway Golf
Company.



                                       13

   1
                                                                    EXHIBIT 10.9



                      ASSIGNMENT OF AND FIRST AMENDMENT TO
                     EXECUTIVE OFFICER EMPLOYMENT AGREEMENT


        This Assignment of and First Amendment to Executive Officer Employment
Agreement ("Assignment") is made effective as of October 16, 2000 by and between
CALLAWAY GOLF EUROPE LTD., a United Kingdom corporation ("Callaway Golf
Europe"), CALLAWAY GOLF COMPANY, a Delaware corporation ("Callaway Golf"), and
IAN B. ROWDEN ("Employee").

        A. Callaway Golf Europe and Employee are parties to that certain
Executive Officer Employment Agreement entered into as of September 1, 2000 (the
"Agreement").

        B. On October 16, 2000, Employee resigned his position as Executive Vice
President, Global Advertising of Callaway Golf Europe, and accepted a position
as Executive Vice President, Global Advertising of Callaway Golf.

        C. In order to facilitate Employee's resignation of his former position
with Callaway Golf Europe and acceptance of his new position with Callaway Golf,
Callaway Golf Europe wishes to assign the Agreement to Callaway Golf, Callaway
Golf wishes to accept the assignment of the Agreement, and the parties wish to
modify the Agreement accordingly.

                                   ASSIGNMENT

        NOW, THEREFORE, in consideration of the foregoing, Callaway Golf Europe,
Callaway Golf and Employee hereby agree as follows:

        1. Effective Date. All provisions of this Assignment shall be effective
as of October 16, 2000.

        2. Resignation. Employee hereby resigns as Executive Vice President,
Global Advertising of Callaway Golf Europe, and Callaway Golf Europe accepts
such resignation.

        3. Appointment. The Board of Directors of Callaway Golf has ratified the
appointment of Employee as Executive Vice President, Global Advertising of
Callaway Golf, and Employee has accepted such appointment.

        4. Assignment and Assumption. Callaway Golf Europe hereby assigns to
Callaway Golf all of Callaway Golf Europe's right, title and interest in and to
the Agreement, and Callaway Golf hereby accepts the assignment and assumes and
agrees to keep, perform and fulfill all of the terms, covenants, conditions and
obligations required to be kept, performed and fulfilled by the "Company" under
the Agreement, as amended. After this assignment, all references to the
"Company" in the Agreement, as amended, shall mean Callaway Golf.


                                    AMENDMENT

        The Agreement is hereby amended as follows:

        5. All references to the "Managing Director" shall be amended to read
"Chief Executive Officer".



   2
        6. Section 2 of the Agreement is hereby amended to add:

                "(c) Nature of Services. The Company and Employee agree that the
services being provided by Employee for the Company under the terms of this
Agreement are unique and intellectual in character and that the Employee and
Company are entering into this Agreement so that the Company will have the
exclusive benefit of those services during the entire term of the Agreement and
any extensions of the Agreement."

        7. Section 4 of the Agreement is hereby amended to read:

               "(a) The Company agrees to pay Employee a base salary at the rate
of $400,000.00 per year, prorated for the year 2000."

               (b) No change.

               "(c) The Company shall provide Employee an opportunity to earn an
annual bonus based upon participation in the Company's officer bonus plan as it
may or may not exist from time to time. Employee acknowledges that currently all
bonuses are discretionary, that the current officer bonus plan does not include
any nondiscretionary bonus plan, and that the Company does not currently
contemplate establishing any nondiscretionary bonus plan applicable to Employee.
However, for the year 2000, the Company will pay Employee a minimum bonus of
$40,000.00, to be paid at the time of payment of all officer bonuses, if any,
for the year 2000. If bonus payments to officers of the Company are approved for
the year 2001 by Callaway Golf's Board of Directors, the Company will pay
Employee a minimum bonus of $100,000.00."

               (d) Delete.

        8.     Section 5 of the Agreement is hereby amended to read:

               (a) No change.

               (b) No change.

               "(c) Benefits. During Employee's employment with the Company
pursuant to this Agreement, the Company shall provide for Employee to:

                      (i) participate in the Company's health insurance and
disability insurance plans as the same may be modified from time to time;

                      (ii) receive, if Employee is insurable under usual
underwriting standards, term life insurance coverage on Employee's life, payable
to whomever the Employee directs, in the face amount of $1,000,000.00, provided
that Employee's physical condition does not prevent Employee from qualifying for
such insurance coverage under reasonable terms and conditions;

                      (iii) participate in the Company's 401(k) plan pursuant to
the terms of the plan, as the same may be modified from time to time;

                      (iv) participate in the Company's Executive Deferred
Compensation Plan, as the same may be modified from time to time; and

                      (v) participate in any other benefit plans the Company
provides from time to time to senior executive officers. It is understood that
benefit plans within the meaning of this subsection do not include compensation
or bonus plans."



                                       2
   3

               (d) No change.

               "(e) Estate Planning and Other Perquisites. To the extent the
Company provides tax and estate planning and related services, or any other
perquisites and personal benefits to other senior executive officers generally
from time to time, such services and perquisites shall be made available to
Employee on the same terms and conditions.

               (f) Club Membership. The Company shall pay the reasonable cost of
initiation associated with Employee gaining privileges at a mutually agreed upon
country club. Employee shall be responsible for all other expenses and costs
associated with such club use, including monthly member dues and charges. The
club membership itself shall belong to and be the property of the Company, not
Employee."

        9. Section 6 of the Agreement is hereby replaced with the following:

               "TAX INDEMNIFICATION. Employee shall be indemnified by the
Company for certain excise tax obligations, as more specifically set forth in
Exhibit A to this Agreement."

               (A true and correct copy of Exhibit A is attached hereto and made
 a part of the Agreement by this reference.)

        10.    Section 7(e) of the Agreement is hereby amended to read:

               "(e) Non-Interference. While employed by the Company, and for one
(1) year thereafter, Employee shall not in any way undertake to harm, injure or
disparage the Company, its officers, directors, employees, agents, affiliates,
vendors, products, or customers, or their successors, or in any other way
exhibit an attitude of hostility toward them. Employee understands that it is
the policy of the Company that only the Chief Executive Officer, President or
Senior Vice President, Global Press and Public Relations, and their specific
designees, may speak to the press or media about the Company or its business,
and agrees not to interfere with the Company's press and public relations by
violating this policy."

        11. Section 9(a) of the Agreement is hereby amended to read:

               "(a) If a Change in Control (as defined in Exhibit B hereto)
occurs before the termination of Employee's employment hereunder, then this
Agreement shall be extended (the "Extended Employment Agreement") in the same
form and substance as in effect immediately prior to the Change in Control,
except that the termination date, as specified pursuant to Section 1 of this
Agreement, shall be three (3) years from the effective date of the Change in
Control."

               (A true and correct copy of Exhibit B is attached hereto and made
a part of the Agreement by this reference.)

        12. Section 11 of the Agreement is hereby amended to read:

               "GENERAL RELATIONSHIP. Employee shall be considered an employee
of the Company within the meaning of all federal, state and local laws and
regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes."




                                       3
   4
        13. Section 13 of the Agreement is hereby amended to read:

               (a) No change.

               "(b) As a material part of the terms and understandings of this
Agreement, Employee agrees to assign to the Company all Designs, Inventions and
Innovations developed, conceived and/or reduced to practice by Employee, alone
or with anyone else, in connection with the work performed by Employee for the
Company during Employee's employment with the Company, regardless of whether
they are suitable to be patented, trademarked and/or copyrighted.

               (c) Employee agrees to disclose in writing to the Chief Executive
Officer of the Company any Design, Invention or Innovation relating to the
business of the Company and/or its affiliates, which Employee develops,
conceives and/or reduces to practice in connection with any work performed by
Employee for the Company, either alone or with anyone else, while employed by
the Company and/or within twelve (12) months of the termination of employment.
Employee shall disclose all Designs, Inventions and Innovations to the Company,
even if Employee does not believe that he or she is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his or
her interest in such Design, Invention or Innovation to the Company. If the
Company and Employee disagree as to whether or not a Design, Invention or
Innovation is included within the terms of this Agreement, it will be the
responsibility of Employee to prove that it is not included.

               (d) Pursuant to California Labor Code Section 2870, the
obligation to assign as provided in this Agreement does not apply to any Design,
Invention or Innovation to the extent such obligation would conflict with any
state or federal law. The obligation to assign as provided in this Agreement
does not apply to any Design, Invention or Innovation that Employee developed
entirely on Employee's own time without using the Company's equipment, supplies,
facilities or Trade Secrets and Confidential Information except those Designs,
Inventions or Innovations that either:

                      (i) Relate at the time of conception or reduction to
practice to the Company's and/or its affiliates' business, or actual or
demonstrably anticipated research of the Company and/or its affiliates; or

                      (ii) Result from any work performed by Employee for the
Company and/or its affiliates.

               (e) Employee agrees that any Design, Invention and/or Innovation
which is required under the provisions of this Agreement to be assigned to the
Company shall be the sole and exclusive property of the Company. Upon the
Company 's request, at no expense to Employee, Employee shall execute any and
all proper applications for patents, copyrights and/or trademarks, assignments
to the Company, and all other applicable documents, and will give testimony when
and where requested to perfect the title and/or patents (both within and without
the United States) in all Designs, Inventions and Innovations belonging to the
Company."

               (f) No change.

        14. Section 14 of the Agreement is hereby amended to read:

               "ASSIGNMENT. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and the successors and assigns of the
Company. Employee shall have no right to assign his rights, benefits, duties,
obligations or other interests in this Agreement, it being understood that this
Agreement is personal to Employee."


                                       4
   5
        15. Section 17 of the Agreement is hereby amended to read:

               "NOTICES. Any notice, request, demand, or other communication
required or permitted hereunder, shall be deemed properly given when actually
received or within five (5) days of mailing by certified or registered mail,
postage prepaid, to Employee at his last known residence address and to the
Company, as follows:

               Company:      Callaway Golf Company
                             2285 Rutherford Road
                             Carlsbad, California 92008-8815
                             Attn:  Steven C. McCracken
                             Senior Executive Vice President,
                             Chief Legal Officer

or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other."

        16. Section 18(c) of the Agreement is hereby amended to read:

               "(c) Applicable Law. This Agreement shall constitute a contract
under the internal laws of the State of California and shall be governed and
construed in accordance with the laws of said state as to both interpretation
and performance."

        17. Section 19 of the Agreement is hereby replaced with the following:

               "IRREVOCABLE ARBITRATION OF DISPUTES.

               (a) EMPLOYEE AND THE COMPANY AGREE THAT ANY DISPUTE, CONTROVERSY
OR CLAIM ARISING HEREUNDER OR IN ANY WAY RELATED TO THIS AGREEMENT, ITS
INTERPRETATION, ENFORCEABILITY, OR APPLICABILITY, OR RELATING TO EMPLOYEE'S
EMPLOYMENT, OR THE TERMINATION THEREOF, THAT CANNOT BE RESOLVED BY MUTUAL
AGREEMENT OF THE PARTIES SHALL BE SUBMITTED TO BINDING ARBITRATION. THIS
INCLUDES, BUT IS NOT LIMITED TO, ALLEGED VIOLATIONS OF FEDERAL, STATE AND/OR
LOCAL STATUTES, CLAIMS BASED ON ANY PURPORTED BREACH OF DUTY ARISING IN CONTRACT
OR TORT, INCLUDING BREACH OF CONTRACT, BREACH OF THE COVENANT OF GOOD FAITH AND
FAIR DEALING, VIOLATION OF PUBLIC POLICY, VIOLATION OF ANY STATUTORY,
CONTRACTUAL OR COMMON LAW RIGHTS, BUT EXCLUDING WORKERS' COMPENSATION,
UNEMPLOYMENT MATTERS, OR ANY MATTER FALLING WITHIN THE JURISDICTION OF THE STATE
LABOR COMMISSIONER. THE PARTIES AGREE THAT ARBITRATION IS THE PARTIES' ONLY
RECOURSE FOR SUCH CLAIMS AND HEREBY WAIVE THE RIGHT TO PURSUE SUCH CLAIMS IN ANY
OTHER FORUM, UNLESS OTHERWISE PROVIDED BY LAW. ANY COURT ACTION INVOLVING A
DISPUTE WHICH IS NOT SUBJECT TO ARBITRATION SHALL BE STAYED PENDING ARBITRATION
OF ARBITRABLE DISPUTES.

               (b) EMPLOYEE AND THE COMPANY AGREE THAT THE ARBITRATOR SHALL HAVE
THE AUTHORITY TO ISSUE PROVISIONAL RELIEF. EMPLOYEE AND THE COMPANY FURTHER
AGREE THAT EACH HAS THE RIGHT, PURSUANT TO CALIFORNIA CODE OF CIVIL PROCEDURE
SECTION 1281.8, TO APPLY TO A COURT FOR A PROVISIONAL REMEDY IN CONNECTION WITH
AN ARBITRABLE DISPUTE SO AS TO PREVENT THE ARBITRATION FROM BEING RENDERED
INEFFECTIVE.

               (c) ANY DEMAND FOR ARBITRATION SHALL BE IN WRITING AND MUST BE
COMMUNICATED TO THE OTHER PARTY PRIOR TO THE EXPIRATION OF THE APPLICABLE
STATUTE OF LIMITATIONS.

               (d) THE ARBITRATION SHALL BE CONDUCTED PURSUANT TO THE PROCEDURAL
RULES STATED IN THE NATIONAL RULES FOR RESOLUTION OF EMPLOYMENT DISPUTES OF THE
AMERICAN ARBITRATION ASSOCIATION ("AAA"). THE ARBITRATION SHALL BE CONDUCTED IN
SAN DIEGO BY A FORMER



                                       5
   6
OR RETIRED JUDGE OR ATTORNEY WITH AT LEAST 10 YEARS EXPERIENCE IN
EMPLOYMENT-RELATED DISPUTES, OR A NON-ATTORNEY WITH LIKE EXPERIENCE IN THE AREA
OF DISPUTE, WHO SHALL HAVE THE POWER TO HEAR MOTIONS, CONTROL DISCOVERY, CONDUCT
HEARINGS AND OTHERWISE DO ALL THAT IS NECESSARY TO RESOLVE THE MATTER. THE
PARTIES MUST MUTUALLY AGREE ON THE ARBITRATOR. IF THE PARTIES CANNOT AGREE ON
THE ARBITRATOR AFTER THEIR BEST EFFORTS, AN ARBITRATOR FROM THE AMERICAN
ARBITRATION ASSOCIATION WILL BE SELECTED PURSUANT TO THE AMERICAN ARBITRATION
ASSOCIATION NATIONAL RULES FOR RESOLUTION OF EMPLOYMENT DISPUTES. THE COMPANY
SHALL PAY THE COSTS OF THE ARBITRATOR'S FEES.

               (e) THE ARBITRATION WILL BE DECIDED UPON A WRITTEN DECISION OF
THE ARBITRATOR STATING THE ESSENTIAL FINDINGS AND CONCLUSIONS UPON WHICH THE
AWARD IS BASED. THE ARBITRATOR SHALL HAVE THE AUTHORITY TO AWARD DAMAGES, IF
ANY, TO THE EXTENT THAT THEY ARE AVAILABLE UNDER APPLICABLE LAW(s). THE
ARBITRATION AWARD SHALL BE FINAL AND BINDING, AND MAY BE ENTERED AS A JUDGMENT
IN ANY COURT HAVING COMPETENT JURISDICTION. EITHER PARTY MAY SEEK REVIEW
PURSUANT TO CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 1286, ET SEQ.

               (f) IT IS EXPRESSLY UNDERSTOOD THAT THE PARTIES HAVE CHOSEN
ARBITRATION TO AVOID THE BURDENS, COSTS AND PUBLICITY OF A COURT PROCEEDING, AND
THE ARBITRATOR IS EXPECTED TO HANDLE ALL ASPECTS OF THE MATTER, INCLUDING
DISCOVERY AND ANY HEARINGS, IN SUCH A WAY AS TO MINIMIZE THE EXPENSE, TIME,
BURDEN AND PUBLICITY OF THE PROCESS, WHILE ASSURING A FAIR AND JUST RESULT. IN
PARTICULAR, THE PARTIES EXPECT THAT THE ARBITRATOR WILL LIMIT DISCOVERY BY
CONTROLLING THE AMOUNT OF DISCOVERY THAT MAY BE TAKEN (E.G., THE NUMBER OF
DEPOSITIONS OR INTERROGATORIES) AND BY RESTRICTING THE SCOPE OF DISCOVERY ONLY
TO THOSE MATTERS CLEARLY RELEVANT TO THE DISPUTE. HOWEVER, AT A MINIMUM, EACH
PARTY WILL BE ENTITLED TO AT LEAST ONE DEPOSITION AND SHALL HAVE ACCESS TO
ESSENTIAL DOCUMENTS AND WITNESSES AS DETERMINED BY THE ARBITRATOR.

               (g) THE PREVAILING PARTY SHALL BE ENTITLED TO AN AWARD BY THE
ARBITRATOR OF REASONABLE ATTORNEYS' FEES AND OTHER COSTS REASONABLY INCURRED IN
CONNECTION WITH THE ARBITRATION TO THE SAME EXTENT PERMITTED TO BE AWARDED BY A
COURT OF LAW.

               (h) THE PROVISIONS OF THIS SECTION SHALL SURVIVE THE EXPIRATION
OR TERMINATION OF THE AGREEMENT, AND SHALL BE BINDING UPON THE PARTIES.


               THE PARTIES HAVE READ SECTION 19 AND IRREVOCABLY AGREE TO
ARBITRATE ANY DISPUTE IDENTIFIED ABOVE.

                   ______ (EMPLOYEE) ______ (COMPANY)"

        18. Section 20(a) of the Agreement is hereby amended to read:

               "(a) Employee's continued compliance with the terms and
 conditions of Sections 7(a), 7(b), 7(c), 7(e), 12, 13 and 19;"

        19. Section 21 of the Agreement is hereby replaced with the following:

               "TRADE SECRETS OF OTHERS. It is the understanding of both the
 Company and Employee that Employee shall not divulge to the Company any
 confidential information or trade secrets belonging to others, including
 Employee's former employers, nor shall the Company seek to elicit from Employee
 any such information. Consistent with the foregoing, Employee shall not provide
 to the Company, and the Company shall not request, any documents or copies of
 documents containing such information."



                                       6
   7
        20. Further Acts. Callaway Golf Europe, Callaway Golf and Employee agree
to execute and deliver, or cause to be executed and delivered, and to do or make
or cause to be done or made, any and all instruments, documents, acts or things,
supplemental, confirmatory or otherwise, as reasonably may be required by a
party for the purposes of perfecting and completing the assignment of the
Agreement to Callaway Golf as contemplated herein.

        21. No Other Change. Except as set forth herein, all other terms and
conditions of the Agreement shall remain unchanged and continue in full force
and effect.

        IN WITNESS WHEREOF, Callaway Golf Europe, Callaway Golf and Employee
have caused this Assignment to be executed effective as of the date set forth
above.

CALLAWAY GOLF EUROPE                               CALLAWAY GOLF

Callaway Golf Europe Ltd.,                         Callaway Golf Company,
a United Kingdom corporation                       a Delaware corporation



By:                                     By:
    -----------------------------------    -------------------------------------
    Charles J. Yash, Chairman              Ely Callaway, Chairman and CEO


Dated: November ____, 2000                 Dated:  November ____, 2000

EMPLOYEE



- ------------------------------
Ian B. Rowden


Dated:  November ____, 2000



                                       7
   8
                                    EXHIBIT A

                               TAX INDEMNIFICATION

        Pursuant to Section 6 of Employee's Executive Officer Employment
Agreement ("Section 6"), the Company agrees to indemnify Employee with respect
to certain excise tax obligations as follows:

        1. Definitions. For purposes of Section 6 and this Exhibit A, the
following terms shall have the meanings specified herein:

               (a) "Claim" shall mean any written claim (whether in the form of
a tax assessment, proposed tax deficiency or similar written notification) by
the Internal Revenue Service or any state or local tax authority that, if
successful, would result in any Excise Tax or an Underpayment.

               (b) "Code" shall mean the Internal Revenue Code of 1986, as
amended. All references herein to any section, subsection or other provision of
the Code shall be deemed to refer to any successor thereto.

               (c) "Excise Tax" shall mean (i) any excise tax imposed by Section
4999 of the Code or any comparable federal, state or local tax, and (ii) any
interest and/or penalties incurred with respect to any tax described in 1(c)(i).

               (d) Gross-Up Payment shall mean a cash payment as specified in
Section 2.

               (e) "Overpayment" and "Underpayment" shall have the meanings
specified in Section 4.

               (f) "Payment" shall mean any payment, benefit or distribution
(including, without limitation, cash, the acceleration of the granting, vesting
or exercisability of stock options or other incentive awards, or the accrual or
continuation of any other payments or benefits) granted or paid to or for the
benefit of Employee by the Company or by any person or persons whose actions
result in a Taxable Event (as defined in this Section), or by any person
affiliated with the Company or such person(s), whether paid or payable pursuant
to the terms of this Agreement or otherwise. Notwithstanding the foregoing, a
Payment shall not include any Gross-Up Payment required under Section 6 and this
Exhibit A

               (g) "Taxable Event" shall mean any change in control or other
event which triggers the imposition of any Excise Tax on any Payment.

        2. In the event that any Payment is determined to be subject to any
Excise Tax, then Employee shall be entitled to receive from the Company a
Gross-Up Payment in an amount such that, after the payment of all income taxes,
Excise Taxes and any other taxes imposed with respect to the Gross-Up Payment
(together with payment of all interest and penalties imposed with respect to any
such taxes), Employee shall retain a net amount of the Gross-Up Payment equal to
the Excise Tax imposed with respect to the Payments.

        3. All determinations required to be made under Section 6 and this
Exhibit A, including, without limitation, whether and when a Gross-Up Payment is
required and the amount of such Gross-Up Payment, and the assumptions to be
utilized in arriving at such determinations, shall be made by the accounting
firm of Pricewaterhouse Coopers LLP or, if applicable, its successor as the
Company's independent auditor (the "Accounting Firm"). In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Taxable Event to



                                       8
   9
which a possible Gross-Up Payment is related, another nationally recognized
accounting firm that is mutually acceptable to the Company and Employee shall be
appointed to make the determinations required hereunder (which accounting firm
shall then be referred to as the Accounting Firm hereunder). The Accounting Firm
shall provide detailed supporting calculations to the Company and to Employee
regarding the amount of Excise Tax (if any) which is payable, and the Gross-Up
Payment (if any) required hereunder, with respect to any Payment or Payments,
with such calculations to be provided at such time as may be requested by the
Company but in no event later than fifteen (15) business days following receipt
of a written notice from Employee that there has been a Payment that may be
subject to an Excise Tax. All fees and expenses of the Accounting Firm shall be
borne solely by the Company. Any Gross-Up Payment as determined pursuant to
Section 6 and this Exhibit A shall be paid by the Company to Employee within
five (5) business days after receipt of the Accounting Firm's determination. If
the Accounting Firm determines that no Excise Tax is payable by Employee, the
Accounting Firm shall furnish Employee with a written opinion that failure to
disclose, report or pay the Excise Tax on Employee's federal or other applicable
tax returns will not result in the imposition of a negligence penalty,
understatement penalty or other similar penalty. All determinations by the
Accounting Firm shall be binding upon the Company and Employee in the absence of
clear and indisputable mathematical error. Following receipt of a Gross-Up
Payment as provided herein, Employee shall be obligated to properly and timely
report his Excise Tax liability on the applicable tax returns or reports and to
pay the full amount of Excise Tax with funds provided through such Gross-Up
Payment. Notwithstanding the foregoing, if the Company reasonably determines
that the Employee will be unable or otherwise may fail to make such Excise Tax
payment, the Company may elect to pay the Excise Tax to the Internal Revenue
Service and/or other applicable tax authority on behalf of the Employee, in
which case the Company shall pay the net balance of the Gross-Up Payment (after
deduction of such Excess Tax payment) to the Employee.

        4. As a result of uncertainty in the application of Section 4999 of the
Code, it is possible that a Gross-Up Payment will not have been made by the
Company that should have been made (an "Underpayment") or that a Gross-Up
Payment is made that should not have been made (an "Overpayment"). In the event
that Employee is required to make a payment of any Excise Tax, due to an
Underpayment, the Accounting Firm shall determine the amount of Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to Employee in which case Employee shall be obligated to make a timely
payment of the full amount of the applicable Excise Tax to the applicable tax
authority, provided, however, the Company may elect to pay the Excise Tax to the
applicable tax authority on behalf of Employee consistent with the provisions of
Section 3, in which case the Company shall pay the net balance of the
Underpayment (after deduction of such Excise Tax payment) to Employee. In the
event that the Accounting Firm determines that an Overpayment has been made, any
such Overpayment shall be repaid by Employee to the Company within ninety (90)
days after written demand to Employee by the Company, provided, however, that
Employee shall have no obligation to repay any amount of the Overpayment that
has been paid to, and not recovered from, a tax authority, provided further,
however, in such event the Company may direct Employee to prosecute a claim for
a refund of such amount consistent with the principles set forth in Section 5.

        5. Employee shall notify the Company in writing of any Claim. Such
notice (a) shall be given as soon as practicable, but in no event later than
fifteen (15) business days, following Employee's receipt of written notice of
the Claim from the applicable tax authority, and (b) shall include a compete and
accurate copy of the tax authority's written Claim or otherwise fully inform the
Company of the nature of the Claim and the date on which any payment of the
Claim must be paid, provided that Employee shall not be required to give notice
to the Company of facts of which the Company is already aware, and provided
further that failure or delay by Employee to give such notice shall not
constitute a breach of Section 6 or this Exhibit A except to the extent that the
Company is prejudiced thereby. Employee shall not pay any portion of a Claim
prior to the earlier of



                                       9
   10
(a) the expiration of thirty (30) days following the date on which Employee
gives the foregoing notice to the Company, (b) the date that any Excise Tax
payment under the Claim is due, or (c) the date the Company notifies Employee
that it does not intend to contest the Claim. If, prior to expiration of such
period, the Company notifies Employee in writing that it desires to contest the
Claim, Employee shall:

               (a) give the Company any information reasonably requested by the
Company relating to the Claim;

               (b) take such action in connection with contesting the Claim as
the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to the Claim by
an attorney selected and compensated by the Company who is reasonably acceptable
to Employee;

               (c) cooperate with the Company in good faith in order to
effectively contest the Claim; and

               (d) permit the Company to participate (at its expense) in any and
all proceedings and conferences pertaining to the Claim; provided, however, that
the Company shall bear and pay directly all costs and expenses (including,
without limitation, additional interest and penalties and attorneys' fees)
incurred in connection with any such contest, and shall indemnify and hold
Employee harmless, on an after-tax basis, for any Excise Tax or income tax
(including, without limitation, interest and penalties with respect thereto) and
all costs imposed or incurred in connection with such contests. Without
limitation upon the foregoing provisions of this Section 5, and except as
provided below, the Company shall control all proceedings concerning any such
contest and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with tax authorities pertaining
to the Claim. At the written request of the Company, and upon payment to
Employee of an amount at least equal to the Claim plus any additional amount
necessary to obtain the jurisdiction of the appropriate tribunal and/or court,
Employee shall pay the same and sue for a refund or otherwise contest the Claim
in any permissible manner as directed by the Company. Employee agrees to
prosecute any contest of a Claim to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine, provided, however, that if the Company
requests Employee to pay the Claim and sue for a refund, the Company shall
indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax
or income tax (including, without limitation, interest and penalties with
respect thereto) and costs imposed or incurred in connection with such contest
or with respect to any imputed income attributable to any advances or payments
by the Company hereunder. Any extension of the statute of limitations relating
to assessment of any Excise Tax for the taxable year of Employee which is the
subject of a Claim is to be limited solely to the Claim. Furthermore, the
Company's control of a contest as provided hereunder shall be limited to issues
for which a Gross-Up Payment would be payable hereunder, and Employee shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other tax authority.

        6. If Employee receives a refund from a tax authority of all or any
portion of an Excise Tax paid by or on behalf of Employee with amounts advanced
by the Company pursuant to Section 6 and this Exhibit A, Employee shall promptly
pay to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). Employee shall, if so directed
by the Company, file and otherwise prosecute a claim for refund of any Excise
Tax payment made by or on behalf of Employee with amounts advanced by the
Company pursuant to Section 6 and this Exhibit A, with any such refund claim to
be effected in accordance with the principles set forth in Section 5. If a
determination is made that Employee shall not be entitled to any refund and the
Company does not notify Employee in writing of its intent to contest such denial
of



                                       10
   11
refund prior to the expiration of thirty (30) days after such determination,
then Employee shall have no further obligation hereunder to contest such denial
or to repay to the Company the amount involved in such unsuccessful refund
claim. The amount of any advances which are made by the Company in connection
with any such refund claim hereunder, to the extent not refunded by the
applicable tax authority to Employee, shall offset, as appropriate consistent
with the purposes of Section 6 and this Exhibit A, the amount of any Gross-Up
Payment required hereunder to be paid by the Company to Employee.



                                       11
   12
                                    EXHIBIT B

                                CHANGE IN CONTROL


        A "Change in Control" means the following and shall be deemed to occur
if any of the following events occurs:

        1. Any person, entity or group, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding
the Company and its affiliates and any employee benefit or stock ownership plan
of the Company or its affiliates and also excluding an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof (such person, entity or group being
referred to herein as a "Person") becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding securities entitled to vote generally in the
election of directors; or

        2. Individuals who, as of the effective date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or

        3. Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than

               (a) a reorganization or merger or consolidation that would result
in the voting securities of the Company outstanding immediately prior thereto
(or, in the case of a reorganization or merger or consolidation that is preceded
or accomplished by an acquisition or series of related acquisitions by any
Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of the
Company, immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining outstanding
or by being converted into voting securities of another entity, more than 50% of
the combined voting power of the voting securities of the Company or such other
entity outstanding immediately after such reorganization or merger or
consolidation (or series of related transactions involving such a reorganization
or merger or consolidation), or

               (b) a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial ownership
of the voting securities of the Company or its successor; or

        4. Approval by the shareholders of the Company or an order by a court of
competent jurisdiction of a plan of liquidation of the Company.



                                       12

   1
                                                                  EXECUTION COPY



                                                                   EXHIBIT 10.35




                      SECOND AMENDMENT AND LIMITED WAIVER
                                       TO
                     AMENDED AND RESTATED CREDIT AGREEMENT


               THIS SECOND AMENDMENT AND LIMITED WAIVER TO AMENDED AND RESTATED
CREDIT AGREEMENT, dated as of December 29, 2000 (this "Amendment") relates to
that certain Amended and Restated Credit Agreement dated as of February 10, 1999
(as amended by the First Amendment to Amended and Restated Credit Agreement,
dated April 28, 2000 (the "First Amendment"), and as may be further amended,
supplemented, restated or otherwise modified from time to time, the "Credit
Agreement") and is entered into among Callaway Golf Company, a Delaware
corporation (the "Borrower"), the other credit parties signatory to the Credit
Agreement (including Callaway Golf Ball Company ("Golf Ball") and, together with
the Borrower, the "Credit Parties"), the lenders signatory hereto (the
"Requisite Lenders") and General Electric Capital Corporation, a New York
corporation, as agent for the Lenders (in such capacity, the "Agent").
Capitalized terms used and not otherwise defined herein shall have the meanings
assigned to them in the Credit Agreement.

                               W I T N E S S E T H

               WHEREAS, the Borrower, the other Credit Parties, Agent and the
Lenders have entered into the Credit Agreement and the First Amendment;

               WHEREAS, Borrower has notified Agent that it intends to merge
with Golf Ball through a tax-free statutory merger (the "Golf Ball Merger") in
which Borrower will be the surviving corporation and, immediately after the
merger, will transfer its assets and liabilities relating to domestic sales (the
"Asset Transfer") to Callaway Golf Sales Company ("Golf Sales");

               WHEREAS, Borrower has notified Agent that it intends to form a
foreign company ("CG South Pacific") to be a wholly-owned subsidiary of Borrower
(as more fully described in Exhibit A attached hereto, the "Subsidiary
Formation");

               WHEREAS, Borrower has notified Agent that Callaway Golf Europe
Ltd. ("CG Europe"), a Material Subsidiary, intends to acquire a Spanish
distribution company through the following steps: (a) CG Europe will purchase
100% of the stock of Green Fee, S.A. ("Green Fee"), (b) CG Europe will create a
wholly-owned subsidiary ("Spanish Co.") into which Green Fee will be merged,
with Spanish Co. as the surviving corporation, and (c) Spanish Co. will be
merged with and into CG Europe (as more fully described in Exhibit C attached
hereto, "Spanish Co. Acquisition" and, together with the Golf Ball Merger, the
Asset Transfer and the Subsidiary Formation, the "Callaway Transactions");

               WHEREAS, Borrower has requested that the Credit Agreement be
amended to remove Golf Ball as a Credit Party and to make other necessary
changes to reflect the Callaway Transactions (the "Amendments");



                                                              SECOND AMENDMENT &
                                                               LIMITED WAIVER TO
                                           AMENDED AND RESTATED CREDIT AGREEMENT

   2
               WHEREAS, Borrower has requested that GE Capital and the Requisite
Lenders grant a limited waiver (the "Limited Waivers") to certain provisions of
the Credit Agreement with respect to the applicable Callaway Transactions, as
follows:

               a. Sections 5.1 (Maintenance of Existing and Conduct of
        Business), 6.1 (Mergers Subsidiaries, Etc.), and 6.4 (Employee Loans and
        Affiliate Transactions), solely with respect to the Golf Ball Merger;

               b. Sections 6.4 (Employee Loans and Affiliate Transactions) and
        6.8 (Sale of Stock and Assets), solely with respect to the Asset
        Transfer;

               c. Sections 6.1 (Mergers Subsidiaries, Etc.), 6.2 (Investments;
        Loans and Advances), 6.3 (Indebtedness) and 6.4 (Employee Loans and
        Affiliate Transactions), solely with respect to the Subsidiary
        Formation; and

               d. Sections 6.1 (Mergers Subsidiaries, Etc.), 6.2 (Investments;
        Loans and Advances), 6.3 (Indebtedness), 6.4 (Employee Loans and
        Affiliate Transactions), 6.7 (Liens) and 6.14 (Restricted Payments),
        solely with respect to the Spanish Acquisition.

               WHEREAS, Section 11.2 of the Credit Agreement requires that the
Requisite Lenders consent to the Amendments and the Limited Waivers; and

               WHEREAS, Agent, Borrower and Requisite Lenders are willing to so
effect the Amendments and provide the Limited Waivers on the terms and
conditions set forth herein.

               NOW, THEREFORE, in consideration of the above premises, Borrower,
Agent, and the Requisite Lenders agree as follows:

        2. Definitions and Usage. Capitalized terms used, but not defined,
herein have the meanings ascribed to such terms in the Credit Agreement. Any
reference herein to Section, Exhibit or Schedule shall, unless otherwise
specified, refer to such Section, Exhibit or Schedule hereof, in its entirety.

        3. Amendments to the Credit Agreement. Upon the Effective Date (as
defined in Section 6 below), the Credit Agreement is hereby amended as follows:

               a. Amendment to Section 1.7. Section 1.7 of the Credit Agreement
        is hereby amended by deleting the text thereof in its entirety and
        substituting the following in lieu thereof:

               "Based on the most recent Borrowing Base Certificate delivered by
               Borrower to Agent and on other information available to Agent,
               Agent shall in its reasonable judgment determine which Inventory
               of Borrower shall be "Eligible Inventory" for purposes of this
               Agreement. In determining whether any particular Inventory
               constitutes Eligible Inventory, Agent shall not include any such
               Inventory to which any of the exclusionary criteria set forth
               below applies. Agent reserves the right, at any time and from
               time to time after the Effective Date, to adjust any such



                                       2
   3
               criteria, to establish new criteria and to adjust advance rates
               with respect to Eligible Inventory in its reasonable judgment,
               subject to the approval of (x) each Lender in the case of an
               increase in the percentage advance rate and (y) Supermajority
               Revolving Lenders in the case of any adjustments or new criteria
               which have the effect of making more credit available. Eligible
               Inventory shall not include any Inventory of Borrower that:

               (a) is not owned by Borrower free and clear of all Liens (other
               than Permitted Encumbrances described in clause (a), (e) or (i)
               of the definition thereof) and rights of any other Person
               (including the rights of a purchaser that has made progress
               payments and the rights of a surety that has issued a bond to
               assure Borrower's performance with respect to that Inventory),
               except the Liens in favor of Agent, on behalf of itself and
               Lenders;

               (b) is (i) not located on premises owned or leased by Borrower or
               (ii) is stored with a bailee, warehouseman or similar Person,
               unless Agent has given its prior consent thereto and unless (x) a
               satisfactory bailee letter or landlord waiver has been delivered
               to Agent, or (y) Reserves satisfactory to Agent have been
               established with respect thereto, or (iii) located at any site if
               the aggregate book value of Inventory at any such location is
               less than $100,000;

               (c) is placed on consignment or is in transit;

               (d) is covered by a negotiable document of title, unless such
               document has been delivered to Agent with all necessary
               endorsements, free and clear of all Liens except those in favor
               of Agent and Lenders;

               (e) in Agent's reasonable determination, is excess, obsolete,
               unsalable, shopworn, seconds, damaged, unfit for sale or
               otherwise no longer used or useful in Borrower's business;

               (f) consists of customized product, demonstration equipment,
               display items or packing or shipping materials, manufacturing
               supplies, work-in-process Inventory or replacement parts;

               (g) consists of goods that have been returned by the buyer;

               (h) is not of a type held for sale in the ordinary course of
               Borrower's business;

               (i) as to which Agent's Lien, on behalf of itself and Lenders,
               therein is not a first priority perfected Lien;

               (j) as to which any of the representations or warranties
               pertaining to Inventory set forth in this Agreement, the Borrower
               Security Agreement or the Subsidiaries Security Agreement (as
               applicable) is untrue;



                                       3
   4
               (k) consists of any costs associated with "freight-in" charges;

               (l) consists of Hazardous Materials or goods that can be
               transported or sold only with licenses that are not readily
               available;

               (m) is not covered by casualty insurance acceptable to Agent;

               (n) that constitutes Golf Ball Inventory that is not eligible for
               inclusion in the Borrowing Base in accordance with the proviso to
               the definition of "Borrowing Base" in Annex A; or

               (o) is otherwise unacceptable to Agent in its reasonable
               judgment."

               b. Amendment to Section 3.6. Section 3.6 of the Credit Agreement
        is hereby amended by deleting the text thereof in its entirety and
        substituting the following in lieu thereof:

               "3.6 Ownership of Property; Liens. As of the Effective Date, the
               real estate ("Real Estate") listed on Disclosure Schedule (3.6)
               constitutes all of the real property owned, leased, subleased, or
               used by any Credit Party. Each Credit Party owns good and
               marketable fee simple title (subject to various matters of
               record) to all of its owned real estate, and valid and marketable
               leasehold interests in all of its leased Real Estate, all as
               described on Disclosure Schedule (3.6), and copies of all such
               leases or a summary of terms thereof satisfactory to Agent have
               been delivered to Agent. Disclosure Schedule (3.6) further
               describes any Real Estate with respect to which any Credit Party
               is a lessor, sublessor or assignor as of the Effective Date. Each
               Credit Party also has good and marketable title to, or valid
               leasehold interests in, all of its personal properties and
               assets, excluding all Receivables Program Assets sold,
               contributed or otherwise disposed of under the Receivables
               Documents, and subject to the interests of the lessor under the
               CEF Lease Facility. As of the Effective Date, none of the
               properties and assets of any Credit Party are subject to any
               Liens other than Permitted Encumbrances and Liens arising under
               the Receivables Documents or under the CEF Lease Facility, and
               there are no facts, circumstances or conditions known to any
               Credit Party that may result in any Liens (including Liens
               arising under Environmental Laws) other than Permitted
               Encumbrances and Liens arising under the Receivables Documents or
               under the CEF Lease Facility. Each Credit Party has received all
               deeds, assignments, waivers, consents, non-disturbance and
               recognition or similar agreements, bills of sale and other
               documents, and has duly effected all recordings, filings and
               other actions necessary to establish, protect and perfect such
               Credit Party's right, title and interest in and to all such Real
               Estate and other properties and assets. Disclosure Schedule (3.6)
               also describes any purchase options, rights of first refusal or
               other similar contractual rights pertaining to any Real Estate.
               As of the Effective Date, no portion of any Credit Party's Real



                                       4
   5
               Estate has suffered any material damage by fire or other casualty
               loss which has not heretofore been repaired and restored in all
               material respects to its original condition or otherwise remedied
               and no Credit Party is aware of any latent or patent structural
               or other significant defect or deficiency in any improvements on
               any of the Real Estate. As of the Effective Date, all material
               permits required to have been issued or appropriate to enable the
               Real Estate to be lawfully occupied and used for all of the
               purposes for which they are currently occupied and used have been
               lawfully issued and are in full force and effect."

               c. Amendment to Section 3.23. Section 3.23 of the Credit
        Agreement is hereby amended by deleting the text thereof in its entirety
        and substituting the following in lieu thereof:

               "Solvency. Both before and after giving effect to (a) the Loans
               and Letter of Credit Obligations to be made or extended on the
               Effective Date or such other date as Loans and Letter of Credit
               Obligations requested hereunder are made or extended, (b) the
               disbursement of the proceeds of such Loans pursuant to the
               instructions of Borrower, (c) the Refinancing and (d) the payment
               and accrual of all transaction costs in connection with the
               foregoing, each Credit Party is Solvent."

               d. Amendment to Section 6.2(h). Section 6.2(h) of the Credit
        Agreement is hereby amended by deleting the text thereof in its entirety
        and substituting the following in lieu thereof:

               "[INTENTIONALLY OMITTED];"

               e. Amendments to Annex A. Annex A is hereby amended as follows:

                      i. The definition of "Borrowing Base" is hereby amended by
               deleting the text of the definition in its entirety and
               substituting the following in lieu thereof:

                      "shall mean, as of any date of determination by Agent,
                      from time to time, an amount equal to the sum at such time
                      of:

                      (a) sixty percent (60%) of the book value of Borrower's
                      Eligible Inventory valued on a first-in, first-out basis
                      (at the lower of cost or market), less any Reserves
                      established by Agent at such time; and

                      (b) the lesser of :

                      (i) the Additional Collateral Amount and

                      (ii) an amount equal to the sum of (x) fifty percent (50%)
                      of the Appraised Value of the Eligible Real Estate, and
                      (y) eighty-five



                                       5
   6
                      percent (85%) of the Appraised Value of the Eligible
                      Equipment, less any Reserves established by Agent at such
                      time, minus, the aggregate outstanding principal amount of
                      Indebtedness (including Indebtedness described in clause
                      (i) of Section 6.3, but excluding the Obligations and
                      Indebtedness created or arising under the Receivables
                      Documents) which is secured by any Eligible Equipment;

                      provided that Golf Ball Inventory shall be included in the
                      Borrowing Base only upon (i) delivery to Agent for the
                      benefit of Lenders of a certificate of the Chief Financial
                      Officer of Borrower as to the matters addressed in Section
                      3.23 and the other certificates and statements (including
                      without limitation a Fair Salable Balance Sheet) described
                      in paragraph X of Annex D, each in form and substance
                      satisfactory to Agent, (ii) the audit and appraisal of the
                      Golf Ball Inventory, the results of which shall be
                      satisfactory to Agent and Requisite Lenders, and (iii) the
                      review and, where appropriate (in the reasonable judgment
                      of Agent), modification by Agent (subject to the approval
                      of all Lenders or Supermajority Revolving Lenders, to the
                      extent required by Sections 1.7, 1.18 and 1.19) of the
                      criteria and advance rates applicable to the Golf Ball
                      Receivables."

                      ii. The definition of "Callaway Golf Ball Company" is
               hereby amended by deleting the definition in its entirety.

                      iii. The definition of "CEF Lease Facility" is hereby
               amended by deleting the text of the definition in its entirety
               and substituting the following in lieu thereof:

                      "shall mean (i) the Master Lease Agreement dated as of
                      December 30, 1998 between General Electric Capital
                      Corporation, for itself and as agent for certain
                      participants, as lessor, and Callaway Golf Ball Company,
                      as lessee, (ii) the Corporate Guaranty dated December 30,
                      1998 by Borrower (as guarantor) for the benefit of GE
                      Capital, for itself and as agent for certain participants,
                      (iii) the Interim Finance Agreement dated December 30,
                      1998 between General Electric Capital Corporation, for
                      itself and as agent for certain participants, as lender,
                      and Callaway Golf Ball Company, as borrower and (iv) all
                      documents delivered under, and relating to, any of the
                      agreements described in clauses (i) through (iii) hereof
                      (including, but not limited to, the Assumption Agreement,
                      dated as of December 29, 2000 by and among General
                      Electric Capital Corporation, for itself and as agent for
                      certain participants, Callaway Golf Ball Company and
                      Borrower), in each case as amended, modified, supplemented
                      or restated from time to time, provided that any
                      amendment, modification, supplement or



                                       6
   7
                      restatement which changes the description of the assets
                      subject to the security interests granted by the CEF Lease
                      Facility in a manner which may adversely affect Agent or
                      the Lenders shall not be incorporated in this definition
                      of "CEF Lease Facility" unless the Supermajority Revolving
                      Lenders have consented to its incorporation."

                      iv. The following definitions are hereby inserted after
               the definition of "General Intangibles":

                             (A) "Golf Ball Inventory" shall mean Inventory
                      consisting of golf balls and materials related to their
                      production.

                             (B) "Golf Ball Receivables" shall mean Receivables
                      arising from the sale of Golf Ball Inventory held by the
                      Borrower designated by the Borrower as such.

                      v. The definition of "Material Subsidiary" is hereby
               amended by deleting the text of the definition in its entirety
               and substituting the following in lieu thereof:

                      "shall mean Callaway Golf Sales Company, Odyssey Golf,
                      Inc., Special Purpose Corporation, Callaway Golf Europe
                      Ltd., Callaway (Barbados) Foreign Sales Corporation, ERC
                      International Company, Callaway Golf Korea Ltd., Callaway
                      Golf Canada Ltd., Callaway Golf South Pacific Pty Ltd and
                      each Person which becomes a Subsidiary of Borrower after
                      the date of this Agreement."

               f. Amendment of Disclosure Schedule 3.8. Disclosure Schedule 3.8
        is hereby amended by deleting the text thereof in its entirety and
        substituting Schedule I, attached hereto, in lieu thereof.

        4. Limited Waivers. Upon the Effective Date, and as limited herein, the
Requisite Lenders hereby waive the following provisions of the Credit Agreement
solely with respect to the matters expressly described below:

               a. Sections 5.1 (Maintenance of Existing and Conduct of
        Business), 6.1 (Mergers Subsidiaries, Etc.), and 6.4 (Employee Loans and
        Affiliate Transactions), solely with respect to the Golf Ball Merger;

               b. Sections 6.4 (Employee Loans and Affiliate Transactions) and
        6.8 (Sale of Stock and Assets), solely with respect to the Asset
        Transfer;

               c. Sections 6.1 (Mergers Subsidiaries, Etc.), 6.2 (Investments;
        Loans and Advances), 6.3 (Indebtedness), and 6.4 (Employee Loans and
        Affiliate Transactions), solely with respect to the Subsidiary
        Formation, provided that the Limited Waiver to Section 6.2 permitting an
        investment in, and/or loan to, CG South Pacific by Borrower



                                       7
   8
        shall be limited to only such investment and/or loan, that in the
        aggregate does not exceed US $3,000,000 and provided further that the
        Limited Waiver to Section 6.3 permitting the incurrence or assumption of
        indebtedness by CG South Pacific shall not apply to any such incurrence
        or assumption of indebtedness exceeding US $3,000,000;

               d. Sections 6.1 (Mergers Subsidiaries, Etc.), 6.2 (Investments;
        Loans and Advances), 6.3 (Indebtedness), 6.4 (Employee Loans and
        Affiliate Transactions), 6.7 (Liens) and 6.14 (Restricted Payments),
        solely with respect to the Spanish Acquisition, provided that the
        Limited Waiver to Section 6.2 permitting an investment in, and/or loan
        to, CG Europe by Borrower shall be limited to (i) only such investment
        and/or loan that does not in the aggregate exceed US $4,000,000 and (ii)
        if a loan is made, only such loan having a term of no longer than five
        (5) years, provided further that the Limited Waiver to Section 6.3
        permitting the incurrence or assumption of indebtedness by CG Europe
        shall not apply to any such incurrence or assumption of indebtedness (A)
        that exceeds US $4,000,000 or (B) the term of which exceeds five (5)
        years, and provided further that the Limited Waiver to Section 6.14
        permitting CG Europe making a Restricted Payment shall not apply to any
        such payment exceeding US $4,000,000.

               e. The Limited Waivers shall be limited to those Events of
        Default, if any, arising solely from any of the Callaway Transactions as
        described herein and do not apply to any past, present or future Events
        of Default caused by any other violation of Sections 5 or 6 or other
        provisions of the Credit Agreement or any of the Loan Documents.

        5. Representations and Warranties. The Credit Parties hereby jointly and
severally represent and warrant to the Agent and the Requisite Lenders that, as
of the Effective Date and after giving effect to this Amendment:

               a. All of the representations and warranties of the Credit
        Parties contained in this Amendment, the Credit Agreement and the other
        Loan Documents are true and correct in all material respects on and as
        of the Effective Date, as if then made (other than representations and
        warranties which expressly speak as of a different date, which shall be
        true and correct in all material respects as of that date); and

               b. No Default or Event of Default has occurred and is continuing
        or will result after giving effect to this Amendment, including without
        limitation, none of the agreements, instruments or other obligations by
        which any of the Credit Parties or their Subsidiaries will be bound
        pursuant to the Subsidiary Formation or the Spanish Acquisition will
        directly or indirectly restrict, prohibit, or require the consent of any
        Person with respect to the payment of dividends or distribution or the
        making or repayment of intercompany loans by a Subsidiary of Borrower to
        Borrower, as provided in Section 6.16 of the Credit Agreement.

        6. Effective Date. This Amendment shall become effective as of the date
first written above (the "Effective Date") upon the satisfaction of each of the
following conditions:



                                       8
   9
               a. The Agent shall have received each of the following documents,
        in each case in form and substance satisfactory to the Agent:

                      i. counterparts hereof executed by each of the Credit
               Parties, the Agent and the Requisite Lenders;

                      ii. duly executed amendments to the CEF Lease Facility and
               the Receivables Documents effecting all modifications necessary
               to permit the Callaway Transactions, together with a certificate
               of the Chief Financial Officer of the Borrower certifying that
               all conditions to the effectiveness of the amendments have been
               satisfied and that the amendments are in full force and effect as
               of the Effective Date;

                      iii. the duly executed Pledge Amendment reflecting the
               Subsidiary Formation accompanied by the share certificate
               representing the outstanding CG South Pacific Stock being pledged
               and a stock power for such share certificate executed in blank;

                      iv. a certificate of the Secretary or Assistant Secretary
               of each of the Credit Parties dated the Effective Date certifying
               (A) that the bylaws of such Credit Party have not been amended or
               otherwise modified since the date of the most recent
               certification thereof by the Secretary or Assistant Secretary of
               such Credit Party delivered to the Agent and remain in full force
               and effect as of the Effective Date, (B) that the charter of such
               Credit Party has not been amended or otherwise modified since the
               date of the most recent certification thereof by the Secretary of
               State of such Credit Party's jurisdiction of incorporation
               delivered to the Agent and remain in full force and effect as of
               the Effective Date and (C) that the execution, delivery and
               performance of this Amendment have been duly authorized by all
               necessary or proper corporate and shareholder action;

                      v. a certified copy of the Certificate of Merger filed
               with the State of California evidencing the Golf Ball Merger;

                      vi. the additional documentation relating to the Spanish
               Acquisition as required by Section 6.1(c) of the Credit
               Agreement; and

                      vii. such additional documentation as the Agent may
               reasonably request;

               b. No law, regulation, order, judgment or decree of any
        Governmental Authority shall, and the Agent shall not have received any
        notice that litigation is pending or threatened which is likely to,
        enjoin, prohibit or restrain the consummation of the transactions
        contemplated by this Amendment, except for such laws, regulations,
        orders or decrees, or pending or threatened litigation, that in the
        aggregate could not reasonably be expected to have a Material Adverse
        Effect;



                                       9
   10
               c. All corporate and other proceedings, and all documents,
        instruments and other legal matters in connection with the transactions
        contemplated by this Amendment shall be satisfactory in all respects in
        form and substance to the Agent; and

               d. No Default or Event of Default shall have occurred and be
        continuing on the Effective Date or will result after giving effect to
        this Amendment.

        7. Reference to and Effect on the Loan Documents.

               a. Upon the Effective Date, each reference in the Credit
        Agreement to "this Agreement", "hereunder", "hereof" or words of like
        import, and each reference in the other Loan Documents to the Credit
        Agreement, shall mean and be a reference to the Credit Agreement as
        amended and supplemented hereby.

               b. Except to the extent specifically set forth herein, the
        respective provisions of the Credit Agreement and the other Loan
        Documents shall not be amended, modified, waived, impaired or otherwise
        affected hereby, and such documents and the Obligations under each of
        them are hereby confirmed as being in full force and effect.

               c. This Amendment shall be limited solely to the matters
        expressly set forth herein and shall not (i) constitute an amendment or
        waiver of any other term or condition of the Credit Agreement or any
        other Loan Document, (ii) prejudice any right or rights which the Agent
        or any Lender may now have or may have in the future under or in
        connection with the Credit Agreement or any other Loan Document, (iii)
        require the Agent or any Lender to agree to a similar transaction on a
        future occasion or (iv) create any right herein to another Person or
        other beneficiary or otherwise, except to the extent specifically
        provided herein.

        8. Miscellaneous. This Amendment is a Loan Document. The headings herein
are for convenience of reference only and shall not alter or otherwise affect
the meaning hereof.

        9. Section Titles. The Section titles in this Amendment are and shall be
without substantive meaning or content of any kind whatsoever and are not a part
of the agreement between the parties hereto.

        10. Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument.

        11. GOVERNING LAW. THIS AMENDMENT, AND ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE HEREOF, SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

        12. No Strict Construction. The parties hereto have participated jointly
in the negotiation and drafting of this Amendment. In the event an ambiguity or
question of intent or



                                       10
   11
interpretation arises, this Amendment shall be construed as if drafted jointly
by the parties hereto and no presumption or burden of proof shall arise favoring
or disfavoring any party by virtue of the authorship of any provisions of this
Amendment.



                                       11
   12
        IN WITNESS WHEREOF, the Credit Parties, the Agent and the Requisite
Lenders have caused this Amendment to be executed by their respective officers
thereunto duly authorized as of the date first above written.




                                   CALLAWAY GOLF COMPANY,
                                   as Borrower


                                   By:
                                      -------------------------------
                                      Name:
                                      Title:




                                 Signature Page
   13
                                   CALLAWAY GOLF SALES COMPANY,
                                   as a Credit Party


                                   By:
                                      -------------------------------
                                      Name:
                                      Title:




                                 Signature Page
   14
                                   CALLAWAY GOLF BALL COMPANY,
                                   as a Credit Party


                                   By:
                                      -------------------------------
                                      Name:
                                      Title:




                                 Signature Page
   15
                                   GENERAL ELECTRIC CAPITAL CORPORATION,
                                   as Agent and Lender


                                   By:
                                      -------------------------------
                                      Name:  Robert Yasuda
                                      Title:  Authorized Signatory
                                      Pro Rata Share:  20.83%




                                 Signature Page
   16
                                   AMERICAN NATIONAL BANK AND TRUST COMPANY OF
                                   CHICAGO,
                                   as a Lender


                                   By:
                                      -------------------------------
                                      Name:
                                      Title:
                                      Pro Rata Share:  17.71%



                                 Signature Page

   17
                                   BANK OF AMERICA, NATIONAL ASSOCIATION,
                                   as a Lender


                                    By:
                                      --------------------------------
                                            Name:
                                            Title:
                                            Pro Rata Share:  14.17%



                                 Signature Page

   18
                                   CONGRESS FINANCIAL CORPORATION (WESTERN),
                                   as a Lender


                                    By:
                                       ------------------------------
                                       Name:
                                       Title:
                                       Pro Rata Share:  14.17%



                                 Signature Page
   19
                                   KEY CORPORATE CAPITAL INC.,
                                   as a Lender


                                    By:
                                       ------------------------------
                                       Name:
                                       Title:
                                       Pro Rata Share:  14.17%



                                 Signature Page
   20
                                   NATIONAL CITY COMMERCIAL FINANCE, INC.,
                                   as a Lender


                                    By:
                                       -----------------------------
                                       Name:
                                       Title:
                                       Pro Rata Share:  8.33%



                                 Signature Page
   21
                                   NATIONAL WESTMINSTER BANK PLC,
                                   as a Lender


                                   By:
                                      ------------------------------
                                      Name:
                                      Title:
                                      Pro Rata Share: 10.63%



                                 Signature Page
   22
                                    EXHIBIT A

                                       TO

  SECOND AMENDMENT AND LIMITED WAIVER TO AMENDED AND RESTATED CREDIT AGREEMENT

                                 (see attached)



                                   Exhibit A
   23
                                    EXHIBIT B

                                       TO

  SECOND AMENDMENT AND LIMITED WAIVER TO AMENDED AND RESTATED CREDIT AGREEMENT

                                 (see attached)



                                   Exhibit B
   24
                                   SCHEDULE I

                                       TO

  SECOND AMENDMENT AND LIMITED WAIVER TO AMENDED AND RESTATED CREDIT AGREEMENT

                                 (see attached)



                                   Schedule I

   1

                                                                   EXHIBIT 10.40


                                                                  EXECUTION COPY


                      SECOND AMENDMENT AND LIMITED WAIVER
                                       TO
                         RECEIVABLES TRANSFER AGREEMENT

                                      AND

                           FIRST AMENDMENT TO ANNEX X


               THIS SECOND AMENDMENT AND LIMITED WAIVER TO RECEIVABLES TRANSFER
AGREEMENT AND FIRST AMENDMENT TO ANNEX X, dated as of December 29, 2000 (this
"Second Amendment & Limited Waiver") relates to (i) that certain Receivables
Transfer Agreement dated as of February 10, 1999, as amended by the First
Amendment to Receivables Transfer Agreement, dated as of April 28, 2000 (the
"First Amendment") (as amended by the First Amendment, and as it may be further
amended, supplemented, restated or otherwise modified from time to time, the
"Transfer Agreement"), and (ii) Annex X to the Transfer Agreement and
Receivables Purchase and Servicing Agreement, and is entered into by and among
GOLF FUNDING CORPORATION, a Delaware Corporation ("GFC"), CALLAWAY GOLF SALES
COMPANY, a California corporation, as the originator (in such capacity, the "CGS
Originator") and as the servicer (in such capacity, the "Servicer"), CALLAWAY
GOLF COMPANY, a Delaware corporation, as the parent guarantor (the "Parent
Guarantor"), REDWOOD RECEIVABLES CORPORATION, as the purchaser (the
"Purchaser"), and GENERAL ELECTRIC CAPITAL CORPORATION, as the operating agent
and the collateral agent ("GECC"). Capitalized terms used and not otherwise
defined herein shall have the meanings assigned to them in Annex X.

                               W I T N E S S E T H

               WHEREAS, GFC, the CGS Originator, the Servicer and the Parent
Guarantor (collectively, the "Parties") have entered into the Transfer
Agreement;

               WHEREAS, Parent Guarantor has notified the other Parties that it
intends to merge with Callaway Golf Ball Company ("Golf Ball") through a
tax-free statutory merger in which Parent Guarantor will be the surviving
corporation (the "Golf Ball Merger") and, immediately after the merger, will
transfer its assets and liabilities relating to domestic sales (the "Asset
Transfer") to the CGS Originator;

               WHEREAS, Callaway Golf Sales Company desires to sell all
Receivables received by it in the Asset Transfer ("Ball Receivables") to GFC
pursuant to the Transfer Agreement;

               WHEREAS, GFC desires to sell the Ball Receivables as Transferred
Receivables to the Purchaser pursuant to the Purchase Agreement;



   2
               WHEREAS, Parent Guarantor has notified the other Parties that it
intends to form a foreign company ("CG South Pacific") to be a wholly-owned
subsidiary of Parent Guarantor (as more fully described in Exhibit A attached
hereto, the "Subsidiary Formation");

               WHEREAS, Parent Guarantor has notified the other Parties that
Callaway Golf Europe Ltd. ("CG Europe") intends to acquire a Spanish
distribution company through the following steps: (a) CG Europe will purchase
100% of the stock of Green Fee, S.A. ("Green Fee"), (b) CG Europe will create a
wholly-owned subsidiary ("Spanish Co.") into which Green Fee will be merged,
with Spanish Co. as the surviving corporation, and (c) Spanish Co. will be
merged with and into CG Europe (as more fully described in Exhibit B attached
hereto, the "Spanish Acquisition" and, together with the Golf Ball Merger, the
Asset Transfer and the Subsidiary Formation, the "Parent Transactions");

               WHEREAS, Parent Guarantor has requested that the Transfer
Agreement be amended to reflect the Parent Transactions (the "Amendments");

               WHEREAS, the Purchaser, the Operating Agent and the Collateral
Agent have agreed to such Amendments and have requested that the Parties agree
to the amendment of Annex X to provide for a "Reserve" in an amount equal to the
Outstanding Balance of the Receivables transferred as part of the Asset Transfer
(the "Annex X Amendment");

               WHEREAS, Parent Guarantor has requested that the Parties grant a
limited waiver (the "Limited Waivers") to certain provisions of the Transfer
Agreement with respect to the applicable Parent Transactions, as follows:

               a. Section 4.05(c) (Mergers, Subsidiaries, Etc.) solely with
        respect to the Golf Ball Merger;

               b. Section 4.03(a) (Sale of Stock and Assets) solely with respect
        to the Asset Transfer;

               c. Sections 4.05(a) (Restricted Payments), 4.05(b) (Indebtedness)
        and 4.05(c) (Mergers, Subsidiaries, Etc.) solely with respect to the
        Subsidiary Formation; and

               d. Sections 4.05(a) (Restricted Payments), 4.05(b) (Indebtedness)
        and 4.05(c) (Mergers, Subsidiaries, Etc.) solely with respect to the
        Spanish Acquisition.

               WHEREAS, the Parties are willing to so effect the Amendments and
the Annex X Amendment and provide the Limited Waivers on the terms and
conditions set forth herein.

               NOW, THEREFORE, in consideration of the above premises, the
Parties, the Purchaser, the Operating Agent, and the Collateral Agent agree as
follows:

        2. Definitions and Usage. Capitalized terms used, but not defined,
herein have the meanings ascribed to such terms in Annex X. Any reference herein
to Section, Exhibit or Schedule shall, unless otherwise specified, refer to such
Section, Exhibit or Schedule hereof, in its entirety.



                                       2
   3
        3. Amendments to the Transfer Agreement. Upon the Effective Date (as
defined in Section 6 below), the Transfer Agreement is hereby amended as
follows:

               a. Amendment to Annex W. Annex W is hereby amended by deleting
        the definition of "CEF Lease Facility" in its entirety and substituting
        the following in lieu thereof:

               "`CEF Lease Facility' shall mean (i) the Master Lease Agreement
               dated as of December 30, 1998 between General Electric Capital
               Corporation, for itself and as agent for certain participants, as
               lessor, and Callaway Golf Ball Company, as lessee, (ii) the
               Corporate Guaranty dated December 30, 1998 by Callaway Golf
               Company for the benefit of General Electric Capital Corporation,
               for itself and as agent for certain participants, (iii) the
               Interim Finance Agreement dated December 30, 1998 between General
               Electric Capital Corporation, for itself and as agent for certain
               participants, as lender, and Callaway Golf Ball Company, as
               borrower and (iv) all documents delivered under, and relating to,
               any of the agreements described in clauses (i) through (iii)
               hereof (including, but not limited to, the Assumption Agreement,
               dated as of December 29, 2000 by and among General Electric
               Capital Corporation, for itself and as agent for certain
               participants, Callaway Golf Ball Company and Parent Guarantor),
               in each case as amended, modified, supplemented or restated from
               time to time."

               b. Amendment to Annex X. Annex X is hereby amended as follows:

                      i. By deleting the definition of "Credit Agreement" in its
               entirety and substituting the following in lieu thereof:

               "`Credit Agreement' shall mean that certain Amended and Restated
               Credit Agreement dated as of February 10, 1999, among Callaway
               Golf Company, as borrower, the lenders party thereto and GE
               Capital, as agent for itself and the other lenders party thereto,
               as amended by the First Amendment to Amended and Restated Credit
               Agreement, dated April 28, 2000 and as further amended by the
               Second Amendment and Limited Waiver to Amended and Restated
               Credit Agreement, dated as of December 29, 2000, together with
               such further amendments, restatements, supplements or
               modifications thereto or any refinancings, replacements or
               refundings thereof as may be agreed to by the Purchaser and the
               Operating Agent.";

                      ii. By amending the definition of "Reserves" by inserting
               the words "CGB Receivable Reserve" after the term "the Extended
               Term Reserve" and prior to the words "and such other reserves . .
               ."; and



                                       3
   4
                      iii. By adding the following defined term after the
               definition of "Cash Purchase Price" and prior to the definition
               of "CGS":

               "CGB Receivable Reserve" shall mean the Outstanding Balance of
               those Receivables that are (a) originated by Callaway Golf Ball
               Company, (b) transferred by Callaway Golf Ball Company to the
               Parent Guarantor in a tax-free statutory merger whereby the
               Parent Guarantor is the surviving corporation and (c)
               subsequently transferred by the Parent Guarantor to the CGS
               Originator; provided, that the CGB Receivable Reserve may be
               eliminated or decreased at any time at the sole discretion of the
               Operating Agent.

               c. Amendment to Schedule 4.01(h). Schedule 4.01(h) to the
        Transfer Agreement is hereby amended by deleting the text thereof in its
        entirety and substituting Schedule I, attached hereto, in lieu thereof.

        4. Limited Waivers. Upon the Effective Date, and as limited herein, the
Parties hereby waive the following provisions of the Transfer Agreement solely
with respect to the matters expressly described below:

               a. Section 4.05(c) (Mergers, Subsidiaries, Etc.) solely with
        respect to the Golf Ball Merger;

               b. Section 4.03(a) (Sale of Stock and Assets) solely with respect
        to the Asset Transfer;

               c. Sections 4.05(a) (Restricted Payments), 4.05(b) (Indebtedness)
        and 4.05(c) (Mergers, Subsidiaries, Etc.) solely with respect to the
        Subsidiary Formation; provided that the Limited Waiver to Section
        4.05(a) permitting the Parent Guarantor and CG South Pacific, one of the
        Parent Guarantor's Subsidiaries, to enter into a lending transaction
        shall be limited to permit only such lending transaction that in the
        aggregate does not exceed US $3,000,000 and provided further that the
        Limited Waver to Section 4.05(b) permitting the incurrence or assumption
        of indebtedness by CG South Pacific shall not apply to any such
        incurrence or assumption of indebtedness exceeding US $3,000,000; and

               d. Sections 4.05(a) (Restricted Payments), 4.05(b) (Indebtedness)
        and 4.05(c) (Mergers, Subsidiaries, Etc.) solely with respect to the
        Spanish Acquisition; provided that the Limited Waiver to Section 4.05(a)
        permitting the Parent Guarantor and CG Europe, one of the Parent
        Guarantor's Subsidiaries, to enter into a lending transaction shall be
        limited to permit only such lending transaction that in the aggregate
        does not exceed US $4,000,000 and provided further that the Limited
        Waver to Section 4.05(b) permitting the incurrence or assumption of
        indebtedness by CG Europe shall not apply to any such incurrence or
        assumption of indebtedness exceeding US $4,000,000.

        5. Representations and Warranties. The Parties hereby jointly and
severally represent and warrant to GFC that, as of the Effective Date and after
giving effect to this Second Amendment & Limited Waiver:



                                       4
   5
               a. All of the representations and warranties of the Parties
        contained in this Second Amendment & Limited Waiver, the Transfer
        Agreement and the other Related Documents are true and correct in all
        material respects on and as of the Effective Date, as if then made
        (other than representations and warranties which expressly speak as of a
        different date, which shall be true and correct in all material respects
        as of that date); and

               b. No Termination Event or Incipient Termination Event has
        occurred and is continuing or will result after giving effect to this
        Second Amendment & Limited Waiver.

        6. Effective Date. This Second Amendment & Limited Waiver shall become
effective as of the date first written above (the "Effective Date") upon the
satisfaction of each of the following conditions:

               a. GFC shall have received each of the following documents, in
        each case in form and substance satisfactory to GFC:

                      i. counterparts hereof executed by each of the Parties;

                      ii. duly executed amendments to the CEF Lease Facility and
               the Credit Facility effecting all modifications necessary to
               permit the Parent Transactions, together with a certificate of
               the Chief Financial Officer of the Parent Guarantor and the CGS
               Originator certifying that all conditions to the effectiveness of
               the amendments have been satisfied and that the amendments are in
               full force and effect as of the Effective Date;

                      iii. the duly executed Pledge Amendment reflecting the
               Subsidiary Formation accompanied by the share certificate
               representing the outstanding CG South Pacific Stock being pledged
               and a stock power for such share certificate executed in blank;

                      iv. a certificate of the Secretary or Assistant Secretary
               of each of the Parties dated the Effective Date certifying (A)
               that the bylaws of such Party have not been amended or otherwise
               modified since the date of the most recent certification thereof
               by the Secretary or Assistant Secretary of such Party delivered
               to GFC and remain in full force and effect as of the Effective
               Date, (B) that the charter of such Party has not been amended or
               otherwise modified since the date of the most recent
               certification thereof by the Secretary of State of such Party's
               jurisdiction of incorporation delivered to GFC and remain in full
               force and effect as of the Effective Date and (C) that the
               execution, delivery and performance of this Amendment have been
               duly authorized by all necessary or proper corporate and
               shareholder action;

                      v. a certified copy of the Certificate of Merger filed
               with the State of California evidencing the Golf Ball Merger; and

                      vi. such additional documentation as GFC may reasonably
               request;



                                       5
   6
               b. No law, regulation, order, judgment or decree of any
        Governmental Authority shall, and GFC shall not have received any notice
        that litigation is pending or threatened which is likely to, enjoin,
        prohibit or restrain the consummation of the transactions contemplated
        by this Amendment, except for such laws, regulations, orders or decrees,
        or pending or threatened litigation, that in the aggregate could not
        reasonably be expected to have a Material Adverse Effect;

               c. All of the representations and warranties of the Parties
        contained in this Amendment, the Transfer Agreement and the other
        Related Documents shall be true and correct in all material respects on
        and as of the Effective Date, as if then made (other than
        representations and warranties which expressly speak as of a different
        date, which shall be true and correct in all material respects as of
        that date);

               d. All corporate and other proceedings, and all documents,
        instruments and other legal matters in connection with the transactions
        contemplated by this Amendment shall be satisfactory in all respects in
        form and substance to GFC; and

               e. No Termination Event or Incipient Termination Event shall have
        occurred and be continuing on the Effective Date or will result after
        giving effect to this Amendment.

        7. Reference to and Effect on the Related Documents.

               a. Upon the Effective Date, each reference in the Transfer
        Agreement to "this Agreement", "hereunder", "hereof" or words of like
        import, and each reference in the Loan Documents and the other Related
        Documents to the Transfer Agreement, shall mean and be a reference to
        the Transfer Agreement as amended and supplemented hereby.

               b. Except to the extent specifically set forth herein, the
        respective provisions of the Transfer Agreement and the other Related
        Documents shall not be amended, modified, waived, impaired or otherwise
        affected hereby, and such documents and the Obligations under each of
        them are hereby confirmed as being in full force and effect.

               c. This Second Amendment & Limited Waiver shall be limited solely
        to the matters expressly set forth herein and shall not (i) constitute
        an amendment or waiver of any other term or condition of the Transfer
        Agreement or any other Related Document, (ii) prejudice any right or
        rights which any of the Parties may now have or may have in the future
        under or in connection with the Transfer Agreement or any other Related
        Document, (iii) require any of the Parties to agree to a similar
        transaction on a future occasion or (iv) create any right herein to
        another Person or other beneficiary or otherwise, except to the extent
        specifically provided herein.

        8. Miscellaneous. This Second Amendment & Limited Waiver is a Related
Document. The headings herein are for convenience of reference only and shall
not alter or otherwise affect the meaning hereof.



                                       6
   7
        9. Section Titles. The Section titles in this Second Amendment & Limited
Waiver are and shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreement between the parties hereto.

        10. Counterparts. This Second Amendment & Limited Waiver may be executed
in any number of counterparts and by the different parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.

        11. GOVERNING LAW. THIS SECOND AMENDMENT & LIMITED WAIVER, AND ALL
MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE HEREOF, SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.

        12. No Strict Construction. The parties hereto have participated jointly
in the negotiation and drafting of this Second Amendment & Limited Waiver. In
the event an ambiguity or question of intent or interpretation arises, this
Second Amendment & Limited Waiver shall be construed as if drafted jointly by
the parties hereto and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Second Amendment & Limited Waiver.

        13. Waiver by Parent Guarantor, CGS Originator, the Servicer and GFC.
Each of the Parent Guarantor, the CGS Originator, the Servicer and GFC hereby
waives any claim, defense, demand, action or suit of any kind or nature
whatsoever against the Purchaser, the Operating Agent or the Collateral Agent
arising on or prior to the date of this Second Amendment & Limited Waiver in
connection with any of the Related Documents or the transactions contemplated
thereunder.



                                    * * * *



                                       7
   8
               IN WITNESS WHEREOF, GFC, the CGS Originator, the Servicer, the
Parent Guarantor, the Purchaser, the Operating Agent and the Collateral Agent
have caused this Second Amendment & Limited Waiver to be executed by their
respective officers thereunto duly authorized as of the date first above
written.

                                   GOLF FUNDING CORPORATION



                                   By:
                                      -------------------------------
                                      Name:
                                      Title:



                                 Signature Page
   9
                                   CALLAWAY GOLF SALES COMPANY,
                                   as CGS Originator and as Servicer



                                   By:
                                      -------------------------------
                                      Name:
                                      Title:



                                 Signature Page
   10
                                   CALLAWAY GOLF COMPANY,
                                   as Parent Guarantor



                                   By:
                                      -------------------------------
                                      Name:
                                      Title:



                                 Signature Page
   11
                                   REDWOOD RECEIVABLES CORPORATION,
                                   as Purchaser



                                   By:
                                      -------------------------------
                                      Name:
                                      Title:



                                 Signature Page
   12
                                   GENERAL ELECTRIC CAPITAL CORPORATION,
                                   as Operating Agent and as Collateral Agent



                                   By:
                                      -------------------------------
                                      Name:
                                      Title:



                                 Signature Page
   13

                                   EXHIBIT A

                                       TO

     SECOND AMENDMENT AND LIMITED WAIVER TO RECEIVABLES TRANSFER AGREEMENT

                                 (SEE ATTACHED)




                                   Exhibit A
   14

                                   EXHIBIT B

                                       TO

     SECOND AMENDMENT AND LIMITED WAIVER TO RECEIVABLES TRANSFER AGREEMENT

                                 (SEE ATTACHED)



                                   Exhibit B
   15
                                   SCHEDULE I

                                       TO

      SECOND AMENDMENT AND LIMITED WAIVER TO RECEIVABLES TRANSFER AGREEMENT


            VENTURES, SUBSIDIARIES AND AFFILIATES; OUTSTANDING STOCK

                                SCHEDULE 4.01(h)

1.      (a)    Subsidiaries of CGS Originator:

               Golf Funding Corporation

        (b)    Joint Ventures/Partnerships of CGS Originator:

               None

        (c)    CGS Originator is an Affiliate of:

               Callaway Golf Company
               Golf Funding Corporation
               Callaway Golf Ball Company (merged into Callaway Golf Company
                  effective 12/29/00)
               CGV, Inc.
               Callaway Golf Europe Ltd.
               Callaway (Barbados) Foreign Sales Corporation
               Callaway Golf (Germany) GmbH
               Callaway Golf Ltd. & Co. KG (a German limited partnership;
                  formerly Callaway Golf Trading GmbH, a German Corporation)
               Callaway Golf Korea Ltd.
               Callaway Golf K.K. (formerly known as ERC International Company)
               Callaway Golf Canada Ltd.
               All-American Golf LLC
               Callaway Golf Shell Company
               Callaway Golf South Pacific Pty Ltd

        (d)    Subsidiaries of Parent Guarantor:

               Callaway Golf Sales Company
               Callaway Golf Ball Company
               CGV, Inc.
               Callaway Golf Europe Ltd.
               Callaway (Barbados) Foreign Sales Corporation
               Callaway Golf (Germany) GmbH
               Callaway Golf Ltd. & Co. KG



                                   Schedule I

   16
               Callaway Golf Korea Ltd.
               Callaway Golf K.K.
               Callaway Golf Canada Ltd.
               All-American Golf LLC
               Golf Funding Corporation
               Callaway Golf Shell Company
               Callaway Golf South Pacific Pty Ltd.

        (e)    Joint Ventures/Partnerships of Parent Guarantor:

               None

        (f)    Parent Guarantor is an Affiliate of:

               Callaway Golf Sales Company
               Callaway Golf Ball Company
               CGV, Inc.
               Callaway Golf Europe Ltd.
               Callaway (Barbados) Foreign Sales Corporation
               Callaway Golf (Germany) GmbH
               Callaway Golf Ltd. & Co. KG
               Callaway Golf Korea Ltd.
               Callaway Golf K.K.
               Callaway Golf Canada Ltd.
               All-American Golf LLC
               Golf Funding Corporation
               Callaway Golf Shell Company
               Callaway Golf South Pacific Pty Ltd.

2.      Issued and Outstanding Stock of CGS Originator and Parent Guarantor:



- --------------------------------------------------------------------------------------------
                                                                   INTEREST
       COMPANY                     (A)  Shareholder/Member          HELD       SHARES
- -----------------------------------------------------------------------------------------
                                                                      
       Callaway Golf Company       Various (Publicly Held)          100%       74,080,622(1)
- --------------------------------------------------------------------------------------------
       Callaway Golf Sales         Callaway Golf Company            100%       10,000
       Company
- --------------------------------------------------------------------------------------------


3.      Outstanding Rights to Purchase, Options, Warrants or Similar Rights or
        Agreements: See attached report entitled "Callaway Golf Company Stock
        Options Outstanding and Exercisable as of 12/28/00."




- ----------
(1)  As of November 30, 2000.



                                   Schedule I

   1
                                                                   EXHIBIT 10.42



                      ASSIGNMENT AND ASSUMPTION AGREEMENT

        This Assignment and Assumption Agreement is made effective as of April
24, 2000, by and among Callaway Golf Company, a Delaware corporation ("Callaway
Golf"), Sanwa Bank California, a California corporation ("Sanwa") and Arrowhead
Trust Incorporated, a California trust company ("Arrowhead").

                                   BACKGROUND

               A. On or about July 14, 1995, Callaway Golf and Sanwa entered
into that certain Trust Agreement (the "Trust Agreement").

               B. On or about September 13, 1995, pursuant to a Stock Purchase
Agreement dated July 14, 1995, Sanwa, as trustee under the Trust Agreement,
executed and delivered to Callaway Golf a Non-Recourse Promissory Note dated
September 13, 1995, made payable to Callaway Golf in the original principal
amount of $60,575,000 (the "First Promissory Note"), and in exchange therefor
purchased 4,000,000 shares of Callaway Golf Common Stock, as evidenced by Stock
Certificate No. NY 17202 (the "First Stock Certificate").

               C. On or about December 29, 1995, pursuant to a Stock Purchase
Agreement dated December 21, 1995, Sanwa, as trustee under the Trust Agreement,
executed and delivered to Callaway Golf a Non-Recourse Promissory Note dated
December 29, 1995, made payable to Callaway Golf in the original principal
amount of $26,262,600 (the "Second Promissory Note"), and in exchange therefor
purchased 1,300,000 shares of Callaway Golf Common Stock, as evidenced by Stock
Certificate No. NY 17213 (the "Second Stock Certificate).

               D. On or about April 21, 2000, Sanwa sold to Arrowhead a portion
of it's trust business, including its rights and obligations with respect to the
First Promissory Note and the Second Promissory Note (collectively, the
"Notes"), the shares of Callaway Golf Common Stock represented by the First
Stock Certificate and the Second Stock Certificate (collectively, the "Acquired
Shares"), the Trust Agreement and the Trust Fund.

               E. Callaway Golf is willing to consent to the transfer of the
Assigned Documents (hereafter defined) to Arrowhead only upon the following
terms and conditions:

                                   AGREEMENT

        1. Assignment. Sanwa does hereby assign, transfer and convey to
Arrowhead all of its right, title and interest in and to (i) the Trust
Agreement, (ii) the Notes, (iii) the Acquired Shares, including the First Stock
Certificate and the Second Stock Certificate, (iv) the Trust Fund (as such term
is used in the Trust Agreement), including all amounts held in the Trust Fund,
(v) all reports, documents and other records relating in any manner whatsoever
to the Trust Agreement or the Trust Fund

   2

and (vi) any other rights, agreements or instruments relating to any of the
items referred to in items (i) through (v) of this sentence (collectively, the
"Assigned Documents").

        2. Assumption. Arrowhead does hereby accept the assignment set forth in
Section 1 and does hereby agree as successor Trustee (as such term is used in
the Trust Agreement) to pay, perform and discharge when due all of Sanwa's
obligations under the Assigned Documents, including any obligation arising prior
to the date hereof which has not been paid, performed or discharged prior to the
effectiveness of this Assignment and Assumption Agreement.

        3. Consent. Callaway Golf does hereby consent to the assignment and
assumption of the Assigned Documents as set forth above in Section 1 and Section
2.

        4. Further Assurances. Sanwa and Arrowhead agree to execute and deliver
such other agreements, documents and instruments as Callaway Golf may reasonably
request to further effect the transfer from Sanwa to Arrowhead of all rights and
obligations being assigned and assumed hereunder and all other related rights
and obligations.

        5. Notice. The address to where notice may be given to Arrowhead under
any of the Assigned Documents, including but not limited to, any notice
provisions thereunder, shall be as follows:

                      Mable Pascasio, Trust Officer
                      Employee Benefit Department
                      Arrowhead Trust Incorporated
                      24 Executive Park, Suite 125
                      Irvine, CA 92614
                      Fax:  (949) 263-8026

        6. Settlement of Accounts. Sanwa Agrees to provide by September 30,
2000, or such later date as Sanwa and Callaway Golf shall mutually agree, the
written account statement required by Section 10.2 of the Trust Agreement.

        7. Counterparts. This Assignment and Assumption Agreement may be
executed in one or more counterparts all of which taken together shall
constitute one and the same instrument.



                                       2


   3

        IN WITNESS WHEREOF, the undersigned have executed this Assignment and
Assumption Agreement as of the date first set forth above.


SANWA BANK CALIFORNIA:



By:
   --------------------------------
Print Name:
Print Title:


ARROWHEAD TRUST INCORPORATED:



By:
   --------------------------------
Print Name:
Print Title:


CALLAWAY GOLF COMPANY:



By:
   --------------------------------
Print Name:
Print Title:

   1

                                                                    EXHIBIT 13.1


FINANCIAL CONTENTS

                                                                  
Selected Financial Data .........................................    12
Management's Discussion and Analysis of Financial
   Condition and Results of Operations ..........................    13
Consolidated Balance Sheet ......................................    24
Consolidated Statement of Operations ............................    25
Consolidated Statement of Cash Flows ............................    26
Consolidated Statement of Shareholders' Equity ..................    27
Notes to Consolidated Financial Statements ......................    28
Report of Independent Accountants ...............................    42
Summarized Quarterly Financial Data (Unaudited) .................    43
Market for Common Shares and Related Shareholder Matters ........    43



Financials


                            Callaway Golf Company 11
   2

SELECTED FINANCIAL DATA(1)




(in thousands, except per share data)                                             Year ended December 31,
                                                              ---------------------------------------------------------------
                                                                2000          1999        1998          1997          1996
                                                              ---------     --------    --------      --------      --------
                                                                                                     
Statement of Operations Data:
Net sales                                                     $ 837,627     $719,038    $703,060      $848,941      $683,536
Cost of goods sold                                              440,119      384,265     410,341       408,345       323,364
                                                              ---------     --------    --------      --------      --------
   Gross profit                                                 397,508      334,773     292,719       440,596       360,172
Selling, general and administrative expenses                    240,874      221,043     241,775       189,109       154,190
Research and development costs                                   34,579       34,002      36,848        30,298        16,154
Restructuring costs (Note 14)                                                 (5,894)     54,235
Sumitomo transition costs (Note 16)                                            5,713
Litigation settlement                                                                                    12,000
                                                              ---------     --------    --------      ---------     ---------
   Income (loss) from operations                                122,055       79,909     (40,139)       209,189       189,828
Interest and other income, net (Note 11)                          8,791        9,182       3,911          4,586         5,804
Interest expense                                                 (1,524)      (3,594)     (2,671)           (10)          (37)
                                                              ---------     --------    --------      ---------     ---------
   Income (loss) before income taxes and cumulative effect
      of accounting change                                      129,322       85,497     (38,899)       213,765       195,595
Income tax provision (benefit)                                   47,366       30,175     (12,335)        81,061        73,258
                                                              ---------     --------    --------      ---------     ---------
   Income before cumulative effect of accounting change          81,956       55,322     (26,564)       132,704       122,337
   Cumulative effect of accounting change                          (957)
                                                              ---------     --------    --------      ---------     ---------
   Net income (loss)                                          $  80,999     $ 55,322    $(26,564)     $ 132,704     $ 122,337
                                                              ---------     --------    --------      ---------     ---------
Earnings (loss) per common share:
   Basic
      Income before cumulative effect of accounting change    $    1.17     $   0.79    $  (0.38)     $    1.94     $    1.83
      Cumulative effect of accounting change                      (0.01)
                                                              ---------     --------    --------      ---------     ---------
      Net income                                              $    1.16     $   0.79    $  (0.38)     $    1.94     $    1.83
                                                              =========     ========    ========      =========     =========
   Diluted
      Income before cumulative effect of accounting change    $    1.14     $   0.78    $  (0.38)     $    1.85     $    1.73
      Cumulative effect of accounting change                      (0.01)
                                                              ---------     --------    --------      ---------     ---------
      Net income                                              $    1.13     $   0.78    $  (0.38)     $    1.85     $    1.73
                                                              =========     ========    ========      =========     =========
Dividends paid per share                                      $    0.28     $   0.28    $   0.28      $    0.28     $    0.24
                                                              =========     ========    ========      =========     =========




(in thousands)                                                   December 31,
                                  ------------------------------------------------------------------------
                                    2000            1999            1998            1997            1996
                                  --------        --------        --------        --------        --------
                                                                                   
Balance Sheet Data:
Cash and cash equivalents         $102,596        $112,602        $ 45,618        $ 26,204        $108,457
Working capital                   $233,163        $205,198        $139,598        $209,402        $250,461
Total assets                      $630,934        $616,783        $655,827        $561,714        $428,428
Long-term liabilities             $  9,884        $ 11,575        $ 18,723        $  7,905        $  5,109
Total shareholders' equity        $511,744        $499,934        $453,096        $481,425        $362,267



(1) Shipping revenues and expenses have been reclassified in accordance with
    Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and
    Handling Revenues and Costs." See accompanying Notes to Consolidated
    Financial Statements.


                            Callaway Golf Company 12
   3

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


RESULTS OF OPERATIONS


Years Ended December 31, 2000 and 1999


For the year ended December 31, 2000, net sales increased $118.6 million, or
16%, to $837.6 million from $719.0 million in the prior year. The increase is
attributable to an increase in sales of irons, golf balls and other products,
including putters and accessories, partially offset by a decrease in sales of
metal woods. The increase in sales of irons of 40% to $310.2 million represents
an increase in both unit and dollar sales and is primarily attributable to sales
of Great Big Bertha(R) Hawk Eye(R) Tungsten Injected(TM) Titanium Irons, which
were not sold in significant quantities during 1999. Also contributing to the
increase in sales of irons were sales of Big Bertha(R) Steelhead(TM) X-14(R)
Stainless Steel Irons, which were introduced in January 2000, and which
generated higher revenues during 2000 than its predecessor, Big Bertha(R)
Steelhead(TM) X-12(R) Stainless Steel Irons, did in 1999. This increase includes
sales of $34.0 million of its Rule 35(R) golf balls during 2000. This product
was not sold during 1999. The overall decrease in sales of metal woods of 3% to
$416.2 million represents a decrease in both unit and dollar sales of titanium
and non-current metal woods, partially offset by an increase in unit and dollar
sales of stainless steel metal woods. The overall decrease in sales of metal
woods is primarily attributable to sales of non-current products during 1999,
which did not occur in significant quantities during the comparable period of
2000, and to a decrease in sales of Great Big Bertha(R) Hawk Eye(R) Titanium
Metal Woods during 2000 as compared with 1999, the year in which they were
introduced. However, sales of ERC(TM) Forged Titanium Drivers, which began
shipping in significant quantities in the second quarter of 2000, and initial
shipments of the Company's newly-introduced ERC II(TM) Forged Titanium Drivers
and Big Bertha(R) Hawk Eye(R) VFT(TM) Titanium Metal Woods, which began shipping
in limited quantities in December 2000, partially offset the decrease in sales
of titanium metal woods. Also partially offsetting the decrease in sales of
titanium metal woods was an increase in sales of stainless steel metal woods
attributable to the January 2000 introduction of Big Bertha(R) Steelhead
Plus(TM) Stainless Steel Metal Woods, which generated higher revenue in 2000
than their predecessor, Big Bertha(R) Steelhead(TM) Stainless Steel Metal Woods,
did in 1999.


        Net sales reflect the effect of a reclassification of shipping revenues
from selling expenses. This reclassification, which added $5.5 million to net
sales in 2000 and $4.6 million in 1999 was required by Emerging Issues Task
Force Issue No. 00-10 ("EITF 00-10"), and did not result in a change in the
Company's earnings or earnings per share for any period.


        During 2000, sales increased in all regions as compared with 1999. Sales
in the United States increased 8% to $451.2 million and sales in Europe also
increased 9% to $125.5 million. Sales in Japan increased 118% to $122.0 million
largely because the Company now sells directly to customers rather than through
a distributor, as in prior years. Sales in the rest of Asia increased 13% to
$82.3 million and sales in the rest of the world increased 1% to $56.5 million.


        For the year ended December 31, 2000, cost of goods sold increased to
$440.1 million from $384.3 million in 1999, and as a percentage of net sales
remained constant at 53%. These amounts reflect the reclassification of shipping
expense from "selling" expense that resulted from the application of EITF 00-10.
This reclassification added $11.2 million to cost of goods sold during 2000 and
$7.9 million in 1999. Cost of goods sold was adversely affected in 2000 by costs
associated with manufacturing the Company's new golf balls, primarily from low
plant utilization and production yields. This effect was offset by improvements
in cost of goods sold attributable to golf club products. As a percentage of net
sales, cost of goods sold for golf club products improved to 49% in 2000 from
53% in 1999. This improvement is attributable to reductions in manufacturing
labor and overhead expenses, a favorable product sales mix primarily related to
sales of ERC(TM) Forged Titanium Drivers and the negative effect that close-out
sales at substantially reduced prices during 1999 had on that period's cost of
goods sold as a percentage of net sales.


        Selling expense in 2000 increased to $170.5 million from $128.6 million
in 1999, and as a percentage of net sales increased to 20% from 18%. These
amounts include the reclassification of shipping revenue and expense, which were
previously recorded in "selling" expense. The effect of this reclassification
reduced selling expense by $5.7 million in 2000 and $3.3 million in 1999. The
overall increase in selling expense was primarily attributable to incremental
expenses associated with the launch of the Company's Rule 35(R) golf balls and
with expanded golf club sales activity in the Company's Japanese subsidiary.
Prior to 2000, Callaway Golf products were sold in Japan through a third party
distributor. Expenses related to product endorsement also contributed to the
increase.


        General and administrative expense decreased to $70.3 million in 2000
from $92.5 million in 1999, and as a percentage of net sales decreased to 8%
from 13%. This decrease is primarily attributable to the shifting of costs
associated with the Company's golf ball pre-production period from general and
administrative expense in 1999 to cost of goods sold in 2000, as these costs
were


                            Callaway Golf Company 13
   4

related to production of golf balls in 2000. Also contributing to the decrease
were reductions in legal and consulting fees and in depreciation expense. The
overall decrease was partially offset by an increase in bad debt expense
associated with the write-off of uncollectible accounts.


        Research and development expense was $34.6 million in 2000 as compared
with $34.0 million in 1999, and as a percentage of net sales decreased to 4%
from 5%. The nominal increase was primarily attributable to an increase in
employee compensation and benefits.


        Interest and other income decreased to $8.8 million in 2000 from $9.2
million in 1999. This decrease is primarily attributable to the 1999 receipt of
insurance proceeds related to the Company's deferred compensation plan. This
decrease was partially offset by an increase in royalty income, a decrease in
foreign currency transaction losses, and an increase in interest income
associated with higher average cash balances in 2000 as compared with 1999.


        Interest expense decreased to $1.5 million in 2000 from $3.6 million in
1999, as 1999 reflects interest expense associated with debt balances on the
Company's line of credit, interim finance agreement for pre-lease financing
advances for the acquisition and installation costs of machinery and equipment,
and accounts receivable securitization facilities. The line of credit and
accounts receivable securitization facilities were not utilized in 2000 and the
interim finance agreement was terminated in 1999.


        During 2000, the Company recorded a provision for income taxes of $47.4
million and recognized a decrease in deferred taxes of $4.4 million. During
2000, the Company realized $6.8 million in tax benefits related to the exercise
of stock options. The provision for income tax as a percentage of income before
taxes was 37% in 2000 as compared with 35% in 1999. The Company's effective tax
rate for 2000 reflects a benefit from the consolidation of Callaway Golf Ball
Company with the Company.


        The Company adopted Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101") in the fourth quarter of
2000 with an effective date of January 1, 2000. SAB No. 101 summarizes the SEC's
Division of Corporation Finance Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. As a
result of the adoption of SAB No. 101, the Company recognized a cumulative
effect adjustment of $1.0 million in the Consolidated Statement of Operations
for the year ended December 31, 2000.


Years Ended December 31, 1999 and 1998


For the year ended December 31, 1999, net sales increased 2%, to $719.0 million
from $703.1 million in the prior year. The increase is attributable to an
increase in sales of metal woods, particularly titanium metal woods, partially
offset by a decrease in sales of irons and by sales of non-current product,
through a managed close-out process, at substantially reduced prices. The
increase in metal woods sales of $39.1 million (10%) is largely attributable to
the January 1999 introduction of Great Big Bertha(R) Hawk Eye(R) Titanium Metal
Woods and increases in sales of Big Bertha(R) Steelhead(TM) Metal Woods, which
were introduced in August 1998. Sales of irons decreased $7.8 million, primarily
as a result of a $27.6 million decrease in sales of Big Bertha(R) Steelhead(TM)
X-12(R) Irons, which were introduced in January 1998, partially offset by sales
from the August 1999 introduction of Great Big Bertha(R) Hawk Eye(R) Tungsten
Injected(TM) Titanium Irons of $27.7 million. Sales of Odyssey(R) and Callaway
Golf(R) putters decreased $7.5 million (14%). Sales of other products decreased
$6.9 million (30%). Also included in 1999 net sales were $56.6 million in sales
of non-current product, most of which were sold at close-out prices.


        Net sales reflect the effect of a reclassification of shipping revenues
from "selling" expenses. This reclassification, which added $4.6 million to net
sales in 1999 and $5.4 million in 1998, was required by EITF 00-10, and did not
result in a change in the Company's earnings or earnings per share for either
period.


        In terms of net sales by region, sales in the United States decreased 5%
to $418.4 million for the year ended December 31, 1999. Net sales in Japan
decreased 9% to $55.9 million, as net purchases by the Company's distributor
declined in anticipation of the transition of distribution of Callaway Golf(R)
products from it to the Company's wholly-owned Japanese subsidiary. Net sales to
Europe decreased 1% to $115.7 million and net sales to the rest of Asia and the
rest of the world increased 114% and 16%, respectively, to $73.1 million and
$55.9 million, respectively. Sales to the rest of Asia increased in 1999 over
1998 due largely to the economic recovery of the Korean market in 1999 and the
introduction of higher-margin products in Korea during 1999. The Company does
not expect that revenue in Korea will continue to increase at a rate comparable
to 1999.


        For the year ended December 31, 1999, cost of goods sold improved to
$384.3 million from $410.3 million in the prior year, and as a percentage of net
sales, improved to 53% from 58%. These amounts include the reclassification of
shipping expense from "selling" expense that resulted from the application of
EITF 00-10. This reclassification added $7.9 million to cost of goods sold
during 1999 and $8.7 million in 1998. The decrease in cost of goods sold is
primarily due to lower obsolescence charges in 1999 versus a $30.0 million
excess inventory charge recorded in the


                            Callaway Golf Company 14
   5

fourth quarter of 1998, and an increase in sales of metal woods. However, cost
of goods sold was unfavorably affected by price reductions and the sales of
non-current products through the Company's managed close-out program and an
increase in distribution costs associated with the Company's foreign
subsidiaries.


        Selling expenses decreased to $128.6 million in 1999 from $143.7 million
in the prior year. As a percentage of net sales, selling expenses decreased to
18% from 20%. These amounts reflect the reclassification of shipping revenue and
expense, which were previously recorded in "selling" expense. The effect of this
reclassification reduced selling expense by $3.3 million in 1999 and 1998. The
decrease in selling expense is primarily attributable to planned reductions in
advertising, pro tour and other promotional expenses, partially offset by an
increase in employee compensation.


        General and administrative expenses decreased to $92.5 million in 1999
from $98.0 million in 1998, or 13% and 14% of net sales, respectively. This
decrease is largely due to decreases in consulting, bad debt expense and
supplies expense, as well as a decrease in building-related costs associated
with the Company's 1998 restructuring program. These amounts were partially
offset by increases in costs associated with the ramp-up of the Company's golf
ball operations and increased depreciation and amortization expense related to
the Company's foreign operations.


        Research and development expenses decreased to $34.0 million (5% of net
sales) in 1999 from $36.8 million (5% of net sales) in 1998. This decrease was
primarily the result of the shut-down of the Company's prototype foundry and a
decrease in consulting fees, partially offset by increases in employee
compensation and component prototype costs.


        Restructuring income primarily relates to the reversal of a
restructuring reserve recorded in 1998 for a lease obligation in New York City
that was subsequently assigned to a third party. See Note 14 to the Consolidated
Financial Statements for a discussion of this and other restructuring
transactions.


        Sumitomo Rubber Industries Ltd. ("Sumitomo") transition costs represent
payments for non-current product which were associated with the transition of
the distribution of Callaway Golf(R) products from Sumitomo to the Company. See
Note 16 to the Consolidated Financial Statements for a discussion of this
transaction.


        Interest and other income increased to $9.2 million from $3.9 million
for the year ended December 31, 1999 as compared with the prior year. This
increase is primarily attributable to an increase in interest income resulting
from higher average cash and deferred compensation investment balances during
1999 as compared with 1998, an increase in royalty income and an increase in
other income due to the receipt of insurance proceeds related to the Company's
deferred compensation plan.


        Interest expense increased to $3.6 million in 1999 from $2.7 million in
1998. This increase is largely related to interest on the Company's interim
finance agreement for pre-lease financing advances for the acquisition and
installation costs of machinery and equipment. Also contributing to the increase
was an increase in interest expense related to the Company's line of credit and
accounts receivable securitization facilities associated with higher interest
and yield rates and related fees.


        During 1999, the Company recorded a tax provision of $30.2 million and
recognized a decrease in deferred taxes of $9.6 million. During 1999, the
Company realized tax benefits of $2.4 million related to the exercise of stock
options, $1.4 million related to non-taxable income from insurance proceeds
related to the Company's deferred compensation plan and $1.0 million related to
the reorganization of a foreign subsidiary.


LIQUIDITY AND CAPITAL RESOURCES


At December 31, 2000, cash and cash equivalents decreased to $102.6 million from
$112.6 million at December 31, 1999. The decrease is the result of cash used in
financing activities of $70.5 million and cash used in investing activities of
$28.6 million, partially offset by cash provided by operating activities of
$91.1 million. Cash flows used in financing activities are primarily
attributable to the acquisition of 4.8 million shares of the Company's Common
Stock and to dividends paid, partially offset by cash flows from the issuance of
Common Stock in connection with stock option exercises. Cash flows used in
investing activities are primarily attributable to capital expenditures. Cash
flows provided by operating activities reflect increases in accounts payable and
accrued expenses, accrued warranty expense and income taxes payable, partially
offset by increases in accounts receivable and inventory.


        The Company's principal source of liquidity, both on a short-term and
long-term basis, has been cash flow provided by operations and the Company's
credit facilities. The Company currently expects this trend to continue. The
Company has a revolving credit facility for up to $120.0 million (the "Amended
Credit Agreement") and an $80.0 million accounts receivable securitization
facility (the "Accounts Receivable Facility") (see Notes 4 and 5 to the
Consolidated Financial Statements). During 2000, the Company did not utilize
either its Accounts Receivable Facility or


                            Callaway Golf Company 15
   6


its line of credit under the Amended Credit Agreement. At December 31, 2000, the
Company had $117.3 million available, net of outstanding letters of credit,
under the Amended Credit Agreement, subject to meeting certain availability
requirements under a borrowing base formula and other limitations. In addition,
at December 31, 2000, there were no advances under the Accounts Receivable
Facility, leaving up to $80.0 million available under this facility.


        In May 2000, the Company announced that its Board of Directors
authorized it to repurchase its Common Stock in the open market or in private
transactions, subject to the Company's assessment of market conditions and
buying opportunities from time to time, up to a maximum cost to the Company of
$100.0 million. The Company began its repurchase program in May 2000 and through
December 31, 2000 has spent $80.5 million to repurchase 4.8 million shares of
its Common Stock at an average cost of $16.71 per share. Pursuant to the
authority granted in May 2000, the Company may purchase up to $19.5 million in
additional shares. If the Company continues to repurchase its Common Stock under
this program and/or under any future programs, the Company's liquidity would
decrease.

        As a result of the implementation of its plan to improve operating
efficiencies (see "Restructuring" below), the Company incurred charges of $54.2
million in the fourth quarter of 1998. Of these charges, $25.5 million were
estimated to be non-cash. Since the adoption of this restructuring plan in the
fourth quarter of 1998, the Company has made cash outlays for employee
termination costs, contract cancellation fees, excess lease costs and other
expenses totaling $20.2 million, of which $1.4 million occurred in 2000. A
portion of certain restructuring reserves totaling $8.6 million was reversed
during 1999. At December 31, 2000, the Company had a contingent liability that
expires in February 2003 of $5.6 million relating to a facility in New York City
(see Note 13 to the Consolidated Financial Statements).


        Although the Company's golf club operations are mature and historically
have generated cash from operations, the Company's golf ball operations
completed the first year of operations in 2000 and to date have not generated
cash flows sufficient to fund these operations. The Company does not expect that
its golf ball operations will generate sufficient cash to fund these operations
in the next 12 months. However, based upon its current operating plan, analysis
of its consolidated financial position and projected future results of
operations, the Company believes that its operating cashflows, together with its
credit facilities, will be sufficient to finance current operating requirements,
including planned capital expenditures and purchase commitments. 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 meeting its future cash requirements (see "Certain
Factors Affecting Callaway Golf Company" below).


RESTRUCTURING


During the fourth quarter of 1998, the Company recorded a restructuring charge
of $54.2 million resulting from a number of cost reduction actions and
operational improvements. These actions included the consolidation of the
operations of the Company's wholly-owned subsidiary, Odyssey Golf, Inc.
("Odyssey"), into the operations of the Company while maintaining the distinct
and separate Odyssey(R) brand image; the discontinuation, transfer or suspension
of certain initiatives not directly associated with the Company's core business,
such as the Company's involvement with interactive golf sites, golf book
publishing, new player development and a golf venue in Las Vegas; and the
re-sizing of the Company's core business to reflect current and expected
business conditions. The restructuring charges primarily related to: 1) the
elimination of job responsibilities, resulting in costs incurred for employee
severance; 2) the decision to exit certain non-core business activities,
resulting in losses on disposition of assets, as well as excess lease costs; and
3) consolidation of the Company's continuing operations resulting in impairment
of assets, losses on disposition of assets and excess lease costs. During 1999,
the Company completed its restructuring initiatives. At December 31, 2000, there
was no remaining reserve balance. The decrease in the reserve balance since
December 31, 1999 of $1.4 million represents cash paid for excess lease costs
for a facility in New York City. The Company also has a contingent liability
related to this facility (see Notes 13 and 14 to the Consolidated Financial
Statements).


CERTAIN FACTORS AFFECTING CALLAWAY GOLF COMPANY


The financial statements included in this report and related discussion report
and analyze the Company's financial performance and condition for the periods
indicated. 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 therefore has included the
following discussion of certain factors which could affect the Company's future
performance or financial condition. These factors could cause the Company's
future performance or financial


                            Callaway Golf Company 16
   7

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.


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. An adverse change in
economic conditions in the United States or in the Company's international
markets (which represent almost half of the Company's total sales), or even a
decrease in consumer confidence as a result of anticipated adverse changes in
economic conditions, could cause consumers to forgo or to postpone purchasing
new golf products. Such forgone or postponed purchases could have a material
adverse affect upon the Company.


Growth Opportunities


Golf Clubs. In order for the Company to grow significantly 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 the worldwide premium golf club market and therefore opportunities for
additional market share may be limited. Furthermore, the Company believes that
since 1997 the overall worldwide premium golf club market has generally not
experienced substantial growth in dollar volume from year to year. There is no
assurance that the overall dollar volume of the worldwide premium golf club
market will grow, or that it will not decline, in the future. The Company's
future club sales growth therefore may be limited unless there is growth in the
worldwide premium golf club market.


Golf Balls. The Company only began selling its golf balls in February 2000 and
therefore it does not have as significant of a market share as it does in the
club business. Although opportunities exist for additional market share in the
golf ball market, such market share is currently held by some well-established
and well-financed competitors. There is no assurance that the Company will be
able to increase its market share in this very competitive golf ball market. If
the Company is unable to obtain additional market share, its golf ball sales
growth may be limited.


Golf Ball Costs


The cost of entering the golf ball business has been higher than the Company
first anticipated. Much of these higher costs are attributable to higher than
expected production costs as a result of yield and other ramp-up issues. To
date, the development of the Company's golf ball business has had a significant
negative impact on the Company's cash flows, financial position and results of
operations. Although the Company believes it generally has resolved these
issues, there is no assurance that the Company will be able to achieve the sales
or production efficiencies necessary to make its golf ball business profitable.
Until the golf ball business becomes profitable, the Company's results of
operations, cash flows and financial position will continue to be negatively
affected.


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 forecast. As in
1998, 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 use, among other
resources, significant quantities of electricity to operate. The State of
California is currently experiencing a severe shortage of electricity. The
shortage may worsen during the summer months when demand for electricity is at
its peak. Many companies in California have experienced periods of black-outs
during


                            Callaway Golf Company 17
   8

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


which electricity was not available. Although the Company has not yet
experienced any such black-outs, the Company expects that it will experience
some black-out periods. If the black-out periods are significant, the Company
will experience significant disruptions in its manufacturing operations as the
Company would be unable to manufacture any product during such black-out
periods. Any extended or recurring disruptions could have a material adverse
affect upon the Company.


        Furthermore, the shortage of electricity is also resulting in increased
prices for electricity. The Company has tried to mitigate fluctuations in
electricity prices by entering into long-term contracts at fixed rates. The
Company's current contract expires this summer and the Company is currently
negotiating a new contract. The Company expects that the new contracted rate
will be higher than its current rate. If the Company is unable to enter into a
new contract for a reasonable rate, the Company's expenses for electricity could
increase significantly. Such an increase could have a significant adverse affect
upon the Company's cost of goods sold and results of operations.


        In addition to electricity, the Company also uses natural gas to run the
golf club and golf ball manufacturing facilities. There is currently a shortage
of natural gas which has caused prices to increase significantly. The Company
expects this shortage to continue at least through the cold weather months when
demand for gas is greatest. Although the Company does not expect any
interruptions in its supply of natural gas, if the prices continue to increase,
such increased prices could have a significant adverse affect upon the Company's
cost of goods sold and results of operations.


Dependence on Certain Vendors 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 are unable to provide
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, including the golf ball cover, 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 is continually
reviewing alternative methods of ground shipping to supplement its use and
reduce its reliance on UPS. To date, a limited number of alternative vendors
have been identified and are being used by the Company. Nevertheless, any
interruption in UPS services could have a material adverse effect on the
Company's sales and results of operations.


        The Company's size has made it a large consumer of certain materials,
including titanium alloys and carbon fiber. 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. An
interruption in the supply of such materials or a significant change in costs
could have a material adverse effect on the Company.


Competition


Golf Clubs. The worldwide market for premium golf clubs 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 and "close-outs" by competitors continue
to generate increased market competition. While the Company believes that its
products and its marketing efforts continue to be competitive, there can be no
assurance that successful marketing activities by competitors will not
negatively impact the Company's future sales.


Golf Balls. The premium 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 market
share in excess of 50% of the premium golf ball business. There are also several
recent entrants into the golf ball business, including Nike. Many of these
competitors have introduced or will introduce golf ball designs that directly
compete with the Company's products.


                            Callaway Golf Company 18
   9

The Company will need to penetrate the market share held by existing competitors
while competing with the other new entrants in order for its golf ball business
to be successful. There can be no assurance that the Company's golf balls will
obtain the market acceptance necessary to be commercially successful.


Market Acceptance of Products


A golf 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 may be subject to rapid and
unanticipated changes. There can be no assurance as to how long the Company's
golf clubs and balls will maintain market acceptance and therefore 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


The Company believes that the introduction of new, innovative golf clubs and
golf balls is important to its future success. 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 may be 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 Company's new products have tended to incorporate significant
innovations in design and manufacture, which have often resulted in higher
prices for the Company's products relative to other products in the marketplace.
For example, the Company's Rule 35(R) golf balls are premium golf balls and
there are many lower priced non-premium golf balls sold by others. There can be
no assurance that a significant percentage of the public will always be willing
to pay such premium prices for golf equipment or that the Company will be able
to continue to design and manufacture premium products that achieve market
acceptance in the future.


        The rapid introduction of new golf club or golf ball products by the
Company could result in close-outs of existing inventories at both the wholesale
and retail levels. Such close-outs can result 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 experienced some of these effects
in 1999 with respect to golf clubs and could experience similar effects in
future years as the Company from time to time introduces new golf club or golf
ball products or misjudges demand.


        It previously was the Company's practice to announce its new product
line at the beginning of each calendar year. The Company recently departed from
that practice and now 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.


Conformance with Rules of Golf


New golf club and golf ball products generally seek to satisfy the standards
established by the United States Golf Association ("USGA") and the Royal and
Ancient Golf Club of St. Andrews ("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.


        Currently, 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." In
1998, the USGA adopted a so-called "spring-like effect test" that limits the
coefficient of restitution ("COR") of drivers. The R&A has announced that it
does not believe that such a limitation is needed or in the best interests of
the game of golf, and has not adopted such a test or other performance
limitation on drivers.


        Some countries, such as Japan and Canada, have local golf associations
that exert some control over the game of golf within their jurisdictions. The
Royal Canadian Golf Association ("RCGA") has announced that it will generally
follow the USGA with respect to equipment rules. So far, no other local
organization within the R&A's general jurisdiction has deviated from the R&A's
position with respect to equipment rules.


        Currently, all of the Company's products are believed to be "conforming"
under the Rules of Golf as published by the R&A. In addition, all of the
Company's products with the exception of the Company's ERC II(TM) Forged
Titanium Driver (together with its predecessor, the ERC(TM) Forged Titanium
Driver, the "ERC(TM) Drivers"), are


                            Callaway Golf Company 19
   10

believed to be "conforming" under the Rules of Golf as published by the USGA and
RCGA. Although the ERC(TM) Drivers conform to all existing R&A equipment rules,
and most existing USGA and RCGA equipment rules, they do not conform to the
USGA's so-called "spring-like effect" test protocol. There is no assurance that
new designs 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.


        On October 18, 2000, the Company announced that it intended to sell its
ERC II(TM) Forged Titanium Driver in the U.S. despite the fact that it has been
ruled to be non-conforming by the USGA. On December 8, 2000, the USGA announced
that scores in rounds played with clubs that do not conform to USGA rules, such
as the ERC II(TM) Forged Titanium Driver, may not be posted for USGA handicap
purposes. To the Company's knowledge, it is the first large, premium brand golf
equipment company to sell non-conforming equipment in the U.S. By undertaking
this approach, the Company hopes to expand participation in the game of golf in
the United States--the source of approximately 55% of the Company's revenues--by
making the game more enjoyable and accessible for more people, including those
people who play the game primarily for fun, enjoyment and recreation.


        While the Company believes that this is the best strategy for the
Company and its shareholders, and one that is good for the game of golf as well,
the strategy is not without risk. It is possible that a significant number of
U.S. retailers may decline to carry a non-conforming product such as the ERC
II(TM) Driver. It is also possible that a significant number of U.S. golfers may
decide that they do not wish to purchase a driver that may not be used in
competitions in the U.S. played subject to the USGA's rules or that may not be
used for handicap purposes. Retailer and/or consumer backlash against the
introduction of a non-conforming product may injure sales of other, conforming
products, or otherwise damage the brand. These negative effects, if they
materialize, could materially reduce U.S. sales of ERC II(TM) Drivers and other
products in 2001 and in future years, and could even negatively affect in a
material way the strength of the brand and the Company's business overseas
despite the fact that the ERC II(TM) Driver fully conforms with the R&A's Rules.
On the other hand, if the Company is correct in its belief that there are a
large number of American golfers who do not play in tournaments subject to the
USGA's Rules and are prepared to purchase an exceptional non-conforming driver
for use in recreational play, and/or the Company's strategy is successful over
time in attracting more people to the game of golf in the U.S., then the
beneficial effects could be significant.


Golf Professional Endorsements


The Company establishes relationships with professional golfers in order to
evaluate and promote Callaway Golf(R) and Odyssey(R) branded products. The
Company has entered into endorsement arrangements with members of the various
professional tours, including the Senior PGA Tour, the PGA Tour, the LPGA Tour,
the PGA European Tour, the Japan Golf Tour and the buy.com 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.


Golf Clubs. Many professional golfers throughout the world use the Company's
golf clubs even though they are not contractually bound to do so and do not
grant any endorsement to the Company. The Company previously created cash pools
that rewarded such usage. In 2001, the Company is discontinuing these pools, as
it believes it is better to allocate these resources to other tour programs. In
addition, many other companies are aggressively seeking the patronage of these
professionals, and are offering many inducements, including specially designed
products and significant cash rewards. In the past, the Company has experienced
an exceptional level of club usage on the world's major professional tours, and
the Company has heavily advertised that fact. The Company's lack of cash
inducements for non-staff golfers could result in a decrease in usage of the
Company's clubs by professional golfers. While it is not clear to what extent
professional usage contributes to retail sales, it is possible that 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.


Golf Balls. Many golf ball manufacturers, including the leading U.S.
manufacturer of premium golf balls, have focused a great deal of their marketing
efforts on promoting the fact that tour professionals use their balls. Some of
these golf ball competitors spend large amounts of money to secure professional
endorsements, and the market leader has obtained a very high degree of tour
penetration. While almost all of the Company's staff professionals, as well as
other professionals who are not on the Company's staff, have decided to use the
Company's golf balls in play, there is no assurance they will continue to do so.
Furthermore, there are many other professionals who are already under contract
with other golf ball manufacturers or who, for other reasons, may not


                            Callaway Golf Company 20
   11

choose to play the Company's golf ball products. The Company does not plan to
match the endorsement spending levels of the leading manufacturer, and will
instead rely more heavily upon the performance of the ball and other factors to
attract professionals to the product. In the future the Company may or may not
increase its tour spending in support of its golf ball. It is not clear to what
extent use by professionals is important to the commercial success of the
Company's golf balls, but it is possible that the results of the Company's golf
ball business could be significantly affected by its success or lack of success
in securing acceptance on the professional tours.


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 aggressively 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. From time to
time others have 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 vendors.
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.


Seasonality and Adverse Weather Conditions


In the golf club and golf ball industries, sales to retailers are generally
seasonal due to lower demand in the retail market during cold weather months.
The Company's golf club business has generally experienced these seasonal
fluctuations and the Company expects this to continue generally for both its
golf club and golf ball businesses. Furthermore, unusual or severe weather
conditions generally result in less golf rounds played, which generally results
in less demand for golf clubs and golf balls. Consequently, sustained adverse
weather conditions, especially during the warm weather months, could materially
affect the Company's sales.


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 to the Company, the incidence of 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. While the Company


                            Callaway Golf Company 21
   12

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


believes that it has sufficient reserves for warranty claims, there can be no
assurance that these reserves will be sufficient if the Company were to
experience an unusually high incidence of breakage or other product problems.


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. How-ever, 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(R) products to unauthorized distributors and/or an increase in
sales returns over historical levels. For example, the Company experienced a
decline in sales in the U.S. in 1998, and believes the decline was due, in part,
to a decline in "gray market" shipments to Asia and Europe. 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 Distribution


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 has reorganized a
substantial portion of its international operations, including the acquisition
of distribution rights in certain key countries in Europe, Asia and North
America. These efforts have resulted and will continue to result in additional
investments in inventory, accounts receivable, employees, corporate
infrastructure and facilities. The integration of foreign distribution into the
Company's international sales operations will continue to require the dedication
of management and other Company resources. The integration of foreign
distribution also could result in disruptions in the distribution of the
Company's products in some areas. There can be no assurance that the acquisition
and integration of the Company's foreign distribution channels will be
successful, and the Company's attempts to do so may adversely affect the
Company's business. Additionally, the Company's plan to integrate foreign
distribution increases the Company's exposure to fluctuations in exchange rates
for various foreign currencies which could result in losses and, in turn, could
adversely impact the Company's results of operations. There can be no assurance
that the Company will be able to mitigate this exposure in the future through
its management of foreign currency transactions.


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, like the one experienced in 1998 and 1999,
primarily in the U.S., 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 of a significant portion of the Company's customers to meet
their obligations to the Company would adversely impact the Company's
performance and financial condition.


Information Systems


Many of the countries in which the Company sells its products are Member States
of the Economic and Monetary Union ("EMU"). Beginning January 1, 1999, Member
States of the EMU have the option of trading in either their local currencies or
the euro, the official currency of EMU participating Member States. Parties are
free to choose the unit they prefer in contractual relationships until 2002 when
their local currencies will be phased out. The current version of the Company's
enterprise-wide business system does not support transactions denominated in
euro. The Company is in the process of upgrading its business systems to support
transactions denominated in euro. The Company intends to enable the euro
functionality of its upgraded system no later than the end of its third quarter
in 2001. Until such time as the upgrade has occurred and the euro functionality
has been enabled, transactions denominated in euro will be processed manually.
To date, the Company has not experienced, and does not anticipate in the


                            Callaway Golf Company 22
   13

near future, a large demand from its customers to transact in euro.
Additionally, the Company does not believe that it will incur material costs
specifically associated with manually processing data or preparing its business
systems to operate in either the transitional period or beyond. However, there
can be no assurance that the conversion of EMU Member States to euro will not
have a material adverse effect on the Company and its operations.


Market Risk


The Company is exposed to the impact of foreign currency fluctuations due to its
international operations and certain export sales. The Company is exposed to
both transactional currency/functional currency and functional
currency/reporting currency exchange rate risks. The Company's foreign currency
exposures include most European currencies, Japanese yen, Canadian dollars and
Korean won. In the normal course of business, the Company employs established
policies and procedures to manage its exposure to fluctuations in the value of
foreign currencies. Pursuant to its foreign exchange hedging policy, the Company
may use forward foreign currency exchange rate contracts to hedge certain firm
commitments and the related receivables and payables. Foreign currency
derivatives are used only to the extent considered necessary to meet the
Company's objectives and the Company does not enter into forward contracts for
speculative purposes. During 2000, the Company entered into such contracts on
behalf of three of its wholly-owned subsidiaries, Callaway Golf Europe Ltd.,
Callaway Golf K.K. and Callaway Golf Canada Ltd. The Company also hedged certain
euro-denominated accounts receivable in 2000. Also pursuant to its foreign
exchange hedging policy, in the fourth quarter of 2000, the Company began
hedging anticipated intercompany sales of inventory denominated in foreign
currencies using forward foreign currency exchange rate contracts. The effect of
these practices is to minimize variability in the Company's operating results
arising from foreign exchange rate movements. These foreign exchange contracts
generally do not subject the Company to risk due to exchange rate movements
because gains and losses on these contracts offset losses and gains on the
transactions being hedged, and the Company does not engage in hedging contracts
which exceed the amounts of these transactions.


       Additionally, the Company is exposed to interest rate risk from its
Accounts Receivable Facility and Amended Credit Agreement (see Notes 4 and 5 to
the Company's Consolidated Financial Statements) which are indexed to the
London Interbank Offering Rate and Redwood Receivables Corporation Commercial
Paper Rate. No amounts were advanced or outstanding under these facilities at
December 31, 2000.


       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 December 31, 2000 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.


       At December 31, 2000, the estimated maximum one-day loss in earnings from
the Company's foreign-currency derivative financial instruments, calculated
using the sensitivity analysis model described above, is $13.9 million
attributable to hedges of anticipated intercompany sales and $0.9 million
attributable to hedges of balance sheet exposures. 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.


       Notes 4 and 5 to the Consolidated Financial Statements outline the
principal amounts, if any, and other terms required to evaluate the expected
cash flows and sensitivity to interest rate changes.


                            Callaway Golf Company 23

   14



CONSOLIDATED BALANCE SHEET



(in thousands, except share and per share data)                                          December 31,
                                                                                    2000             1999
============================================================================================================
                                                                                            
ASSETS
Current assets:
         Cash and cash equivalents                                                $ 102,596       $ 112,602
         Accounts receivable, net                                                    58,836          54,252
         Inventories, net                                                           133,962          97,938
         Deferred taxes                                                              29,354          32,558
         Other current assets                                                        17,721          13,122
- ------------------------------------------------------------------------------------------------------------

            Total current assets                                                    342,469         310,472

Property, plant and equipment, net                                                  134,712         142,214
Intangible assets, net                                                              112,824         120,143
Other assets                                                                         40,929          43,954
- ------------------------------------------------------------------------------------------------------------
                                                                                  $ 630,934       $ 616,783
============================================================================================================

LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
         Accounts payable and accrued expenses                                    $  44,173       $  46,664
         Accrued employee compensation and benefits                                  22,574          21,126
         Accrued warranty expense                                                    39,363          36,105
         Accrued restructuring costs                                                                  1,379
         Income taxes payable                                                         3,196
- ------------------------------------------------------------------------------------------------------------
            Total current liabilities                                               109,306         105,274

Long-term liabilities:
         Deferred compensation                                                        9,884          11,575

Commitments and contingencies (Note 13)

Shareholders' equity:
         Preferred Stock, $.01 par value, 3,000,000 shares authorized, none
            issued and outstanding at December 31, 2000 and 1999
         Common Stock, $.01 par value, 240,000,000 shares authorized,
            78,958,963 and 76,302,196 issued December 31, 2000 and 1999                 790             763
         Paid-in capital                                                            347,765         307,329
         Unearned compensation                                                       (1,214)         (2,784)
         Retained earnings                                                          349,681         288,090
         Accumulated other comprehensive income                                      (6,096)            280
         Less:  Grantor Stock Trust (5,300,000  shares at December 31, 2000
            and 1999) at market (Note 8)                                            (98,713)        (93,744)
- ------------------------------------------------------------------------------------------------------------
                                                                                    592,213         499,934
         Less:  Common Stock held in treasury, at cost, 4,815,241  shares at
            December 31, 2000  and none at December 31, 1999                        (80,469)
- ------------------------------------------------------------------------------------------------------------
               Total shareholders' equity                                           511,744         499,934
- ------------------------------------------------------------------------------------------------------------
                                                                                  $ 630,934       $ 616,783
============================================================================================================



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

                            Callaway Golf Company 24
   15

CONSOLIDATED STATEMENT OF OPERATIONS




(in thousands, except per share data)                                         Year ended December 31,
                                                    ----------------------------------------------------------------------------
                                                             2000                        1999                       1998
                                                    --------------------        --------------------       ---------------------
                                                                                                          
Net sales                                           $837,627        100%        $719,038        100%       $703,060         100%
Cost of goods sold                                   440,119         53%         384,265         53%        410,341          58%
                                                    --------       ----         --------       ----        --------         ---
   Gross profit                                      397,508         47%         334,773         47%        292,719          42%

Selling expenses                                     170,541         20%         128,565         18%        143,727          20%
General and administrative expenses                   70,333          8%          92,478         13%         98,048          14%
Research and development costs                        34,579          4%          34,002          5%         36,848           5%
Restructuring costs (Note 14)                                                     (5,894)        (1%)        54,235           8%
Sumitomo transition costs (Note 16)                                                5,713          1%
                                                    --------       ----         --------       ----        --------         ---
   Income (loss) from operations                     122,055         15%          79,909         11%        (40,139)         (6%)
Interest and other income, net (Note 11)               8,791                       9,182                      3,911
Interest expense                                      (1,524)                     (3,594)                    (2,671)
                                                    --------       ----         --------       ----        --------         ---
Income (loss) before income taxes and cumulative
   effect of accounting change                       129,322         16%          85,497         12%        (38,899)         (6%)
Income tax provision (benefit)                        47,366                      30,175                    (12,335)
                                                    --------       ----         --------       ----        --------         ---
Income before cumulative effect of accounting
   change                                             81,956                      55,322                    (26,564)
Cumulative effect of accounting change                  (957)
                                                    --------       ----         --------       ----        --------         ---
   Net income (loss)                                $ 80,999         10%        $ 55,322          8%      $ (26,564)         (4%)
                                                    ========       ====         ========       =====      =========         ===


Earnings (loss) per common share:
   Basic
       Income before cumulative effect of
          accounting change                         $   1.17                    $   0.79                  $   (0.38)
       Cumulative effect of accounting change          (0.01)
                                                    --------                    --------                  ---------
                                                    $   1.16                    $   0.79                  $   (0.38)
                                                    ========                    ========                  =========
   Diluted
       Income before cumulative effect of
           accounting change                        $   1.14                    $   0.78                  $   (0.38)
       Cumulative effect of accounting change          (0.01)
                                                    --------                    --------                   --------
                                                    $   1.13                    $   0.78                  $   (0.38)
                                                    ========                    ========                  =========
Common equivalent shares:
   Basic                                              69,946                      70,397                     69,463
   Diluted                                            71,412                      71,214                     69,463
                                                    --------                    --------                   --------



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


                            Callaway Golf Company 25

   16

CONSOLIDATED STATEMENT OF CASH FLOWS




(in thousands)                                                                           Year ended December 31,
                                                                               --------------------------------------------
                                                                                 2000              1999             1998
                                                                               ---------         ---------         --------
                                                                                                          
Cash flows from operating activities:
   Net income (loss)                                                           $  80,999         $  55,322         $(26,564)
   Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
       Depreciation and amortization                                              40,249            39,877           35,885
       Non-cash compensation                                                       2,157             1,390            2,887
       Tax benefit from exercise of stock options                                  6,806             2,377            3,068
       Net non-cash foreign currency and hedging gains                            (1,410)
       Deferred taxes                                                              4,906             9,971          (36,235)
       Non-cash restructuring costs                                                                 (8,609)          25,497
       Loss on disposal of assets                                                    342               315            1,298

   Changes in assets and liabilities, net of effects from acquisitions:
       Accounts receivable, net                                                   (9,047)           19,690           51,575
       Inventories, net                                                          (39,402)           51,092          (42,665)
       Other assets                                                               (3,074)          (12,966)         (12,149)
       Accounts payable and accrued expenses                                       2,638            12,225           (4,357)
       Accrued employee compensation and benefits                                  1,623             9,875           (3,411)
       Accrued warranty expense                                                    3,258               286            7,760
       Income taxes payable                                                        4,088           (10,001)           9,652
       Accrued restructuring costs                                                (1,379)           (3,476)           7,389
       Deferred compensation                                                      (1,691)            3,969             (299)
       Accrued restructuring costs - long-term                                                      (5,041)          11,117
                                                                               ---------         ---------         --------
   Net cash provided by operating activities                                      91,063           166,296           30,448
                                                                               ---------         ---------         --------
Cash flows from investing activities:
                                                                               ---------         ---------         --------
   Capital expenditures                                                          (28,386)          (56,244)         (67,859)
   Acquisitions, net of cash acquired                                               (444)           (2,389)         (10,672)
   Proceeds from sale of assets                                                      244             5,095            3,417
                                                                               ---------         ---------         --------
   Net cash used in investing activities                                         (28,586)          (53,538)         (75,114)
                                                                               ----------        ----------        ---------
Cash flows from financing activities:
   Net proceeds from line of credit                                                                (70,919)          70,919
   Proceeds from note payable                                                                       35,761           12,971
   Short-term debt retirement                                                                                       (10,373)
   Issuance of Common Stock                                                       28,233             9,009           10,343
   Acquisition of Treasury Stock                                                 (80,469)
   Retirement of Common Stock                                                                                          (917)
   Proceeds from sale-leaseback of equipment                                       1,268
   Dividends paid, net                                                           (19,538)          (19,760)         (19,485)
                                                                               ---------         ---------         --------
Net cash (used in) provided by financing activities                              (70,506)          (45,909)          63,458
                                                                               ---------         ---------         --------
Effect of exchange rate changes on cash                                           (1,977)              135              622
                                                                               ---------         ---------         --------
Net (decrease) increase in cash and cash equivalents                             (10,006)           66,984           19,414
Cash and cash equivalents at beginning of year                                   112,602            45,618           26,204
                                                                               ---------         ---------         --------
Cash and cash equivalents at end of year                                       $ 102,596         $ 112,602         $ 45,618
                                                                               =========         =========         ========
Supplemental disclosures:
   Non-cash financing (Note 4)                                                                   $  48,732
   Cash paid for interest and fees                                             $     805         $   3,637         $  2,162
   Cash paid for income taxes                                                  $  29,245         $  30,670         $  8,165
                                                                               ---------         ---------         --------


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


                            Callaway Golf Company 26

   17

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY




(in thousands)                                                                                           Accumulated
                                            Common Stock                                                   Other
                                          ----------------        Paid-in      Unearned     Retained    Comprehensive
                                          Shares    Amount        Capital    Compensation   Earnings       Income
                                          -------   ------       ---------   ------------   ---------   -------------
                                                                                      
Balance, December 31, 1997                74,252     $743        $337,403      $(3,575)     $298,728        $(559)
                                          ------     ----        --------      -------      --------      -------
Exercise of stock options                    391        4           4,433
Tax benefit from exercise of
   stock options                                                    3,068
Issuance of Restricted
   Common Stock                              130        1           4,029       (4,030)
Cancellation of Restricted
   Common Stock                              (19)                    (597)         597
Compensatory stock and
   stock options                                                    1,532        1,355
Employee stock purchase plan                 386        4           5,902
Stock retirement                             (45)      (1)           (765)                      (151)
Cash dividends                                                                               (20,969)
Dividends on shares
   held by GST                                                                                 1,484
Adjustment of GST shares to
   market value                                                   (96,990)
Equity adjustment from foreign
   currency translation                                                                                     2,339
Net income                                                                                   (26,564)
                                          ------     ----        --------      -------      --------      -------
Balance, December 31, 1998                75,095      751         258,015       (5,653)      252,528        1,780
                                          ======     ====        ========      =======      ========      =======
Exercise of stock options                    851        8           5,362
Tax benefit from exercise of
   stock options                                                    2,377
Cancellation of Restricted
   Common Stock                              (22)                    (684)         684
Compensatory stock and
   stock options                                                     (795)       2,185
Employee stock purchase plan                 378        4           3,635
Cash dividends                                                                               (21,244)
Dividends on shares
   held by GST                                                                                 1,484
Adjustment of GST shares to
   market value                                                    39,419
Equity adjustment from foreign
   currency translation                                                                                    (1,500)
Net income                                                                                    55,322
                                          ------     ----        --------      -------      --------      -------
Balance, December 31, 1999                76,302      763         307,329       (2,784)      288,090          280
                                          ======     ====        ========      =======      ========      =======
Exercise of stock options                  2,252       23          23,932
Tax benefit from exercise of
   stock options                                                   6,806
Cancellation of Restricted
   Common Stock                               (7)                   (217)          217
Acquisition of Treasury Stock
Compensatory stock and
   stock options                                                     804         1,353
Employee stock purchase plan                 412        4          4,274
Cash dividends                                                                               (21,022)
Dividends on shares
   held by GST                                                                                 1,484
Adjustment of GST shares to
   market  value                                                   4,969
Equity adjustment from foreign
   currency translation                                                                                    (5,422)
Unrealized loss on cash flow
   hedges, net of tax                                                                                        (954)
Other                                                               (132)                        130
Net income                                                                                    80,999
                                          ------     ----        --------      -------      --------      -------
Balance, December 31, 2000                78,959     $790       $347,765       $(1,214)     $349,681      $(6,096)
                                          ======     ====        ========      =======      ========      =======





(in thousands)                                                                                          Current
                                                           Treasury Stock                                Year's
                                                        --------------------                         Comprehensive
                                         GST            Shares       Amount           Total              Income
                                       --------         ------      --------         --------        -------------
                                                                                      
Balance, December 31, 1997            $(151,315)                                     $481,425
Exercise of stock options                                                               4,437
Tax benefit from exercise of
   stock options                                                                        3,068
Issuance of Restricted
   Common Stock
Cancellation of Restricted
   Common Stock
Compensatory stock and
   stock options                                                                        2,887
Employee stock purchase plan                                                            5,906
Stock retirement                                                                         (917)
Cash dividends                                                                        (20,969)
Dividends on shares
   held by GST                                                                          1,484
Adjustment of GST shares to
   market value                          96,990
Equity adjustment from foreign
   currency translation                                                                 2,339            $2,339
Net income                                                                            (26,564)          (26,564)
                                       --------         ------      --------         --------            -------
Balance, December 31, 1998              (54,325)                                      453,096          $(24,225)
                                       ========         ======      ========         ========            =======
Exercise of stock options                                                               5,370
Tax benefit from exercise of
   stock options                                                                        2,377
Cancellation of Restricted
   Common Stock
Compensatory stock and
   stock options                                                                        1,390
Employee stock purchase plan                                                            3,639
Cash dividends                                                                        (21,244)
Dividends on shares
   held by GST                                                                          1,484
Adjustment of GST shares to
   market value                         (39,419)
Equity adjustment from foreign
   currency translation                                                                (1,500)          $(1,500)
Net income                                                                             55,322            55,322
                                       --------         ------      --------         --------           -------
Balance, December 31, 1999              (93,744)                                      499,934           $53,822
                                       ========         ======      ========         ========           =======
Exercise of stock options                                                              23,955
Tax benefit from exercise of
   stock options                                                                        6,806
Cancellation of Restricted
   Common Stock
Acquisition of Treasury Stock                           (4,815)     $(80,469)         (80,469)
Compensatory stock and
   stock options                                                                        2,157
Employee stock purchase plan                                                            4,278
Cash dividends                                                                        (21,022)
Dividends on shares
   held by GST                                                                          1,484
Adjustment of GST shares to
   market  value                         (4,969)
Equity adjustment from foreign
   currency translation                                                                (5,422)          $(5,422)
Unrealized loss on cash flow
   hedges, net of tax                                                                    (954)             (954)
Other                                                                                     (2)
Net income                                                                             80,999            80,999
                                       --------         ------      --------         --------           -------
Balance, December 31, 2000             $(98,713)        (4,815)     $(80,469)        $511,744           $74,623
                                       ========         ======      ========         ========           =======



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


                            Callaway Golf Company 27

   18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1

THE COMPANY


Callaway Golf Company ("Callaway Golf" or the "Company") was incorporated in
California in 1982 and was reincorporated in Delaware in 1999. The Company
designs, develops, manufactures and markets high-quality, innovative golf clubs
and golf balls. Callaway Golf's primary products for the periods presented
include Great Big Bertha(R) Hawk Eye(R) Titanium Metal Woods, ERC(R) Forged
Titanium Drivers, Big Bertha(R) Steelhead Plus(TM) and Big Bertha(R)
Steelhead(TM) Metal Woods, Biggest Big Bertha(R) Titanium Drivers, Great Big
Bertha(R) Titanium Metal Woods, Great Big Bertha(R) Hawk Eye(R) Tungsten
Injected(TM) Titanium Irons, Steelhead(TM) X-14(R) and X-12(R) Irons, Great Big
Bertha(R) Tungsten-Titanium(TM) Irons, Odyssey(R) putters and wedges and Rule
35(R) golf balls.


NOTE 2


SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation


The consolidated financial statements for the periods presented include the
accounts of the Company and its subsidiaries, Callaway Golf Sales Company, Golf
Funding Corporation ("Golf Funding"), Callaway Golf Ball Company, Odyssey Golf,
Inc. ("Odyssey"), CGV, Inc., All-American Golf LLC ("All-American"), Callaway
Golf Media Ventures ("CGMV"), Callaway Golf Europe Ltd., Callaway Golf Europe,
S.A., Callaway Golf K.K. (formerly named ERC International Company), Callaway
Golf (Germany) GmbH, Callaway Golf Canada Ltd. and Callaway Golf Korea, Ltd. All
significant intercompany transactions and balances have been eliminated.
Callaway Golf Ball Company and Odyssey were merged with the Company as of
December 29, 2000 and December 22, 1999, respectively. The Company sold the
business of All-American in 1998 and its interest in CGMV in March 1999 (Note
15). Callaway Golf Europe, S.A. was merged with Callaway Golf Europe Ltd. in
1999 (Note 15).


Financial Statement Preparation


The preparation of financial statements in conformity with generally accepted
accounting principles 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. Examples of such estimates include provisions for warranty,
uncollectible accounts receivable, inventory obsolescence and restructuring
costs (Note 14). Actual results could differ from those estimates, which could
materially affect future results of operations.


Revenue Recognition


Sales are recognized net of an allowance for sales returns when title and risk
of loss transfers to the customer. The Company adopted Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101") in the
fourth quarter of 2000 with an effective date of January 1, 2000. SAB No. 101
summarizes the SEC's Division of Corporation Finance Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. As a result of the adoption of SAB No. 101, the Company recognized a
cumulative effect adjustment of $957,000 in the Consolidated Statement of
Operations for the year ended December 31, 2000 to reflect the change in the
Company's revenue recognition policy from shipping point to the time risk of
loss transfers to the customer.


Fair Value of Financial Instruments


The Company's financial instruments consist of cash and cash equivalents, trade
receivables and payables, forward foreign currency exchange contracts, its
revolving line of credit and note payable (Note 4) and its accounts receivable
securitization facility (Note 5). The carrying amounts of these instruments
approximate fair value because of their short maturities and variable interest
rates.


Advertising Costs


The Company advertises primarily through television and print media. The
Company's policy is to expense advertising costs, including production costs, as
incurred. Advertising expenses for 2000, 1999 and 1998 were $35,100,000,
$26,202,000 and $32,944,000, respectively.


Foreign Currency Translation and Transactions


The Company's foreign subsidiaries utilize their local currency as their
functional currency. The accounts of these foreign subsidiaries have been
translated into United States dollars at appropriate rates of exchange.
Cumulative translation gains or losses are recorded as accumulated other
comprehensive income in shareholders' equity. Gains or losses resulting from
foreign currency transactions (transactions denominated in a currency other than
the entity's local currency) are included in the consolidated statement of
operations. The Company recorded transaction losses of $147,000 and $793,000 in
2000 and 1999, respectively, and transaction gains of $1,598,000 in 1998.


Derivatives and Hedging


In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No.133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and


                            Callaway Golf Company 28

   19

requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Changes in the fair value of derivatives are recorded each period in income or
other comprehensive income, depending on whether the derivatives are designated
as hedges and, if so, the types and effectiveness of hedges. SFAS No. 133 is
effective for all periods beginning after June 15, 2000; the Company elected to
adopt early SFAS No. 133 on January 1, 1999.


        Adoption of this statement did not significantly affect the way in which
the Company currently accounts for derivatives to hedge payments due on
intercompany transactions, as described in Note 6. Accordingly, no cumulative
effect adjustments were made. In the fourth quarter of 2000, the Company began
hedging anticipated intercompany sales of inventory denominated in foreign
currencies using forward foreign currency exchange rate contracts. The purpose
of these derivative instruments is to minimize the variability of cash flows
associated with the anticipated transactions being hedged. As changes in foreign
currency rates impact the United States dollar value of anticipated
transactions, the fair value of the forward contracts also changes, providing a
synthetic offset to foreign currency rate fluctuations.


        The forward contracts used to hedge anticipated transactions are cash
flow hedges and are recorded as either assets or liabilities in the balance
sheet at fair value. Gains and losses on such contracts are recorded in other
comprehensive income and will be recorded in income when the anticipated
transactions occur. The ineffective portion of all hedges are recognized in
current period earnings.


        Additional information about the Company's use of derivative instruments
is presented in Note 6.


Earnings per Common Share


Basic earnings per common share is calculated by dividing net income for the
period by the weighted-average number of common shares outstanding during the
period. Diluted earnings per common share is calculated by dividing net income
for the period by the weighted-average number of common shares outstanding
during the period, increased by dilutive potential common shares ("dilutive
securities") that were outstanding during the period. Dilutive securities
include shares owned by the Callaway Golf Company Grantor Stock Trust (Note 8),
options issued pursuant to the Company's stock option plans (Note 10), potential
shares related to the Employee Stock Purchase Plan (Note 10) and rights to
purchase preferred shares under the Callaway Golf Company Shareholder Rights
Plan (Note 10). Dilutive securities related to the Callaway Golf Company Grantor
Stock Trust and the Company's stock option plans are included in the calculation
of diluted earnings per common share using the treasury stock method. Dilutive
securities related to the Employee Stock Purchase Plan are calculated by
dividing the average withholdings during the period by 85% of the lower of the
offering period price or the market value at the end of the period. The dilutive
effect of rights to purchase preferred shares under the Callaway Golf
Shareholder Rights Plan have not been included as dilutive securities because
the conditions necessary to cause these rights to be redeemed were not met. A
reconciliation of the numerators and denominators of the basic and diluted
earnings per common share calculations for the years ended December 31, 2000,
1999 and 1998 is presented in Note 9.


Cash Equivalents


Cash equivalents are highly liquid investments purchased with maturities of
three months or less.


Inventories


Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.


Property, Plant and Equipment


Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of two to 30 years. The Company's property, plant and equipment generally
are depreciated over the following periods:


                                                          
              Buildings and improvements                     10-30 years
              Machinery and equipment                         5-15 years
              Furniture, computers and equipment               3-5 years
              Production molds                                   2 years



        Normal repairs and maintenance are expensed as incurred. Expenditures
that materially increase values, change capacities or extend useful lives are
capitalized. Replacements are capitalized and the property, plant, and equipment
accounts are relieved of the items being replaced. The related costs and
accumulated depreciation of disposed assets are eliminated and any resulting
gain or loss on disposition is included in income.


        The Company capitalizes certain software development and implementation
costs for internal use. Development and implementation costs are expensed until
management has determined that the software will result in probable future
economic benefit and management has committed to funding the project.
Thereafter, all direct external implementation costs, as well as purchased
software costs, are capitalized and amortized using the straight-line method
over the remaining estimated useful lives.


        In September 2000, the Company completed an extensive upgrade of its
enterprise-wide business software system to a more


                            Callaway Golf Company 29

   20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


current release. The upgrade includes improved functionalities and provides the
Company the opportunity to build upon its investment in the software. As a
result of this upgrade, the Company expects that this business system will have
a greater useful life to the Company than originally estimated. Therefore, the
Company has extended the estimated useful life of its business system by three
years. The effect of this change in accounting estimate reduced depreciation
expense by $1,319,000 for the year ended December 31, 2000. The resulting
increase in net income increased the Company's earnings per share by $0.01 for
the year ended December 31, 2000.


Long-Lived Assets


The Company assesses potential impairments of its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. An impairment loss would be recognized when the
sum of the expected future net cash flows is less than the carrying amount of
the asset. During the fourth quarter of 1998, the Company implemented a
restructuring plan that included a number of cost reduction actions and
operational improvements (Note 14). As a result of this plan, impairment losses
were recorded in 1998 for certain of the Company's long-lived assets.


Intangible Assets


Intangible assets consist primarily of trade name, trademark, trade dress,
patents and goodwill resulting from the 1997 purchase of substantially all of
the assets and certain liabilities of Odyssey Sports, Inc. and goodwill
associated with the purchase of certain foreign distributors (Note 15).
Intangible assets are amortized using the straight-line method over periods
ranging from three to 40 years. During 2000, 1999 and 1998, amortization of
intangible assets was $7,195,000, $7,476,000 and $5,466,000 respectively.


Stock-Based Compensation


The Company measures compensation expense for its stock-based employee
compensation awards using the intrinsic value method. Pro forma disclosures of
net income and earnings per share, as if the fair value-based method had been
applied in measuring compensation expense, are presented in Note 10.
Compensation expense for non-employee stock-based compensation awards is
measured using the fair-value method.


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 differences in the financial
reporting and tax bases of assets and liabilities. Deferred income tax expense
(benefit) is the net change during the year in the deferred income tax asset or
liability.


        Deferred taxes have not been provided on the cumulative undistributed
earnings of foreign subsidiaries since such amounts are expected to be
reinvested indefinitely. 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.


Comprehensive Income


SFAS No. 130, "Reporting Comprehensive Income," requires that all components of
comprehensive income be reported in the financial statements in the period in
which they are recognized. The components of comprehensive income for the
Company include net income, unrealized gains or losses on cash flow hedges and
foreign currency translation adjustments. Since the Company has met the
indefinite reversal criterion, it does not accrue income taxes on foreign
currency translation adjustments. During 2000, the Company recorded $954,000,
net of tax benefit of $645,000, related to net unrealized losses on cash flow
hedges. No amounts were reclassified to earnings during 2000.


Segment Information


The Company utilizes the management approach to report segment information. The
management approach designates the international organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. The Company also discloses
information about products and services, geographic areas and major customers.
This information is presented in Note 16.


Diversification of Credit Risk


The Company's financial instruments that are subject to concentrations of credit
risk consist primarily of cash equivalents and trade receivables.


        The Company may invest its excess cash in money market accounts and U.S.
Government securities and has established guidelines relative to diversification
and maturities in an effort to maintain safety and liquidity. These guidelines
are periodically reviewed and modified to take advantage of trends in yields and
interest rates.


        The Company operates in the golf equipment industry and 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. The Company maintains


                            Callaway Golf Company 30

   21

reserves for potential credit losses, which it considers adequate to cover any
such losses.


        During 2000, 1999 and 1998, approximately 46%, 42% and 38%,
respectively, of the Company's net sales were made to foreign customers. An
adverse change in either economic conditions abroad or the Company's
relationship with significant foreign retailers could negatively impact the
volume of the Company's international sales and the Company's results of
operations, cash flows and financial position.


        The Company enters into forward exchange rate contracts for the purpose
of hedging foreign exchange rate exposures on existing or anticipated
transactions. In the event of a failure to honor one of these forward contracts
by one of the banks with which the Company has contracted, management believes
any loss would be limited to the exchange rate differential from the time the
contract was made until the time it was compensated.


Recent Accounting Pronouncement


In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS No. 140 replaces Statement of
Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
It revises the standards for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
the SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective
for transactions after March 31, 2001, but certain disclosure requirements are
effective for periods ending after December 15, 2000. The Company does not
expect that SFAS No. 140 will have any effect on its results of operations,
financial position or cash flows. Required disclosures are presented in Note 5.


Reclassifications


In July 2000, the Emerging Issues Task Force ("EITF") finalized its consensus on
Issue No. 00-10, "Accounting for Shipping and Handling Revenues and Costs."
Pursuant to EITF Issue No. 00-10 and the Securities and Exchange Commission's
position on this issue, all amounts billed to customers for shipping and
handling should be included in "net sales" and costs incurred related to
shipping and handling should be included in "cost of goods sold." The Company
had previously included shipping and handling revenues and costs in "selling"
expenses. The Company's Statement of Operations for all periods presented has
been reclassified and reflects the classification required by EITF Issue No.
00-10.


        Certain other prior period amounts have been reclassified to conform
with the current period presentation.


NOTE 3

SELECTED FINANCIAL STATEMENT INFORMATION




      (in thousands)                                       December 31,
                                                    ---------------------------
                                                       2000             1999
                                                    ---------         ---------
                                                                
      Accounts receivable, net:
         Trade accounts receivable                  $  65,063         $  59,543
         Allowance for doubtful accounts               (6,227)           (5,291)
                                                    ---------         ---------
                                                    $  58,836         $  54,252
                                                    =========         =========
      Inventories, net:
         Raw materials                              $  56,936         $  45,868
         Work-in-process                                1,293             1,403
         Finished goods                                83,453            65,661
                                                    ---------         ---------
                                                      141,682           112,932
         Reserve for obsolescence                      (7,720)          (14,994)
                                                    ---------         ---------
                                                    $ 133,962         $  97,938
                                                    =========         =========
      Property, plant and equipment, net:
         Land                                       $  12,358         $  12,358
         Buildings and improvements                    90,301            87,910
         Machinery and equipment                       60,399            50,942
         Furniture, computers
              and equipment                            65,140            64,334
         Production molds                              25,610            22,714
         Construction-in-process                        5,766             5,032
                                                    ---------         ---------
                                                      259,574           243,290
         Accumulated depreciation                    (124,862)         (101,076)
                                                    ---------         ---------
                                                    $ 134,712         $ 142,214
                                                    =========         =========
      Intangible assets, net:
         Trade name                                 $  69,629         $  69,629
         Trademark and trade dress                     29,841            29,841
         Patents, goodwill and other                   33,759            34,911
                                                    ---------         ---------
                                                      133,229           134,381
         Accumulated amortization                     (20,405)          (14,238)
                                                    ---------         ---------
                                                    $ 112,824         $ 120,143
                                                    =========         =========
      Accounts payable and accrued expenses:
         Accounts payable                           $   5,552         $  11,297
         Accrued expenses                              38,621            35,367
                                                    ---------         ---------
                                                    $  44,173         $  46,664
                                                    =========         =========
      Accrued employee compensation
         and benefits:
         Accrued payroll and taxes                  $  16,178         $  15,303
         Accrued vacation and sick pay                  5,111             4,571
         Accrued commissions                            1,285             1,252
                                                    ---------         ---------
                                                    $  22,574         $  21,126
                                                    =========         =========




                            Callaway Golf Company 31

   22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4


BANK LINE OF CREDIT AND NOTE PAYABLE


In February 1999, the Company consummated the amendment of its credit facility
to increase the facility to up to $120,000,000 (the "Amended Credit Agreement").
The Amended Credit Agreement expires in February 2004 and is secured by
substantially all of the assets of the Company. The Amended Credit Agreement
bears interest at the Company's election at the London Interbank Offering Rate
("LIBOR") plus a margin or the higher of the base rate on corporate loans at
large U.S. money center commercial banks (prime rate), or the Federal Funds Rate
plus 50 basis points. The line of credit requires the Company to maintain
certain minimum financial ratios, including a fixed charge coverage ratio, as
well as other restrictive covenants. As of December 31, 2000, up to $117,276,000
of the credit facility remained available for borrowings (including a reduction
of $2,724,000 for outstanding letters of credit), subject to meeting certain
availability requirements under a borrowing base formula and other limitations.


        In December 1998, Callaway Golf Ball Company, then a wholly-owned
subsidiary of the Company, entered into a master lease agreement for the
acquisition and lease of up to $56,000,000 of machinery and equipment. By
December 31, 1999, the Company had finalized its lease program and leased
$50,000,000 of equipment pursuant to the master lease agreement. This lease
program included an interim finance agreement (the "Finance Agreement"). The
Finance Agreement provided pre-lease financing advances for the acquisition and
installation costs of the aforementioned machinery and equipment. The Finance
Agreement bore interest at LIBOR plus a margin and was secured by the underlying
machinery and equipment and a corporate guarantee from the Company. During the
third and fourth quarters of 1999, the Company converted the balance of this
note payable to the operating lease discussed above. As of December 31, 1999, no
amount was outstanding under this facility. On December 29, 2000, pursuant to an
assumption agreement, the Company assumed all of the rights, title, interest and
obligations of Callaway Golf Ball Company under the master lease agreement.


NOTE 5


ACCOUNTS RECEIVABLE SECURITIZATION


The Company's wholly-owned subsidiary, Callaway Golf Sales Company, sells trade
receivables on an ongoing basis to its wholly-owned subsidiary, Golf Funding.
Pursuant to an agreement effective February 1999 with a securitization company
(the "Accounts Receivable Facility"), Golf Funding, in turn, sells such
receivables to the securitization company on an ongoing basis, which yields
proceeds of up to $80.0 million at any point in time. Golf Funding's sole
business is the purchase of trade receivables from Callaway Golf Sales Company.
Golf Funding is a separate corporate entity with its own separate creditors,
which in the event of its liquidation will be entitled to be satisfied out of
Golf Funding's assets prior to any value in Golf Funding becoming available to
the Company. The Accounts Receivable Facility expires in February 2004.


        Under the Accounts Receivable Facility, the receivables are sold at face
value with payment of a portion of the purchase price being deferred. During
2000 and as of December 31, 2000, no amount was outstanding under the Accounts
Receivable Facility. Fees incurred in connection with the facility and discounts
associated with the sale of accounts receivable for years ended December 31,
2000 and 1999 were $303,000 and $923,000 and were recorded as interest expense.


NOTE 6


DERIVATIVES AND HEDGING


During 2000, 1999 and 1998, the Company entered into forward foreign currency
exchange rate contracts to hedge payments due on intercompany transactions by
certain of its wholly-owned foreign subsidiaries. The Company also hedged
certain yen-denominated transactions with its Japanese distributor in 1999 and
1998. Realized and unrealized gains and losses on these contracts are recorded
in income. The effect of this practice is to minimize variability in the
Company's operating results arising from foreign exchange rate movements. The
Company does not engage in foreign currency speculation. These foreign exchange
contracts generally do not subject the Company to risk due to exchange rate
movements because gains and losses on these contracts offset losses and gains on
the intercompany transactions being hedged, and the Company does not engage in
hedging contracts which exceed the amount of the intercompany transactions. At
December 31, 2000, 1999 and 1998, the Company had approximately $10,457,000,
$7,117,000 and $11,543,000, respectively, of these foreign exchange contracts
outstanding. The contracts outstanding at December 31, 2000 mature between
January and March of 2001. The Company had net realized and unrealized gains on
foreign exchange contracts of $5,299,000, $358,000 and $57,000 in 2000, 1999 and
1998, respectively.


        During the fourth quarter of 2000, the Company utilized forward foreign
currency exchange rate contracts to hedge cash flows associated with forecasted
intercompany sales of inventory. These forward contracts are accounted for as
cash flow hedges. The Company only hedges transactions that it deems to be more
likely than not to occur. During 2000, the Company hedged only those
transactions forecasted to occur by December 31, 2001. As of December 31, 2000,
the Company had approximately $107,779,000 of cash flow hedges outstanding. The
Company assesses the effectiveness of these derivatives using the spot rate.
Changes in the spot-forward differential are excluded from the test of hedge
effectiveness and are recorded currently in earnings as a component of "Interest
and other income, net." Assessments of hedge effectiveness are performed using
the dollar offset method and applying a


                            Callaway Golf Company 32

   23

hedge effectiveness ratio of between 80% and 125%. Given that both the hedged
item and the hedged instrument are evaluated using the same spot rate, the
Company anticipates hedges of anticipated intercompany inventory sales to be
highly effective. The effectiveness of each derivative is assessed monthly.
During 2000, a loss of $174,000, representing the ineffective portion of the
Company's derivative instruments, was recorded in earnings.


        The effective portion of the fair value of the derivatives is deferred
on the balance sheet in other comprehensive income ("OCI"), a component of
"Accumulated other comprehensive income." Amounts recorded in OCI will be
released to earnings in the same period that the hedged transaction will impact
the Company's consolidated earnings. This transaction date is assumed to occur
when the underlying sale of product to a third party occurs. At December 31,
2000, $1,599,000 of deferred net losses is expected to be reclassified into
earnings within the next 12 months. During 2000, no gains or losses were
reclassified into earnings as a result of the discontinuance of any cash flow
hedges.


NOTE 7


TREASURY STOCK


On May 3, 2000, the Company announced that its Board of Directors authorized it
to repurchase its Common Stock in the open market or in private transactions,
subject to the Company's assessment of market conditions and buying
opportunities from time to time, up to a maximum cost to the Company of
$100,000,000. The Company began its repurchase program in May 2000. During 2000,
the Company spent $80,469,000 to repurchase 4,815,000 shares of its Common Stock
at an average cost of $16.71 per share.


        The Company's repurchases of shares of Common Stock are recorded at
average cost in "Common Stock held in treasury" and result in a reduction of
"Shareholders' equity". At December 31, 2000, retained earnings was restricted
in the amount of $80,469,000 million, representing the cost of 4,815,000 shares
of Common Stock held in treasury.


NOTE 8


GRANTOR STOCK TRUST


In July 1995, the Company established the Callaway Golf Company Grantor Stock
Trust (the "GST"). In conjunction with the formation of the GST, the Company
sold 4,000,000 shares of newly issued Common Stock to the GST at a purchase
price of $60,575,000 ($15.14 per share). In December 1995, the Company sold an
additional 1,300,000 shares of newly issued Common Stock to the GST at a
purchase price of $26,263,000 ($20.20 per share). The sale of these shares had
no net impact on shareholders' equity. During the term of the GST, shares in the
GST may be used to fund the Company's obligations with respect to one or more of
the Company's non-qualified or qualified employee benefit plans.


        Shares owned by the GST are accounted for as a reduction to
shareholders' equity until used in connection with employee benefits. Each
period, the shares owned by the GST are valued at the closing market price, with
corresponding changes in the GST balance reflected in capital in excess of par
value.


NOTE 9


EARNINGS PER COMMON SHARE


For the years ended December 31, 2000 and 1999, 8,931,000 and 10,979,000
options, respectively, were excluded from the calculations, as their effect
would have been antidilutive. For the year ended December 31, 1998, all dilutive
securities were excluded from the calculation of diluted loss per share, as
their effect would have been antidilutive.


        The schedule below summarizes the elements included in the calculation
of basic and diluted earnings (loss) per common share for the years ended
December 31, 2000, 1999 and 1998.




(in thousands, except per share data)                                       Year Ended December 31,
                                                                  ----------------------------------------------
                                                                     2000               1999              1998
                                                                  ----------         ----------         --------
                                                                                               
Net income (loss)                                                 $   80,999         $   55,322         $(26,564)
                                                                  ==========         ==========         ========
Weighted-average shares outstanding:
   Weighted-average shares outstanding - Basic                        69,946             70,397           69,463
   Dilutive securities                                                 1,466                817
                                                                  ----------         ----------         --------
   Weighted-average shares outstanding - Diluted                      71,412             71,214           69,463
                                                                  ----------         ----------         --------
Earnings (loss) per common share:
   Basic
      Income before cumulative effect of accounting change        $     1.17         $     0.79         $  (0.38)
      Cumulative effect of accounting change                           (0.01)
                                                                  ----------         ----------         --------
                                                                  $     1.16         $     0.79         $  (0.38)
                                                                  ==========         ==========         ========
   Diluted
      Income before cumulative effect of accounting change        $     1.14         $     0.78         $  (0.38)
      Cumulative effect of accounting change                           (0.01)
                                                                  ----------         ----------         --------
                                                                  $     1.13         $     0.78         $  (0.38)
                                                                  ==========         ==========         ========



                            Callaway Golf Company 33


   24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10


STOCK OPTIONS AND RIGHTS


Options


The Company had the following fixed stock option plans, under which shares were
available for grant at December 31, 2000: the 1991 Stock Incentive Plan (the
"1991 Plan"), the 1995 Employee Stock Incentive Plan (the "1995 Plan"), the 1996
Stock Option Plan (the "1996 Plan"), the 1998 Stock Incentive Plan (the "1998
Plan"), the Promotion, Marketing and Endorsement Stock Incentive Plan (the
"Promotion Plan") and the Non-Employee Directors Stock Option Plan (the
"Directors Plan").


        The 1991 Plan, the 1996 Plan and the 1998 Plan permit the granting of
options or other stock awards to the Company's officers, employees and
consultants. Under the 1991 Plan, option prices may be less than the market
value at the date of grant, while under the 1996 Plan and the 1998 Plan options
may not be granted at option prices that are less than fair market value at the
date of grant. The 1995 Plan permits the granting of options or other stock
awards to only non-executive officer employees and consultants of the Company at
option prices that may be less than market value at the date of grant. The 1995
Plan and 1996 Plan were amended in 2000 to increase the maximum number of shares
of Common Stock to be issued upon exercise of an option to 9,300,000 and
9,000,000 shares respectively.


        During 1996 and 1995, the Company granted options to purchase shares to
two key officers, under separate plans, in conjunction with terms of their
initial employment (the "Key Officer Plans"). No shares are available for grant
under the Key Officer Plans as of December 31, 2000.


        Under the Promotion Plan, shares of Common Stock may be granted in the
form of options or other stock awards to golf professionals and other endorsers
at prices that may be less than the market value of the stock at the grant date.
The Directors Plan permits the granting of options to purchase shares of Common
Stock to Directors of the Company who are not employees, at prices based on a
non-discretionary formula, which may not be less than the market value of the
stock at the date of grant.


        The following table presents shares authorized, available for future
grant and outstanding under each of the Company's plans as of December 31, 2000:




       (in thousands)          Authorized       Available       Outstanding
       --------------          ----------       ---------       -----------
                                                       
       1991 Plan                  10,000             60            2,076
       Promotion Plan              3,560            816            1,014
       1995 Plan                   9,300          2,363            6,135
       1996 Plan                   9,000          2,275            5,967
       1998 Plan                     500            250              250
       Key Officer Plans           1,100                             820
       Directors Plan                840             52              496
                                  ------          -----           ------
       TOTAL                      34,300          5,816           16,758
                                  ======          =====           ======



        Under the Company's stock option plans, outstanding options vest over
periods ranging from zero to five years from the grant date and expire up to 12
years after the grant date.


        The following summarizes stock option transactions for the years ended
December 31, 2000, 1999 and 1998:




(in thousands, except per share data)                                   Year ended December 31,
                                         ---------------------------------------------------------------------------------------
                                                     2000                         1999                          1998
                                         --------------------------     -------------------------      -------------------------
                                                          Weighted-                       Weighted-                     Weighted-
                                                           Average                        Average                        Average
                                                           Exercise                       Exercise                      Exercise
                                             Shares         Price           Shares         Price          Shares          Price
                                         --------------   ---------     --------------    ---------    --------------   ---------
                                                                                                      
Outstanding at beginning of year             15,747         $20.46          13,637         $22.62           11,257        $22.41
Granted                                       4,461         $13.71           4,012         $11.30            4,020        $25.04
Exercised                                    (2,252)        $10.64            (851)        $ 6.40             (441)       $10.16
Canceled                                     (1,198)        $25.01          (1,051)        $24.95           (1,199)       $34.86
                                         --------------     ------      --------------     ------      --------------     ------
Outstanding at end of year                   16,758         $19.66          15,747         $20.46           13,637        $22.62
Options exercisable at end of year           12,394         $19.99          11,066         $18.64            6,039        $17.78
                                         --------------     ------      --------------     ------      --------------     ------
Price range of outstanding options       $2.50 - $40.00                 $0.44 - $40.00                 $0.44 - $40.00
                                         ==============                 ==============                 ==============



                            Callaway Golf Company 34

   25

        The exercise price of all options granted during 2000 was equal to the
market value on the date of grant. The following table summarizes additional
information about outstanding stock options at December 31, 2000:


   OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 2000:




                                               Weighted-Average
                            Number                Remaining                                 Number
     Range of            Outstanding             Contractual       Weighted-Average      Exercisable     Weighted-Average
  Exercise Price        (in thousands)           Life - Years       Exercise Price      (in thousands)    Exercise Price
  --------------        --------------         ----------------    ----------------     --------------   ----------------
                                                                                          
   $2.50 - $10                 494                  1.53                $ 3.39                 482            $ 3.22
     $10 - $15               7,145                  6.17                $12.50               4,915            $12.12
     $15 - $25               2,916                  5.05                $18.20               2,185            $18.46
     $25 - $40               6,203                  4.50                $29.88               4,812            $30.39
   -----------              ------                  ----                ------              ------            ------
   $2.50 - $40              16,758                  5.22                $19.66              12,394            $19.99
   ===========              ======                  ====                ======              ======            ======



        During 2000, the Company, at its discretion, extended the expiration
terms or accelerated the vesting of 622,000 options held by certain employees
and officers. Also, during 1999, the Company, at its discretion, extended the
expiration terms of 1,532,000 options held by certain employees and officers. At
the time of the modifications, the exercise prices of the options were in excess
of the then-current market price and accordingly this action did not result in
compensation expense for the Company.


        During 1998, the Company modified certain terms of 720,000 options held
by directors, certain officers and employees. These modifications, which largely
resulted from the Company's restructuring plan, included acceleration of vesting
and extension of expiration terms at the Company's discretion. At the time of
modification, the exercise prices of the options were in excess of the
then-current market price and accordingly this action did not result in
compensation expense for the Company.


        Also during 1998, the Company canceled 150,000 options held by
non-employees with option prices in excess of the then-current market price of
the Company's stock. The Company then reissued an equivalent number of options
to these non-employees at the then-current market price and extended certain
expiration terms, and recorded the related compensation expense of $71,000. An
additional $195,000 was recorded in unearned compensation, and is being
amortized over the remaining vesting periods.


Rights


The Company has granted officers, consultants, and employees rights to receive
an aggregate of 826,800 shares of Common Stock for services or other
consideration. During 1998, 80,000 rights were exercised while none were
granted. No rights were granted or exercised during 2000 or 1999. At December
31, 2000, no rights to receive shares of Common Stock remained outstanding.


        The Company has a plan to protect shareholders' rights in the event of a
proposed takeover of the Company. Under the plan, each share of the Company's
outstanding Common Stock carries one right to purchase one one-thousandth of a
share of the Company's Series "A" Junior Participating Preferred Stock (the
"Right"). The Right entitles the holder, under certain circumstances, to
purchase Common Stock of Callaway Golf Company or of the acquiring company at a
substantially discounted price ten days after a person or group publicly
announces it has acquired or has tendered an offer for 15% or more of the
Company's outstanding Common Stock. The Rights are redeemable by the Company at
$.01 per Right and expire in 2005.


Restricted Common Stock


During 1998, the Company granted 130,000 shares of Restricted Common Stock to 26
officers of the Company. Of these shares, 68,250 shares have been canceled due
to the service requirement not being met. The shares, which are restricted as to
sale or transfer until vesting, will vest on January 1, 2003. The related net
compensation expense of $1,914,000 is being recognized ratably over the vesting
period, based on the difference between the exercise price and market value of
the stock on the measurement date.


Employee Stock Purchase Plan


The Company has an Employee Stock Purchase Plan ("ESPP") whereby eligible
employees may purchase shares of Common Stock at 85% of the lower of the fair
market value on the first day of a two year offering period or the last day of
each six month exercise period. Employees may authorize the Company to withhold
compensation during any offering period, subject to certain limitations. In May
1999, the Company's shareholders approved a new ESPP (the "1999 ESPP") with
substantially the same terms as the ESPP. This plan was effective February 1,
2000 upon the termination of the ESPP.


        During 2000, 1999 and 1998, approximately 412,000, 378,000 and 386,000
shares, respectively, of the Company's Common Stock were purchased under the
1999 ESPP or the ESPP. As of December 31, 2000, 1,588,000 shares were reserved
for future issuance under the 1999 ESPP.


                            Callaway Golf Company 35

   26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Compensation Expense


During 2000, 1999 and 1998, the Company recorded $2,162,000, $1,370,000 and
$2,321,000, respectively, in compensation expense for Restricted Common Stock
and certain options to purchase shares of Common Stock granted to employees,
officers, professional endorsers and consultants of the Company. The valuation
of options granted to non-employees is estimated using the Black-Scholes option
pricing model.


        Unearned compensation has been charged for the value of options granted
to both employees and non-employees on the measurement date based on the
valuation methods described above. These amounts are amortized over the vesting
period. The unamortized portion of unearned compensation is shown as a reduction
of shareholders' equity in the accompanying consolidated balance sheet.


Pro Forma Disclosures


If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for employee awards under these plans, the Company's net
income (loss) and earnings (loss) per share would be changed to the pro forma
amounts indicated below:




(in thousands, except per share data)                         Year Ended December 31,
                                                         2000          1999          1998
                                                        -------       -------      --------
                                                                          
Net income (loss):
    As reported                                         $80,999       $55,322      $(26,564)
    Pro forma                                           $58,761       $34,422      $(46,847)
Earnings (loss) per
    common share:
    As reported
         Basic                                            $1.16         $0.79        $(0.38)
         Diluted                                          $1.13         $0.78        $(0.38)
    Pro forma
         Basic                                            $0.84         $0.49        $(0.67)
         Diluted                                          $0.83         $0.48        $(0.67)
                                                        =======       =======      ========



        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:




                                                       Year Ended December 31,
                                   ---------------------------------------------------------------
                                      2000                      1999                     1998
                                   -------------            -------------            -------------
                                                                            
Dividend yield                         1.1%                     1.4%                     1.9%
Expected volatility                    53.0%                    45.6%                    42.0%
Risk free interest rates           5.18% - 5.56%            5.36% - 6.24%            4.66% - 4.72%
Expected lives                      3 - 4 years              3 - 4 years              3 - 6 years
                                   =============            =============            =============



        The weighted-average grant-date fair value of options granted during
2000 was $6.91 per share. 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.


NOTE 11


EMPLOYEE BENEFIT PLANS


The Company has a voluntary deferred compensation plan under Section 401(k) of
the Internal Revenue Code (the "401(k) Plan") for all employees who satisfy the
age and service requirements under the 401(k) Plan. Each participant may elect
to contribute up to 10% of annual compensation, up to the maximum permitted
under federal law, and the Company is obligated to contribute annually an amount
equal to 100% of the participant's contribution up to 6% of that participant's
annual compensation. Employees contributed $6,119,000, $5,486,000 and $5,601,000
to the 401(k) Plan in 2000, 1999 and 1998, respectively. In accordance with the
provisions of the 401(k) Plan, the Company matched employee contributions in the
amount of $4,706,000, $4,510,000 and $4,673,000 during 2000, 1999 and 1998,
respectively. Additionally, the Company can make discretionary contributions
based on the profitability of the Company. For the years ended December 31, 2000
and 1999, the Company recorded compensation expense for discretionary
contributions of $3,799,000 and $3,605,000. No discretionary contributions were
made for the year ended December 31, 1998.


        The Company also has an unfunded, nonqualified 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 upon retirement, death or
separation from the Company. For the years ended December 31, 2000, 1999 and
1998, the total participant deferrals, which are reflected in long-term
liabilities, were $843,000, $997,000 and $908,000, respectively. Included in
other income during 1999 were net proceeds from an insurance policy related to
the deferred compensation plan of $3,622,000.


                            Callaway Golf Company 36


   27

NOTE 12


INCOME TAXES


The Company's income (loss) before income tax provision (benefit) was subject to
taxes in the following jurisdictions for the following periods:




(in thousands)                                    Year Ended December 31,
                                     -------------------------------------------------
                                       2000                1999                1998
                                     --------             -------            ---------
                                                                    
United States                        $101,890             $75,799            $(34,555)
Foreign                                27,432               9,698              (4,344)
                                     --------             -------            ---------
                                     $129,322             $85,497            $(38,899)
                                     ========             =======            =========



The provision (benefit) for income taxes is as follows:




(in thousands)                                             Year Ended December 31,
                                               -----------------------------------------------
                                                2000                1999                1998
                                               -------             -------            --------
                                                                             
Current tax provision:
   United States                               $26,616             $14,779             $21,345
   State                                         5,130               2,774               2,296
   Foreign                                      10,623               3,044                 250

Deferred tax expense (benefit):
   United States                                 7,463               8,956             (31,173)
   State                                        (1,596)              1,162              (4,847)
   Foreign                                        (870)               (540)               (206)
                                               -------             -------            --------
Income tax provision (benefit):                $47,366             $30,175            $(12,335)
                                               =======             =======            ========



        During 2000, 1999 and 1998, the Company recognized certain tax benefits
related to stock option plans in the amount of $6,806,000, $2,377,000 and
$3,068,000, respectively. Such benefits were recorded as a reduction of income
taxes payable and an increase in additional paid-in capital.


        Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2000 and 1999 are as follows:




(in thousands)                                                        December 31,
                                                             -------------------------------
                                                               2000                   1999
                                                             --------               --------
                                                                              
Deferred tax assets:
Reserves and allowances                                      $ 22,365               $ 28,052
Depreciation and amortization                                  12,225                 16,601
Compensation and benefits                                       7,208                  7,010
Effect of inventory overhead adjustment                         1,934                  1,977
Compensatory stock options and rights                           3,473                  2,573
Foreign net operating loss carryforwards                          107                    798
Revenue recognition                                             1,320
Other                                                           1,793                    441
Restructuring charges
    Long-lived asset impairment                                 1,738                  1,740
    Rental/lease arrangements                                                            557
Capital loss carryforward                                         834                    829
Tax credit carryforwards                                        3,200                  2,827
                                                             --------               --------
Total deferred tax assets                                      56,197                 63,405
Valuation allowance for deferred tax assets                    (1,354)                (4,190)
                                                             --------               --------
Deferred tax assets, net of valuation allowance                54,843                 59,215
Deferred tax liabilities:
State taxes, net of federal income tax benefit                 (2,157)                (2,128)
                                                             --------               --------
Net deferred tax assets                                      $ 52,686               $ 57,087
                                                             ========               ========



        At December 31, 2000, the Company had tax credit carryforwards primarily
relating to state investment tax credits which have expiration dates beginning
with December 31, 2006.


        A valuation allowance has been established due to the uncertainty of
realizing certain tax credits, carryforwards, and a portion of other deferred
tax assets. The valuation allowance was decreased by $2,836,000 during 2000, of
which $2,373,000 was attributable to state research and investment tax credits.
Based on management's assessment, it is more likely than not that all the net
deferred tax assets will be realized through future earnings or implementation
of tax planning strategies.


        A reconciliation of income taxes computed by applying the statutory U.S.
income tax rate to the Company's income (loss) before income taxes to the income
tax provision (benefit) is as follows:




(in thousands)                                    Year Ended December 31,
                                        ----------------------------------------------
                                          2000               1999               1998
                                        --------           --------           --------
                                                                     
Amounts computed at
   statutory U.S. tax rate              $ 45,263           $ 29,924           $(13,615)
State income taxes, net of
   U.S. tax benefit                        4,112              3,046             (1,501)
State tax credits, net of
   U.S. tax benefit                         (325)            (2,075)
Nondeductible foreign losses                  65               (476)             1,226
Expenses with no tax benefit                 931                814              1,064
Nondeductible capital losses                                    130                588
Foreign sales corporation
   tax benefits                           (1,487)            (1,471)              (236)
Nontaxable insurance proceeds                                (1,408)
Change in tax valuation
   allowance                              (2,836)             2,431
Other                                      1,643               (740)               139
                                        --------           --------           --------
Income tax provision (benefit)          $ 47,366           $ 30,175           $(12,335)
                                        ========           ========           ========



        U.S. tax return examinations have been completed for the years through
1994. Management believes adequate provisions for income tax have been recorded
for all years.


NOTE 13


COMMITMENTS AND CONTINGENCIES


On July 24, 2000, Bridgestone Sports Co., Ltd. ("Bridgestone") filed a complaint
for patent infringement in the United States District Court for the Northern
District of Georgia, Civil Action No.100-CV-1871, against Callaway Golf Company,
Callaway Golf Ball Company (collectively "Callaway Golf"), and a golf retailer
located in Georgia (the "U.S. Action"). Bridgestone alleges in the U.S. Action
that the manufacture and sale of the Company's Rule 35(R) golf ball infringes
four U.S. golf ball patents owned by Bridgestone. Bridgestone is seeking
unspecified damages and


                            Callaway Golf Company 37


   28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

injunctive relief. On September 12, 2000, Callaway Golf answered the complaint
and asserted affirmative counterclaims against Bridgestone seeking a judicial
declaration that Callaway Golf does not infringe the Bridgestone patents, that
the patents are invalid, and that Bridgestone engaged in inequitable conduct in
the United States Patent and Trademark Office. On October 13, 2000, Bridgestone
and the retailer defendant entered into a consent judgment discontinuing the
U.S. Action against the retailer. The parties are engaged in discovery. No trial
date has been set by the District Court.


        On December 14, 2000, Bridgestone filed an action in the Tokyo, Japan,
District Court asserting patent infringement against Callaway Golf's
wholly-owned subsidiary, Callaway Golf K.K., based on its sale of Rule 35(R)
golf balls in Japan (the "Japan Action"). Only one of the Bridgestone golf ball
patents at issue in the U.S. Action has issued in Japan. Callaway Golf K.K. has
denied the claims asserted in the Japan Action.


        The Company and its subsidiaries, incident to their business activities,
are parties to a number of legal proceedings, lawsuits and other potential
claims. Such matters are subject to many uncertainties and outcomes are not
predictable with assurance. Consequently, management is unable to ascertain the
ultimate aggregate amount of monetary liability, amounts which may be covered by
insurance, or the financial impact with respect to these matters as of December
31, 2000. However, management believes that the final resolution of these
matters, individually and in the aggregate, will not have a material adverse
effect upon the Company's annual consolidated financial position, results of
operations or cash flows.


        The Company leases certain warehouse, distribution and office
facilities, as well as office and manufacturing equipment under operating
leases. Lease terms range from one to 10 years with options to renew at varying
terms. The Company has guaranteed the residual value of equipment leased
pursuant to an operating lease which is subject to renewal. The residual value
guarantee, which approximates estimated fair market value of the equipment at
each option period, is reduced over time. Commitments for minimum lease payments
under non-cancelable operating leases having initial or remaining non-cancelable
terms in excess of one year as of December 31, 2000 are as follows:




(in thousands)
                                   
2001                                  $12,264
2002                                    7,114
2003                                    2,041
2004                                    1,889
2005                                    1,744
Thereafter                              4,113
                                      -------
                                      $29,165
                                      =======



        Future minimum lease payments have not been reduced by future minimum
sublease rentals of $1,928,000 under an operating lease. At December 31, 2000,
the Company is contingently liable for $5,625,000 through February 2003 under an
operating lease that was assigned to a third party (Note 14). Rent expense for
the years ended December 31, 2000, 1999 and 1998 was $3,197,000, $2,315,000 and
$17,654,000, respectively. Rent expense for 1999 does not include a credit of
$6,076,000 related to the reversal of a restructuring reserve for excess lease
costs (Note 14). Rent expense for 1998 includes $13,466,000 in excess lease
costs related to the Company's restructuring activities (Note 14). The Company
had no capital leases at December 31, 2000.


NOTE 14


RESTRUCTURING


During the fourth quarter of 1998, the Company recorded a restructuring charge
of $54,235,000 resulting from a number of cost reduction actions and operational
improvements. These actions included: the consolidation of the operations of the
Company's wholly-owned subsidiary, Odyssey, into the operations of the Company
while maintaining the distinct and separate Odyssey(R) brand; the
discontinuation, transfer or suspension of certain initiatives not directly
associated with the Company's core business, such as the Company's involvement
with interactive golf sites, golf book publishing, new player development and a
golf venue in Las Vegas; and the re-sizing of the Company's core business to
reflect current and expected business conditions. These initiatives were
completed during 1999, with the exception of cash outlays related to the
assignment of a lease obligation for a facility in New York City that continued
through July 2000. The restructuring charges (shown below in tabular format)
primarily related to: 1) the elimination of job responsibilities, resulting in
costs incurred for employee severance; 2) the decision to exit certain non-core
business activities, resulting in losses on disposition of the Company's 80%
interest in CGMV (Note 15), a loss on the sale of the business of All-American
(Note 15), as well as excess lease costs; and 3) consolidation of the Company's
continuing operations resulting in impairment of assets, losses on disposition
of assets and excess lease costs.


        Employee reductions occurred in almost all areas of the Company,
including manufacturing, marketing, sales, and administrative areas. At December
31, 1998, the Company had reduced its non-temporary work force by approximately
750 positions. Although substantially all reductions occurred prior to December
31, 1998, a small number of reductions occurred in the first quarter of 1999.


                            Callaway Golf Company 38


   29

        During the restructuring, the Company consolidated its operations and
sold certain of its buildings, which housed a portion of its manufacturing and
research and development activities. Other write-downs were recorded during 1998
for idle assets, assets whose manner of use had changed significantly and
equipment replaced as a result of capital improvements. The impaired assets
included buildings, building improvements, and machinery and equipment used in
certain of the Company's manufacturing and research and development activities.


        The projected future cash flows from these assets were less than the
carrying values of the assets. The carrying values of the assets held for sale
and the assets to be held and used were reduced to their estimated fair values
based on independent appraisals of selling values and values of similar assets
sold, less costs to sell. In 1998, the Company recorded losses from impairment
of assets of $12,634,000, which were recorded as restructuring costs. The
Company completed the dispositions in 1999. At December 31, 1998, subsequent to
the write-down for impairments, the carrying amount of the assets held for
disposal and assets to be held and used was $13,678,000 and $4,582,000,
respectively. The Company continued to depreciate the assets that were held and
used but did not further depreciate the assets held for disposition. The effect
on depreciation for the years ended December 31, 2000 and 1999 did not
materially impact the Company's results of operations and management does not
expect this effect to materially impact future results of operations.


Details of the one-time charge are as follows:




(in thousands)                                                          Reserve                    Reserve                 Reserve
                                      Cash/     One-Time                Balance                    Balance                 Balance
                                    Non-Cash     Charge    Activity   at 12/31/98  Activity(1)   at 12/31/99  Activity   at 12/31/00
                                    --------    --------   --------   -----------  -----------   -----------  --------   -----------
                                                                                                 
Elimination of Job
  Responsibilities                              $11,664     $ 8,473     $ 3,191       $ 3,191
   Severance packages                   Cash     11,603       8,412       3,191         3,191
   Other                            Non-cash         61          61

Exiting Certain Non-Core
 Business Activities                            $28,788     $12,015     $16,773     $  15,394       $1,379     $1,379
   Loss on disposition of
      subsidiaries                  Non-cash     13,072      10,341       2,731         2,731(2)     1,379      1,379
   Excess lease costs                   Cash     12,660         146      12,514        11,135
   Contract cancellation fees           Cash      2,700       1,504       1,196         1,196
   Other                                Cash        356          24         332           332

Consolidation of Operations                     $13,783     $ 2,846     $10,937     $  10,937
   Loss on impairment/disposition
       of assets                    Non-cash     12,364       2,730       9,634         9,634(3)
   Excess lease costs                   Cash        806           4         802           802(4)
   Other                                Cash        613         112         501           501
                                    ========    =======     =======     =======     =========       ======     ======



(1) Includes reversal of reserve totaling $8,609,000, as actual amounts differed
    from estimates. Significant reversals are noted below in (2) through (4).

(2) Includes reversal of $6,076,000 of reserve due to the assignment of lease
    obligation at terms significantly more favorable than estimated at the
    establishment of the reserve.

(3) Includes reversal of $1,470,000 of reserve related to disposition of two
    buildings at higher sales prices than estimated.

(4) Includes reversal of $491,000 of reserve due to the sublease of a facility
    at terms more favorable than estimated at the establishment of the reserve.


        During 1999, the Company incurred charges of $1,295,000 on the
disposition of building improvements eliminated during the consolidation of
manufacturing operations, as well as other charges of $671,000. These charges
did not meet the criteria for accrual in 1998. Additionally, in 1999, the
Company incurred charges of $749,000 related to asset dispositions and other
restructuring activities for which reserves were not established in 1998. No
charges were incurred during 2000.


                            Callaway Golf Company 39

   30

Notes to Consolidated Financial Statements


Note 15


ACQUISITIONS AND REORGANIZATIONS


On December 29, 2000, the Company consolidated a wholly-owned subsidiary,
Callaway Golf Ball Company, with the Company. During 1999, the Company acquired
distribution rights and substantially all of the assets from its distributor in
Ireland for $810,000. Also in 1999, the Company merged its subsidiary, Callaway
Golf Europe, S.A., with another of its subsidiaries, Callaway Golf Europe, Ltd.
and now operates in France through a satellite office. During 1998, the Company
acquired distribution rights and substantially all of the assets from its
distributors in Korea, Canada, France, Belgium, Norway and Denmark, as well as
the remaining 20% interest in Callaway Golf Trading GmbH (Note 17), the results
of which are consolidated in the results of Callaway Golf (Germany) GmbH. The
aggregate purchase price for these transactions was $27,229,000, excluding the
assumption and subsequent retirement of short-term debt obligations of
$10,373,000. The excess of the purchase price over net assets acquired of
$20,935,000 was allocated to goodwill and is being amortized over estimated
useful lives of three to 10 years. These acquisitions, along with the
acquisition of the remaining 80% interest in All-American (discussed below) are
not considered significant business combinations. Accordingly, pro forma
financial information is not presented.


       In May 1998, the Company acquired for $4,526,000 the remaining 80%
interest in All-American, which operates a nine-hole golf course, performance
center, training facility and driving range located in Las Vegas, Nevada. On
December 30, 1998, as part of its business plan to discontinue certain non-core
business activities, the Company sold the business of All-American in exchange
for barter trade credits, which were recorded at the fair market value of the
asset exchanged. The Company recorded a loss on the disposition of this
business of $10,341,000 in December 1998 (Note 14).


Note 16


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 of Callaway
Golf(R) titanium and stainless steel metal woods and irons, Callaway Golf(R) and
Odyssey(R) putters and wedges and related accessories. The Golf Balls segment
consists of golf balls that are designed, manufactured, marketed and distributed
by the Company. All Other segments, including interactive golf sites, golf book
publishing, new player development and a driving range venture, are aggregated
as they do not meet requirements for separate disclosure set forth in SFAS No.
131. In accordance with its restructuring, the Company is no longer pursuing
these initiatives (Note 14). There are no significant intersegment transactions.
In 2000, management changed its method of allocating certain corporate costs and
other income (expense) used in evaluating segment income (loss) before tax. As a
result, certain amounts are not attributable to the segments in the
determination of segment income (loss) before tax. Prior period amounts have
been reclassified to reflect the current allocation methodology. The tables
below contain information utilized by management to evaluate its operating
segments.




   (in thousands)                          2000               1999                1998
                                         ---------         ---------            ---------
                                                                       
   Net sales
       Golf Clubs                        $ 803,663         $ 719,038            $ 703,060
       Golf Balls                           33,964
       All Other
                                         ---------         ---------            ---------
                                         $ 837,627         $ 719,038            $ 703,060
                                         =========         =========            =========
   Income (loss) before tax
       Golf Clubs                        $ 213,786         $ 175,794            $  47,493
       Golf Balls                          (45,918)          (36,097)             (21,826)
       All Other                                                                  (26,089)
       Reconciling items(1)                (38,546)          (54,200)             (38,477)
                                         ---------         ---------            ---------
                                         $ 129,322         $  85,497            $ (38,899)
                                         =========         =========            =========
   Depreciation and amortization
       Golf Clubs                        $  34,326         $  36,151            $  34,121
       Golf Balls                            5,923             3,726                1,072
       All Other                                                                      692
                                         ---------         ---------            ---------
                                         $  40,249         $  39,877            $  35,885
                                         =========         =========            =========
   Additions to long-lived assets
       Golf Clubs                        $  24,703         $  10,210            $  39,854
       Golf Balls                            3,683            46,912(2)            47,721
       All Other                                                                    1,408
                                         ---------         ---------            ---------
                                         $  28,386         $  57,122            $  88,983
                                         =========         =========            =========



(1) Represents corporate general and administrative expenses and other income
    (expense) not utilized by management in determining segment profitability.

(2) Includes amounts converted to an operating lease in 1999.


        The Company markets its products domestically and internationally, with
its principal international markets being Asia and Europe. The tables below
contain information about the geographical areas in which the Company operates.
Revenues are attributed to the location to which the product was shipped.
Long-lived assets are based on location of domicile.


        The Company, through a distribution agreement, had appointed Sumitomo as
the sole distributor of Callaway Golf(R) clubs in Japan. The distribution
agreement, which began in February 1993 and ended on December 31, 1999, required
Sumitomo to purchase specified minimum quantities. In 1999 and 1998, sales to
Sumitomo


                            Callaway Golf Company 40


   31

accounted for 7% and 8%, respectively, of the Company's net sales. In the fourth
quarter of 1999, the Company successfully completed negotiations with Sumitomo
to provide a smooth transition of its business. As a result of this transition
agreement, the Company recorded a net charge of $8.6 million in the fourth
quarter of 1999 for buying certain current inventory, payments for non-current
inventory and other transition expenses, including foreign currency transaction
losses. Odyssey(R) brand products are sold through the Company's wholly-owned
Japanese subsidiary, Callaway Golf K.K., and beginning January 1, 2000, Callaway
Golf(R) brand products were sold through this subsidiary.




(in thousands)                   Sales     Long-Lived Assets
                               --------    -----------------
2000
                                         
United States                  $451,264        $228,920
Europe                          125,511          11,229
Japan                           122,003           3,229
Rest of Asia                     82,371             994
Other foreign countries          56,478           3,164
                               --------        --------
Total                          $837,627        $247,536
                               ========        ========

1999

United States                  $418,397        $241,241
Europe                          115,673          14,027
Japan                            55,927           2,634
Rest of Asia                     73,121             974
Other foreign countries          55,920           3,481
                               --------        --------
Total                          $719,038        $262,357
                               ========        ========

1998

United States                  $442,043        $277,611
Europe                          117,107          17,789
Japan                            61,460             857
Rest of Asia                     34,189           1,194
Other foreign countries          48,261           3,122
                               --------        --------
Total                          $703,060        $300,573
                               ========        ========



Note 17


TRANSACTIONS WITH RELATED PARTIES


During 1998, the Company entered into an agreement with Callaway Editions, Inc.
to form CGMV, a limited liability company that was owned 80% by the Company and
20% by Callaway Editions, Inc. ("Callaway Editions"). Callaway Editions is a
publishing and media company which is owned 9% by Ely Callaway, Chairman,
President and Chief Executive Officer of the Company, and 81% by his son,
Nicholas Callaway. CGMV was formed to produce print and other media products
that relate to the game of golf. Pursuant to the agreement, the Company agreed
to loan CGMV up to $20,000,000 for working capital, subject to CGMV's
achievement of certain milestones to the satisfaction of the Company in its sole
discretion. Also pursuant to the agreement, CGMV was obligated to pay an annual
management fee of $450,000 to Callaway Editions. In conjunction with the
Company's restructuring plan, the Company committed to sell or assign its
interest in CGMV to Callaway Editions. Accordingly, the Company recorded a
charge in operations to December 1998 based on the December 31, 1998 book value
of CGMV (Note 14).


        During 1999, the Company forgave the existing loan balance from CGMV of
approximately $2,142,000, sold its interest to Callaway Editions for a nominal
amount and paid $1,000,000 as consideration for release from its obligation to
loan CGMV up to $20,000,000. These transactions did not result in a charge in
1999, as they were adequately accrued in the 1998 restructuring reserve (Note
14).


        In December 1998, the Company purchased the remaining 20% interest in
Callaway Golf Trading GmbH, the Company's former German distributor, for
$6,766,000. The purchase price was in the form of a note payable bearing
interest at 7%, due in June 1999 to the seller, who was then an officer of a
wholly-owned subsidiary of the Company. The note payable was included in
accounts payable and accrued expenses at December 31, 1998 and was paid in
February 1999.


                            Callaway Golf Company 41


   32
                       Report of Independent Accountants

To the Board of Directors and Shareholders of
Callaway Golf Company:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Callaway
Golf Company and its subsidiaries at December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.  These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits.  We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its revenue recognition policy effective January 1, 2000.



PricewaterhouseCoopers LLP

San Diego, California
March 19, 2001

                            Callaway Golf Company 42
   33

SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)(1)




(in thousands, except per share data)                Fiscal Year 2000 Quarters(3)
                                    ------------------------------------------------------------------------
                                      1st             2nd             3rd             4th             Total
                                    --------        --------        --------        --------        --------
                                                                                     
Net sales                           $197,406        $289,922        $208,081        $142,218        $837,627
Gross profit                        $ 88,265        $144,507        $102,031        $ 62,705        $397,508
Net income                          $ 12,141        $ 44,189        $ 20,055        $  4,614        $ 80,999


Earnings per common share(2)
       Basic                        $   0.17        $   0.63        $   0.29        $   0.07        $   1.16
       Diluted                      $   0.17        $   0.61        $   0.29        $   0.07        $   1.13
                                    --------        --------        --------        --------        --------





                                                            Fiscal Year 1999 Quarters
                                    ------------------------------------------------------------------------
                                      1st             2nd             3rd             4th            Total
                                    --------        --------        --------        --------        --------
                                                                                     
Net sales                           $186,747        $231,205        $184,488        $116,598        $719,038
Gross profit                        $ 82,868        $107,479        $ 89,545        $ 55,881        $334,773
Net income                          $ 12,823        $ 24,771        $ 17,572        $    156        $ 55,322


Earnings per common share(2)
        Basic                       $   0.18        $   0.35        $   0.25        $   0.00        $   0.79
        Diluted                     $   0.18        $   0.35        $   0.25        $   0.00        $   0.78
                                    --------        --------        --------        --------        --------



(1) Shipping revenues and expenses have been reclassified in accordance with
    Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and
    Handling Revenues and Costs."

(2) Earnings per share is computed individually for each of the quarters
    presented; therefore, the sum of the quarterly earnings per share may not
    necessarily equal the total for the year.

(3) Effective January 1, 2000, Callaway Golf adopted Staff Accounting Bulletin
    No. 101, "Revenue Recognition in Financial Statements". Accordingly,
    Callaway Golf has restated its results for all quarters of the year ended
    December 31, 2000.


MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS


The Company's Common Shares are traded on the New York Stock Exchange (NYSE).
The Company's symbol for its Common Shares is "ELY." As of March 5, 2001, the
approximate number of holders of record of the Company's Common Stock was 9,000.


STOCK PRICE INFORMATION




                                                      Year ended December 31,
                                    2000                                                 1999
                    ---------------------------------------            ----------------------------------------
Period:              High           Low            Dividend             High              Low          Dividend
                    ------         ------          --------            ------            ------        --------
                                                                                     
First Quarter       $17.75         $11.00            $0.07             $11.44            $10.00          $0.07
Second Quarter      $20.56         $14.81            $0.07             $16.69            $12.19          $0.07
Third Quarter       $16.69         $12.44            $0.07             $14.63            $ 9.31          $0.07
Fourth Quarter      $19.56         $14.50            $0.07             $18.00            $11.69          $0.07
                    ------         ------            -----             ------            ------          -----



                            Callaway Golf Company 43

   1
                                                                    Exhibit 21.1



                              CALLAWAY GOLF COMPANY
                                  SUBSIDIARIES


All-American Golf LLC

Callaway (Barbados) Foreign Sales Corporation

Callaway Golf (Germany) GmbH

Callaway Golf Canada Ltd.

Callaway Golf Europe Ltd.

Callaway Golf K.K.

Callaway Golf Korea Ltd.

Callaway Golf Sales Company

Callaway Golf South Pacific Pty Ltd

Callaway Golf Shell Company

CGV, Inc.

Golf Funding Corporation

   1
                                                                    EXHIBIT 23.1



                       CONSENT OF INDEPENDENT ACCOUNTANTS
                       ----------------------------------

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 33-77024) and in the Registration Statements on Form
S-8 (No. 333-43756, No. 333-52020, No. 33-85692, No. 33-50564, No. 33-56756, No.
33-67160, No. 33-73680, No. 33-98750, No. 33-92302, No. 333-242, No. 333-5719,
No. 333-5721, No. 333-24207, No. 333-27089, No. 333-27091, No. 333-39093, No.
333-39095, No. 333-61889, No. 333-95601, and No. 333-95603) of Callaway Golf
Company of our report dated March 19, 2001 relating to the consolidated
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated March 19, 2001 relating to the
financial statement schedule, which appears in this Form 10-K.


PricewaterhouseCoopers LLP

San Diego, California
March 29, 2001

   1




                            FORM OF POWER OF ATTORNEY

        Each of William C. Baker, Vernon E. Jordan, Yotaro Kobayashi, Aulana L.
Peters and Richard L. Rosenfield executed the following power of attorney,
except that his/her name was inserted where "[name of director]" appears.


                            LIMITED POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that I, [NAME OF DIRECTOR], a member
of the Board of Directors of Callaway Golf Company, a Delaware corporation (the
"Company"), with its principal executive offices in Carlsbad, California, do
hereby constitute, designate and appoint each of Steven C. McCracken and Bradley
J. Holiday, each of whom are executive officers of the Company, as my true and
lawful attorneys-in-fact, each with power of substitution, with full power to
act without the other and on behalf of and as attorney for me, for the purpose
of executing and filing with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 2000, and
any and all amendments thereto, and to do all such other acts and execute all
such other instruments which said attorney may deem necessary or desirable in
connection therewith.

        I have executed this Limited Power of Attorney as of March 20, 2001.




                                            -------------------------------
                                            [name of director]