CALLAWAY GOLF CO /CA (Form: 10-K, Received: 03/10/2005 16:34:50)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2004

Commission file number 1-10962

Callaway Golf Company

(Exact name of registrant as specified in its charter)


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

2180 Rutherford Road

Carlsbad, CA 92008

(760) 931-1771

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

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


Title of each class		Name of each exchange on which registered

Common Stock, $.01 par value per share Preferred Share Purchase Rights		New York Stock Exchange

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

None

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

Indicate by check mark 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. o

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

As of June 30, 2004, the aggregate market value of the Registrant’s Common Stock held by nonaffiliates of the Registrant was $764,936,593 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 February 28, 2005, the number of shares of the Registrant’s Common Stock outstanding was 76,289,277, and there were no shares of the Registrant’s Preferred Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts I and III incorporate certain information by reference from the Registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the Registrant’s 2005 Annual Meeting of Shareholders, which is scheduled to be held on May 24, 2005. Such Definitive Proxy Statement will be filed with the Commission not later than 120 days after the conclusion of the Registrant’s fiscal year ended December 31, 2004.

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

Callaway Golf Company Trademarks: The following marks and phrases, among others, are trademarks of Callaway Golf Company: Apex — Apex Edge — Apex Tour — Baby Ben — Ben Hogan — BH — BH-5 — Big Ben — Big Bertha — C design — C455 — CB1 — CS-3 — CTU 30 — Callaway — Callaway Golf — Callaway Hickory Stick — Carnoustie — Chevron Device — Complete — Dawn Patrol — Daytripper — Demonstrably Superior and Pleasingly Different — Deuce — DFX — Distance Yourself — Divine Nine — Dual Force — Dual Zone — Edge CFT — Ely Would — ERC — Ever Grip — Explosive Distance.Amazing Soft Feel — Flying Lady — FTX — Fusion — Game Enjoyment System — Gems — GES — Ginty — Great Big Bertha — Hawk Eye — Heavenwood — Hogan — HX — I-Trax — Legacy — Legend — Little Bertha — Long & Soft — Molitor — Number One Putter in Golf — Odyssey — Pure Distance — RCH — Riviera — Rossie — Rule 35 — S2H2 — STS — SenSert — Speed Slot — Steelhead — Strata — Stronomic — Sure-Out — T design — The Hawk — The Longest Balls — The Most Played Name in Golf — TL Distance — TL Tour — Top-Flite — Top-Flite Infinity — Top-Flite Tour — Top-Flite XL — Tour Ace — Tour Blue — Tour Deep — Tour Premier — Tour Professional — Tour Straight — Tour Ultimate — Trade In! Trade Up! — TriForce — TriHot — Trilateral — Tru Bore — Tunite — VFT — Warbird — Where They Don’t Play Golf, They Don’t Play Top-Flite — White Hot — White Steel — World’s Friendliest — X-12 — X-14 — X-16 — X-18 — XL 3000 — X-SPANN — X-Tour — XWT

CALLAWAY GOLF COMPANY

INDEX


PART I.
Item 1.	Business	1
Item 2.	Properties	8
Item 3.	Legal Proceedings	8
Item 4.	Submission of Matters to a Vote of Security Holders	10

PART II.
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 8.	Financial Statements and Supplementary Data	43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	43
Item 9A.	Controls and Procedures	43
Item 9B.	Other Information	44

PART III.
Item 10.	Directors and Executive Officers of the Registrant	47
Item 11.	Executive Compensation	47
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	47
Item 13.	Certain Relationships and Related Transactions	47
Item 14.	Principal Accountant Fees and Services	47

PART IV.
Item 15.	Exhibits and Financial Statement Schedules	48

Signatures		53
Consolidated Financial Statements		F-1
EXHIBIT 10.13
EXHIBIT 10.14
EXHIBIT 10.23
EXHIBIT 10.24
EXHIBIT 10.25
EXHIBIT 10.28
EXHIBIT 10.34
EXHIBIT 10.50
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 24.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

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. In 1997, the Company acquired substantially all of the assets of Odyssey Sports, Inc., which manufactured and marketed the Odyssey brand of putters and wedges. In 1998, the Company began a reorganization of its international operations by acquiring the distribution rights in certain key international markets. As a result, during 1998 through 2001, the Company acquired distribution rights and substantially all of the assets from its distributors in Japan, France, Belgium, Norway, Denmark, Germany, Japan, Ireland, Spain, Canada, Korea and Australia. In 2000, the Company entered the golf ball business with the release of its first golf ball product. In 2003, the Company acquired through a court-approved sale substantially all of the golf-related assets of the TFGC Estate Inc. (f/k/a The Top-Flite Golf Company, f/k/a Spalding Sports Worldwide, Inc.), which included golf ball manufacturing facilities, the Top-Flite and Ben Hogan brands, and all golf-related patents and trademarks (the “Top-Flite Acquisition”). Beginning in 2001, the Company and its participating retailers partnered with FrogTrader to develop the Trade In! Trade Up! program. In 2004, the Company acquired all of the issued and outstanding shares of stock of FrogTrader, Inc. (which subsequently changed its name to Callaway Golf Interactive, Inc.). The Company acquired FrogTrader to stimulate purchases of new clubs by growing its Trade In! Trade Up! program and to enable the Company to better manage the distribution of pre-owned golf clubs and the Callaway Golf brand. The Company currently has the following wholly-owned operating subsidiaries: Callaway Golf Sales Company, The Top-Flite Golf Company, Callaway Golf Interactive, Inc., Callaway Golf Europe Ltd., Callaway Golf K.K., Callaway Golf Korea Ltd., Callaway Golf Canada Ltd. and Callaway Golf South Pacific PTY Ltd.

The Company, together with its subsidiaries, designs, manufactures and sells high quality golf clubs (drivers, fairway woods, irons, wedges and putters) and golf balls. The Company also sells golf accessories such as golf bags, golf gloves, golf headwear, travel covers and bags, golf towels and golf umbrellas. In some markets outside of the United States, the Company’s subsidiaries also sell footwear. The Company generally sells its products to golf retailers, sporting goods retailers and mass merchants, directly and through its wholly-owned subsidiaries, and to third party distributors. The Company also sells pre-owned golf products through its website, www.callawaygolfpreowned.com . The Company’s products are sold in the United States and in over 100 countries around the world. 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. In addition, the Company licenses its trademarks and service marks in exchange for a royalty fee to third parties for use on products such as golf apparel, golf shoes, watches, luggage and other golf related products such as headwear, travel bags, golf towels and golf umbrellas. The Company’s business is seasonal and as a result approximately two-thirds of its sales occur during the first half of its fiscal year (see below “Certain Factors Affecting Callaway Golf Company — Seasonality and Adverse Weather Conditions” contained in Item 7).

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 14 to the Company’s Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002 (“Consolidated Financial Statements”), which note is incorporated herein by this reference and is included as part of “Item 8. Financial Statements and Supplementary Data” to this Form 10-K.

Products

The Company designs, manufactures and sells high quality golf clubs and golf balls and also sells related accessories. In some markets outside the United States the Company’s subsidiaries also sell footwear. The Company designs its products to be technologically-advanced and in this regard invests a considerable amount in research and development each year. The Company’s products are designed for golfers of all skill levels, both amateur and professional.

The following table sets forth the contribution to net sales attributable to the principal product groups for the periods indicated:


		Year Ended December 31,

		2004				2003				2002

		(In millions)
Drivers and fairway woods		$	238.6	25	%	$	252.4	31	%	$	310.0	39	%
Irons*			259.1	28	%		280.7	34	%		252.2	32	%
Putters			100.5	11	%		142.8	18	%		111.5	14	%
Golf balls			231.3	25	%		78.4	10	%		66.0	8	%
Accessories and other*			105.1	11	%		59.7	7	%		53.5	7	%

	Net sales	$	934.6	100	%	$	814.0	100	%	$	793.2	100	%


*		Beginning with the year ended December 31, 2004, the Company includes wedge sales within the iron sales product category. Previously, wedge sales were included as a component of the accessories and other category. Prior periods have been reclassified to conform with the current period presentation.

For a discussion regarding the changes in net sales for each product group from 2004 to 2003 and from 2003 to 2002, see below, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” contained in Item 7.

The Company’s current principal products by product group are described below:

Drivers and Fairway Woods. This product category includes sales of the Company’s drivers and fairway woods, which are sold under the Callaway Golf, Top-Flite and Ben Hogan brands. The Company’s drivers and fairway woods are generally made of metal (either titanium or steel) or a combination of metal and a composite material. The Company’s products compete at all price segments in the drivers and fairway woods category. In general, composite/metal “Fusion” drivers and fairway woods sell at higher price points than most titanium drivers and fairway woods, and titanium products sell at higher price points than steel products. The Company’s drivers and fairway woods are available in a variety of lofts, shafts and other specifications to accommodate the preferences and skill levels of all golfers. All of the Company’s current drivers and fairway woods conform to the current rules of the United States Golf Association (the “USGA”) or the Royal and Ancient Golf Club of St. Andrews (the “R&A”), as applicable to the markets in which the products are intended to be sold.

Irons. This product category includes sales of the Company’s irons and wedges, which are sold under the Callaway Golf, Ben Hogan and Top-Flite brands. The Company’s irons are generally made of metal (either titanium or steel) or a combination of metal and a composite material. The Company’s products compete at all price segments in the irons category. In general, the Company’s composite/metal irons sell at higher price points than its titanium irons, and the Company’s titanium irons sell at higher price points than its steel irons. The Company’s irons are available in a variety of lofts, shafts and other specifications to accommodate the preferences and skill levels of all golfers. All of the Company’s current iron products conform to the current rules of the USGA and the R&A, as applicable.

Putters. This product category includes sales of the Company’s putters, which are sold under the Odyssey, Callaway Golf, Ben Hogan and Top-Flite brands. The Company’s products compete at all price segments in the putters category. The Company’s putters are available in a variety of styles, shafts and other specifications to accommodate the preferences and skill levels of all golfers. All of the Company’s current putter products conform to the current rules of the USGA and the R&A, as applicable.

Golf Balls. This product category includes sales of the Company’s golf balls, which are sold under the Callaway Golf, Ben Hogan and Top-Flite brands. The Company’s golf balls are generally either a 2-piece golf ball (consisting of a core and cover) or a multi-layer golf ball (consisting of two or more components in addition to the cover). The Company’s golf ball products include covers that incorporate a traditional dimple pattern as well as covers that incorporate the Company’s unique HEX Aerodynamics (i.e., a series of

hexagons and pentagons separated by tubular ridges). The Company’s products compete at all price segments in the golf ball category. In general, the Company’s multi-layer golf balls sell at higher price points than its 2-piece golf balls. All of the Company’s current golf ball products conform to the current rules of the USGA and the R&A, as applicable.

Accessories and Other. This product category includes sales of golf bags, golf gloves, golf headwear, travel covers and bags, golf towels and golf umbrellas. This segment also includes royalties from licensing of the Company’s trademarks and service marks on products such as golf apparel, golf shoes, watches, luggage and other golf related products including headwear, travel bags, golf towels and golf umbrellas.

Product Design and Development

Product design at the Company is a result of the integrated efforts of its product management, research and 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 2004, 2003 and 2002, the Company invested $30.6 million, $29.5 million and $32.2 million, respectively, in research and development. The Company intends to continue to invest substantial amounts in its research and development activities in connection with its development of new golf club and golf ball products.

The Company 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 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, the Company has been able to accelerate the design, development and testing of new golf clubs. In addition, the Company’s sophisticated CAD/ CAM design, tooling, ball prototyping and indoor testing equipment, together with the Company’s predictive computer modeling capability, allows it to develop and test prototype golf balls in a relatively short cycle time. Further, the Company utilizes a variety of testing equipment and computer software, including an “Iron Byron” robot, launch monitors, a proprietary virtual test center, a proprietary performance analysis system, an indoor test range and other destructive and non-destructive methods to develop and test its products.

For certain risks associated with product design and development, see below, “Certain Factors Affecting Callaway Golf Company — Market Acceptance of Products” and “— New Product Introduction and Product Cyclicality” contained in Item 7.

Manufacturing


	*Golf Clubs*

The Company’s drivers, fairway woods, irons, putters and wedges are assembled primarily at the Company’s facilities in Carlsbad, California. A portion of these products are assembled outside of the United States. The Company’s products are assembled using components obtained from suppliers both within the United States and internationally. The golf club assembly process is very labor intensive.


	*Golf Balls*

Prior to the Top-Flite Acquisition, Callaway Golf manufactured golf balls in its Carlsbad, California facility and Top-Flite manufactured golf balls primarily in its Chicopee, Massachusetts and Gloversville, New York facilities. Following the Top-Flite Acquisition, the Company moved a majority of its Callaway Golf ball manufacturing to the Chicopee and Gloversville facilities and expects to move the remainder to these facilities in 2005. The golf ball manufacturing process is much more automated than the golf club assembly process, although a significant amount of labor is still used in the golf ball manufacturing process.

For certain risks associated with manufacturing, see below, “Certain Factors Affecting Callaway Golf Company — Manufacturing Capacity” and “— Dependence on Certain Suppliers and Materials” contained in Item 7.

Sales and Marketing


	*Sales in the United States*

Approximately 58%, 55% and 55% of the Company’s net sales were derived from sales for distribution within the United States in 2004, 2003 and 2002, respectively. The Company primarily sells to both on- and off-course golf retailers and sporting goods retailers who sell quality golf products and provide a level of customer service appropriate for the sale of such products. The Company also sells to mass merchants, primarily with regard to its Top-Flite branded products. On a consolidated basis, no one customer that distributes golf clubs or balls in the United States accounted for more than 4% of the Company’s revenues in 2004, 2003 or 2002. On a segment basis, the golf ball customer base is much more concentrated than the golf club customer base. In 2004, the top five golf ball customers accounted for approximately 25% of the total golf ball sales. A loss of one or more of these customers could have a significant adverse effect upon the Company’s golf ball sales.

Sales of the Callaway Golf and Odyssey branded golf clubs, golf balls and accessories in the United States are made and supported by full-time regional field representatives and in-house sales and customer service representatives who are employees of the Company. The Company maintains a separate sales force for the sale of Top-Flite and Ben Hogan branded products. Like Callaway Golf, the Top-Flite and Ben Hogan golf club, golf ball and accessory sales in the United States are sold and supported by full-time regional field representatives and in-house sales and customer service representatives. However, the regional field representatives that sell and support the Top-Flite and Ben Hogan branded products are independent contractors and are permitted to sell the golf products of other companies, so long as such products do not compete with the Top-Flite and Ben Hogan branded golf products.

Each geographic territory is covered by both a field representative and a dedicated in-house sales representative 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 dedicated in-house sales representatives provides the Company a competitive advantage. In addition to these sales representatives, the Company also has dedicated in-house customer service representatives.

In addition, other dedicated sales representatives service corporate customers who want their corporate logo imprinted on the Company’s golf balls, putters or golf bags. The Company imprints the logos on its products, 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 manufacturing and customer service representatives who focus on the Company’s custom club sales. Custom club sales are generated primarily from a club fitting experience designed by the Company for golfers of all abilities. Club fittings are performed by golf professionals who are specifically trained to utilize the Company’s proprietary club fitting software. The Company believes that offering golfers the opportunity to gain knowledge of custom club specifications increases sales and promotes brand loyalty.

The Company maintains various sales programs from time to time including a Preferred Retailer Program. The Preferred Retailer Program offers longer payment terms, as well as potential rebates and discounts, for participating retailers in exchange for providing certain benefits to the Company, including the maintenance of agreed upon inventory levels, prime product placement and retailer staff training.


	*Sales Outside of the United States*

Approximately 42%, 45% and 45% of the Company’s net sales were derived from sales for distribution outside of the United States in 2004, 2003 and 2002, respectively. The Company does business (either directly or through its subsidiaries and distributors) in more than 100 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 continue to be an important element in the future growth and success of the Company.

The majority of the Company’s international sales are made through its wholly-owned subsidiaries located in Europe, Japan, Canada, Korea and Australia. In addition to sales through its subsidiaries, the Company also sells through distributors in over 65 foreign countries, including Singapore, Hong Kong, Taiwan, China, the Philippines, India, South Africa and various countries in South America. Prices of golf clubs and balls for sales by distributors outside of the United States generally reflect an export pricing discount to compensate international distributors for selling and distribution costs. A change in the Company’s relationship with significant distributors could negatively impact the volume of the Company’s international sales.

The Company’s sales programs in foreign countries are specifically designed based upon local laws and competitive conditions. Some of the sales programs utilized include the custom club fitting experiences and the Preferred Retailer Program or variations of those programs employed in the United States as described above.

Conducting business outside of the United States subjects the Company to increased risks inherent in international business. See below, “Certain Factors Affecting Callaway Golf Company — Foreign Currency Risk” and “ — International Risks” contained in Item 7.


	*Sales of Pre-Owned Golf Clubs*

The Company sells certified, pre-owned Callaway Golf products through its website, www.callawaygolfpreowned.com . The Company generally acquires the pre-owned products through the Company’s Trade In! Trade Up! program. The website for this program is www.tradeintradeup.com . The Trade In! Trade Up! program gives golfers the opportunity to trade in their used Callaway Golf and select competitor golf clubs at authorized Callaway Golf retailers or through the Callaway Golf Pre-Owned website for credit toward the purchase of new or pre-owned Callaway Golf equipment.


	*Advertising and Promotion*

Within the United States, the Company has focused its advertising efforts mainly on a combination of television commercials, primarily during golf telecasts, and printed advertisements in national magazines, such as Golf Magazine , Golf World and Golfweek . Advertising of the Company’s products outside of the United States is generally handled by the Company’s subsidiaries in coordination with U.S. direction.

In addition, the Company establishes relationships with professional golfers and celebrities from other industries in order to promote the Company’s products. The Company has entered into endorsement arrangements with members of the various professional golf 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” contained in Item 7.

Competition

The golf club markets in which the Company competes 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 competitors are TaylorMade, Titleist, Cobra, Cleveland, Ping and Mizuno. For putters, the Company’s major competitors are Ping and Titleist. In addition, the Company also competes with Dunlop, Bridgestone and PRGR among others in Japan and throughout Asia. The Company believes that it is the leader, or one of the leaders, in every golf club market in which it competes.

The golf ball business is also highly competitive. There are a number of well-established and well-financed competitors, including Acushnet (Titleist and Pinnacle), Sumitomo Rubber Industries (Srixon), Bridgestone (Precept), Nike, TaylorMade (MaxFli) and others. These competitors have established market share in the golf ball business, with Acushnet having a market share of approximately 50% of the golf ball business in the United States. The Company’s golf ball products have been well received by both professional

and amateur golfers alike. The Company’s golf ball products continue to receive a significant degree of usage on the major professional golf tours and maintained the number two position on tour in 2004. In addition, the Company’s golf ball products achieved the number two retail market share in 2004.

For both golf clubs and golf balls, the Company generally competes on the basis of technology, quality, performance, customer service and price. For risks relating to competition, see below, “Certain Factors Affecting Callaway Golf Company — Competition” contained in Item 7.

Environmental Matters

The Company’s operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of certain materials, substances and wastes and the remediation of environmental contaminants (“Environmental Laws”). In the ordinary course of its manufacturing processes, the Company uses paints, chemical solvents and other materials, and generates waste by-products, that are subject to these Environmental Laws. In addition, in connection with the Top-Flite Acquisition, the Company assumed certain monitoring and remediation obligations at the Top-Flite facilities.

The Company adheres to all applicable Environmental Laws and takes action as necessary to comply with these laws. The Company maintains an environmental and safety program and employs three full-time environmental engineers to manage the program. The environmental and safety program includes obtaining environmental permits as required, capturing and appropriately disposing of any waste by-products, tracking hazardous waste generation and disposal, air emissions, safety situations, material safety data sheet management and recycling, and auditing and reporting on its compliance.

In addition, The Top-Flite Golf Company is a charter member in the U.S. Environmental Protection Agency’s National Performance Track program. This program recognizes facilities that have demonstrated a commitment to superior environmental performance and have a good record of compliance with environmental regulations. The National Environmental Performance Track was developed by the Environmental Protection Agency to reward companies who do more than environmental regulations require.

Historically, the costs of environmental compliance have not had a material adverse effect upon the Company’s business. Furthermore, the Company does not believe that the monitoring and remedial obligations it assumed in connection with the Top-Flite Acquisition will have a material adverse effect upon the Company’s business. The Company believes that its operations are in substantial compliance with all applicable Environmental Laws.

Intellectual Property

The Company is the owner of over 3,000 U.S. and foreign trademark registrations and over 1,500 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. The Company’s intellectual property rights are very important to the Company and the Company seeks to protect such 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 its rights through litigation.

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. See below, “Certain Factors Affecting Callaway Golf Company — Intellectual Property and Proprietary Rights” contained in Item 7.

Licensing

The Company from time to time licenses its trademarks and service marks to third parties for use on products such as golf apparel, golf shoes, watches, luggage and other golf related products, such as headwear, travel bags, golf towels and golf umbrellas. The Company has a current licensing arrangement with Ashworth, Inc. for a complete line of Callaway Golf men’s and women’s apparel for distribution in the United States, Canada, Europe, Australia, New Zealand and South Africa. The first full year in which the Company received royalty revenue under this licensing arrangement was 2003. The Company also has a current licensing arrangement with Sanei International Co., Ltd. (“Sanei”) for a complete line of Callaway Golf men’s and women’s apparel for distribution in Asian Pacific countries including Japan, Korea, Hong Kong, Taiwan, Singapore, Indonesia, Malaysia, Thailand, Vietnam, the Philippines, Brunei, Myanmar and China.

In addition to apparel, the Company has also entered into licensing arrangements with (i) Tour Golf Group, Inc. for a Callaway Golf footwear collection, (ii) Fossil, Inc. for a line of Callaway Golf watches and clocks, (iii) TRG Accessories, LLC for a collection consisting of luggage, personal leather products and skin protection products and (iv) Global Wireless Entertainment, Inc. for the creation of golf-related software and applications for wireless handheld devices and platforms. In 2003, as part of the Top-Flite Acquisition, the Company assumed certain license agreements Top-Flite had previously entered into with third parties to license, among other things, the use of its Top-Flite and Ben Hogan marks on apparel, souvenirs and gifts.

Employees

As of December 31, 2004, the Company and its subsidiaries had approximately 3,000 full-time employees. In addition, the Company employs temporary personnel to manage the seasonal fluctuations of its business.

Historically, Callaway Golf employees have not been represented by unions. The Top-Flite manufacturing employees in Chicopee, Massachusetts, however, are unionized. Shortly after the Top-Flite Acquisition was consummated the Company negotiated a new collective bargaining agreement with the union in Chicopee which is not scheduled to expire until September 30, 2008. In addition, the Company’s production employees in Canada and Australia are also unionized. The Company considers its employee relations to be good.

Access to SEC Filings through Company Website

Interested readers can access the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) through the Investor Relations section of the Company’s website at www.callawaygolf.com . These reports can be accessed free of charge from the Company’s website as soon as reasonably practicable after the Company electronically files such materials with, or furnishes them to, the Securities and Exchange Commission. In addition, the Company’s Corporate Governance Guidelines, Code of Conduct and the written charters of the committees of the Board of Directors are available in the Corporate Governance portion of the Investor Relations section of the Company’s website and are available in print to any shareholder who requests a copy. The information contained on the Company’s website shall not be deemed to be incorporated into this report.

Additional Factors Affecting the Company’s Business

The financial statements contained in this report and the related discussion describe 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 are not necessarily indicative of the Company’s future performance or financial condition. The Company therefore has included in this report at Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Affecting Callaway Golf Company” a 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.


Item 2.	*Properties*

The Company and its subsidiaries conduct operations in both owned and leased properties. The Company’s principal executive offices and domestic operations are located in Carlsbad, California. The eight buildings utilized in the Company’s Carlsbad operations include corporate offices, manufacturing, research and development, warehousing and distribution facilities. These buildings comprise approximately 735,000 square feet. The Company owns seven of these properties, representing approximately 585,000 square feet of space. An additional property, representing approximately 150,000 square feet of space, is leased and the lease is scheduled to expire in November 2007. As part of the Top-Flite Acquisition, the Company acquired the Chicopee manufacturing plant, warehouse and offices that encompass approximately 869,000 square feet and a manufacturing plant in Gloversville, New York comprising approximately 70,000 square feet. In addition, the Company owns and leases a number of other properties domestically and internationally, including properties in Australia, Canada, Japan, Korea and the United Kingdom. The Company’s operations at each of these properties are used to some extent for both the golf club and golf ball businesses. The Company believes that its facilities currently are adequate to meet its requirements.


Item 3.	*Legal Proceedings*

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

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

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

made any determination that the case may proceed in the form of a class action. In light of the Lundsford II case subsequently filed in the United States District Court, described below, the parties have agreed to stay Lundsford I, and to dismiss it without prejudice once the federal court proceedings are underway.

In Foulston, filed on November 4, 2002, plaintiff seeks to assert an alleged class action on behalf of Kansas consumers who purchased Callaway Golf products covered by the NPIP and seeks damages and restitution for the alleged class under Kansas law. The trial court in Foulston stayed the case in light of Lundsford I. The Foulston court has not made any determination that the case may proceed in the form of a class action.

The complaint in Murray was filed on May 14, 2004, alleging that a retail golf business was damaged by the alleged refusal of Callaway Golf Sales Company to sell certain products after the store violated the NPIP, and by the failure to permit plaintiff to sell Callaway Golf products on the internet. The proprietor seeks compensatory and punitive damages associated with the failure of his retail operation. Callaway Golf removed the case to the United States District Court for the Western District of North Carolina, and has answered the complaint denying liability. The parties are currently engaged in discovery, and a trial date in December 2005 has been set by the court.

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

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

its principals. Plaintiffs sued Callaway Golf Company, Callaway Golf Sales Company and a Callaway Golf Sales Company sales representative. Plaintiffs alleged that the Company misappropriated certain alleged trade secrets and proprietary information of the Perfect Putter Co. and incorporated those purported trade secrets in the Company’s Odyssey White Hot 2-Ball Putter. Plaintiffs also alleged that the Company made false statements and acted inappropriately during discussions with plaintiffs. Plaintiffs sought compensatory damages, exemplary damages, attorneys’ fees and costs, pre- and post-judgment interest and injunctive relief. On December 20, 2002, the Company removed the case to the United States District Court for the Southern District of Florida, Case No. 02-14342. On April 29, 2003, the District Court denied plaintiffs’ motion to remand the case to state court. The parties have resolved and dismissed this litigation. As part of the resolution, Callaway Golf has purchased certain putter patents from Perfect Putter. Other terms of the resolution are confidential.

On December 14, 2004, Callaway Golf Sales Company was served with a complaint captioned York v. Callaway Golf Sales Company, filed in the Circuit Court for Dade County, Florida, Case No. 04-25625 CA 11, asserting a purported class action on behalf of all consumers who purchased allegedly defective HX Red golf balls with cracked covers. The complaint contains causes of action for strict liability, breach of implied and express warranties, and violation of the Magnuson-Moss Consumer Product Warranty Act. Plaintiff is seeking compensatory damages, attorneys’ fees and prejudgment interest according to the proof to be presented. On January 12, 2005, Callaway Golf removed the case to the United States District Court for the Southern District of Florida.

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


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

None.

Executive Officers of the Registrant

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


Name	Age		Position(s) Held

William C. Baker		71	Chairman and Chief Executive Officer
Richard C. Helmstetter		63	Vice Chairman and Senior Executive Vice President, Strategic Initiatives
Steven C. McCracken		54	Senior Executive Vice President, Chief Legal Officer and Secretary
Bradley J. Holiday		51	Senior Executive Vice President and Chief Financial Officer
Robert A. Penicka		42	Senior Executive Vice President and Chief Operating Officer, Equipment
John F. Melican		42	Senior Vice President and Global Marketing Officer

William C. Baker is Chairman and Chief Executive Officer of the Company and has served in such capacity since August 2004. Mr. Baker has served as a Director of the Company since January 1994. From August 1998 to April 2000, Mr. Baker was the President of Meditrust Operating Company. He was President and Chief Executive Officer of the Los Angeles Turf Club, Inc., a subsidiary of Magna International, Inc., from December 1998 to June 1999. He was Chairman and Chief Executive Officer of The Santa Anita Companies, Inc., a subsidiary of Meditrust Operating Company, from November 1997 to December 1998.

Prior to that, he was Chairman of Santa Anita Realty Enterprises, Inc. from April 1996 to November 1997 and Chairman, President and Chief Executive Officer of Santa Anita Operating Company from August 1996 to November 1997. He was President and Chief Operating Officer of Red Robin International, Inc. (a restaurant chain) from May 1993 to May 1995, and Chairman and Chief Executive Officer of Carolina Restaurant Enterprises, Inc. from August 1992 to December 1995. Mr. Baker was the principal shareholder and Chief Executive Officer of Del Taco, Inc. from 1977 until 1988 when that business was sold. He also serves as a Director of La Quinta Corporation (f/k/a The Meditrust Companies), Public Storage, Inc., California Pizza Kitchen, Inc., and Javo Beverage Company. Mr. Baker received his law degree in 1957 from the University of Texas.

Richard C. Helmstetter is Vice Chairman and Senior Executive Vice President, Strategic Initiatives of the Company and has served in the capacity of Vice Chairman since November 2004 and in the capacity of Senior Vice President, Strategic Initiatives since September 2003. He served as Senior Executive Vice President, Chief of New Products from August 2000 to September 2003 and as Senior Executive Vice President, Chief of New Golf Club Products from January 1998 through August 2000. Previously he 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 LLP 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.

Bradley J. Holiday is Senior Executive Vice President and Chief Financial Officer of the Company and has served in such capacity since September 2003. Mr. Holiday previously served as Executive Vice President and Chief Financial Officer since August 2000. Prior to joining the Company, Mr. Holiday served as Vice President — Financial Planning & Analysis for Gateway, Inc. Prior to Gateway, Inc., Mr. Holiday was with Nike, Inc. in various capacities beginning in April 1993, 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 M.B.A. in Finance from the University of St. Thomas and a B.S. in Accounting from Iowa State University.

Robert A. Penicka is Senior Executive Vice President, and Chief Operating Officer, Equipment, of the Company and has served in such capacity since January 2005. Mr. Penicka also serves as the President of The Top-Flite Golf Company, a wholly-owned subsidiary of the Company, and has served in such capacity since September 2003. Previously, from June 2001 to September 2003, he served as the Company’s Executive Vice President of Manufacturing. Prior to becoming Executive Vice President, Manufacturing, Mr. Penicka served as the Company’s Senior Vice President of Golf Ball Manufacturing from May 2000 until June 2001. He also previously held the positions of Senior Vice President of Golf Club Manufacturing and Vice President of Manufacturing Technology. Mr. Penicka joined Callaway Golf in 1997 when the Company acquired Odyssey Golf. At Odyssey Golf, Mr. Penicka served as Vice President of Manufacturing, based in Chicago. Prior to entering the golf business, he spent eight years with General Electric Company and six years at Harman International Industries in Indianapolis as Vice President of Manufacturing for its automotive OEM business. Mr. Penicka graduated with a degree in Chemical Engineering from The Ohio State University in 1984.

John F. Melican is Senior Vice President and Global Marketing Officer of the Company and has served in such capacity since February 2005. He served as Senior Vice President, Sales and Marketing from October 2003 to February 2005. Mr. Melican served as Vice President, Product Management for the Company’s iron, wedge and putter business from September 2001 to October 2003. Prior to joining the Company, Mr. Melican was with Nike, Inc. in a variety of sales management positions beginning in 1992, including Director of Sales for Nike’s Team Sports business unit. Before joining Nike, he worked in sales roles at The Warnaco Group with well-known brands including the Chaps Ralph Lauren, Hathaway and Jack Nicklaus Sportswear divisions. Mr. Melican received a bachelor’s degree in business administration from the University of San Diego.

Information with respect to the Company’s employment agreements with its Chief Executive Officer and other four most highly compensated executive officers, is contained in the Company’s definitive Proxy Statement under the caption “Compensation of Executive Officers — Employment Agreements and Termination of Employment Arrangements,” to be filed with the Commission within 120 days after the end of fiscal year 2004 pursuant to Regulation 14A, which information is incorporated herein by this reference. In addition, the Company currently has employment agreements with each of its executive officers which are included as exhibits to this report.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities*

The Company’s Common Stock is listed, and principally traded, on the New York Stock Exchange (“NYSE”). The Company’s symbol for its Common Stock is “ELY.” As of February 28, 2005, the approximate number of holders of record of the Company’s Common Stock was 9,000. The following table sets forth the range of high and low per share closing prices of the Company’s Common Stock and per share dividends for the periods indicated.


	Year Ended December 31,

	2004						2003

Period:	High		Low		Dividend		High		Low		Dividend

First Quarter	$	19.23	$	16.93	$	0.07	$	13.88	$	10.50	$	0.07
Second Quarter	$	19.95	$	11.09	$	0.07	$	14.66	$	11.83	$	0.07
Third Quarter	$	12.50	$	10.30	$	0.07	$	15.89	$	13.55	$	0.07
Fourth Quarter	$	13.50	$	9.28	$	0.07	$	17.07	$	14.85	$	0.07


	Securities Authorized for Issuance Under Equity Compensation Plans

Information about the Company’s equity compensation plans at December 31, 2004 is as follows:

Equity Compensation Plan Information


	Number of Shares				Number of Shares
	to be Issued Upon		Weighted Average		Remaining
	Exercise of		Exercise Price of		Available for
Plan Category	Outstanding Options		Outstanding Options		Future Issuance

	(In thousands, except dollar amounts)
Equity Compensation Plans Approved by Shareholders ⁽¹⁾		5,721	$	18.02		9,084	⁽²⁾
Equity Compensation Plans Not Approved by Shareholders ⁽³⁾		6,948	$	17.61		—

Total		12,669	$	18.41		9,084


⁽¹⁾	Consists of the following plans: 1991 Stock Incentive Plan, 1996 Stock Option Plan, 1998 Stock Incentive Plan, Non-Employee Directors Stock Option Plan, 2001 Non-Employee Directors Stock Option Plan, 2004 Equity Incentive Plan and Employee Stock Purchase Plan. No shares are available for grant under the 1991 Stock Incentive Plan, 1996 Stock Option Plan, 1998 Stock Incentive Plan or Non-Employee Directors Stock Option Plan at December 31, 2004. The 2001 Non-Employee Directors Stock Option Plan provides for stock option awards only. The 2004 Equity Incentive Plan permits the award of stock options, restricted stock and various other stock-based awards.

⁽²⁾	Includes 4,032,517 shares reserved for issuance under the Employee Stock Purchase Plan.

⁽³⁾	Consists of the following plans: 1995 Employee Stock Incentive Plan, Key Officer Plan and Promotion, Marketing and Endorsement Stock Incentive Plan. No shares are available for grant under these plans at December 31, 2004.

Equity Compensation Plans Not Approved By Shareholders

The Company has the following equity compensation plans which were not approved by shareholders: the 1995 Employee Stock Incentive Plan (the “1995 Plan”), the Promotion, Marketing and Endorsement Stock Incentive Plan (the “Promotion Plan”) and the Key Officer Plan. No shares are available for grant under the 1995 Plan, the Promotion Plan or the Key Officer Plan as of December 31, 2004. For additional information, see “Notes to Consolidated Financial Statements, Note 10 — Stock, Stock Options and Rights.”

1995 Plan. Under the 1995 Plan, the Company granted stock options to non-executive officer employees and consultants of the Company. Although the 1995 Plan permitted stock option grants to be made at less than the fair market value of the Company’s Common Stock on the date of grant, the Company’s practice was to generally grant stock options at exercise prices equal to the fair market value of the Company’s Common Stock on the date of grant.

Promotion Plan. Under the Promotion Plan, the Company granted stock options to golf professionals and other endorsers of the Company’s products. Such grants were generally made at prices that were equal to the fair market value of the Company’s Common Stock on the date of grant.

Key Officer Plan. At December 31, 2004, there remained outstanding under this plan an option to purchase 100,000 shares of the Company’s common stock, which previously had been issued to a former officer of the Company. As of the date of this report, that option has expired and there were no longer any options or awards outstanding under the key officer plan.


	Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In May 2002, the Company announced that its Board of Directors authorized it to repurchase shares of its Common Stock in the open market or in private transactions, subject to the Company’s assessment of market conditions and buying opportunities, up to a maximum cost to the Company of $50.0 million. During 2004, the Company repurchased 353,000 shares of Common Stock at an average cost per share of $17.84. There were no share repurchases during the fourth quarter of 2004. As of December 31, 2004, the Company is authorized to repurchase up to an additional $7.9 million of its Common Stock under the repurchase program. 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. See below “Share Repurchases” contained in Item 7.


Item 6.	*Selected Financial Data*

The following statements of operations data and balance sheet data for the five years ended December 31, 2004 were derived from the Company’s audited consolidated financial statements. Consolidated balance sheets at December 31, 2004 and 2003 and the related consolidated statements of operations and statements of cash flows for each of the three years in the period ended December 31, 2004 and notes thereto appear elsewhere in this report. The data should be read in conjunction with the annual consolidated financial statements, related notes and other financial information appearing elsewhere in this report.


		Year Ended December 31,

		2004 ^(2,3)			2003 ⁽⁴⁾			2002 ⁽⁵⁾			2001 ⁽⁶⁾			2000 ⁽⁷⁾

		(In thousands, except per share data)
Statement of Operations Data:
Net sales ⁽¹⁾		$	934,564		$	814,032		$	793,219		$	818,072		$	840,612
Cost of sales			575,742			445,417			393,068			411,585			440,119

	Gross profit ⁽¹⁾		358,822			368,615			400,151			406,487			400,493
Selling, general and administrative expenses ⁽¹⁾			352,967			273,231			256,909			259,473			241,187
Research and development expenses			30,557			29,529			32,182			32,697			34,579

	Income (loss) from operations ⁽¹⁾		(24,702	)		65,855			111,060			114,317			124,727
Interest and other income, net ⁽¹⁾			1,934			3,550			2,271			5,349			6,119
Interest expense			(945	)		(1,522	)		(1,660	)		(1,552	)		(1,524	)
Unrealized energy derivative losses			—			—			—			(19,922	)		—

	Income (loss) before income taxes and cumulative effect of accounting change		(23,713	)		67,883			111,671			98,192			129,322
Income tax provision (benefit)			(13,610	)		22,360			42,225			39,817			47,366

	Income (loss) before cumulative effect of accounting change		(10,103	)		45,523			69,446			58,375			81,956
	Cumulative effect of accounting change		—			—			—			—			(957	)

	Net income (loss)	$	(10,103	)	$	45,523		$	69,446		$	58,375		$	80,999


			Year Ended December 31,

			2004 ^(2,3)			2003 ⁽⁴⁾		2002 ⁽⁵⁾		2001 ⁽⁶⁾		2000 ⁽⁷⁾

			(In thousands, except per share data)
Earnings per common share:
	Basic
		Income (loss) before cumulative effect of accounting change	$	(0.15	)	$	0.69	$	1.04	$	0.84	$	1.17
		Cumulative effect of accounting change		—			—		—		—		(0.01	)

		Net income (loss)	$	(0.15	)	$	0.69	$	1.04	$	0.84	$	1.16

	Diluted
		Income (loss) before cumulative effect of accounting change	$	(0.15	)	$	0.68	$	1.03	$	0.82	$	1.14
		Cumulative effect of accounting change		—			—		—		—		(0.01	)

		Net income (loss)	$	(0.15	)	$	0.68	$	1.03	$	0.82	$	1.13

Dividends paid per share			$	0.28		$	0.28	$	0.28	$	0.28	$	0.28


	December 31,

	2004		2003		2002		2001		2000

	(In thousands)
Balance Sheet Data:
Cash and cash equivalents	$	31,657	$	47,340	$	108,452	$	84,263	$	102,596
Marketable securities	$	—	$	—	$	—	$	6,422	$	—
Working capital	$	272,934	$	253,302	$	259,866	$	252,817	$	233,163
Total assets	$	735,737	$	748,566	$	679,845	$	647,602	$	630,934
Long-term liabilities	$	28,622	$	29,023	$	27,297	$	31,379	$	9,884
Total shareholders’ equity	$	586,317	$	589,383	$	543,387	$	514,349	$	511,744


⁽¹⁾	Beginning with the first quarter of 2003, the Company records royalty revenue in net sales and royalty related expenses as selling expenses. Previously, royalty revenue and the related expenses were recorded as components of other income. Prior periods have been reclassified to conform with the current period presentation.

⁽²⁾	On May 28, 2004, the Company acquired all of the issued and outstanding shares of stock of FrogTrader, Inc. Thus, the Company’s financial data includes the FrogTrader, Inc. results of operation from May 28, 2004 forward.

⁽³⁾	During 2004, the Company’s gross profit, net income and earnings per common share include the recognition of certain integration charges related to the consolidation of its Callaway Golf and Top-Flite golf ball and golf club manufacturing and research and development operations. These charges reduced the Company’s gross profit, net income and earnings per common share by approximately $15.7 million, $17.5 million and $0.26, respectively. (see Note 3).

⁽⁴⁾	On September 15, 2003 the Company completed the domestic portion of the Top-Flite Acquisition. The settlement of the international assets was effective October 1, 2003. Thus, the Company’s financial data includes The Top-Flite Golf Company results of operations in the United States from September 15, 2003, and the international operations from October 1, 2003 forward. Additionally, the Company’s 2003 gross profit, net income and earnings per common share include the recognition of certain integration charges related to the consolidation of its Callaway Golf and Top-Flite golf ball and golf club manufacturing and research and development operations. These charges reduced the Company’s gross profit, net income and earnings per common share by approximately $24.1 million, $16.1 million and $0.24, respectively (see Note 3 to the Consolidated Financial Statements).

⁽⁵⁾	For 2002, the Company’s gross profit, net income and earnings per common share include the effect of the change in accounting estimate for the Company’s warranty reserve. During the third quarter of 2002, the Company reduced its warranty reserve by approximately $17.0 million, pre-tax (see Note 4 to the Consolidated Financial Statements).


⁽⁶⁾	For 2001, the Company’s net income and earnings per common share include the recognition of unrealized energy contract losses due to changes in the estimated fair value of the energy contract based on market rates. During the second and third quarters of 2001, the Company recorded $6.4 million and $7.8 million, respectively, of after-tax unrealized losses. During the fourth quarter of 2001, the Company terminated the energy contract. As a result, the Company will continue to reflect the derivative valuation account on its balance sheet with no future valuation adjustments for changes in market rates, subject to periodic review (see Note 13 to the Consolidated Financial Statements).

⁽⁷⁾	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. 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 to reflect the change in the Company’s revenue recognition policy to recognize revenue at the time both legal and practical risk of loss transfers to the customer (see Note 2 to the Consolidated Financial Statements).


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

The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes and the “Important Notice to Investors” that appear elsewhere in this report.

Regulation G Disclosure

The Company’s discussion and analysis of its results of operations, financial condition and liquidity set forth in this Item 7 have been derived from financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In addition to the GAAP results of operations, the Company has also provided additional information concerning the Company’s results that includes certain financial measures not prepared in accordance with GAAP. The non-GAAP financial measures included in this discussion are pro forma gross profit, net income and earnings per share amounts that exclude from 2003 charges associated with the integration of the Top-Flite business and from 2002 the adjustment to the Company’s warranty reserve. These non-GAAP financial measures should not be considered a substitute for any measure derived in accordance with GAAP. These non-GAAP financial measures may also be inconsistent with the manner in which similar measures are derived or used by other companies. Management believes that the presentation of such non-GAAP financial measures, when considered in conjunction with the most directly comparable GAAP financial measures, provides useful information to investors by permitting additional relevant period-over-period comparisons of the historical operations of the Callaway Golf business. The Company has included in this discussion supplemental information which reconciles those non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP.

Critical Accounting Policies and Estimates

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

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


	*Revenue Recognition*

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


	*Allowance for Doubtful Accounts*

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


	*Inventories*

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


	*Long-Lived Assets*

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


	*Warranty*

The Company has a stated two-year warranty policy for its golf clubs, although the Company’s historical practice has been to honor warranty claims well after the two-year stated warranty period. The Company’s policy is to accrue the estimated cost of satisfying future warranty claims at the time the sale is recorded. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company’s stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty. If the number of actual warranty claims or the cost of satisfying warranty

claims significantly exceeds the estimated warranty reserve, the Company’s cost of sales, gross profit and net income would be significantly adversely affected.


	*Taxes*

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

The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes. As required under applicable accounting rules, the Company therefore accrues an amount for its estimate of additional tax liability the Company could incur as a result of the ultimate resolution of disagreements with the various taxing authorities. The tax contingency accrual is recorded as a component of the Company’s net income taxes payable/receivable balance, which the Company reviews and updates over time as more definitive information becomes available from taxing authorities, completion of tax audits or upon occurrence of other events.


	*Change in Accounting Estimate*

As discussed above, the Company has a stated two-year warranty policy for its golf clubs, although the Company’s historical practice has been to honor warranty claims well after the two-year stated warranty period. Prior to the third quarter of 2002, the Company’s method of estimating both its implicit and explicit warranty obligation was to utilize data and information based on the cumulative failure rate by product after taking into consideration specific risks the Company believes existed at the time the financial statements were prepared. These additional risks included product-specific risks, such as the introduction of products with new technology or materials that would be more susceptible to failure or breakage, and other business risks, such as increased warranty liability as a result of acquisitions. In many cases, additions to the warranty reserve for new product introductions have been based on management’s judgment of possible future claims derived from the limited product failure data that was available at the time.

Beginning in the second quarter of 2001, the Company began to compile data that illustrated the timing of warranty claims in relation to product life cycles. In the third quarter of 2002, the Company determined it had gathered sufficient data and concluded it should enhance its warranty accrual estimation methodology to utilize the additional data. The analysis of the data, in management’s judgment, provided management with more insight into timing of claims and demonstrated that some product failures are more likely to occur early in a product’s life cycle while other product failures occur in a more linear fashion over the product’s life cycle. As a result of its analysis of the additional information, the Company believes it has gained better insight and improved judgment to more accurately project the ultimate failure rates of its products. As a result of this refinement in its methodology, the Company concluded that it should change its methodology of estimating warranty accruals and reduce its warranty reserve by approximately $17.0 million. The $17.0 million reduction is recorded in cost of sales and favorably impacted gross profit as a percentage of net sales by two percentage

points for the year ended December 31, 2002. The change in methodology has been accounted for as a change in accounting principle inseparable from a change in estimate.

In connection with Regulation G, the Company provides the following table which summarizes what net income and earnings per share would have been had the warranty reserve adjustment, adjusted for taxes, been excluded from reported results and reconciles such non-GAAP financial measures to the most directly comparable GAAP financial measures (in millions, except per share data):


		Year Ended
		December 31,
		2002

Reported net income		$	69.4
	Non-cash warranty reserve adjustment, net of tax		(10.5	)

Pro forma net income		$	58.9

Basic earnings per share:
Reported net income		$	1.04
	Non-cash warranty reserve adjustment, net of tax		(0.16	)

Pro forma basic earnings per share		$	0.88

Diluted earnings per share:
Reported net income		$	1.03
	Non-cash warranty reserve adjustment, net of tax		(0.16	)

Pro forma diluted earnings per share		$	0.87

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 2 to the Consolidated Financial Statements, which is incorporated herein by this reference.

FrogTrader Acquisition

On May 28, 2004, the Company acquired all of the issued and outstanding shares of stock of FrogTrader, Inc (“FrogTrader”), an e-commerce company which subsequently changed its name to Callaway Golf Interactive, Inc. The Company’s consolidated statements of operations include the financial results of FrogTrader for the period from the acquisition date of May 28, 2004. The Company acquired FrogTrader to stimulate purchases of new clubs by growing the Trade In! Trade Up! program and to enable the Company to better manage the distribution of pre-owned golf clubs and the Callaway Golf brand.

The FrogTrader acquisition was accounted for as a purchase in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” Under SFAS No. 141, the aggregate cost of the acquired stock was $15.2 million, which included transaction costs of approximately $0.2 million, and was paid entirely in cash. The aggregate acquisition costs exceeded the estimated fair value of the net assets acquired. As a result, the Company has recorded goodwill of $9.1 million, none of which is deductible for tax purposes. The Company has recorded the fair values of FrogTrader’s internally developed software and

certain customer information based on an assessment from an outside valuation company received during 2004. The allocation of the aggregate acquisition costs is as follows (in millions):


Assets:
	Cash		$	6.0
	Accounts receivable			0.1
	Inventory			2.0
	Other current assets			1.5
	Property, plant and equipment			0.3
	Internally developed software			1.2
	Customer lists			0.7
	Goodwill			9.1
Liabilities:
	Current liabilities			(5.6	)
	Long-term liabilities			(0.1	)

		Total net assets acquired	$	15.2

Top-Flite Acquisition

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

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

The Top-Flite Acquisition was accounted for as a purchase in accordance with SFAS No. 141. Under SFAS No. 141, the aggregate cost of the acquired assets was $183.0 million, which includes cash paid of $154.1 million, transaction costs of approximately $6.3 million, and assumed liabilities of approximately $22.5 million. The estimated fair value of the assets exceeded the estimated aggregate acquisition costs. As a

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


Assets Acquired:
	Accounts receivable		$	45.3
	Inventory			32.8
	Other assets			1.1
	Property and equipment			55.8
	Intangible assets			48.0
Liabilities Assumed:
	Current liabilities			(17.4	)
	Long-term liabilities			(5.1	)

		Total net assets acquired	$	160.5

During the fourth quarter of 2003, the Company began consolidating the Callaway Golf and Top-Flite golf ball and golf club manufacturing and research and development operations. In connection with the consolidation, the Company incurred charges to pre-tax earnings in the amounts of $28.5 million and $24.1 million in 2004 and 2003, respectively. During 2004 these charges included severance, the disposition of certain long-lived assets and other costs associated with the consolidation of certain facilities. The charges incurred during 2003 related to a decrease in the carrying value of the Company’s golf ball assets in connection with the disposition of certain golf ball manufacturing equipment. On January 20, 2005, the Company announced that in 2005 it expects to incur additional pre-tax charges of approximately $7.0 to $12.0 million as it continues to consolidate its Callaway Golf and Top-Flite operations. These additional charges are expected to include non-cash charges for acceleration of depreciation on certain golf ball manufacturing equipment and cash charges related to severance and facility consolidations.

The Company’s results of operations include The Top-Flite Golf Company’s results in the United States beginning September 15, 2003 and the results of the international operations beginning October 1, 2003.

Results of Operations


	*Years Ended December 31, 2004 and 2003*

Net sales increased 15% to $934.6 million for the year ended December 31, 2004 as compared to $814.0 million for the year ended December 31, 2003. The overall increase in net sales is primarily due to a $153.0 million (195%) increase in the sales of golf balls and a $45.5 million (76%) increase in the sales of accessories and other products as compared to 2003. The increase in golf ball sales resulted from the inclusion of Top-Flite ball sales for a full year in 2004 compared to fifteen weeks in 2003 as well as a $42.1 million increase in Callaway Golf brand golf ball sales. The increase in accessories and other products sales is primarily due to the inclusion of Top-Flite accessories and other product sales for a full year in 2004 compared to fifteen weeks in 2003. These increases were partially offset by a $42.3 million (30%) decrease in sales of putters, a $21.6 million (8%) decrease in sales of irons and a $13.9 million (5%) decrease in sales of woods in 2004 as compared to 2003.

The Company’s net sales were significantly affected by the $171.3 million increase in sales of Top-Flite and Ben Hogan branded products due to the inclusion of these sales for a full year in 2004 compared to fifteen weeks in 2003. Excluding sales of Top-Flite and Ben Hogan branded products, sales of Callaway Golf and Odyssey branded products were $722.8 million in 2004, a $50.8 million (7%) decrease as compared to 2003. This decrease is primarily due to a decline in sales of products that were in their second and third year of their product life cycles as well as a decline in average selling prices.

The Company believes that its overall net sales in 2004 were adversely affected by continued competitive pressures (which had a negative impact upon average selling prices), limited market acceptance of certain of the Company’s 2004 products, continued economic uncertainty in many of the Company’s key markets, as

well as the military actions in the Middle East. The Company’s net sales are also affected by changes in foreign currency rates. See below, “Certain Factors Affecting Callaway Golf Company — Foreign Currency Risk.”

Net sales information by product category is summarized as follows:


		Year Ended
		December 31,				Growth/(Decline)

		2004		2003		Dollars			Percent

		(In millions)
Net Sales:
	Driver and fairway woods	$	238.6	$	252.4	$	(13.8	)		(5	)%
	Irons*		259.1		280.7		(21.6	)		(8	)%
	Putters		100.5		142.8		(42.3	)		(30	)%
	Golf balls		231.3		78.4		152.9			195	%
	Accessories and other*		105.1		59.7		45.4			76	%

		$	934.6	$	814.0	$	120.6			15	%


*	Beginning with the year ended December 31, 2004, the Company includes wedge sales within the iron sales product category. Previously, wedge sales were included as a component of the accessories and other category. Prior periods have been reclassified to conform with the current period presentation.

The $13.8 million (5%) decrease in net sales of drivers and fairway woods to $238.6 million for the year ended December 31, 2004 resulted from lower average selling prices, partially offset by higher sales volumes in 2004 compared to the prior year. The majority of this decrease in sales related to a decline in sales of titanium fairway woods products. This decline in fairway woods sales was expected as the titanium fairway woods products were introduced in 2003 and 2002 and were considered closeout products in 2004. Also contributing to the decline in woods sales were the credits given to retailers in connection with sales programs to reduce inventory levels at retail. These declines were partially offset by an increase in sales of the Company’s steel fairway woods products and sales of the Company’s new hybrid woods products and new fusion fairway woods products which were introduced during 2004.

The $21.6 million (8%) decrease in net sales of irons to $259.1 million for the year ended December 31, 2004 was due to a combination of lower sales volumes and lower average selling prices in 2004 compared to 2003. This decline was expected as the Company’s steel and titanium iron products were in the second year of their product life cycle and such products generally sell better in the first year after introduction. These decreases were partially offset by the introduction of the Company’s fusion irons in 2004 as well as an increase in Top-Flite irons sales, resulting from the inclusion of Top-Flite sales for a full twelve months in 2004 as compared to fifteen weeks in 2003.

The $42.3 million (30%) decrease in net sales of putters to $100.5 million for the year ended December 31, 2004 was due to a combination of lower sales volumes and lower average selling prices in 2004 compared to 2003. The majority of this decrease was attributable to decreased sales of White Hot putters which were introduced in 2002, partially offset by the introduction of the new White Steel line of putters in 2004 and the inclusion of Top-Flite sales for a full twelve months in 2004 as compared to fifteen weeks in 2003.

The $153.0 million (195%) increase in net sales of golf balls to $231.3 million for the year ended December 31, 2004 was primarily attributable to higher sales volumes resulting from the inclusion of Top-Flite and Ben Hogan golf ball sales for a full twelve months in 2004 as compared to fifteen weeks in 2003. Sales of the Top-Flite and Ben Hogan brand golf balls were $144.9 million. Callaway Golf ball sales during 2004 were $86.4 million, an increase of $42.1 million (95%) from the year ended 2003. The increase in sales of Callaway Golf brand golf balls was driven by the success of the HX Tour golf ball products, as well as increased sales across the entire line of Callaway Golf ball products.

The $45.4 million (76%) increase in net sales of accessories and other products is primarily attributable to sales of Top-Flite and Ben Hogan bags, gloves and other accessories, sales of pre-owned products through the FrogTrader business acquired in May of 2004, combined with an increase in sales of Callaway Golf shoes, travel bags and other accessories.

Net sales information by region is summarized as follows:


		Year Ended
		December 31,				Growth/(Decline)

		2004		2003		Dollars			Percent

				(In millions)
Net Sales:
	United States	$	546.2	$	449.4	$	96.8			22	%
	Europe		169.5		145.1		24.4			17	%
	Japan		70.5		101.3		(30.8	)		(30	)%
	Rest of Asia		51.7		58.3		(6.6	)		(11	)%
	Other foreign countries		96.7		59.9		36.8			61	%

		$	934.6	$	814.0	$	120.6			15	%

Net sales in the United States increased $96.8 million (22%) to $546.2 million during 2004 versus 2003. Overall, the Company’s sales in regions outside of the United States increased $23.8 million (7%) to $388.4 million during 2004 versus 2003. This increase in international sales is primarily attributable to a $24.4 million (17%) increase in sales in Europe and a $36.8 million (61%) increase in sales in other foreign countries. The increase in the United States, Europe and other foreign countries, was primarily attributable to the inclusion of Top-Flite for a full twelve months in 2004 versus fifteen weeks in 2003. These increases were partially offset by a $30.8 million (30%) decrease in sales in Japan and a $6.6 million (11%) decrease in sales in other areas of Asia.

For the year ended December 31, 2004, gross profit decreased $9.8 million (3%) to $358.8 million from $368.6 million in the comparable period of 2003. Gross profit as a percentage of net sales decreased 7 percentage points to 38% in 2004 as compared to 45% in 2003. The Company’s gross profit in 2004 and 2003 was unfavorably impacted by $15.7 million and $24.1 million, respectively, as a result of charges associated with the integration of the Top-Flite operations. The Company’s overall gross profit was also negatively impacted by lower average selling prices of golf club and ball products, resulting from increased competitive pressure in the marketplace during 2004, as well as lower Top-Flite margins.

Selling expenses increased $55.3 million (27%) in 2004 to $263.1 million from $207.8 million in 2003, and were 28% and 26% of net sales, respectively. This increase was primarily due to the $44.2 million increase in Top-Flite selling expenses resulting from the inclusion of a full year of Top-Flite selling expenses in 2004 as compared to fifteen weeks in 2003. The increase was also due to a $17.2 million increase in tour and promotional expenses incurred primarily during the first half of the year, as a result of the Company’s strategy to increase its presence on golf’s major professional tours. Additionally, the Company incurred $4.4 million of selling integration costs in connection with the integration of the Top-Flite operations with the Callaway Golf operations. These increases were partially offset by decreases in other selling and tour expense of $7.3 million and other promotional golf club expense of $3.2 million.

General and administrative expenses increased $24.5 million (37%) in 2004 to $89.9 million from $65.4 million in 2003, and were 10% and 8% of net sales, respectively. This increase was primarily due to the $12.9 million increase in Top-Flite general and administrative expenses resulting from the inclusion of a full year of Top-Flite expenses in 2004 as compared to fifteen weeks of Top-Flite expenses in 2003, as well as $7.6 million of general and administrative expenses incurred in connection with the integration of the Top-Flite operations with the Callaway Golf operations. This increase was also due to an increase in legal fees of $5.4 million primarily related to the Dunlop/ Maxfli litigation and a $2.0 million increase resulting from the inclusion of seven months of FrogTrader general and administrative expenses during the year ended December 31, 2004.

Research and development expenses increased $1.1 million (4%) in 2004 to $30.6 million from $29.5 million in 2003, and were 3% and 4% of net sales in 2004 and 2003, respectively. The dollar increase was primarily due to the $3.8 million increase in Top-Flite expenses resulting from the inclusion of a full year of Top-Flite expenses in 2004 as compared to fifteen weeks of Top-Flite expenses in 2003, as well as $0.9 million of research and development expenses incurred in connection with the integration of the Top-Flite operations with the Callaway Golf operations. This increase was partially offset by a $2.0 million decrease in employee costs during 2004 due to a decrease in personnel in 2004 compared to 2003.

Interest and other income decreased $1.6 million (46%) in 2004 to $1.9 million from $3.6 million in 2003. This decrease is primarily attributable to a $3.3 million decrease in foreign currency transactional gains partially offset by a $2.1 million decrease in foreign currency contract losses as well as a decrease in interest income of approximately $0.6 million as a result of a decrease in cash invested during 2004 compared to 2003.

Interest expense decreased $0.6 million (38%) in 2004 to $0.9 million compared to $1.5 million in 2003. This decrease is due to a decrease in the average amount borrowed under the Company’s line of credit during 2004.

During 2004, the Company recorded an income tax benefit of $13.6 million. The income tax benefit as a percentage of loss before taxes was 57% in 2004 as compared to a provision of 33% in 2003. The 2004 effective tax rate was positively impacted by the reversal of previously accrued taxes primarily as a result of the resolution of certain tax audits. The 2003 tax rate was positively impacted by an atypical benefit related to the statutory U.S. export sales incentive.

Net income for the year ended December 31, 2004 decreased 122% to a loss of $10.1 million from income of $45.5 million in 2003. Earnings per diluted share decreased to a loss of $0.15 per share in 2004 as compared to earnings of $0.68 per share in 2003. Net income was negatively impacted by after-tax charges related to the integration of the Callaway Golf and Top-Flite operations in the amounts of $17.5 million and $16.1 million in 2004 and 2003, respectively. Earnings per share was negatively impacted by after-tax charges related to the integration of the Callaway Golf and Top-Flite operations in the amounts of $0.26 and $0.24 per share, in 2004 and 2003, respectively.


	*Years Ended December 31, 2003 and 2002*

Net sales increased 3% to $814.0 million for the year ended December 31, 2003 as compared to $793.2 million for the year ended December 31, 2002. The overall increase in net sales is primarily due to a $31.3 million (28%) increase in the sales of putters, a $28.5 million (11%) increase in the sales of irons, a $12.4 million (19%) increase in the sales of golf balls and a $6.2 million (11%) increase in the sales of accessories and other products as compared to 2002. The increase in golf ball sales is attributable to the addition of Top-Flite golf ball sales. The aggregate increases in net sales were partially offset by a $57.6 million (19%) decrease in sales of woods in 2003 as compared to 2002.

The Company believes that adverse economic conditions and continued economic uncertainty, particularly in the United States, Japan and other parts of Asia, as well as the military actions in Iraq and increased competition, had a significant negative effect upon the Company’s overall net sales in 2003. The Company also believes that its net sales for 2003, particularly during the first half, were negatively affected by adverse weather conditions and a continued decrease in the number of golf rounds played. Golf Datatech has reported that the number of golf rounds played in the United States declined 2.6% during 2003, as compared to 2002. In addition, the Company’s net sales are also affected by changes in foreign currency rates. See below, “Certain Factors Affecting Callaway Golf Company — Foreign Currency Risk.”

Net sales information by product category is summarized as follows:


		Year Ended
		December 31,				Growth/(Decline)

		2003		2002		Dollars			Percent

		(In millions)
Net Sales:
	Driver and fairway woods	$	252.4	$	310.0	$	(57.6	)		(19)	%
	Irons		280.7		252.2		28.5			11	%
	Putters		142.8		111.5		31.3			28	%
	Golf balls		78.4		66.0		12.4			19	%
	Accessories and other*		59.7		53.5		6.2			11	%

		$	814.0	$	793.2	$	20.8			3	%


*	Beginning with the first quarter of 2003, the Company records royalty revenue in net sales. Previously, royalty revenue was recorded as a component of other income and prior periods have been reclassified to conform with the current period presentation.

The $57.6 million (19%) decrease in net sales of driver and fairway woods to $252.4 million represents a decrease in both unit and dollar sales. This decrease was primarily attributable to a decline in sales of Big Bertha Hawk Eye VFT Titanium Drivers and Fairway Woods, Big Bertha Steelhead III Drivers and Fairway Woods, ERC II Forged Titanium Drivers and Fairway Woods and Big Bertha C4 Drivers. The declines in sales of these products were expected as the Company’s products generally sell better in their first year after introduction. Both Big Bertha Hawk Eye VFT Titanium Drivers and Fairway Woods and ERC II Forged Titanium Drivers were introduced in 2001 and Big Bertha C4 Drivers were introduced in 2002. All of these products were being closed out in 2003. In addition, 2003 is the second year in the life cycle for ERC II Forged Titanium Fairway Woods and Big Bertha Steelhead III Drivers and Fairway Woods. These decreases were partially offset by sales of Great Big Bertha II Drivers and Fairway Woods, which were launched during the fourth quarter of 2002. Sales of Great Big Bertha II Drivers and Fairway Woods in 2003 exceeded the combined prior year sales of all other lines of the Company’s titanium driver and fairway woods products which included Big Bertha Hawk Eye VFT Titanium Drivers and Fairway Woods and ERC II Forged Titanium Drivers and Fairway Woods.

The $28.5 million (11%) increase in net sales of irons to $280.7 million represents an increase in both dollar and unit sales. The sales growth was due primarily to the January 2003 launch of the Steelhead X-16 Stainless Steel Irons, including the Steelhead X-16 Pro Series line. This sales growth was partially offset by a decline in sales of Big Bertha Irons which were launched in January 2002, Hawkeye VFT irons which were launched in August 2001, and Steelhead X-14 Irons which were launched in October 2000 and were being closed out in 2003.

The $31.3 million (28%) increase in net sales of putters to $142.8 million is primarily attributable to increased sales of the Company’s Odyssey putters primarily resulting from the continued success of the Odyssey White Hot 2-Ball putter, which was introduced in January 2002.

The $12.4 million (19%) increase in net sales of golf balls to $78.4 million represents an increase in both unit and dollar sales. The increase is primarily attributable to the addition of Top-Flite, Strata and Ben Hogan golf ball sales beginning late in the third quarter of 2003. This increase was partially offset by a decline in sales of Callaway Golf balls, which were adversely affected by the decline in rounds played in 2003, the absence of any new product introductions in 2003, and the uncertainty surrounding the Company’s golf ball business earlier in the year.

The $6.2 million (11%) increase in net sales of accessories and other products to $59.7 million is primarily attributable to increased sales of golf bags, combined with an increase in royalty revenue from licensed merchandise in 2003 as compared to 2002.

Net sales information by region is summarized as follows:


		Year Ended
		December 31,				Growth/(Decline)

		2003		2002		Dollars			Percent

		(In millions)
Net Sales:
	United States*	$	449.4	$	439.8	$	9.6			2	%
	Europe		145.1		136.9		8.2			6	%
	Japan		101.3		102.6		(1.3	)		(1)	%
	Rest of Asia		58.3		58.0		0.3			1	%
	Other foreign countries		59.9		55.9		4.0			7	%

		$	814.0	$	793.2	$	20.8			3	%


*	Beginning with the first quarter of 2003, the Company records royalty revenue in net sales. Previously, royalty revenue was recorded as a component of other income and prior periods have been reclassified to conform with the current period presentation.

Net sales in the United States increased $9.6 million (2%) to $449.4 million during 2003 versus 2002. Overall, the Company’s sales in regions outside of the United States increased $11.2 million (3%) to $364.6 million during 2003 versus 2002. This increase in international sales is primarily attributable to an $8.2 million (6%) increase in sales in Europe, a $0.3 million (1%) increase in sales in the Rest of Asia, which includes Korea, and a $4.0 million (7%) increase in sales in other regions outside of the United States. These increases were partially offset by a $1.3 million (1%) decrease in sales in Japan.

For the year ended December 31, 2003, gross profit decreased to $368.6 million from $400.2 million in the comparable period of 2002. Gross profit as a percentage of net sales decreased 5 percentage points to 45% in 2003 as compared to 2002. The Company’s gross profit percentage in 2003 was unfavorably impacted by the $24.1 million non-cash charge associated with the integration of Top-Flite (see above “Top-Flite Acquisition”). The Company’s gross profit percentage for 2002 was favorably impacted by the $17.0 million reduction in the Company’s warranty accrual during the third quarter of 2002 (see above “Change in Accounting Estimate”). Excluding the effects of the integration charges and the warranty reserve adjustment, gross profit in 2003 increased 2% to $392.7 million from $383.2 million in 2002 and gross profit as a percentage of net sales remained flat at 48% in 2003 as compared to 2002.


		Year Ended
		December 31,					Growth/(Decline)

		2003		2002			Dollars			Percent

		(In millions, except per share data)
Reported gross profit		$	368.6	$	400.2		$	(31.6	)		(8	)%
	Non-cash integration charges		24.1		—
	Non-cash warranty reserve adjustment		—		(17.0	)

Pro forma gross profit		$	392.7	$	383.2		$	9.5			2	%

The Company’s gross profit percentage (excluding the 2003 integration charges and the 2002 warranty accrual reduction) was positively impacted by a more favorable sales mix in 2003 combined with the additional inventory obsolescence reserves established in 2002 on ERC II Drivers and Big Bertha C4 Drivers. These favorable impacts were offset by a decline in golf ball margins and overall lower average selling prices on golf club and ball products.

Selling expenses increased $7.5 million (4%) in 2003 to $207.8 million from $200.3 million in 2002, and were 26% and 25% of net sales, respectively. This increase was primarily due to the Top-Flite selling expenses incurred in 2003 of $13.9 million. Excluding these Top-Flite selling expenses, selling expenses in 2003 decreased $6.4 million as compared to 2002. This decrease was primarily due to a decrease in employee costs

of $5.7 million, advertising expenses of $3.4 million, promotional club expenses of $2.2 million, mailing and freight expenses of $0.9 million and travel and entertainment expenses of $0.6 million. These decreases were partially offset by increases in depreciation expense of $3.4 million, other promotional expenses of $1.5 million and tour expenses of $1.4 million.

General and administrative expenses increased $8.8 million (16%) in 2003 to $65.4 million from $56.6 million in 2002, and were 8% and 7% of net sales, respectively. This increase was primarily due to the Top-Flite expenses incurred in 2003 of $7.7 million. Excluding these Top-Flite expenses, general and administrative expenses in 2003 increased $1.2 million as compared to 2002. This increase was mainly attributable to an increase of $1.6 million in deferred compensation plan expenses.

Research and development expenses decreased $2.7 million (8%) in 2003 to $29.5 million from $32.2 million in 2002. As a percentage of net sales, the expenses remained constant at 4%. Excluding Top-Flite expenses of $1.0 million, research and development expenses in 2003 decreased $3.7 million as compared to 2002. The decrease is primarily due to a decrease in consulting services of $1.3 million, depreciation expense of $1.2 million, and employee costs of $1.1 million.

Interest and other income increased $1.3 million (56%) in 2003 to $3.6 million from $2.3 million in 2002. The increase is primarily attributable to a $1.9 million increase in gains on investments to fund the deferred compensation plan and $0.6 million generated from litigation settlements. These increases were partially offset by a $0.5 million decline in interest income and a $0.5 million decline in foreign currency transaction gains.

Interest expense decreased in 2003 to $1.5 million compared to $1.7 million in 2002.

During 2003, the Company recorded a provision for income taxes of $22.4 million. The provision for income tax as a percentage of income before taxes was 33% in 2003 as compared to 38% in 2002. The effective tax rate was lower in 2003 as compared to 2002 primarily as a result of the recognition of atypical tax benefits in the current year income tax provision related to the statutory U.S export sales incentive.

Net income for the year ended December 31, 2003 decreased 34% to $45.5 million from $69.4 million in 2002. Earnings per diluted share decreased 34% to $0.68 in 2003 as compared to $1.03 in 2002. Net income in 2003 was negatively impacted by the $24.1 million non-cash integration charges (see above “Top-Flite Acquisition”). Net income in 2002 was positively impacted by the $17.0 million reduction in the warranty reserve (see above “Change in Accounting Estimate”). Excluding the $24.1 million non-cash integration charges recorded in 2003 and the $17.0 million non-cash warranty reserve adjustment recorded in 2002, the Company’s net income would have increased 5% to $61.7 million in 2003 from $58.9 million in 2002 and diluted earnings per share would have increased 7% to $0.93 in 2003 from $0.87 in 2002.

In connection with Regulation G, the Company provides the following table which summarizes what net income and earnings per share would have been had the integration charges and the warranty reserve

adjustment, adjusted for taxes, been excluded from reported results and reconciles such non-GAAP financial measures to the most directly comparable GAAP financial measures:


		Year Ended
		December 31,					Growth/(Decline)

		2003		2002			Dollars			Percent

		(In millions, except per share data)
Reported net income		$	45.5	$	69.4		$	(23.9	)		(34	)%
	Non-cash integration charges		16.2
	Non-cash warranty reserve adjustment		—		(10.5	)

Pro forma net income		$	61.7	$	58.9		$	2.8			5	%

Reported basic earnings per share		$	0.69	$	1.04		$	(0.35	)		(34	)%
	Non-cash integration charges		0.24		—
	Non-cash warranty reserve adjustment		—		(0.16	)

Pro forma basic earnings per share		$	0.93	$	0.88		$	0.05			6	%

Reported diluted earnings per share		$	0.68	$	1.03		$	(0.35	)		(34	)%
	Non-cash integration charges		0.25		—
	Non-cash warranty reserve adjustment		—		(0.16	)

Pro forma diluted earnings per share		$	0.93	$	0.87		$	0.06			7	%

Financial Condition

Cash and cash equivalents decreased $15.6 million (33%) to $31.7 million at December 31, 2004, from $47.3 million at December 31, 2003. This resulted primarily from cash used in investing activities of $34.8 million, partially offset by cash provided by financing activities of $7.9 million, cash provided by operating activities of $8.5 million and the effect of exchange rate changes on cash of $2.6 million. Cash provided by operating activities decreased $110.2 million to $8.5 million for the year ended December 31, 2004 from $118.7 million in 2003. This decrease was primarily due to a $55.6 million decrease in net income, as well as a $40.7 million decrease in income taxes payable. Cash used in investing activities decreased $133.2 million to $34.8 million for the year ended December 31, 2004 from $167.9 in 2003. This decrease primarily reflects the $160.3 million use of cash for the purchase of the Top-Flite assets in 2003. Cash provided by financing activities increased $21.4 million to cash provided by financing activities of $7.9 million in 2004 from cash used in financing activities of $13.4 million in 2003. The $21.4 million increase is primarily due to proceeds from borrowings under the Company’s line of credit, as well as an increase in proceeds from the issuance of common stock in connection with the exercise of stock options during the year.

The Company’s net accounts receivable balance increased $4.5 million to $105.2 million at December 31, 2004 from $100.7 million at December 31, 2003. The Company’s consolidated days sales outstanding (“DSO”) increased to 71 days as of December 2004 as compared to 60 days as of December 2003. The increase in DSO and accounts receivable balance is primarily attributable to extended payment terms for strategic customers.

The Company’s net inventory decreased $4.2 million to $181.2 million at December 31, 2004 from $185.4 million at December 31, 2003. This decrease is due to the Company’s decrease in inventories of drivers and fairway woods of $7.6 million, irons and wedges of $3.8 million, putters of $3.2 million, balls of $5.4 million and bags and accessories of $3.6 million. These decreases were partially offset by a $5.0 million decrease in the Company’s reserve for obsolete inventory, an increase in Top-Flite inventory of $8.0 million and the addition of FrogTrader inventory of $4.8 million.

At December 31, 2004, the Company’s net property, plant and equipment decreased $28.9 million to $135.9 million from $164.8 million at December 31, 2003. This decrease is primarily due to current year depreciation and amortization expense of $47.8 million and the disposal of $7.7 million of assets during 2004

resulting from the integration of the Callaway Golf and Top-Flite operations (see above “Top-Flite Acquisition”). These decreases were partially offset by current year capital expenditures of $26.0 million.

At December 31, 2004, the Company’s goodwill balance increased $10.3 million to $30.5 million from $20.2 million at December 31, 2003. This increase is primarily due to the $9.1 million of goodwill recorded in connection with the FrogTrader acquisition in May 2004.

Liquidity and Capital Resources


	*Sources of Liquidity*

The Company’s principal sources of liquidity are cash flows provided by operations and the Company’s credit facilities in effect from time to time. The Company currently expects this to continue. Effective November 5, 2004, the Company amended and restated its line of credit to provide for a new five year revolving line of credit from Bank of America, N.A. and certain other lenders (the “Line of Credit”), providing for revolving loans of up to $250.0 million (with the possible expansion of the Line of Credit to $300.0 million upon the satisfaction of certain conditions and the agreement of the lenders). Actual borrowing availability under the Line of Credit is effectively limited by the financial covenants set forth in the agreement governing the Line of Credit. At December 31, 2004 the maximum amount that could be borrowed under the Line of Credit was approximately $141.3 million and $13.0 million of that amount was outstanding.

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

The agreement governing the Line of Credit requires the Company to maintain certain financial covenants, including a maximum leverage ratio, a minimum asset coverage ratio, a maximum capitalization ratio, a minimum interest coverage ratio and a minimum consolidated EBITDA. The agreement also includes certain other restrictions, including restrictions limiting additional indebtedness, dividends, stock repurchases, transactions with affiliates, capital expenditures, asset sales, acquisitions, mergers, liens and encumbrances and other restrictions. The agreement also contains other provisions, including affirmative covenants, representations and warranties and events of default. As of December 31, 2004, the Company was in compliance with the covenants and other terms thereof.

The total origination fees incurred in connection with the Line of Credit were $1.3 million and are being amortized into interest expense over five years (the term of the Line of Credit agreement). The unamortized origination fees were $1.2 million as of December 31, 2004 and have been included in prepaid and other current assets in the accompanying consolidated balance sheet.


	*Share Repurchases*

In August 2001 and May 2002, 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 and $50.0 million, respectively. The following schedule summarizes the status of the Company’s repurchase programs:


	Year Ended December 31,

	2004				2003				2002

			Average				Average				Average
	Shares		Cost Per		Shares		Cost Per		Shares		Cost Per
	Repurchased		Share		Repurchased		Share		Repurchased		Share

	(In thousands, except per share data)
Authority Announced in August 2001		—		—		—		—		866	$	17.86
Authority Announced in May 2002		353	$	17.84		373	$	12.77		1,967	$	15.75

Total		353	$	17.84		373	$	12.77		2,833	$	16.40

The Company has completed its August 2001 repurchase program. As of December 31, 2004, the Company is authorized to repurchase up to an additional $7.9 million of its Common Stock under the repurchase program announced in May 2002. 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.


	*Other Significant Cash and Contractual Obligations*

The following table summarizes certain significant cash obligations as of December 31, 2004, that will affect the Company’s future liquidity (in millions):


		Payments Due By Period

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

Line of credit		$	13.0	$	13.0	$	—	$	—	$	—
Operating leases ⁽¹⁾			17.6		6.2		8.4		2.1		0.9
Capital leases ⁽²⁾			0.1		0.1		—		—		—
Unconditional purchase obligations ⁽³⁾			121.5		28.2		51.5		35.6		6.2
Deferred compensation ⁽⁴⁾			8.5		1.0		1.1		0.7		5.7

	Total ⁽⁵⁾	$	160.7	$	48.5	$	61.0	$	38.4	$	12.8


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

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

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

purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item.

⁽⁴⁾ The Company has an unfunded, non-qualified deferred compensation plan. The plan allows officers, certain other employees and directors of the Company to defer all or part of their compensation, to be paid to the participants or their designated beneficiaries upon retirement, death or separation from the Company. To support the deferred compensation plan, the Company has elected to purchase Company-owned life insurance. The cash surrender value of the Company-owned insurance related to deferred compensation is included in other assets and was $9.8 million at December 31, 2004. The liability for the deferred compensation is included in long-term liabilities and was $8.7 million at December 31, 2004.

⁽⁵⁾ During the third quarter of 2001, the Company entered into a derivative commodity instrument to manage electricity costs in the volatile California energy market. The contract was originally effective through May 2006. During the fourth quarter of 2001, the Company notified the energy supplier that, among other things, the energy supplier was in default of the energy supply contract and that based upon such default, and for other reasons, the Company was terminating the energy supply contract. The Company continues to reflect the $19.9 million derivative valuation account on its balance sheet, subject to periodic review, in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The $19.9 million represents unrealized losses resulting from changes in the estimated fair value of the contract and does not represent contractual cash obligations. The Company believes the energy supply contract has been terminated and, therefore, the Company does not have any further cash obligations under the contract. Accordingly, the energy derivative valuation account is not included in the table. There can be no assurance, however, that a party will not assert a future claim against the Company or that a bankruptcy court or arbitrator will not ultimately nullify the Company’s termination of the contract. No provision has been made for contingencies or obligations, if any, under the contract beyond November 2001. See below Note 13 “Commitments and Contingencies — Supply of Electricity and Energy Contracts.”

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company products or trademarks, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has made contractual commitments to each of its officers and certain other employees providing for severance payments upon the termination of employment. The Company also has consulting agreements that provide for payment of nominal fees upon the issuance of patents and/or the commercialization of research results. The Company has also issued a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain workers’ compensation insurance policies. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments the Company could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’s financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote that material payments will be required under the commitments and guarantees described above. The fair value of indemnities, commitments and guarantees that the Company issued during the fiscal year ended December 31, 2004 was not material to the Company’s financial position, results of operations or cash flows.

In addition to the contractual obligations listed above, the Company’s liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that the Company is subject to from time to time. See Note 13 to the Company’s Consolidated Financial Statements.


	*Sufficiency of Liquidity*

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


	*Capital Resources*

The Company does not currently have any material commitments for capital expenditures.


	*Off-Balance Sheet Arrangements*

At December 31, 2004 and 2003, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.


	*Certain Factors Affecting Callaway Golf Company*

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


	*Market Acceptance of Products*

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


	*New Product Introduction and Product Cyclicality*

The Company believes that the introduction of new, innovative golf clubs and golf balls is important to its future success. A major portion of the Company’s revenues is generated by products that are less than two years old. The Company faces certain risks associated with such a strategy. For example, in the golf industry, new models and basic design changes in golf equipment are frequently met with consumer rejection. In

addition, prior successful designs have been rendered obsolete within a relatively short period of time as new products are introduced into the marketplace. Further, any new products that retail at a lower price than prior products may negatively impact the Company’s revenues unless unit sales increase. The rapid introduction of new golf club or golf ball products by the Company has resulted in close-outs of existing inventories at both the wholesale and retail levels. Such close-outs have resulted in reduced margins on the sale of older products, as well as reduced sales of new products, given the availability of older products at lower prices.

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


	*Manufacturing Capacity*

The Company plans its manufacturing capacity based upon the forecasted demand for its products. The nature of the Company’s business makes it difficult to quickly adjust its manufacturing capacity if actual demand for its products exceeds or is less than forecasted demand. If actual demand for its products exceeds the forecasted demand, the Company may not be able to produce sufficient quantities of new products in time to fulfill actual demand, which could limit the Company’s sales and adversely affect its financial performance. On the other hand, if actual demand is less than the forecasted demand for its products, 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.


	*Dependence on Certain Suppliers and Materials*

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

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

The Company uses United Parcel Service (“UPS”) for substantially all ground shipments of products to its U.S. customers. The Company uses air carriers and shipping services for most of its international shipments of products. Any significant interruption in UPS, air carrier or shipping services could have a material adverse

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


	*Dependence on Energy Resources*

The Company’s golf club and golf ball manufacturing facilities in California use, among other resources, significant quantities of electricity to operate. In 2001, some companies in California, including the Company, experienced periods of blackouts during which electricity was not available. If the Company were to experience such blackouts again, there is no assurance that it would be able to obtain alternative power supplies at reasonable prices. An interruption in the supply of electricity or a significant increase in the cost of electricity could have a significant adverse effect upon the Company’s results of operations.


	*Competition*

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

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

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


	*Adverse Global Economic Conditions*

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


	*Terrorist Activity and Armed Conflict*

Terrorist activities and armed conflicts in recent years (such as the attacks on the World Trade Center and the Pentagon, the incidents of Anthrax poisoning and the military actions in the Middle East, including the war in Iraq), as well as the threat of future conflict, have had a significant adverse effect upon the Company’s business. Any such additional events would likely have an adverse effect upon the world economy and would likely adversely affect the level of demand for the Company’s products as consumers’ attention and interest are diverted from golf and become focused on these events and the economic, political, and public safety issues and concerns associated with such events. Also, such events could adversely affect the Company’s ability to manage its supply and delivery logistics. If such events caused a significant disruption in domestic or international air, ground or sea shipments, the Company’s ability to obtain the materials necessary to produce and sell its products and to deliver customer orders also would be materially adversely affected. Furthermore, such events can negatively impact tourism, which could adversely affect the Company’s sales to retailers at resorts and other vacation destinations.


	*Natural Disasters and Pandemic Diseases*

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


	*Foreign Currency Risk*

A significant portion of the Company’s sales are international sales. As a result, the Company conducts transactions in approximately 12 currencies worldwide. Conducting business in such various currencies increases the Company’s exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar.

The Company’s financial results are reported in U.S. dollars. As a result, transactions conducted in foreign currencies must be translated into U.S. dollars for reporting purposes based upon the applicable foreign currency exchange rates. Fluctuations in these foreign currency exchange rates therefore may positively or negatively affect the Company’s reported financial results.

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

In addition, foreign currency fluctuations can also affect the prices at which products are sold in the Company’s international markets. The Company therefore adjusts its pricing based in part upon fluctuations in foreign currency exchange rates. Significant unanticipated changes in foreign currency exchange rates make it more difficult for the Company to manage pricing in its international markets. If the Company is unable to adjust its pricing in a timely manner to counteract the effects of foreign currency fluctuations, the Company’s pricing may not be competitive in the marketplace and the Company’s financial results in its international markets could be adversely affected.


	*Growth Opportunities*

In order for the Company to significantly grow its sales of golf clubs or golf balls, the Company must either increase its share of the market for golf clubs or balls, or the market for golf clubs or balls must grow. The Company already has a significant share of worldwide golf club sales and the Company’s golf ball products achieved the number two retail market share in 2004. Therefore, opportunities for additional market share may be limited. The Company does not believe there has been any material increase in the number of golfers worldwide in over four years. Furthermore, the Company believes that overall worldwide golf club sales have generally not experienced substantial growth in the past several years. There is no assurance that the overall dollar volume of worldwide golf club or ball sales will grow, or that it will not decline, in the future.


	*Seasonality and Adverse Weather Conditions*

In addition to the effects of product cycles described above, the Company’s business is also subject to the effects of seasonal fluctuations. The Company’s first quarter sales generally represent the Company’s sell-in to the golf retail channel of its golf club products for the new golf season. Orders for many of these sales are received during the fourth quarter of the prior year. The Company’s second and third quarter sales generally represent re-order business for golf clubs. Sales of golf clubs during the second and third quarters are significantly affected not only by the sell-through of the Company’s products that were sold into the channel during the first quarter but also by the sell-through of the products of the Company’s competitors. Retailers are sometimes reluctant to re-order the Company’s products in significant quantity when they already have excess inventory of the Company’s or its competitors’ products. The Company’s sales of golf balls are generally associated with the level of rounds played in the areas where the Company’s products are sold. Therefore, golf ball sales tend to be greater in the second and third quarters, when the weather is good in most of the Company’s key markets and rounds played are up. Golf ball sales are also stimulated by product introductions as the retail channel takes on initial supplies. Like golf clubs, re-orders of golf balls depend on the rate of sell-through. The Company’s sales during the fourth quarter are generally significantly less than the other quarters because in general in many of the Company’s principal markets less people are playing golf during that time of year due to cold weather. Furthermore, it previously was the Company’s practice to announce its new product line at the beginning of each calendar year. In recent years, the Company has departed from that practice and now generally announces its new product line in the fourth quarter to allow retailers to plan better. Such early announcements of new products could cause golfers, and therefore the Company’s customers, to defer purchasing additional golf equipment until the Company’s new products are available. Such deferments could have a material adverse effect upon sales of the Company’s current products and/or result in close-out sales at reduced prices.

Because of these seasonal trends, the Company’s business can be significantly adversely affected by unusual or severe weather conditions. Unfavorable weather conditions generally result in less golf rounds played, which generally results in less demand for golf clubs and golf balls. Furthermore, catastrophic storms, such as the hurricanes in Florida and along the east coast in late 2004, can negatively affect golf rounds played not only during the storms but also for a significant period of time afterward as storm damaged golf courses are repaired and golfers focus on repairing the damage to their homes, businesses and communities. Consequently, sustained adverse weather conditions, especially during the warm weather months, could materially affect the Company’s sales.


	*Conformance with the Rules of Golf*

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

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

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

There is no assurance that the Company’s future products will satisfy USGA and/or R&A standards, or that existing USGA and/or R&A standards will not be altered in ways that adversely affect the sales of the Company’s products or the Company’s brand. If a change in rules were adopted and caused one or more of the Company’s current products to be non-conforming, the Company’s sales of such products could be adversely affected. Furthermore, any such new rules could restrict the Company’s ability to develop new products.


	*Golf Professional Endorsements*

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

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


	*Intellectual Property and Proprietary Rights*

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

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

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

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

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


	*Brand Licensing*

The Company licenses its trademarks to third party licensees who produce, market and sell their products bearing the Company’s trademarks. The Company chooses its licensees carefully and imposes upon such licensees various restrictions on the products, and on the manner, on which such trademarks may be used. In addition, the Company requires its licensees to abide by certain standards of conduct and the laws and regulations of the jurisdictions in which they do business. However, if a licensee fails to adhere to these requirements, the Company’s brand could be damaged by the use or misuse of the Company’s trademarks in connection with its licensees’ products.


	*Product Returns*

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

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

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


	*“Gray Market” Distribution*

Some quantities of the Company’s products find their way to unapproved outlets or distribution channels. This “gray market” for the Company’s products can undermine authorized retailers and foreign wholesale distributors who promote and support the Company’s products, and can injure the Company’s image in the minds of its customers and consumers. On the other hand, stopping such commerce could result in a potential decrease in sales to those customers who are selling the Company’s products to unauthorized distributors and/or an increase in sales returns over historical levels. While the Company has taken some lawful steps to limit commerce of its products in the “gray market” in both the U.S. and abroad, it has not stopped such commerce.


	*International Risks*

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

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

benefits of conducting business internationally outweigh these risks, any significant adverse change in circumstances or conditions could have a significant adverse effect upon the Company’s operations and therefore financial performance and condition.


	*Credit Risk*

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


	*Information Systems*

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


	*Change In Accounting Rules*

The Company currently and historically has accounted for its stock based compensation under Accounting Principles Board Opinion No. 25 (“APB No. 25”). Under APB No. 25, the Company is not required to record compensation expense for equity-based awards granted to employees. The Financial Accounting Standards Board has recently issued rules which require the Company to begin recording compensation expense for such awards based upon the fair value of such awards for all periods beginning after June 15, 2005. Such noncash compensation expense is anticipated to have a significant adverse effect upon the Company’s reported earnings.

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


	*Analyst Guidance, Media Reports and Market Volatility*

The Company’s stock is traded publicly, principally on the New York Stock Exchange. As a result, at any given time, there are usually various securities analysts which follow the Company and issue reports on the Company. These reports include information about the Company’s historical financial results as well as the analysts’ estimates of the Company’s future performance. The analysts’ estimates are based upon their own opinions and are often different from the Company’s own estimates or expectations. The Company has a policy against confirming financial forecasts or projections issued by analysts and any reports issued by such

analysts are not the responsibility of the Company. Investors should not assume that the Company agrees with any report issued by any analyst or with any statements, projections, forecasts or opinions contained in any such report. In addition to analyst reports, the media also reports its opinion on the Company’s results. These media reports are often written quickly so as to be the first to the news wire and in an attempt to garner attention often lead with headlines that are not representative of the substance of the article. Furthermore, these media reports, which are often written by writers who are not financial experts, reflect only the writers’ views of the Company’s results. Investors should not assume that the Company agrees with such media reports or the manner in which the Company’s results are presented or characterized in such reports.

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

The Company may from time to time provide investors with estimates of anticipated revenues and earnings per share. If the Company provides such estimates, they will be based upon the information available and management’s expectations at the time such estimates are made and actual results could differ materially. See “Important Notice to Investors” on the inside cover of this report.


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

The Company uses derivative financial instruments for hedging purposes to limit its exposure to changes in foreign exchange rates. Transactions involving these financial instruments are with credit-worthy firms. The use of these instruments exposes the Company to market and credit risk which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated. The Company is also exposed to interest rate risk from its credit facility.

Foreign Currency Fluctuations

In the normal course of business, the Company is exposed to foreign currency exchange rate risks (see Note 8 to the Company’s Consolidated Condensed Financial Statements) that could impact the Company’s results of operations. The Company’s risk management strategy includes the use of derivative financial instruments, including forwards and purchased options, to hedge certain of these exposures. The Company’s objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge them, thereby reducing volatility of earnings. The Company does not enter into any trading or speculative positions with regard to foreign currency related derivative instruments.

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

The Company enters into foreign exchange contracts to hedge against exposure to changes in foreign currency exchange rates. Such contracts are designated at inception to the related foreign currency exposures being hedged, which include anticipated intercompany sales of inventory denominated in foreign currencies, payments due on intercompany transactions from certain wholly-owned foreign subsidiaries, and anticipated sales by the Company’s wholly-owned European subsidiary for certain Euro-denominated transactions. Hedged transactions are denominated primarily in British Pounds, Euros, Japanese Yen, Korean Won, Canadian Dollars and Australian Dollars. To achieve hedge accounting, contracts must reduce the foreign currency exchange rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies. Pursuant to its foreign exchange hedging policy, the Company may hedge anticipated transactions and the related receivables and payables denominated in foreign

currencies using forward foreign currency exchange rate contracts and put or call options. Foreign currency derivatives are used only to meet the Company’s objectives of minimizing variability in the Company’s operating results arising from foreign exchange rate movements. The Company does not enter into foreign exchange contracts for speculative purposes. Hedging contracts mature within twelve months from their inception.

At December 31, 2004, 2003 and 2002, the notional amounts of the Company’s foreign exchange contracts were approximately $52.7 million, $91.2 million and $134.8 million respectively. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates, and records all derivatives on the balance sheet at fair value. At December 31, 2004, current liabilities related to the fair value of foreign currency-related derivatives were $3.0 million. There were no current assets related to the fair values of foreign currency-related derivatives. At December 31, 2003, the fair values of foreign currency-related derivatives were recorded as current assets of $0.05 million and current liabilities of $0.8 million.

At December 31, 2004, 2003 and 2002, the notional amounts of the Company’s foreign exchange contracts designated as cash flow hedges were approximately $0, $44.4 million and $84.8 million, respectively. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially recorded in accumulated other comprehensive income (“OCI”) as a separate component of shareholders’ equity and subsequently reclassified into earnings in the period during which the hedged transaction is recognized.

During the years ended December 31, 2004 and 2003, no gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges. During the year ended December 30, 2002, gains of $0.2 million were reclassified into earnings as a result of the discontinuance of cash flow hedges.

The ineffective portion of the gain or loss for derivative instruments that is designated and qualifies as a cash flow hedge is immediately reported as a component of interest and other income. For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedging effectiveness and are recorded currently in earnings as a component of interest and other income. During the years ended December 31, 2004, 2003 and 2002, the Company recorded a net gain/loss of $0.1 million loss, $0.04 million gain and $0.3 million gain, respectively, as a result of changes in the spot-forward differential. Assessments of hedge effectiveness are performed using the dollar offset method and applying a hedge effectiveness ratio between 80% and 125%. Given that both the hedged item and the hedging instrument are evaluated using the same spot rate, the Company anticipates the hedges to be highly effective. The effectiveness of each derivative is assessed quarterly.

At December 31, 2004, 2003 and 2002, the notional amounts of the Company’s foreign exchange contracts used to hedge outstanding balance sheet exposures were approximately $52.7 million, $46.8 million and $49.9 million, respectively. The gains and losses on foreign currency contracts used to hedge balance sheet exposures are recognized as a component of interest and other income in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities and thus offset these gains and losses. During the years ended December 31, 2004, 2003 and 2002, the Company recorded net losses of $4.6 million, $6.8 million and $8.1 million, respectively, due to net realized and unrealized gains and losses on contracts used to hedge balance sheet exposures.

Sensitivity analysis is the measurement of potential loss in future earnings of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates or foreign currency values. The Company used a sensitivity analysis model to quantify the estimated potential effect of unfavorable movements of 10% in foreign currencies to which the Company was exposed at December 31, 2004 through its derivative financial instruments.

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

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

The estimated maximum one-day loss from the Company’s foreign-currency derivative financial instruments, calculated using the sensitivity analysis model described above, is $5.9 million at December 31, 2004. The portion of the estimated loss associated with the foreign exchange contracts that offset the remeasurement gain and loss of the related foreign currency denominated assets and liabilities is $5.9 million at December 31, 2004 and would impact earnings. 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.

Interest Rate Fluctuations

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


Item 8.	*Financial Statements and Supplementary Data*

The Company’s consolidated financial statements as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004, together with the reports of our independent registered public accounting firm, are included in this Annual Report on Form 10-K on pages F-1 through F-39.


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

None.


Item 9A.	*Controls and Procedures*

Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

Management’s Report on Internal Control Over Financial Reporting. Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its report entitled Internal Control — Integrated Framework. Based on the assessment, management believes that, as of December 31, 2004, the Company’s internal control over financial reporting is effective based on those criteria. During the fourth quarter of 2004, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become

inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 has been audited by Deloitte and Touche LLP, an independent registered public accounting firm, as stated in its report which is included herein.


Item 9B.	*Other Information*

None.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Callaway Golf Company

Carlsbad, California

We have audited management’s assessment, included in the accompanying Management’s Report on Internal control over Financial Reporting , appearing in Item 9A, that Callaway Golf Company (“the Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2004 of the Company and our report, dated March 9, 2005, expressed an unqualified opinion on those financial statements and financial statement schedules.

Deloitte & Touche LLP

Costa Mesa, California

March 9, 2005

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. The other information required by Item 10 has been included in the Company’s definitive Proxy Statement under the captions “Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance,” to be filed with the Commission within 120 days after the end of fiscal year 2004 pursuant to Regulation 14A, which information is incorporated herein by this reference.


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 is included in the Company’s definitive Proxy Statement under the captions “Compensation of Executive Officers,” “Report of the Compensation and Management Succession Committee on Executive Compensation,” “Performance Graph” and “Board of Directors and Corporate Governance,” to be filed with the Commission within 120 days after the end of fiscal year 2004 pursuant to Regulation 14A, which information is incorporated herein by this reference.


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters*

The information required by Item 12 is included in Item 5 of this report and the Company’s definitive Proxy Statement under the caption “Beneficial Ownership of the Company’s Securities,” to be filed with the Commission within 120 days after the end of fiscal year 2004 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 is included in the Company’s definitive Proxy Statement under the caption “Compensation of Executive Officers — Compensation Committee Interlocks and Insider Participation,” to be filed with the Commission within 120 days after the end of fiscal year 2004 pursuant to Regulation 14A, which information is incorporated herein by this reference.


Item 14.	*Principal Accountant Fees and Services*

The information included in Item 14 is included in the Company’s definitive Proxy Statement under the caption “Information Concerning Independent Registered Public Accounting Firm” to be filed with the Commission within 120 days after the end of fiscal year 2004 pursuant to Regulation 14A, which information is incorporated herein by this reference.

PART IV


Item 15.	*Exhibits and Financial Statement Schedules*

(a) Documents filed as part of this report:

1. Financial Statements. The following consolidated financial statements of Callaway Golf Company and its subsidiaries required to be filed pursuant to Part II, Item 8 of this Form 10-K, are included in this Annual Report on Form 10-K on pages F-1 through F-39:


	Consolidated Balance Sheets as of December 31, 2004 and 2003;

	Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002;

	Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002;

	Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2004, 2003 and 2002;

	Notes to Consolidated Financial Statements; and

	Report of Independent Registered Public Accounting Firm.

2. Financial Statement Schedule. The following consolidated financial statement schedule of Callaway Golf Company and its subsidiaries required to be filed pursuant to Part IV, Item 15 of this Form 10-K, is included in this Annual Report on Form 10-K on page S-1:


	Schedule II — Consolidated Valuation and Qualifying Accounts; and

	All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto.

3. Exhibits.

A copy of any of the following exhibits will be furnished to any beneficial owner of the Company’s Common Stock, or any person from whom the Company solicits a proxy, upon written request and payment of the Company’s reasonable expenses in furnishing any such exhibit. All such requests should be directed to the Company’s Investor Relations Department at Callaway Golf Company, 2180 Rutherford Road, Carlsbad, CA 92008.


	3.1			Certificate of Incorporation, incorporated herein by this reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission (“Commission”) on July 1, 1999 (file no. 1-10962).
	3.2			Third Amended and Restated Bylaws, as amended and restated as of December 3, 2003, incorporated herein by this reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Commission on March 15, 2004 (file no. 1-10962).
	4.1			Dividend Reinvestment and Stock Purchase Plan, incorporated herein by this reference to the Prospectus in the Company’s Registration Statement on Form S-3, as filed with the Commission on March 29, 1994 (file no. 33-77024).
	4.2			First Amendment to Rights Agreement, effective June 22, 2001, between the Company and Mellon Investor Services LLC, as Rights Agent, incorporated herein by this reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Commission on March 21, 2002 (file no. 1-10962).
	4.3			Rights Agreement, dated as of June 21, 1995, between the Company and Mellon Investor Services LLC (f/k/a Chemical Mellon Shareholder Services), as Rights Agent, incorporated herein by this reference to Exhibit 4.0 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 1995, as filed with the Commission on August 12, 1995 (file no. 1-10962).


*Executive Compensation Contracts/Plans*
	10.1	Compensation Agreement between the Company and William C. Baker, incorporated herein by this reference to Exhibit 10.49 to the Company’s Current Report on Form 8-K, as filed with the Commission on January 24, 2005 (file no. 1-10962).
	10.2	Notice of Grant of Stock Option and Option Agreement between the Company and William C. Baker, incorporated herein by this reference to Exhibit 10.50 to the Company’s Current Report on Form 8-K, as filed with the Commission on January 24, 2005 (file no. 1-10962).
	10.3	First Amendment to Executive Officer Employment Agreement, dated April 1, 2003, between the Company and Richard C. Helmstetter, incorporated herein by this reference to Exhibit 10.49 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as filed with the Commission on May 7, 2003 (file no. 1-10962).
	10.4	Executive Officer Employment Agreement, entered into as of January 1, 1998, between the Company and Richard C. Helmstetter, incorporated herein by this reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, as filed with the Commission on March 31, 1998 (file no. 1-10962).
	10.5	Second Amendment to First Amended Executive Officer Employment Agreement, effective September 15, 2003, between the Company and Steven C. McCracken, incorporated herein by this reference to Exhibit 10.61 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, as filed with the Commission on November 14, 2003 (file no. 1-10962).
	10.6	First Amendment to First Amended Executive Officer Employment Agreement, dated March 1, 2003, between the Company and Steven C. McCracken, incorporated herein by this reference to Exhibit 10.50 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as filed with the Commission on May 7, 2003 (file no. 1-10962).
	10.7	First Amended Executive Officer Employment Agreement, effective as of June 1, 2002, between the Company and Steven C. McCracken, incorporated herein by this reference to Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the Commission on August 14, 2002 (file no. 1-10962).
	10.8	Second Amendment to First Amended Executive Officer Employment Agreement, effective September 15, 2003, between the Company and Bradley J. Holiday, incorporated herein by this reference to Exhibit 10.62 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, as filed with the Commission on November 14, 2003 (file no. 1-10962).
	10.9	First Amendment to First Amended Executive Officer Employment Agreement, dated March 1, 2003, between the Company and Bradley J. Holiday, incorporated herein by this reference to Exhibit 10.51 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as filed with the Commission on May 7, 2003 (file no. 1-10962).
	10.10	First Amended Executive Officer Employment Agreement, effective as of June 1, 2002, between the Company and Bradley J. Holiday, incorporated herein by this reference to Exhibit 10.55 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the Commission on August 14, 2002 (file no. 1-10962).
	10.11	Officer Employment Agreement between the Company and Robert A. Penicka, incorporated herein by this reference to Exhibit 10.51 to the Company’s Current Report on Form 8-K, as filed with the Commission on January 24, 2005 (file no. 1-10962).
	10.12	Officer Employment Agreement between The Top-Flite Golf Company (f/k/a TFGC Acquisition Corp.) and Robert A. Penicka, incorporated herein by this reference to Exhibit 10.59 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, as filed with the Commission on November 14, 2003 (file no. 1-10962).
	10.13	First Amendment to First Amended Officer Employment Agreement, effective as of October 6, 2003, between the Company and John F. Melican.†
	10.14	First Amended Officer Employment Agreement, effective as of March 1, 2003, between the Company and John F. Melican.†
	10.15	Separation Agreement, entered into on October 28, 2004, between the Company and Ronald A. Drapeau, incorporated herein by this reference to Exhibit 10.47 to the Company’s Current Report on Form 8-K, as filed with the Commission on October 29, 2004 (file no. 1-10962).


	10.16			Second Amendment to Second Amended Executive Officer Employment Agreement, effective as of September 15, 2003, between the Company and Ronald A. Drapeau, incorporated herein by this reference to Exhibit 10.60 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, as filed with the Commission on November 14, 2003 (file no. 1-10962).
	10.17			First Amendment to Second Amended Executive Officer Employment Agreement, dated March 1, 2003, between the Company and Ronald A. Drapeau, incorporated herein by this reference to Exhibit 10.48 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as filed with the Commission on May 7, 2003 (file no. 1-10962).
	10.18			Second Amended Executive Officer Employment Agreement, effective as of June 1, 2002, between the Company and Ronald A. Drapeau, incorporated herein by this reference to Exhibit 10.53 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the Commission on August 14, 2002 (file no. 1-10962).
	10.19			Separation Agreement, entered into on February 24, 2005, between the Company and Patrice Hutin, incorporated herein by this reference to Exhibit 10.52 to the Company’s Current Report on Form 8-K, as filed with the Commission on March 1, 2005 (file no. 1-10962).
	10.20			Second Amendment to Executive Officer Employment Agreement, effective September 15, 2003, between the Company and Patrice Hutin, incorporated herein by this reference to Exhibit 10.63 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, as filed with the Commission on November 14, 2003 (file no. 1-10962).
	10.21			First Amendment to Executive Officer Employment Agreement, dated March 1, 2003, between the Company and Patrice Hutin, incorporated herein by this reference to Exhibit 10.52 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as filed with the Commission on May 7, 2003 (file no. 1-10962).
	10.22			Executive Officer Employment Agreement, effective November 6, 2002, between the Company and Patrice Hutin, incorporated herein by this reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Commission on March 17, 2003 (file no. 1-10962).
	10.23			Callaway Golf Company Executive Deferred Compensation Plan, as amended and restated, effective May 6, 2002.†
	10.24			Trust Agreement for the Callaway Golf Company Executive Deferred Compensation Plan, entered into as of May 6, 2002, between the Company and U.S. Trust Company, N.A.†
	10.25			Form of Notice of Grant of Stock Option and Option Agreement for Non-Employee Directors.†
	10.26			Callaway Golf Company 2001 Non-Employee Directors Stock Option Plan, incorporated herein by this reference to Appendix A to the Company’s definitive Proxy Statement on Schedule 14A filed with the Commission on March 27, 2000 (file no. 1-10962).
	10.27			Callaway Golf Company Non-Employee Directors Stock Option Plan (as amended and restated August 15, 2000), incorporated herein by this reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Commission on March 21, 2002 (file no. 1-10962).
	10.28			Form of Notice of Grant of Stock Option and Option Agreement for Officers.†
	10.29			Callaway Golf Company 2004 Equity Incentive Plan, incorporated herein by this reference to Exhibit B to the Company’s definitive Proxy Statement on Schedule 14A filed with the Commission on April 20, 2004 (file no. 1-10962).
	10.30			Callaway Golf Company 1998 Stock Incentive Plan (as amended and restated August 15, 2000), incorporated herein by this reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Commission on March 21, 2002 (file no. 1-10962).
	10.31			Amended and Restated 1996 Stock Option Plan (as amended and restated May 3, 2000), incorporated herein by this reference to Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2000, as filed with the Commission on August 14, 2000 (file no. 1-10962).


	10.32	Callaway Golf Company 1995 Stock Incentive Plan (as amended and restated November 7, 2001), incorporated herein by this reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Commission on March 17, 2003 (file no. 1-10962).
	10.33	Callaway Golf Company 1991 Stock Incentive Plan (as amended and restated August 2000), incorporated herein by this reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Commission on March 21, 2002 (file no. 1-10962).
	10.34	Indemnification Agreement, dated April 7, 2004, between the Company and Anthony S. Thornley.†
	10.35	Indemnification Agreement, dated as of April 21, 2003, between the Company and Samuel H. Armacost, incorporated herein by this reference to Exhibit 10.57 the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, as filed with the Commission on August 7, 2003 (file no. 1-10962).
	10.36	Indemnification Agreement, dated as of April 21, 2003, between the Company and John C. Cushman, III, incorporated herein by this reference to Exhibit 10.58 the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, as filed with the Commission on August 7, 2003 (file no. 1-10962).
	10.37	Indemnification Agreement, effective June 7, 2001, between the Company and Ronald S. Beard, incorporated herein by this reference to Exhibit 10.28 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, as filed with the Commission on November 14, 2001 (file no. 1-10962).
	10.38	Indemnification Agreement, dated as of July 1, 1999, between the Company and William C. Baker, incorporated herein by this reference to Exhibit 10.27 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, as filed with the Commission on August 16, 1999 (file no. 1-10962).
	10.39	Indemnification Agreement, dated July 1, 1999, between the Company and Yotaro Kobayashi, incorporated herein by this reference to Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, as filed with the Commission on August 16, 1999 (file no. 1-10962).
	10.40	Indemnification Agreement, dated July 1, 1999, between the Company and Richard L. Rosenfield, incorporated herein by this reference to Exhibit 10.32 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, as filed with the Commission on August 16, 1999 (file no. 1-10962).
*Other Contracts*
	10.41	Amendment No. 4 to Asset Purchase Agreement, dated as of September 30, 2003, between the Company and TFGC Estate Inc. (f/k/a The Top-Flite Golf Company), incorporated herein by this reference to Exhibit 99.5 to the Company’s Current Report on Form 8-K, as filed with the Commission on September 30, 2003 (file no. 1-10962).
	10.42	Amendment No. 3 to Asset Purchase Agreement, dated as of September 15, 2003, between the Company and TFGC Estate Inc. (f/k/a The Top-Flite Golf Company), incorporated herein by this reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K, as filed with the Commission on September 30, 2003 (file no. 1-10962).
	10.43	Amendment No. 2 to Asset Purchase Agreement, dated as of September 4, 2003, between the Company and TFGC Estate Inc. (f/k/a The Top-Flite Golf Company), incorporated herein by this reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K, as filed with the Commission on September 30, 2003 (file no. 1-10962).
	10.44	Amendment No. 1 to Asset Purchase Agreement, dated as of August 11, 2003, between the Company and TFGC Estate Inc. (f/k/a The Top-Flite Golf Company), incorporated herein by this reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K, as filed with the Commission on September 30, 2003 (file no. 1-10962).


	10.45			Asset Purchase Agreement, dated as of June 30, 2003, between the Company and The Top-Flite Golf Company (f/k/a Spalding Sports Worldwide, Inc.), incorporated herein by this reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, as filed with the Commission on August 7, 2003 (file no. 1-10962).
	10.46			Amended and Restated Credit Agreement, dated as of November 5, 2004, between the Company and Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer, Banc of America Securities LLC, as Sole Lead Manager and Sole Book Manager, and the other lenders party to the Amended and Restated Credit Agreement, incorporated herein by this reference to Exhibit 10.48 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, as filed with the Commission on November 9, 2004 (file no. 1-10962).
	10.47			Credit Agreement, dated as of November 10, 2003, between the Company and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Banc of America Securities LLC, as Sole Lead Manager and Sole Book Manager, and the other lenders party to the Credit Agreement, incorporated herein by this reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Commission on March 15, 2004 (file no. 1-10962).
	10.48			Pledge Agreement, dated November 10, 2003, by and between the Company and Bank of America, N.A., as Administrative Agent, incorporated herein by this reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Commission on March 15, 2004 (file no. 1-10962).
	10.49			Master Energy Purchase and Sale Agreement and related Confirmation letter, each entered into as of April 12, 2001, between the Company and Enron Energy Services, Inc., incorporated herein by this reference to Exhibit 10.34 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, as filed with the Commission on August 14, 2001 (file no. 1-10962).
	10.50			Amendment No. 2 to Trust Agreement, effective as of October 21, 2004, by the Company with the consent of Arrowhead Trust Incorporated.†
	10.51			Amendment No. 1 to Trust Agreement, effective as of June 29, 2001, by the Company with the consent of Arrowhead Trust Incorporated, incorporated herein by this reference to Exhibit 10.46 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Commission on March 21, 2002 (file no. 1-10962).
	10.52			Assignment and Assumption Agreement, effective as of April 24, 2000, among the Company, Sanwa Bank California and Arrowhead Trust Incorporated, incorporated herein by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001 (file no. 1-10962).
	10.53			Trust Agreement, dated July 14, 1995, between the Company and Sanwa Bank California, as Trustee, for the benefit of participating employees, incorporated herein by this reference to Exhibit 10.45 to the corresponding exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, as filed with the Commission on November 14, 1995 (file no. 1-10962).
	21.1			List of Subsidiaries.†
	23.1			Consent of Deloitte & Touche LLP.†
	24.1			Form of Power of Attorney.†
	31.1			Certification of William C. Baker pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
	31.2			Certification of Bradley J. Holiday pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
	32.1			Certification of William C. Baker and Bradley J. Holiday pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†


†	Included in this Report

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.


	Callaway Golf Company


	By:	/s/ William C. Baker



	William C. Baker
	Chairman and Chief Executive Officer

Date: March 9, 2005

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


Signature		Title	Dated as of


Principal Executive Officer:

/s/ William C. Baker William C. Baker		Chairman of the Board and Chief Executive Officer	March 9, 2005

Principal Financial Officer and Principal Accounting Officer:

/s/ Bradley J. Holiday Bradley J. Holiday		Senior Executive Vice President and Chief Financial Officer	March 9, 2005

Directors:

* Samuel H. Armacost		Director	March 9, 2005

* Ronald S. Beard		Director	March 9, 2005

* John C. Cushman, III		Director	March 9, 2005

* Yotaro Kobayashi		Director	March 9, 2005

* Richard L. Rosenfield		Director	March 9, 2005

* Anthony S. Thornley		Director	March 9, 2005

*By:	/s/ Bradley J. Holiday Bradley J. Holiday Attorney-in-fact

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003			F-3
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002			F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002			F-5
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2004, 2003 and 2002			F-6
Notes to Consolidated Financial Statements			F-7

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Callaway Golf Company

Carlsbad, California

We have audited the accompanying consolidated balance sheets of Callaway Golf Company and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index at Item (15)a2. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Callaway Golf Company and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report, dated March 9, 2005, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Deloitte & Touche LLP

Costa Mesa, California

March 9, 2005

F-2

CALLAWAY GOLF COMPANY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


				December 31,

				2004			2003

ASSETS
Current assets:
	Cash and cash equivalents			$	31,657		$	47,340
	Accounts receivable, net				105,153			100,664
	Inventories, net				181,230			185,389
	Deferred taxes				32,959			36,707
	Income taxes receivable				28,697			—
	Other current assets				14,036			13,362

		Total current assets			393,732			383,462
Property, plant and equipment, net					135,865			164,763
Intangible assets, net					149,168			149,635
Goodwill					30,468			20,216
Deferred taxes					9,837			12,289
Other assets					16,667			18,201

				$	735,737		$	748,566


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and accrued expenses			$	75,501		$	79,787
	Accrued employee compensation and benefits				20,215			25,544
	Accrued warranty expense				12,043			12,627
	Bank line of credit				13,000			—
	Capital leases, current portion				39			240
	Income taxes payable				—			11,962

		Total current liabilities			120,798			130,160
Long-term liabilities:
	Deferred compensation				8,674			8,947
	Energy derivative valuation account				19,922			19,922
	Capital leases, net of current portion				26			154
Commitments and contingencies (Note 13)
Shareholders’ equity:
	Preferred Stock, $.01 par value, 3,000,000 shares authorized, none issued and outstanding at December 31, 2004 and 2003				—			—
	Common Stock, $.01 par value, 240,000,000 shares authorized, 84,785,694 shares and 83,710,094 shares issued at December 31, 2004 and 2003, respectively				848			837
	Additional paid-in capital				387,950			400,939
	Unearned compensation				(12,562	)		—
	Retained earnings				437,269			466,441
	Accumulated other comprehensive income				11,081			2,890
	Less: Grantor Stock Trust held at market value, 7,176,678 shares and 8,702,577 shares at December 31, 2004 and 2003, respectively				(96,885	)		(146,638	)

					727,701			724,469
	Less: Common Stock held in treasury, at cost, 8,497,667 shares and 8,144,667 shares at December 31, 2004 and 2003, respectively				(141,384	)		(135,086	)

			Total shareholders’ equity		586,317			589,383

				$	735,737		$	748,566

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

F-3

CALLAWAY GOLF COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


		Year Ended December 31,

		2004					2003				2002


Net sales		$	934,564		100	%	$	814,032		100%	$	793,219		100%
Cost of sales			575,742		62	%		445,417		55%		393,068		50%

	Gross profit		358,822		38	%		368,615		45%		400,151		50%
Selling expenses			263,089		28	%		207,783		26%		200,329		25%
General and administrative expenses			89,878		10	%		65,448		8%		56,580		7%
Research and development expenses			30,557		3	%		29,529		4%		32,182		4%

	Total operating expenses		383,524		41	%		302,760		37%		289,091		36%
Income (loss) from operations			(24,702	)	(3	)%		65,855		8%		111,060		14%
Interest and other income, net			1,934					3,550				2,271
Interest expense			(945	)				(1,522	)			(1,660	)

Income (loss) before income taxes			(23,713	)	(3	)%		67,883		8%		111,671		14%
Provision for income taxes			(13,610	)				22,360				42,225

Net income (loss)		$	(10,103	)	(1	)%	$	45,523		6%	$	69,446		9%

Earnings (loss) per common share:
	Basic	$	(0.15	)			$	0.69			$	1.04
	Diluted	$	(0.15	)			$	0.68			$	1.03
Common equivalent shares:
	Basic		67,721					66,027				66,517
	Diluted		67,721					66,471				67,274

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

F-4

CALLAWAY GOLF COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


			Year Ended December 31,

			2004			2003			2002

Cash flows from operating activities:
	Net income (loss)		$	(10,103	)	$	45,523		$	69,446
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		51,154			44,496			37,640
		Loss on disposal of long-lived assets		7,669			24,163			1,168
		Loss on purchase of leased equipment		—			—			2,318
		Tax benefit (reversal of benefit) from exercise of stock options		2,161			(982	)		5,479
		Non-cash compensation		1,741			15			314
		Net non-cash foreign currency hedging (gains) loss		1,811			2,619			(4,238	)
		Net (gain) loss from sale of marketable securities		—			98			(37	)
		Deferred taxes		7,707			(8,320	)		11,357
	Changes in assets and liabilities, net of effects from acquisitions:
		Accounts receivable, net		(1,048	)		12,698			(9,279	)
		Inventories, net		10,299			4,897			21,785
		Other assets		1,554			(4,743	)		10,202
		Accounts payable and accrued expenses		(16,945	)		(2,561	)		11,579
		Accrued employee compensation and benefits		(5,895	)		(3,898	)		(2,383	)
		Accrued warranty expense		(584	)		(838	)		(21,400	)
		Income taxes receivable and payable		(40,711	)		4,004			6,185
		Deferred compensation		(273	)		1,572			(922	)

	Net cash provided by operating activities			8,537			118,743			139,214

Cash flows from investing activities:
	Capital expenditures			(25,986	)		(7,810	)		(73,502	)
	Acquisitions, net of cash acquired			(9,204	)		(160,321	)		—
	Proceeds from sale of marketable securities			—			24			6,998
	Cash paid for investment			—			—			(2,000	)
	Proceeds from sale of capital assets			431			178			871

	Net cash used in investing activities			(34,759	)		(167,929	)		(67,633	)

Cash flows from financing activities:
	Issuance of Common Stock			20,311			17,994			18,305
	Acquisition of Treasury Stock			(6,298	)		(4,755	)		(46,457	)
	Proceeds from Line of Credit			13,000			—			—
	Dividends paid, net			(19,069	)		(18,536	)		(18,601	)
	Payments on financing arrangements			—			(8,117	)		(2,374	)

	Net cash provided by (used in) financing activities			7,944			(13,414	)		(49,127	)

Effect of exchange rate changes on cash and cash equivalents				2,595			1,488			1,735

Net increase (decrease) in cash and cash equivalents				(15,683	)		(61,112	)		24,189
Cash and cash equivalents at beginning of year				47,340			108,452			84,263

Cash and cash equivalents at end of year			$	31,657		$	47,340		$	108,452

Supplemental disclosures (See Note 3 for acquisition-related disclosures):
	Marketable securities received upon demutualization of insurance provider		$	—		$	—		$	540
	Unrealized loss on marketable securities		$	—		$	—		$	(92	)
	Cash paid for interest and fees		$	(1,384	)	$	(835	)	$	(953	)
	Cash paid for income taxes		$	(17,379	)	$	(30,925	)	$	(16,628	)

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

F-5

CALLAWAY GOLF COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(In thousands)


														Accumulated
	Common Stock				Additional									Other			Grantor			Treasury Stock
					Paid-in			Unearned			Retained			Comprehensive			Stock												Comprehensive
	Shares		Amount		Capital			Compensation			Earnings			Income (Loss)			Trust			Shares			Amount			Total			Income

Balance, December 31, 2001		82,694	$	827	$	419,541		$	(211	)	$	388,609		$	(4,399	)	$	(206,144	)		(4,939	)	$	(83,874	)	$	514,349		$	60,072

Exercise of stock options		879		9		10,067			—			—			—			2,950			—			—			13,026
Tax benefit from exercise of stock options		—		—		5,479			—			—			—			—			—			—			5,479
Acquisition of Treasury Stock		—		—		—			—			—			—			—			(2,833	)		(46,457	)		(46,457	)
Compensatory stock and stock options		—		—		118			196			—			—			—			—			—			314
Employee stock purchase plan		4		—		(2,590	)		—			—			—			7,869			—			—			5,279
Cash dividends		—		—		—			—			(21,502	)		—			—			—			—			(21,502	)
Dividends on shares held by Grantor Stock Trust		—		—		—			—			2,901			—			—			—			—			2,901
Adjustment of Grantor Stock Trust shares to market value		—		—		(61,119	)		—			—			—			61,119			—			—			—
Equity adjustment from foreign currency translation		—		—		—			—			—			5,602			—			—			—			5,602		$	5,602
Unrealized loss on cash flow hedges, net of tax		—		—		—			—			—			(4,958	)		—			—			—			(4,958	)		(4,958	)
Unrealized loss on marketable securities, net of tax		—		—		—			—			—			(92	)		—			—			—			(92	)		(92	)
Net income		—		—		—			—			69,446			—			—			—			—			69,446			69,446

Balance, December 31, 2002		83,577	$	836	$	371,496		$	(15	)	$	439,454		$	(3,847	)	$	(134,206	)		(7,772	)	$	(130,331	)	$	543,387		$	69,998

Exercise of stock options		133		1		(900	)		—			—			—			14,650			—			—			13,751
Reversal of tax benefit from exercise of stock options		—		—		(982	)		—			—			—			—			—			—			(982	)
Acquisition of Treasury Stock		—		—		—			—			—			—			—			(373	)		(4,755	)		(4,755	)
Compensatory stock and stock options		—		—		—			15			—			—			—			—			—			15
Employee stock purchase plan		—		—		(851	)		—			—			—			5,094			—			—			4,243
Cash dividends		—		—		—			—			(21,160	)		—			—			—			—			(21,160	)
Dividends on shares held by Grantor Stock Trust		—		—		—			—			2,624			—			—			—			—			2,624
Adjustment of Grantor Stock Trust shares to market value		—		—		32,176			—			—			—			(32,176	)		—			—			—
Equity adjustment from foreign currency translation		—		—		—			—			—			7,396			—			—			—			7,396		$	7,396
Unrealized loss on cash flow hedges, net of tax		—		—		—			—			—			(751	)		—			—			—			(751	)		(751	)
Unrealized loss on marketable securities, net of tax		—		—		—			—			—			92			—			—			—			92			92
Net income		—		—		—			—			45,523			—			—			—			—			45,523			45,523

Balance, December 31, 2003		83,710	$	837	$	400,939		$	—		$	466,441		$	2,890		$	(146,638	)		(8,145	)	$	(135,086	)	$	589,383		$	52,260

Exercise of stock options		23		—		(3,532	)		—			—			—			19,186			—			—			15,654
Tax benefit from exercise of stock options		—		—		2,161			—			—			—			—			—			—			2,161
Issuance of Restricted Common Stock		1,053		11		14,290			(14,301	)		—			—			—			—			—			—
Acquisition of Treasury Stock		—		—		—			—			—			—			—			(353	)		(6,298	)		(6,298	)
Compensatory stock and stock options		—		—		2			1,739			—			—			—			—			—			1,741
Employee stock purchase plan		—		—		(1,302	)		—			—			—			5,959			—			—			4,657
Cash dividends		—		—		—			—			(21,176	)		—			—			—			—			(21,176	)
Dividends on shares held by Grantor Stock Trust		—		—		—			—			2,107			—			—			—			—			2,107
Adjustment of Grantor Stock Trust shares to market value		—		—		(24,608	)		—			—			—			24,608			—			—			—
Equity adjustment from foreign currency translation		—		—		—			—			—			4,252			—			—			—			4,252		$	4,252
Unrealized loss on cash flow hedges, net of tax		—		—		—			—			—			3,939			—			—			—			3,939			3,939
Net loss		—		—		—			—			(10,103	)		—			—			—			—			(10,103	)		(10,103	)

Balance, December 31, 2004		84,786	$	848	$	387,950		$	(12,562	)	$	437,269		$	11,081		$	(96,885	)		(8,498	)	$	(141,384	)	$	586,317		$	(1,912	)

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

F-6

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.	The Company

Callaway Golf Company (“Callaway Golf” or the “Company”), a Delaware corporation, together with its subsidiaries, designs, manufactures and sells high quality golf clubs (drivers, fairway woods, irons, wedges and putters) and golf balls. The Company also sells golf accessories such as golf bags, golf gloves, golf headwear, travel covers and bags, golf towels and golf umbrellas. The Company generally sells its products to golf retailers, sporting goods retailers and mass merchants, directly and through its wholly-owned subsidiaries, and to third party distributors in the United States and in over 100 countries around the world. The Company also sells pre-owned Callaway Golf products through its website, www.callawaygolfpreowned.com . In addition, the Company licenses its name for apparel, golf shoes, watches, luggage and other golf accessories.


Note 2.	Significant Accounting Policies


	*Principles of Consolidation*

The accompanying consolidated financial statements include the accounts of Callaway Golf Company and its domestic and foreign subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.


	*Use of Estimates*

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Examples of such estimates include provisions for warranty, uncollectable accounts receivable, inventory obsolescence, market value estimates of derivative instruments and recoverability of long-lived assets. Actual results may materially differ from these estimates. On an on-going basis, the Company reviews its estimates to ensure that these estimates appropriately reflect changes in its business or as new information becomes available.


	*Revenue Recognition*

Amounts billed to customers for shipping and handling are included in net sales and costs incurred related to shipping and handling are included in cost of sales.

Royalty income is recorded as underlying product sales occur, subject to certain minimums, in accordance with the related licensing arrangements (Note 15). Royalty income for 2004, 2003 and 2002 was $4,132,000, $2,703,000 and $1,155,000, respectively.


	*Warranty Policy*

F-7

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

future warranty obligations the Company considers various relevant factors, including the Company’s stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty. The following table provides a reconciliation of the activity related to the Company’s reserve for warranty expense:


	Year Ended December 31,

	2004			2003			2002

	(In thousands)
Beginning balance	$	12,627		$	13,464		$	34,864
Provision ⁽¹⁾		10,930			11,752			(6,987	)
Claims paid/costs incurred		(11,514	)		(12,589	)		(14,413	)

Ending balance	$	12,043		$	12,627		$	13,464


⁽¹⁾	In the third quarter of 2002, the Company changed its methodology of estimating warranty accruals and reduced its warranty reserve by approximately $17,000,000. The change in methodology has been accounted for as a change in accounting principle inseparable from a change in estimate (Note 4).


	*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 (Note 8) and its financing arrangements (Note 7). The carrying amounts of these instruments approximate fair value because of their short-term 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 2004, 2003 and 2002 were $56,585,000, $44,770,000 and $44,001,000, respectively.


	*Research and Development Costs*

Research and development costs are expensed as incurred. Research and development costs for 2004, 2003 and 2002 were $30,557,000, $29,529,000 and $32,182,000, 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 using the current exchange rate at the balance sheet date for assets and liabilities and at the average exchange rate for the period for revenues and expenses. Cumulative translation gains or losses are recorded as accumulated other comprehensive income in shareholders’ equity. Gains or losses resulting from transactions that are made in a currency different from the functional currency are recognized in earnings as they occur or, for hedging contracts, when the underlying hedged transaction affects earnings. The Company recorded transaction gains of $744,000, $1,566,000 and $2,046,000 in 2004, 2003 and 2002, respectively, in interest and other income, net.


	*Derivatives and Hedging*

The Company enters into derivative financial instrument contracts only for hedging purposes and accounts for them in accordance with Statement of Financial Accounting Standard (SFAS) No. 133 and its amendments SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities-Deferral of the

F-8

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Effective Date of SFAS No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” 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, offsetting foreign currency rate fluctuations. 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.

Additional information about the Company’s use of derivative instruments is presented in Note 8.


	*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 sum of the weighted-average number of common shares outstanding during the period, plus the number of potentially dilutive common shares (“dilutive securities”) that were outstanding during the period. Dilutive securities include shares owned by the Callaway Golf Company Grantor Stock Trust, options granted pursuant to the Company’s stock option plans, potential shares related to the Employee Stock Purchase Plan, rights to purchase preferred shares under the Callaway Golf Company Shareholder Rights Plan and Restricted Stock grants to employees and non-employees (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. Under the treasury stock method, the dilutive securities related to the Callaway Golf Company Grantor Stock Trust do not have any impact upon the diluted earnings per common share. 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 exercisable were not met. Potentially dilutive securities are excluded from the computation of earnings per share in periods in which a net loss is reported, as their effect would be antidilutive. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share calculations for the years ended December 31, 2004, 2003 and 2002 is presented in Note 9.


	*Cash and Cash Equivalents*

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


	*Allowance for Doubtful Accounts*

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


	*Inventories*

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories include material, labor and manufacturing overhead costs.

F-9

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*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 as follows:


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 costs 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. Construction in-process consists primarily of store display equipment not yet assembled and installed, in-process internally developed software and unfinished molds that have not yet been placed in service.

In accordance with AICPA Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” the Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. Costs incurred in the preliminary project stage are expensed. All direct external costs incurred to develop internal-use software during the development stage are capitalized and amortized using the straight-line method over the remaining estimated useful lives. Costs such as maintenance and training are expensed as incurred.

During the fourth quarter of 2003, in connection with the Top-Flite Acquisition (Note 3), the Company began consolidating the Callaway Golf and Top-Flite golf club and golf ball manufacturing and research and development operations. In connection with this consolidation, the Company disposed of certain long-lived assets. As a result, the Company reduced the carrying value of its golf ball assets and therefore incurred pre-tax charges to earnings in the amounts of $5,677,000 and $24,080,000 during 2004 and 2003, respectively.


	*Long-Lived Assets*

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company assesses potential impairments of its long-lived assets whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. An impairment loss would be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.


	*Goodwill and Intangible Assets*

Goodwill and intangible assets consist of goodwill, trade name, trademark, trade dress, patents and other intangible assets acquired during the acquisition of FrogTrader, Inc., Odyssey Sports, Inc., Top-Flite Golf Company and certain foreign distributors. See Note 3, for further discussion of the intangible assets acquired in connection with the FrogTrader and Top-Flite Acquisitions.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, acquired intangible assets must be separately identified. Goodwill and other intangible assets with indefinite lives are not amortized, but are reviewed at least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives. In addition to goodwill, the Company’s intangible assets with indefinite lives consist of trade name, trademark and trade dress. In accordance with SFAS No. 142, the goodwill and other intangible assets with indefinite lives that were being

F-10

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amortized over periods ranging from five to 40 years follow the non-amortization approach beginning January 1, 2002. Patents and other intangible assets are amortized using the straight-line method over periods ranging from less than one year to sixteen years (Note 6).


	*Stock-Based Compensation*

The Company has stock-based compensation plans, which are described in Note 10. The Company accounts for its stock-based employee compensation plans using the recognition and measurement principles (intrinsic value method) of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company accounts for its stock-based non-employee compensation plans using SFAS No. 123, “Accounting for Stock-Based Compensation.” All employee stock option awards were granted with an exercise price equal to the market value of the underlying common stock on the date of grant and no compensation cost is reflected in net income for those awards. For the years ended December 31, 2004, 2003 and 2002, the Company recorded compensation expense of $1,741,000, $15,000 and $314,000, in net income as a result of restricted stock awards and certain options to purchase shares of stock granted to employees, officers, professional endorsers and consultants of the Company. Pro forma disclosures of net income (loss) and earnings (loss) per share, as if the fair value-based recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” had been applied in measuring stock-based employee compensation expense, are as follows:


		Year Ended December 31,

		2004			2003			2002

		(In thousands, except per share data)
Net income (loss), as reported		$	(10,103	)	$	45,523		$	69,446
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			84			10			114
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(6,605	)		(9,839	)		(11,003	)

Pro forma net income (loss)		$	(16,624	)	$	35,694		$	58,557

Earnings (loss) per Common Share:
	Basic — as reported	$	(0.15	)	$	0.69		$	1.04
	Basic — pro forma	$	(0.25	)	$	0.54		$	0.88
	Diluted — as reported	$	(0.15	)	$	0.68		$	1.03
	Diluted — pro forma	$	(0.25	)	$	0.54		$	0.88

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,

	2004		2003		2002

Dividend yield		1.9%		1.7%		1.7%
Expected volatility		42.6%		46.1%		52.2%
Risk free interest rates		2.74% - 4.26%		2.26% - 2.75%		1.94% - 2.37%
Expected lives		3-4 years		3-4 years		3-4 years

F-11

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The weighted-average grant-date fair value of options granted during 2004, 2003 and 2002 was $4.80, $6.74 and $6.17 per share, respectively. 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.


	*Income Taxes*

Current income tax expense (benefit) is the amount of income taxes expected to be paid (refunded) for the current year. A deferred income tax asset or liability is established for the expected future consequences resulting from temporary differences in the financial reporting and tax bases of assets and liabilities. 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 (Note 12).


	*Interest and Other Income, Net*

Interest and other income, net primarily includes gains and losses on foreign currency transactions, interest income and gains and losses on investments to fund the deferred compensation plan. The components of interest and other income, net are as follows:


	Year Ended December 31,

	2004		2003			2002

	(In thousands)
Foreign currency gains	$	744	$	1,567		$	2,046
Interest income		745		1,098			—
Gains on deferred compensation plan assets		360		888			156
Other		85		(3	)		69

	$	1,934	$	3,550		$	2,271


	*Other Accumulated Comprehensive Income (Loss)*

Components of comprehensive income are 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, foreign currency translation adjustments and unrealized gains or losses on marketable securities. Since the Company has met the indefinite reversal criteria, it does not accrue income taxes on foreign currency translation adjustments. During 2004, no gains or losses were

F-12

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

reclassified to earnings as a result of the discontinuance of cash flow hedges. The components of accumulated other comprehensive income (loss) are as follows:


	Year Ended December 31,

	2004		2003			2002

	(In thousands)
Unrealized gain (loss) on cash flow hedges	$	2,270	$	(1,669	)	$	(918	)
Equity adjustment from foreign currency translation		8,811		4,559			(2,837	)
Unrealized loss on marketable securities		—		—			(92	)

	$	11,081	$	2,890		$	(3,847	)


	*Segment Information*

The Company’s operating segments are organized on the basis of products and consist of Golf Clubs and Golf Balls. The Golf Clubs segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan woods, irons, wedges and putters as well as Odyssey putters, other golf-related accessories and royalty and other income. The Golf Balls segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan golf balls that are designed, manufactured and sold by the Company. The Company also discloses information about geographic areas. This information is presented in Note 14.


	*Diversification of Credit Risk*

The Company’s financial instruments that are subject to concentrations of credit risk consist primarily of cash equivalents, trade receivables and foreign currency contracts.

The Company historically invests 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, sporting goods retailers and mass merchants, 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 reserves for estimated credit losses, which it considers adequate to cover any such losses. Managing customer-related credit risk is more difficult in regions outside of the United States. During 2004, 2003 and 2002, approximately 42%, 45% and 45%, respectively, of the Company’s net sales were made in regions outside of the United States. An adverse change in either economic conditions abroad or in the Company’s relationship with significant foreign retailers could significantly increase the Company’s credit risk related to its international operations.

The Company enters into forward exchange rate contracts and put or call options 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 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 Pronouncements*

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS 123R”), Share-Based Payment. This Statement replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes ABP Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R addresses the accounting

F-13

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method under APB Opinion No. 25, Accounting for Stock Issued to Employees , and generally would require instead that such transactions be accounted for using a fair-value-based method. The Company is currently evaluating SFAS No. 123R to determine which fair-value-based model and transitional provision it will follow upon adoption. SFAS No. 123R will be effective for the Company beginning in its third quarter of fiscal 2005. Although the Company will continue to evaluate the application of SFAS No. 123R, management expects adoption to have a material impact on its results of operations in amounts that are currently undeterminable.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provision in SFAS No. 153 are effective for nonmonetary asset exchanges incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the effect, if any, of adopting SFAS No. 153.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, which amends ARB Opinion No. 43, Chapter 4, “Inventory Pricing”. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) to be expensed as incurred and not included in overhead. Further, SFAS No. 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS No. 151 are effective for inventory cost incurred during fiscal years beginning after June 15, 2005. The Company’s current accounting policies are consistent with the accounting practices addressed under SFAS No. 151.

In October 2004 the FASB issued Staff Position No. 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”). FSP 109-2 provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has not completed the evaluation of the impact of the repatriation provisions. Accordingly, as of December 31, 2004, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

Note 3. Business Acquisitions


	*FrogTrader Stock Purchase*

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

F-14

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The FrogTrader acquisition was accounted for as a purchase in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” Under SFAS No. 141, the aggregate cost of the acquired stock was $15,175,000, which included transaction costs of approximately $218,000, and was paid entirely in cash. The aggregate acquisition costs exceeded the estimated fair value of the net assets acquired. As a result, the Company has recorded goodwill of $9,097,000, none of which is deductible for tax purposes. The Company has recorded the fair values of FrogTrader’s internally developed software and certain customer information based on an assessment from an outside valuation company received during 2004. The allocation of the aggregate acquisition costs is as follows (in thousands):


Assets:
	Cash		$	5,971
	Accounts receivable			85
	Inventory			1,962
	Other current assets			1,475
	Property, plant and equipment			258
	Internally developed software			1,200
	Customer lists			700
	Goodwill			9,097
Liabilities:
	Current liabilities			(5,567	)
	Long-term liabilities			(6	)

		Total net assets acquired	$	15,175

Top-Flite Asset Purchase

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

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

The Company’s consolidated statements of operations include the Company’s Top-Flite business results of operations in the United States from September 15, 2003 forward and the Company’s Top-Flite business results of operations outside the United States from October 1, 2003 forward.

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

F-15

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the acquired long-term assets on a pro rata basis. The allocation of the aggregate acquisition costs is as follows (in thousands):


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

Total net assets acquired		$	160,476

Pro Forma Results of Operations

The following sets forth the Company’s pro forma results of operations for the year ended December 31, 2003, as if the acquisition of the Top-Flite golf operations had taken place at the beginning of the period presented. No pro forma information has been included relating to the FrogTrader acquisition, as this acquisition was deemed insignificant (in thousands, except per share data) ⁽¹⁾ .


		Year Ended
		December 31,
		2003

Net sales		$	1,005,070
Net income		$	33,471
Earnings per common share:
	Basic	$	0.51
	Diluted	$	0.50

⁽¹⁾

Until September 15, 2003, the Top-Flite golf business was operated as a part of, and was integrated with, the other businesses of Spalding Sports Worldwide. The pro forma results of operations presented above therefore are based upon an estimated allocation of personnel and costs with regard to the manner in which the Top-Flite golf business was structured and operated as part of Spalding Sports Worldwide. The allocated personnel and costs are not necessarily indicative of the personnel and costs that would have been included had the Top-Flite business been operated as part of Callaway Golf Company since the beginning of the periods presented. As a result, the pro forma results of operations are not necessarily indicative of the results of operations had the acquisition been completed at the beginning of the period presented.

Note 4. Change in Accounting Estimate

In preparing its financial statements, the Company is required to make certain estimates, including those related to provisions for warranty, uncollectable accounts receivable, inventory obsolescence, valuation allowance for deferred tax assets and the market value of derivative instruments. The Company periodically reviews its estimates to ensure that the estimates appropriately reflect changes in its business or as new information becomes available.

F-16

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

quarter of 2002, the Company’s method of estimating both its implicit and explicit warranty obligation was to utilize data and information based on the cumulative failure rate by product after taking into consideration specific risks the Company believes existed at the time the financial statements were prepared. These additional risks included product specific risks, such as the introduction of products with new technology or materials that would be more susceptible to failure or breakage, and other business risks, such as increased warranty liability as a result of acquisitions. In many cases, additions to the warranty reserve for new product introductions have been based on management’s judgment of possible future claims derived from the limited product failure data that was available at the time.

Beginning in the second quarter of 2001, the Company began to compile data that illustrated the timing of warranty claims in relation to product life cycles. In the third quarter of 2002, the Company determined it had gathered sufficient data and concluded it should enhance its warranty accrual estimation methodology to utilize the additional data. The analysis of the data, in management’s judgment, provided management with more insight into timing of claims and demonstrated that some product failures are more likely to occur early in a product’s life cycle while other product failures occur in a more linear fashion over the product’s life cycle. As a result of its analysis of additional information, the Company believes it has gained better insight and improved judgment to more accurately project the ultimate failure rates of its products. As a result of this refinement in its methodology, the Company concluded that it should change its methodology of estimating warranty accruals and reduce its warranty reserve by approximately $17,000,000. The $17,000,000 reduction is recorded in cost of sales and favorably impacted gross profit as a percentage of net sales by two percentage points for the year ended December 31, 2002. The change in methodology has been accounted for as a change in accounting principle inseparable from a change in estimate.

F-17

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 5.	Selected Financial Statement Information


		December 31,

		2004			2003

		(In thousands)
Accounts receivable, net:
	Trade accounts receivable	$	112,523		$	106,856
	Allowance for doubtful accounts		(7,370	)		(6,192	)

		$	105,153		$	100,664

Inventories, net:
	Raw materials	$	73,558		$	76,122
	Work-in-process		6,768			9,129
	Finished goods		114,505			118,744

			194,831			203,995
	Reserve for excess and obsolescence		(13,601	)		(18,606	)

		$	181,230		$	185,389

Property, plant and equipment, net:
	Land	$	12,809		$	12,805
	Buildings and improvements		92,703			91,148
	Machinery and equipment		128,462			129,270
	Furniture, computers and equipment		93,390			90,571
	Production molds		28,936			26,968
	Construction-in-process		10,663			2,920

			366,963			353,682
	Accumulated depreciation		(231,098	)		(188,919	)

		$	135,865		$	164,763

Accounts payable and accrued expenses:
	Accounts payable	$	16,658		$	24,343
	Accrued expenses		58,843			55,444

		$	75,501		$	79,787

Accrued employee compensation and benefits:
	Accrued payroll and taxes	$	10,411		$	16,577
	Accrued vacation and sick pay		8,581			8,126
	Accrued commissions		1,223			841

		$	20,215		$	25,544

F-18

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 6.	Goodwill and Intangible Assets

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


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

				(In thousands)
Non-Amortizing:
	Trade name, trademark and trade dress			$	121,794	$	—	$	121,794	$	120,605	$	—	$	120,605
Amortizing:
	Patents		3-16		35,307		9,787		25,520		32,277		7,251		25,026
	Other		1-9		3,080		1,226		1,854		4,386		382		4,004

Total intangible assets				$	160,181	$	11,013	$	149,168	$	157,268	$	7,633	$	149,635

Aggregate amortization expense on intangible assets was approximately $3,380,000 for the year ended December 31, 2004. Amortization expense related to intangible assets at December 31, 2004 in each of the next five fiscal years and beyond is expected to be incurred as follows:


	(In thousands)
2005	$	3,042
2006		2,992
2007		2,988
2008		2,948
2009		2,768
Thereafter		12,636

	$	27,374

In connection with the settlement of the Perfect Putter litigation, the Company, among other things, acquired certain patents and other intellectual property owned by Perfect Putter. As of December 31, 2004, the estimated value assigned to the acquired Perfect Putter intellectual property was $2,300,000. The final valuation of the acquired intellectual property is to be determined by an independent valuation company. It is anticipated that the final assessment will be completed during the first half of 2005 and will not differ materially from the preliminary value recorded.

In accordance with SFAS No. 142, the Company has completed the annual impairment tests and fair value analysis for goodwill and other non-amortizing intangible assets, respectively, held throughout the year. There were no impairments or impairment indicators present and no loss was recorded during the year ended December 31, 2004. The value of the trade names and other intangible assets acquired in connection with the FrogTrader and Top-Flite acquisitions were determined through an independent valuation. Changes in goodwill during the year ended December 31, 2004 consisted of $9,097,000 of goodwill added in connection with the FrogTrader acquisition, as well as, $1,155,000 in foreign currency fluctuations. The $2,014,000 increase in goodwill during the year ended December 31, 2003, was due entirely to foreign currency fluctuations.

F-19

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 7.	Financing Arrangements

Effective November 5, 2004, the Company amended and restated its line of credit to provide for a new five year revolving line of credit from Bank of America, N.A. and certain other lenders (the “Line of Credit”), providing for revolving loans of up to $250,000,000 (with the possible expansion of the Line of Credit to $300,000,000 upon the satisfaction of certain conditions and the agreement of the lenders). Actual borrowing availability under the Line of Credit is effectively limited by the financial covenants set forth in the agreement governing the Line of Credit. At December 31, 2004, the maximum amount that could be borrowed under the Line of Credit was approximately $141,269,000 of which $13,000,000 was outstanding.

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

The agreement governing the Line of Credit requires the Company to maintain certain financial covenants, including a maximum leverage ratio, a minimum asset coverage ratio, a maximum capitalization ratio, a minimum interest coverage ratio and a minimum consolidated EBITDA. The agreement also includes certain other restrictions, including restrictions limiting additional indebtedness, dividends, stock repurchases, transactions with affiliates, capital expenditures, asset sales, acquisitions, mergers, liens and encumbrances and other restrictions. The agreement also contains other provisions, including affirmative covenants, representations and warranties and events of default. As of the December 31, 2004, the Company was in compliance with the covenants and other terms thereof.

The total origination fees incurred in connection with the Line of Credit were $1,263,000 and are being amortized into interest expense over five years (the term of the Line of Credit agreement). The unamortized origination fees were $1,221,000 as of December 31, 2004 and have been included in prepaid and other current assets in the accompanying consolidated balance sheet.


Note 8.	Derivatives and Hedging

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


	*Foreign Currency Exchange Contracts*

F-20

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

At December 31, 2004, 2003 and 2002, the notional amounts of the Company’s foreign exchange contracts were approximately $52,736,000, $91,222,000 and $134,782,000, respectively. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates, and records all derivatives on the balance sheet at fair value. At December 31, 2004, current liabilities related to the fair value of foreign currency-related derivatives were $2,981,000. There were no current assets related to the fair values of foreign currency-related derivatives. At December 31, 2003, the fair values of foreign currency-related derivatives were recorded as current assets of $50,000 and current liabilities of $799,000.

At December 31, 2004, 2003 and 2002, the notional amounts of the Company’s foreign exchange contracts designated as cash flow hedges were approximately $0, $44,443,000 and $84,843,000, respectively. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially recorded in accumulated other comprehensive income (“OCI”) as a separate component of shareholders’ equity and subsequently reclassified into earnings in the period during which the hedged transaction is recognized.

During the years ended December 31, 2004 and 2003, no gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges. During the year ended December 30, 2002, gains of $171,000 were reclassified into earnings as a result of the discontinuance of cash flow hedges.

The ineffective portion of the gain or loss for derivative instruments that are designated and qualify as cash flow hedges is immediately reported as a component of interest and other income. For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedging effectiveness and are recorded currently in earnings as a component of interest and other income. During the years ended December 31, 2004, 2003 and 2002, the Company recorded net gains/losses of $103,000 loss, $38,000 gain and $376,000 gain, respectively, as a result of changes in the spot-forward differential. Assessments of hedge effectiveness are performed using the dollar offset method and applying a hedge effectiveness ratio between 80% and 125%. Given that both the hedged item and the hedging instrument are evaluated using the same spot rate, the Company anticipates the hedges to be highly effective. The effectiveness of each derivative is assessed quarterly.

At December 31, 2004, 2003 and 2002, the notional amounts of the Company’s foreign exchange contracts used to hedge outstanding balance sheet exposures were approximately $52,736,000, $46,779,000 and $49,939,000, respectively. The gains and losses on foreign currency contracts used to hedge balance sheet exposures are recognized as a component of interest and other income in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities and thus offset these gains and losses. During the years ended December 31, 2004, 2003 and 2002, the Company recorded net losses of $4,577,000, $6,838,000 and $8,148,000, respectively, due to net realized and unrealized gains and losses on contracts used to hedge balance sheet exposures.

F-21

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 9.	Earnings Per Common Share

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, 2004, 2003 and 2002.


		Year Ended December 31,

		2004			2003		2002

		(In thousands,
		except per share data)
Net income (loss)		$	(10,103	)	$	45,523	$	69,446

Weighted-average shares outstanding:
	Weighted-average shares outstanding — Basic		67,721			66,027		66,517
	Dilutive securities		—			444		757

	Weighted-average shares outstanding — Diluted		67,721			66,471		67,274

Earnings (loss) per common share:
	Basic	$	(0.15	)	$	0.69	$	1.04
	Diluted	$	(0.15	)	$	0.68	$	1.03

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Options with an exercise price in excess of the average market value of the Company’s common stock during the period have been excluded from the calculation as their effect would be antidilutive. Additionally, potentially dilutive securities are excluded from the computation of earnings per share in periods in which a net loss is reported as their effect would be antidilutive. Thus, weighted-average shares outstanding — Diluted is the same as weighted-average shares outstanding — Basic in periods when a net loss is reported. For the years ended December 31, 2004, 2003 and 2002, options outstanding totaling 10,312,000 shares, 10,606,000 shares and 14,177,000 shares, respectively, were excluded from the calculations of earnings per common share, as their effect would have been antidilutive.


Note 10.	Stock, Stock Options and Rights


	*Common Stock and Preferred Stock*

The Company has an authorized capital of 243,000,000 shares, $.01 par value, of which 240,000,000 shares are designated Common Stock, and 3,000,000 shares are designated Preferred Stock. Of the Preferred Stock, 240,000 shares are designated Series A Junior Participating Preferred Stock in connection with the Company’s shareholders’ rights plan (see Shareholders’ Rights Plan below). The remaining shares of Preferred Stock are undesignated as to series, rights, preferences, privileges or restrictions.

The holders of Common Stock are entitled to one vote for each share of Common Stock on all matters submitted to a vote of the Company’s shareholders. Although to date no shares of Series A Junior Participating Preferred Stock have been issued, if such shares were issued, each share of Series A Junior Participating Preferred Stock would entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the shareholders of the Company. The holders of Series A Junior Participating Preferred Stock and the holders of Common Stock shall generally vote together as one class on all matters submitted to a vote of the Company’s shareholders. Shareholders entitled to vote for the election of directors are entitled to vote cumulatively for one or more nominees.

F-22

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Treasury Stock*


		Year Ended December 31,

		2004				2003				2002

				Average				Average				Average
		Shares		Cost Per		Shares		Cost Per		Shares		Cost Per
		Repurchased		Share		Repurchased		Share		Repurchased		Share

		(In thousands, except per share data)
Authority Announced in August 2001			—		—		—		—		866	$	17.86
Authority Announced in May 2002			353	$	17.84		373	$	12.77		1,967	$	15.75

	Total		353	$	17.84		373	$	12.77		2,833	$	16.40

The Company has completed its August 2001 repurchase program. As of December 31, 2004, the Company is authorized to repurchase up to $7,968,000 of its Common Stock under the repurchase program announced in May 2002. 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.


	*Grantor Stock Trust*

In July 1995, the Company established the Callaway Golf Company Grantor Stock Trust (the “GST”) for the purpose of funding the Company’s obligations with respect to one or more of the Company’s non-qualified or qualified employee benefit plans. The GST shares are used primarily for the settlement of employee stock option exercises and employee stock plan purchases. The existence of the GST will have no impact upon the amount of benefits or compensation that will be paid under the Company’s employee benefit plans. The GST acquires, holds and distributes shares of the Company’s Common Stock in accordance with the terms of the trust. Shares held by the GST are voted in accordance with voting directions from eligible employees of the Company as specified in the GST.

In conjunction with the formation of the GST, the Company issued 4,000,000 shares of newly issued Common Stock to the GST in exchange for a promissory note in the amount of $60,575,000 ($15.14 per share). In December 1995, the Company issued an additional 1,300,000 shares of newly issued Common Stock to the GST in exchange for a promissory note in the amount of $26,263,000 ($20.20 per share). In July 2001, the Company issued 5,837,000 shares of Common Stock held in treasury to the GST in exchange for a promissory note in the amount of $90,282,000 ($15.47 per share). The issuance of these shares to the GST had no net impact on shareholders’ equity.

For financial reporting purposes, the GST is consolidated with the Company. The value of shares owned by the GST are accounted for as a reduction to shareholders’ equity until used in connection with the settlement of employee stock option exercises, employee stock plan purchases or other awards. Each period, the shares owned by the GST are valued at the closing market price, with corresponding changes in the GST balance reflected in additional paid-in capital. The issuance of shares by the GST is accounted for by reducing the GST and additional paid-in capital accounts proportionately as the shares are released. The GST does not impact the determination or amount of compensation expense for the benefit plans being settled. The

F-23

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

GST shares do not have any impact on the Company’s earnings per share until they are used in connection with the settlement of employee stock option exercises, employee stock plan purchases or other awards.

The following table presents shares released from the GST for the settlement of employee stock option exercises and employee stock plan purchases for the years ended December 31, 2004, 2003 and 2002:


		Year Ended December 31,

		2004		2003		2002

		(In thousands)
Employee stock option exercises			1,109		1,041		197
Employee stock plan purchases			417		385		439

	Total shares released from the GST		1,526		1,426		636


	*Options*

The Company had the following two stock option plans under which shares were available for grant at December 31, 2004, the 2001 Non-Employee Directors Stock Option Plan (the “2001 Directors Plan”) and the 2004 Equity Incentive Plan (the “2004 Plan”).

The 2004 Plan permits the granting of options or other equity-based awards to the Company’s officers, employees and consultants. Under the 2004 Plan, options may not be granted at option prices that are less than fair market value at the date of grant. The 2001 Directors Plan is a shareholder approved plan. It provides for automatic grants of stock options upon a non-employee Director’s initial appointment to the Company’s Board of Directors and annually on the anniversary of such appointment. All such grants are made at prices based on 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, 2004:


	Authorized		Available		Outstanding

	(In thousands)
1991 Stock Incentive Plan		10,000		—		142
Promotion, Marketing and Endorsement Stock Incentive Plan		3,560		—		673
1995 Employee Stock Incentive Plan		10,800		—		6,175
1996 Stock Option Plan		9,000		—		4,508
1998 Stock Incentive Plan		500		—		117
2001 Directors Plan		500		318		182
2004 Plan		8,000		4,734		636
Non-Employee Directors Stock Option Plan		840		—		136
Key Officer Plan		1,100		—		100

Total		44,300		5,052		12,669

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

F-24

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following summarizes stock option transactions for the years ended December 31, 2004, 2003 and 2002:


	Year Ended December 31,

	2004					2003					2002

				Weighted-					Weighted-					Weighted-
				Average					Average					Average
	Shares			Exercise Price		Shares			Exercise Price		Shares			Exercise Price

	(in thousands, except per share data)
Outstanding at beginning of year		13,238		$	19.04		14,936		$	20.19		14,753		$	20.57
Granted		2,875		$	13.89		1,820		$	12.73		2,458		$	16.46
Exercised		(1,132	)	$	13.84		(1,174	)	$	11.71		(1,077	)	$	12.10
Canceled		(2,312	)	$	22.21		(2,344	)	$	25.18		(1,198	)	$	24.45

Outstanding at end of year		12,669		$	18.41		13,238		$	19.04		14,936		$	20.19
Options exercisable at end of year		9,154		$	19.57		9,922		$	20.56		11,522		$	21.11

Price range of outstanding options				$	5.25 - $40.00				$	5.25 - $40.00				$	5.00 - $40.00

The exercise price of all options granted during 2004, 2003 and 2002 was equal to the market value on the date of grant. The following table summarizes additional information about outstanding stock options at December 31, 2004:


				Remaining
Range of		Number		Contractual		Weighted-Average		Number		Weighted-Average
Exercise Price		Outstanding		Life-Years		Exercise Price		Exercisable		Exercise Price

(in thousands)						(in thousands)
	$5.25 - $10		23		6.07	$	8.87		13	$	8.06
	$10 - $15		3,724		5.61	$	12.67		2,344	$	13.03
	$15 - $25		6,826		6.14	$	17.75		4,701	$	17.84
	$25 - $40		2,096		0.43	$	30.85		2,096	$	30.85

	$5.25 - $40		12,669		5.66	$	18.41		9,154	$	19.57

During 2002, the Company, at its discretion, extended the expiration terms in severance arrangements and accelerated the vesting of 683,000 options, held by certain terminated 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 these actions did not result in compensation expense for the Company.


	*Restricted Common Stock*

During 2004, the Company granted 1,052,500 shares of Restricted Common Stock with fair values ranging from $10.45 to $15.23 per share to certain employee and non-employee participants under the Company’s 2004 Equity Incentive Plan. The Company recorded $1,741,000 of compensation expense related to these shares of Restricted Common Stock during 2004.

During 1998, the Company granted 130,000 shares of Restricted Common Stock with a fair value of $31 per share to 26 officers of the Company. Of these shares, 83,750 shares were canceled due to the service requirement not being met. The remaining 26,250 shares, vested on January 1, 2003. The net compensation expense of $814,000 related to the remaining shares was recognized ratably over the vesting period, based on the difference between the exercise price and market value of the stock on the measurement date. The Company’s Restricted common stock generally vest over periods ranging from one to five years.

F-25

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Employee Stock Purchase Plan*

On May 25, 2004 the Company’s shareholders approved the amendment and restatement of the Company’s 1999 Employee Stock Purchase Plan. The amended and restated plan was renamed the Callaway Golf Company Employee Stock Purchase Plan (the “ESPP” or the “Plan”) and authorized an additional 4,000,000 shares for issuance under the Plan. Additionally, the Plan was amended to shorten the look-back period from two years to one year. Under the amended and restated Plan participating employees authorize the Company to withhold compensation and to use the withheld amounts to purchase shares of the Company’s Common Stock at 85% of the lower of the fair market value on the first day of a one year offering period or the last day of each six month exercise period. During 2004, 2003 and 2002, approximately 417,000, 385,000 and 439,000 shares, respectively, of the Company’s Common Stock were purchased under the Employee Stock Purchase Plan. As of December 31, 2004, there were 4,033,000 shares reserved for future issuance under the Plan.


	*Compensation Expense*

During 2004, 2003 and 2002, the Company recorded $1,741,000, $15,000 and $314,000, 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 stock-based awards 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.


	*Shareholders’ Rights Plan*

The Company has a plan to protect shareholders’ rights in the event of a proposed takeover of the Company. This plan is not intended to prevent transactions which provide full and fair value to shareholders. It is intended to discourage abusive takeover tactics and to provide time for the Company’s Board of Directors to review and evaluate what is in the best interests of shareholders. 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 $0.01 per Right. The shareholder rights plan, and related rights, are scheduled to expire in June 2005.


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 25% 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 $9,065,000, $6,216,000 and $6,502,000 to the 401(k) Plan in 2004, 2003 and 2002, respectively. In accordance with the provisions of the 401(k) Plan, the Company matched employee contributions in the amount of $6,608,000, $4,695,000 and $4,912,000 during 2004, 2003 and 2002, respectively. Additionally, the Company can make discretionary contributions based on the profitability of the Company. For the years ended

F-26

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2004, 2003 and 2002, compensation expense for discretionary contributions was $0, $1,898,000 and $2,669,000, respectively.

The Company also has an unfunded, non-qualified deferred compensation plan. The plan allows officers, certain other employees and directors of the Company to defer all or part of their compensation, to be paid to the participants or their designated beneficiaries upon retirement, death or separation from the Company. To support the deferred compensation plan, the Company has elected to purchase Company-owned life insurance. The cash surrender value of the Company-owned insurance related to deferred compensation is included in other assets and was $9,792,000 and $9,905,000 at December 31, 2004 and 2003, respectively. The liability for the deferred compensation is included in long-term liabilities and was $8,674,000 and $8,947,000 at December 31, 2004, and 2003, respectively. For the years ended December 31, 2004 and 2003, the total participant deferrals were $3,482,000 and $1,544,000, respectively.


Note 12.	Income Taxes

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


	Year Ended December 31,

	2004			2003		2002

	(In thousands)
United States	$	(34,182	)	$	50,803	$	101,897
Foreign		10,469			17,080		9,774

	$	(23,713	)	$	67,883	$	111,671

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


		Year Ended December 31,

		2004			2003			2002

		(In thousands)
Current tax provision:
	Federal	$	(24,700	)	$	21,452		$	26,666
	State		(270	)		2,954			3,935
	Foreign		5,160			7,215			3,811
Deferred tax expense (benefit):
	Federal		10,147			(8,323	)		5,944
	State		(2,814	)		120			1,367
	Foreign		(1,133	)		(1,058	)		502

Income tax provision (benefit)		$	(13,610	)	$	22,360		$	42,225

During 2004, 2003 and 2002, tax benefits related to stock option exercises were $2,161,000, $1,784,000 and $5,479,000, respectively. Such benefits were recorded as a reduction of income taxes payable and an increase in additional paid-in capital.

F-27

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related asset or liability. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2004 and 2003 are as follows:


		December 31,

		2004			2003

		(In thousands)
Deferred tax assets:
	Reserves and allowances	$	16,414		$	16,527
	Depreciation and amortization		—			6,921
	Compensation and benefits		6,765			7,474
	Effect of inventory overhead adjustment		5,815			1,708
	Compensatory stock options and rights		941			1,328
	Revenue recognition		9,177			8,171
	Long-lived asset impairment		635			625
	Operating loss carryforward		3,305			—
	Tax credit carryforwards		3,770			1,200
	Energy derivative		8,230			8,108
	Other		1,280			2,133

Total deferred tax assets			56,332			54,195
Valuation allowance for deferred tax assets			(4,706	)		(3,540	)

Deferred tax assets, net of valuation allowance			51,626			50,655

Deferred tax liabilities:
	State taxes, net of federal income tax benefit		(3,374	)		(1,659	)
	Prepaid expenses		(2,405	)		—
	Depreciation and amortization		(3,051	)		—

Net deferred tax assets		$	42,796		$	48,996

Of the total tax credit carryforwards of $3,770,000 at December 31, 2004, the Company had state investment tax credits of $2,450,000 which expire in 2012, foreign tax credit carryforwards of $800,000 which expire in 2009, and research and development credit carryforwards of $520,000 that generally do not expire. The deferred tax asset of $3,305,000 related to net operating loss carryforwards is set to expire in 2014 if unutilized.

A valuation allowance has been established due to the uncertainty of realizing certain tax carryforwards, and a portion of other deferred tax assets. Of the $4,706,000 valuation allowance at December 31, 2004, $2,100,000 was related to certain Top-Flite deferred tax assets existing at the time of the acquisition. In the future, if we determine that the realization of these Top-Flite deferred tax assets is more likely than not, the reversal of the related valuation allowance will reduce goodwill instead of provision for taxes. Based on management’s assessment, it is more likely than not that the net deferred tax assets will be realized through future earnings.

F-28

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Year Ended December 31,

	2004			2003			2002

	(In thousands)
Amounts computed at statutory U.S. tax rate	$	(8,300	)	$	23,703		$	39,085
State income taxes, net of U.S. tax benefit		(1,466	)		2,509			4,213
State tax credits, net of U.S. tax benefit		(1,171	)		(1,138	)		(429	)
Expenses with no tax benefit		706			876			1,089
Foreign sales corporation tax benefits		—			(4,277	)		(1,060	)
Change in deferred tax valuation allowance		1,166			1,086			(310	)
Reversal of previously accrued income taxes		(4,382	)		(3	)		(6	)
Other		(163	)		(396	)		(357	)

Income tax provision	$	(13,610	)	$	22,360		$	42,225

The Company’s U.S. and foreign tax returns are subject to routine compliance reviews by the various tax authorities. The Company accrues for tax contingencies based upon its best estimate of the taxes expected to be paid. These estimates are updated over time as more definitive information becomes available from taxing authorities, completion of tax audits or upon occurrence of other events. The tax contingency accrual is recorded as a component of the Company’s net income taxes payable/receivable balance.

In 2004, the tax rate benefited from net favorable adjustments to previously estimated tax liabilities in the amount of $4,382,000. The most significant favorable adjustments relate to the resolution of state tax audits and various agreements reached with the Internal Revenue Service (IRS) on certain issues necessitating a reassessment of the Company’s tax exposures for all open tax years.

In November 2004, the IRS completed its field examination of the Company’s 1998 through 2000 tax returns and assessed additional tax. The Company disagrees with certain of the proposed adjustments and is in the process of contesting them at the Appeals level of the IRS. There can be no assurance the Company will be successful on appeal and the Company could ultimately be required to pay the additional assessed tax. However, in the opinion of the Company’s management, the final disposition of these matters, and adjustments from other taxing authorities, will not have a material adverse effect on the consolidated financial position, liquidity or results of operations of the Company.

As of December 31, 2004 the Company did not provide for United States income taxes or foreign withholding taxes on a cumulative total of $43,200,000 of undistributed earnings from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States. Should the Company repatriate foreign earnings, the Company would have to adjust the income tax provision in the period management determined that the Company would repatriate earnings. The Company is currently studying the impact of the one-time favorable foreign dividend provision enacted on October 22, 2004 as part of the American Jobs Creation Act of 2004, and may decide to repatriate earnings of some of its foreign subsidiaries. It is expected that this evaluation will be completed before June 30, 2005 and the effects of any decision cannot be reasonably estimated at this time.


Note 13.	Commitments and Contingencies


	*Legal Matters*

F-29

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

these actions may, among other things, contest the validity and/or the enforceability of some of the Company’s patents and/or trademarks. Others may assert counterclaims against the Company. Historically, these matters individually and in the aggregate have not had a material adverse effect upon the financial position or results of operations of the Company. It is possible, however, that in the future one or more defenses or claims asserted by defendants in one or more of those actions may succeed, resulting in the loss of all or part of the rights under one or more patents, loss of a trademark, a monetary award against the Company or some other material loss to the Company. One or more of these results could adversely affect the Company’s overall ability to protect its product designs and ultimately limit its future success in the marketplace.

Lundsford I was filed on April 6, 2001, and seeks to assert a punitive class action by plaintiff on behalf of himself and on behalf of consumers in Tennessee and Kansas who purchased select Callaway Golf products covered by the NPIP on or after March 30, 2000. Plaintiff asserts violations of Tennessee and Kansas antitrust and consumer protection laws and is seeking damages, restitution and punitive damages. The court has not made any determination that the case may proceed in the form of a class action. In light of the Lundsford II case subsequently filed in the United States District Court, described below, the parties have agreed to stay Lundsford I, and to dismiss it without prejudice once the federal court proceedings are underway.

F-30

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

also alleges a violation of the state antitrust laws of Tennessee, Kansas, South Carolina and Oklahoma. Lundsford II seeks to assert a nationwide class action consisting of all persons who purchased Callaway Golf clubs subject to the NPIP on or after March 30, 2000. Plaintiff seeks treble damages under the federal antitrust laws, compensatory damages under state law, and injunctive relief. The Lundsford II court has not made a determination that the case may proceed in the form of a class action. The parties are engaged in discovery and motion practice.

On December 2, 2002, Callaway Golf Company was served with a complaint filed in the Circuit Court of the 19th Judicial District in and for Martin County, Florida, Case No. 935CA, by the Perfect Putter Co. and its principals. Plaintiffs sued Callaway Golf Company, Callaway Golf Sales Company and a Callaway Golf Sales Company sales representative. Plaintiffs alleged that the Company misappropriated certain alleged trade secrets and proprietary information of the Perfect Putter Co. and incorporated those purported trade secrets in the Company’s Odyssey White Hot 2-Ball Putter. Plaintiffs also allege that the Company made false statements and acted inappropriately during discussions with plaintiffs. Plaintiffs sought compensatory damages, exemplary damages, attorneys’ fees and costs, pre- and post-judgment interest and injunctive relief. On December 20, 2002, the Company removed the case to the United States District Court for the Southern District of Florida, Case No. 02-14342. On April 29, 2003, the District Court denied plaintiffs’ motion to remand the case to state court. On January 7, 2005, the parties announced a resolution and dismissal of the litigation with Callaway Golf’s acquisition of putter patents from Perfect Putter. Other terms of the resolution are confidential.

F-31

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Plaintiff is seeking compensatory damages, attorneys’ fees and prejudgment interest according to the proof to be presented. On January 12, 2005, Callaway Golf removed the case to the United States District Court for the Southern District of Florida.

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


	*Supply of Electricity and Energy Contracts*

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

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

Because the Enron Contract provided for the Company to purchase an amount of energy in excess of what it expected to be able to use in its operations, the Company accounted for the Enron Contract as a derivative instrument in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Enron Contract did not qualify for hedge accounting under SFAS No. 133. Therefore, the Company recognized changes in the estimated fair value of the Enron Contract currently in earnings. The estimated fair value of the Enron Contract was based upon a present value determination of the net differential between the contract price for electricity and the estimated future market prices for electricity as applied to the remaining amount of unpurchased electricity under the Enron Contract. Through September 30, 2001, the Company had recorded unrealized pre-tax losses of $19,922,000.

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

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

F-32

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As a result of the Company’s notice of termination to EESI, and certain other automatic termination provisions under the Enron Contract, the Company believes that the Enron Contract has been terminated. As a result, the Company adjusted the estimated value of the Enron Contract through the date of termination, at which time the terminated Enron Contract ceased to represent a derivative instrument in accordance with SFAS No. 133. Because the Enron Contract is terminated and neither party to the contract is performing pursuant to the terms of the contract, the Company no longer records future valuation adjustments for changes in electricity rates. The Company continues to reflect on its balance sheet the derivative valuation account of $19,922,000, subject to periodic review, in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

The Company believes the Enron Contract has been terminated, and as of March 1, 2005, EESI has not asserted any claim against the Company. There can be no assurance, however, that EESI or another party will not assert a future claim against the Company or that a bankruptcy court or arbitrator will not ultimately nullify the Company’s termination of the Enron Contract. No provision has been made for contingencies or obligations, if any, under the Enron Contract beyond November 30, 2001.


	*Lease Commitments*

The Company leases certain warehouse, distribution and office facilities, vehicles as well as office equipment under operating leases and certain computer and telecommunication equipment under capital leases. Lease terms range from one to ten years expiring at various dates through July 2014, with options to renew at varying terms. Commitments for minimum lease payments under non-cancelable operating leases as of December 31, 2004 are as follows:


	(In thousands)
2005	$	6,209
2006		4,464
2007		3,945
2008		1,397
2009		671
Thereafter		938

	$	17,624

Future minimum lease payments have not been reduced by future minimum sublease rentals of $765,000 under an operating lease. Rent expense for the years ended December 31, 2004, 2003 and 2002 was $6,391,000 $4,388,000 and $3,780,000, respectively.


	*Unconditional Purchase Obligations*

During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, endorsement agreements with professional golfers and other endorsers, employment and consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements as they are subject to many variables including performance-based bonuses, reductions in payment obligations if designated minimum performance criteria are not achieved, and severance arrangements. As of December 31, 2004, the Company has entered into many of these contractual agreements with terms ranging from one to seven years. The minimum obligation that the Company is required to pay under these agreements is $121,524,000 over the next seven years. In addition, the Company also enters into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or

F-33

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this total. Future purchase commitments as of December 31, 2004 are as follows:


	(In thousands)
2005		38,357
2006		26,405
2007		20,045
2008		18,750
2009		15,750
Thereafter		2,217

	$	121,524


	*Other Contingent Contractual Obligations*

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


	*Employment Contracts*

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

F-34

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 14.	Segment Information

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

The table below contains information utilized by management to evaluate its operating segments.


		2004			2003			2002

		(In thousands)
Net sales
	Golf Clubs	$	703,227		$	735,654		$	727,196
	Golf Balls		231,337			78,378			66,023

		$	934,564		$	814,032		$	793,219

Income (loss) before tax
	Golf Clubs ⁽¹⁾	$	38,295		$	167,996		$	179,489
	Golf Balls ⁽²⁾		(8,911	)		(52,687	)		(25,576	)
	Reconciling items ⁽³⁾		(53,097	)		(47,426	)		(42,242	)

		$	(23,713	)	$	67,883		$	111,671

Identifiable assets ⁽⁴⁾
	Golf Clubs	$	388,801		$	307,462		$	311,823
	Golf Balls		107,476			190,172			103,152
	Reconciling items ⁽⁴⁾		239,460			250,932			264,870

		$	735,737		$	748,566		$	679,845

Goodwill
	Golf Clubs	$	30,468		$	20,216		$	18,202
	Golf Balls		—			—			—

		$	30,468		$	20,216		$	18,202

Depreciation and amortization
	Golf Clubs	$	38,492		$	30,818		$	30,628
	Golf Balls		12,662			13,678			7,012

		$	51,154		$	44,496		$	37,640


⁽¹⁾	For 2002, the Company’s income before tax includes the effect of the change in accounting estimate for the Company’s warranty accrual. During the third quarter of 2002, the Company reduced its warranty reserve by approximately $17,000,000 (Note 4).

⁽²⁾	The Company’s income (loss) before tax includes the recognition of certain integration charges related to the consolidation of its Callaway Golf and Top-Flite golf ball and golf club manufacturing and research and development operations. The Golf Clubs segment’s income before tax balance included $1,987,000 and $0 of integration charges in 2004 and 2003, respectively. The Golf Ball segment’s loss before income tax balance included $14,157,000 and $24,080,000 of integration charges in 2004 and 2003, respectively.

F-35

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


⁽³⁾	Represents corporate general and administrative expenses and other income (expense) not utilized by management in determining segment profitability.

⁽⁴⁾	Identifiable assets are comprised of net inventory, certain property, plant and equipment, intangible assets and goodwill. Reconciling items represent unallocated corporate assets not segregated between the two segments.

The Company’s net sales by product category are as follows:


		Year Ended December 31,

		2004		2003		2002

		(In thousands)
Net sales
	Drivers and Fairway Woods	$	238,555	$	252,420	$	309,972
	Irons ^*		259,058		280,758		252,116
	Putters		100,482		142,814		111,523
	Golf Balls		231,337		78,378		66,023
	Accessories and Other ^*		105,132		59,662		53,585

		$	934,564	$	814,032	$	793,219


^*	Beginning with the year ended December 31, 2004, the Company includes wedge sales within the iron sales product category. Previously, wedge sales were included as a component of the accessories and other category. Prior periods have been reclassified to conform with the current period presentation.

The Company markets its products in the United States and internationally, with its principal international markets being Japan 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.


			Long-Lived
	Sales		Assets

	(In thousands)
2004
United States	$	546,219	$	286,089
Europe		169,519		10,481
Japan		70,536		3,176
Rest of Asia		51,662		4,412
Other foreign countries		96,628		11,343

	$	934,564	$	315,501

2003
United States	$	449,424	$	305,176
Europe		145,148		16,995
Japan		101,259		3,590
Rest of Asia		58,327		846
Other foreign countries		59,874		8,007

	$	814,032	$	334,614

F-36

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


			Long-Lived
	Sales		Assets

	(In thousands)
2002
United States ^*	$	439,847	$	263,706
Europe		136,941		16,477
Japan		102,624		3,791
Rest of Asia		58,040		1,000
Other foreign countries		55,767		3,683

	$	793,219	$	288,657


^*	Beginning with the first quarter of 2003, the Company records royalty revenue in net sales. Previously, royalty revenue was recorded as a component of other income and prior periods have been reclassified to conform with the current period presentation.

Note 15. Licensing Arrangements

The Company from time to time licenses its trademarks and service marks to third parties for use on products such as golf apparel, golf shoes, watches, luggage and other golf related products, such as headwear, travel bags, golf towels and golf umbrellas. The Company has a current licensing arrangement with Ashworth, Inc. for a complete line of Callaway Golf men’s and women’s apparel for distribution in the United States, Canada, Europe, Australia, New Zealand and South Africa. The first full year in which the Company received royalty revenue under these licensing arrangements was 2003. The Company also has a current licensing arrangement with Sanei International Co., Ltd. (“Sanei”) for a complete line of Callaway Golf men’s and women’s apparel for distribution in Asian Pacific markets including Japan, Korea, Hong Kong, Taiwan, Singapore, Indonesia, Malaysia, Thailand, Vietnam, Philippines, Brunei, Myanmar and China.

In addition to apparel, the Company has also entered into licensing arrangements with (i) Tour Golf Group, Inc. for a Callaway Golf footwear collection, (ii) Fossil, Inc. for a line of Callaway Golf watches and clocks and (iii) TRG Accessories, LLC for a collection consisting of luggage, personal leather products and skin protection products. The Company assumed certain license agreements Top-Flite had previously entered into with third parties to license the use of its Top-Flite, Ben Hogan and Strata brands on apparel, souvenirs and gifts. In 2004, the Company entered into licensing arrangements with Global Wireless Entertainment, Inc. for the creation of golf-related software and applications for wireless handheld devices and platforms.


Note 16.	Transactions with Related Parties

The Callaway Golf Company Foundation (the “Foundation”) oversees and administers charitable giving for the Company and makes grants to carefully selected organizations. Officers of the Company also serve as directors of the Foundation and the Company’s employees provide accounting and administrative services for the Foundation. In 2004, 2003 and 2002, the Company recognized charitable contribution expense of $920,000, $939,000 and $1,165,000, respectively, as a result of its unconditional promise to contribute such amounts to the Foundation.

In connection with the terms of the Company’s former chief executive officer’s separation from the Company, the Company purchased his primary residence at a cost of $1,715,000. The purchase price was determined based upon two independent appraisals. As of March 2005, the Company was marketing the home and accounted for the home as a long-lived asset held for sale classified as other assets.

In the latter part of 2003, the Company requested on short notice that one of its executive officers relocate to Chicopee, Massachusetts to be the President and Chief Operating Officer of the newly acquired Top-Flite business. In order to assist this officer with his relocation across country on such short notice (and because under the Sarbanes-Oxley Act of 2002 the Company is prohibited from making a loan to him), the

F-37

CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company purchased his residence in California at a cost of $2,000,000. The purchase price was determined based upon two independent appraisals. As of December 31, 2003, the Company was marketing the home and accounted for the home as a long-lived asset held for sale classified as other assets. In 2004, this residence was sold and the Company recorded a net loss of $27,000.


Note 17.	Summarized Quarterly Data (Unaudited)


		Fiscal Year 2004 Quarters

		1st		2nd ⁽²⁾		3rd			4th			Total ⁽³⁾

		(In thousands, except per share data)
Net sales		$	363,786	$	297,908	$	128,457		$	144,413		$	934,564
Gross profit		$	166,191	$	127,836	$	26,071		$	38,724		$	358,822
Net income (loss)		$	40,545	$	13,715	$	(35,895	)	$	(28,468	)	$	(10,103	)
Earnings (loss) per common share ⁽¹⁾
	Basic	$	0.60	$	0.20	$	(0.53	)	$	(0.42	)	$	(0.15	)
	Diluted	$	0.59	$	0.20	$	(0.53	)	$	(0.42	)	$	(0.15	)

		Fiscal Year 2003 Quarters

			1st		2nd		3rd			4th			Total ⁽⁴	⁾


Net sales		$	271,719	$	242,077	$	153,634		$	146,602		$	814,032
Gross profit		$	137,837	$	126,494	$	70,220		$	34,064		$	368,615
Net income (loss)		$	42,477	$	34,143	$	2,334		$	(33,431	)	$	45,523
Earnings (loss) per common share ⁽¹⁾
	Basic	$	0.65	$	0.52	$	0.04		$	(0.50	)	$	0.69
	Diluted	$	0.64	$	0.52	$	0.03		$	(0.50	)	$	0.68


⁽¹⁾	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.

⁽²⁾	On May 28, 2004, the Company acquired all of the issued and outstanding shares of stock of FrogTrader, Inc. Thus, the Company’s financial data includes the FrogTrader, Inc. results of operations from May 28, 2004.

⁽³⁾	During 2004, the Company’s gross profit, net income and earnings per common share include the recognition of certain integration charges related to the consolidation of its Callaway Golf and Top-Flite golf ball and golf club manufacturing and research and development operations. These charges reduced the Company’s gross profit, net income and earnings per common share by approximately $15,689,000, $17,470,000 and $0.26, respectively, for the year ended December 31, 2004 (see Note 3).

⁽⁴⁾	On September 15, 2003 the Company completed the domestic portion of the Top-Flite Acquisition. The settlement of the international assets was effective October 1, 2003. Thus, the Company’s consolidated statement of operations include The Top-Flite Golf Company results of operations in the United States beginning September 15, 2003 forward and the international operations beginning October 1, 2003 forward. Additionally, the Company’s 2003 gross profit, net income and earnings per common share include the recognition of integration charges related to the consolidation of its Callaway Golf and Top-Flite golf ball and golf club operations. These charges reduced the Company’s gross profit, net income and earnings per common share by approximately $24,080,000, $16,147,000 and $0.24, respectively, for the year ended December 31, 2003 (Note 3).

F-38

SCHEDULE II

CALLAWAY GOLF COMPANY

CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2004, 2003 and 2002


								Valuation
		Allowance			Reserve			Allowance
		for			for			For
		Doubtful			Obsolete			Deferred
Date		Accounts			Inventory			Tax Assets

		(Dollars in thousands)
Balance, December 31, 2001		$	5,157		$	7,136		$	2,764
	Provision		1,124			12,871			—
	Write-off, disposals, costs and other, net		(807	)		(3,246	)		(310	)

Balance, December 31, 2002			5,474			16,761			2,454
	Provision		2,047			7,629			1,189
	Write-off, disposals, costs and other, net		(1,329	)		(5,784	)		(103	)

Balance, December 31, 2003			6,192			18,606			3,540
	Provision		1,291			3,900			1,312
	Write-off, disposals, costs and other, net		(113	)		(8,905	)		(146	)

Balance, December 31, 2004		$	7,370		$	13,601		$	4,706

S-1

EXHIBIT INDEX


Exhibit
Number			Description of Exhibit

	10.1	3	First Amendment to First Amended Officer Employment Agreement, effective as of October 6, 2003, between the Company and John F. Melican.
	10.1	4	First Amended Officer Employment Agreement, effective as of March 1, 2003, between the Company and John F. Melican.
	10.2	3	Callaway Golf Company Executive Deferred Compensation Plan, as amended and restated, effective May 6, 2002.
	10.2	4	Trust Agreement for the Callaway Golf Company Executive Deferred Compensation Plan, entered into as of May 6, 2002, between the Company and U.S. Trust Company, N.A.
	10.2	5	Form of Notice of Grant of Stock Option and Option Agreement for Non-Employee Directors.
	10.2	8	Form of Notice of Grant of Stock Option and Option Agreement for Officers.
	10.3	4	Indemnification Agreement, dated April 7, 2004, between the Company and Anthony S. Thornley.
	10.5	0	Amendment No. 2 to Trust Agreement, effective as of October 21, 2004, by the Company with the consent of Arrowhead Trust Incorporated.
	21.1		List of Subsidiaries.
	23.1		Consent of Deloitte & Touche LLP.
	24.1		Form of Power of Attorney.
	31.1		Certification of William C. Baker pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2		Certification of Bradley J. Holiday pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1		Certification of William C. Baker and Bradley J. Holiday pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EXHIBIT 10.13

FIRST AMENDMENT TO
FIRST AMENDED OFFICER EMPLOYMENT AGREEMENT

This First Amendment to First Amended Officer Employment Agreement ("First Amendment") is made effective as of October 6, 2003 by and between CALLAWAY GOLF COMPANY, a Delaware corporation (the "Company") and JOHN MELICAN ("Employee").

A. The Company and Employee are parties to that certain First Amended Officer Employment Agreement entered into as of March 1, 2003 (the "First Amended Agreement").

B. The Company and Employee desire to amend the First Amended Agreement pursuant to Section 15 of the First Amended 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 Employee hereby agree as follows:

1. Services. Section 2(a) of the First Amended Agreement is hereby amended to read:

"(a) Employee shall serve as Senior Vice President, Sales & Marketing, of the Company. Employee's duties shall be the usual and customary duties of the offices in which Employee serves. Employee shall report to such person as the Chief Executive Officer shall designate. The Board of Directors and/or the Chief Executive Officer of the Company may change employee's title, position and/or duties at any time."

2. Compensation. Section 4(a) of the First Amended Agreement is hereby amended to read:

"(a) The Company agrees to pay Employee a base salary at the rate of $300,000.00 per year, in equal installments in accordance with the Company's current pay schedule."

3. Expenses and Benefits. Section 5(b) of the First Amended Agreement is hereby amended to read:

"(b) Paid Time Off. Employee shall accrue thirty (30) days of paid time off annually. With the exception of the accrual of paid time off, all other portions of the Paid Time Off Program, as stated in the Company's Employee Handbook, as may be modified from time to time, shall govern Employee's paid time off. The time off may be taken any time during the year subject to prior approval by the Company, such approval not to be unreasonably withheld. The Company reserves the right to pay Employee for unused, accrued paid time off benefits in lieu of providing time off."

4. Termination. Sections 8(a), 8(c) and 8(d) of the First Amended Agreement are hereby amended to read:

"(a) Termination at the Company's Convenience. Employee's employment under this First Amended 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 that would have vested had

Employee remained employed pursuant to this First Amended Agreement for a period of twelve (12) months from the date of such termination. In addition to the foregoing, Employee shall be entitled to Special Severance as described in
Section 19 and Incentive Payments as described in Section 20."

"(c) Termination by Employee for Substantial Cause. Employee's employment under this First Amended 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 that would have vested had Employee remained employed pursuant to this First Amended Agreement for a period of twelve (12) months from the date of such termination. In addition to the foregoing, Employee shall be entitled to Special Severance as described in Section 19 and Incentive Payments as described in Section 20. "Substantial cause" shall mean for purposes of this subsection a material breach of this First Amended Agreement by the Company."

"(d) Termination Due to Permanent Disability. Subject to all applicable laws, Employee's employment under this First Amended 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 First Amended 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 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 then current base salary at the same rate and on the same schedule as in effect at the time of termination for a period of 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 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."

5. Special Severance. Section 19(a) of the First Amended Agreement is hereby amended to read:

"(a) Amount. Special Severance shall consist of (i) severance payments equal to one-half of Employee's then current base salary at the same rate and on the same payment schedule as in effect at the time of termination for a period of twelve (12) months from the date of termination; (ii) the payment of premiums owed for COBRA insurance benefits for a period of twelve
(12) months from the date of termination; and (iii) no other severance."

6. Incentive Payments. Section 20(a) of the First Amended Agreement is hereby amended to read:

"(a) Terms and Conditions. Incentive Payments shall be equal to one-half of Employee's then-current base salary at the rate and on the same payment schedule in effect at the time of termination for a period of twelve
(12) months from the date of termination. Incentive Payments shall be conditioned upon Employee choosing not to engage (whether as an owner, employee, agent, consultant, or in any other capacity) in any business or venture that competes with

2 John Melican

the business of the Company or any of its affiliates. If Employee chooses to engage in such activities, then the Company shall have no obligation to make Incentive Payments for the period of time during which Employee chooses to do so."

7. But for the amendments contained herein, and any other written amendments properly executed by the parties, the First Amended Agreement shall otherwise remain unchanged.

IN WITNESS WHEREOF, the parties have executed this First Amendment on the dates set forth below, to be effective as of the date first written above.

EMPLOYEE                                       COMPANY

                                               Callaway Golf Company,
                                               a Delaware corporation


  /s/ JOHN F. MELICAN                      By:   /s/ RONALD A. DRAPEAU
-------------------------------------          ---------------------------------
John Melican                                   Ronald A. Drapeau
                                               Chairman of the Board,
                                               Chief Executive Officer


Dated:           10/30/03               Dated:           11/11/03
       ------------------------------          ---------------------------------




                                       3                            John Melican

EXHIBIT 10.14

FIRST AMENDED OFFICER EMPLOYMENT AGREEMENT

This First Amended Officer Employment Agreement ("First Amended Agreement") is entered into as of March 1, 2003, by and between CALLAWAY GOLF COMPANY, a Delaware corporation (the "Company"), and JOHN MELICAN ("Employee").

A. The Company and Employee are parties to that certain Officer Employment Agreement effective September 24, 2001 (the "Original Agreement").

B. Pursuant to Section 15 of the Original Agreement, the parties desire to amend and restate the Original Agreement in the manner set forth herein. The Original Agreement shall no longer be of any force or effect except as restated in this First Amended Agreement. To the extent there is any conflict between the Original Agreement and this First Amended Agreement, this First Amended Agreement shall control and all agreements shall be construed so as to give the maximum force and effect to the provisions of this First Amended Agreement.

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

1. TERM.

(a) The Company hereby employs Employee and Employee hereby accepts employment pursuant to the terms and provisions of this First Amended Agreement for the period commencing March 1, 2003 and terminating December 31, 2003.

(b) On December 31, 2003, and on each December 31 thereafter (the "Extension Dates"), the expiration date of this First Amended Agreement shall be automatically extended one year, through December 31 of the following year, so long as (a) this First Amended Agreement is otherwise in full force and effect,
(b) Employee is still employed by the Company pursuant to this First Amended Agreement, (c) Employee is not otherwise in breach of this First Amended Agreement, and (d) neither the Company nor Employee has given notice as provided in Section 1(c) of this First Amended Agreement.

(c) At any time prior to an Extension Date, either Employee or the Company may give written notice to the other ("Notice") that the next automatic extension of the expiration date of this First Amended Agreement pursuant to
Section 1(b) shall be the final such automatic extension of the expiration date of this First Amended Agreement. Thus, if either Employee or the Company gives Notice on or before December 31, 2003, and all other conditions for automatic extension of the expiration date of this First Amended Agreement pursuant to
Section 1(b) exist, then on December 31, 2003, the expiration date of this First Amended Agreement shall be extended pursuant to Section 1(b) from December 31, 2003 to December 31, 2004, with this First Amended Agreement expiring on that date (if not earlier terminated pursuant to its terms) without any further automatic extensions.

(d) Upon expiration of this First Amended Agreement, Employee's status shall be one of at will employment.

2. SERVICES.

(a) Employee shall serve as Vice President, Product Management, of the Company. Employee's duties shall be the usual and customary duties of the offices in which Employee serves. Employee shall report to such person as the Chief Executive Officer shall designate. The Board of Directors and/or the Chief Executive Officer of the Company may change

employee's title, position and/or duties at any time, though neither contemplates doing so at the time this Agreement was signed.

(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 Employee's full productive time and best efforts to the performance of Employee's duties hereunder pursuant to the supervision and direction of the Company's Board of Directors and its Chief Executive Officer. 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, 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 $250,000.00 per year, in equal installments in accordance with the Company's current pay schedule.

(b) 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.

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 Chief Executive Officer.

(b) Paid Time Off. Employee shall accrue twenty-five (25) days of paid time off annually during the first five (5) years of employment with the Company. Employee shall accrue thirty (30) days of paid time off annually after five (5) years of employment. With the exception of the accrual of paid time off, all other portions of the Paid Time Off Program, as stated in the Company's Employee Handbook, as may be modified from time to time, shall govern Employee's paid time off. The time off may be taken any time during the year subject to prior approval by the Company, such approval not to be unreasonably withheld. The Company reserves the right to pay Employee for unused, accrued paid time off benefits in lieu of providing time off.

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

2 John Melican

(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 Employee directs, in an amount equal to three (3) times Employee's base salary, not to exceed a maximum of $1,500,000.00 in coverage, provided that Employee completes the required health statement and application and 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) retirement investment plan pursuant to the terms of the plan, as the same may be modified from time to time; and

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

(d) 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 officers generally from time to time, such services and perquisites shall be made available to Employee on the same terms and conditions.

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

7. BUSINESS ISSUES.

(a) Other Business. To the fullest extent permitted by law, Employee agrees that, while employed by the Company, Employee will not, directly or indirectly (whether as employee, agent, consultant, holder of a beneficial interest, creditor, or in any other capacity), engage in any business or venture which conflicts with Employee's duties under this First Amended Agreement, including services that are 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 Employee's 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. This obligation shall remain in effect while Employee is employed by the Company and for a period of one (1) year thereafter.

(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 John Melican

(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, the Senior Vice President of 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.

8. TERMINATION.

(a) Termination at the Company's Convenience. Employee's employment under this First Amended 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 that would have vested had Employee remained employed pursuant to this First Amended Agreement for a period of nine (9) months from the date of such termination. In addition to the foregoing, Employee shall be entitled to Special Severance as described in
Section 19 and Incentive Payments as described in Section 20.

(b) Termination by the Company for Substantial Cause. Employee's employment under this First Amended 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 Employee's duties, material breach of this First Amended 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 First Amended 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 that would have vested had Employee remained employed pursuant to this First Amended Agreement for a period of nine (9) months from the date of such termination. In addition to the foregoing, Employee shall be entitled to Special Severance as described in Section 19 and Incentive Payments as described in Section 20. "Substantial cause" shall mean for purposes of this subsection a material breach of this First Amended Agreement by the Company.

(d) Termination Due to Permanent Disability. Subject to all applicable laws, Employee's employment under this First Amended 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 First Amended 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 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 then current base salary at the same rate and on the same schedule as in effect at the time of termination for a period of nine (9) months from the date of termination; (iii) the immediate vesting of outstanding but unvested stock

4 John Melican

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 nine (9) 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 By Mutual Agreement of the Parties. Employee's employment pursuant to this First Amended 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.

(f) Pre-Termination Rights. The Company shall have the right, at its option, to require Employee to vacate Employee's 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 First Amended Agreement.

9. RIGHTS UPON A CHANGE IN CONTROL.

(a) If a Change in Control (as defined in Exhibit B hereto) occurs before the termination of Employee's employment hereunder, then this First Amended Agreement shall be automatically renewed (the "Renewed Employment Agreement") in the same form and substance as in effect immediately prior to the Change in Control.

(b) Notwithstanding anything in this First Amended 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 First Amended Agreement there is a Termination Event (as defined below), Employee shall be treated as if he or she had been terminated for the convenience of the Company pursuant to Section 8(a). Furthermore, the provisions of Section 8 shall continue to apply during the term of the Renewed 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 Employee's permanent disability (defined in Section 8(d)), Employee's death, or 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 First Amended Agreement by the Company;

(ii) a failure by the Company to obtain the assumption of this First Amended 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, as a publicly traded entity, 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 First Amended 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

5 John Melican

(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 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 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.

12. TRADE SECRETS AND CONFIDENTIAL INFORMATION.

(a) As used in this First Amended 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 First Amended 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 First Amended 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

6 John Melican

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 First Amended Agreement, and shall be binding upon Employee in perpetuity.

13. ASSIGNMENT OF RIGHTS.

(a) As used in this First Amended 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 First Amended 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 President and 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 First Amended Agreement, or pursuant to California Labor Code Section 2870, to assign Employee's 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 First Amended 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 First Amended 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 First Amended 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 First Amended Agreement to be assigned to the Company shall

7 John Melican

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

14. ASSIGNMENT. This First Amended 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 First Amended Agreement, it being understood that this First Amended Agreement is personal to Employee.

15. ENTIRE UNDERSTANDING. This First Amended 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 First Amended Agreement shall not be modified, amended or terminated except by another instrument in writing executed by the parties hereto. This First Amended Agreement replaces and supersedes any and all prior understandings or agreements between Employee and the Company regarding employment.

16. 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 the address currently on file with the Company, and to the Company at:

Company:    Callaway Golf Company
            2180 Rutherford Road
            Carlsbad, California 92008
            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.

17. 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 FIRST AMENDED 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.

8 John Melican

(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 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. THE ARBITRATOR SHALL ALLOW REASONABLE DISCOVERY AS PROVIDED IN THE CALIFORNIA ARBITRATION ACT, BUT SHALL CONTROL THE AMOUNT AND SCOPE OF DISCOVERY.

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

THE PARTIES HAVE READ SECTION 17 AND IRREVOCABLY AGREE TO ARBITRATE ANY DISPUTE IDENTIFIED ABOVE.

        /S/ JM (EMPLOYEE)                /S/ RAD (COMPANY)
        ------                           -------

18.   MISCELLANEOUS.

(a) Headings. The headings of the several sections and paragraphs of this First Amended 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.

9 John Melican

(b) Waiver. Failure of either party at any time to require performance by the other of any provision of this First Amended 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 First Amended 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.

(d) Severability. In the event any provision or provisions of this First Amended Agreement is or are held invalid, the remaining provisions of this First Amended 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 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 First Amended Agreement may be executed in one or more counterparts which, when fully executed by the parties, shall be treated as one agreement.

19. SPECIAL SEVERANCE.

(a) Amount. Special Severance shall consist of (i) severance payments equal to one-half of Employee's then current base salary at the same rate and on the same payment schedule as in effect at the time of termination for a period of nine (9) months from the date of termination; (ii) the payment of premiums owed for COBRA insurance benefits for a period of nine (9) months from the date of termination; and (iii) no other severance.

(b) Conditions on Receiving 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 First Amended Agreement shall be subject to: (i) Employee's continued compliance with the terms and conditions of Sections 7(b), 7(c), 7(e), 12, 13 and 17; and (ii) Employee shall 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.

20. INCENTIVE PAYMENTS.

(a) Terms and Conditions. Incentive Payments shall be equal to one-half of Employee's then-current base salary at the rate and on the same payment schedule in effect at the time of termination for a period of nine (9) months from the date of termination. Incentive Payments shall be conditioned upon Employee choosing not to engage (whether as an owner, employee, agent, consultant, or in any other capacity) in any business or venture that competes with the business of the Company or any of its affiliates. If Employee chooses to engage in such activities, then the Company shall have no obligation to make Incentive Payments for the period of time during which Employee chooses to do so.

(b) Sole Consideration. Employee and the Company agree and acknowledge that the sole and exclusive consideration for the Incentive Payments is Employee's agreement as

10 John Melican

described in subparagraph (a) above. In the event that subparagraph (a) is deemed unenforceable or invalid for any reason, then the Company will have no obligation to make Incentive Payments for the period of time during which it has been deemed unenforceable or invalid. The obligations and duties of this Section 20 shall be separate and distinct from the other obligations and duties set forth in this First Amended Agreement, and any finding of invalidity or unenforceability of this Section 20 shall have no effect upon the validity or invalidity of the other provisions of this First Amended Agreement.

21. TREATMENT OF SPECIAL SEVERANCE AND INCENTIVE PAYMENTS. Any Special Severance and Incentive Payments shall be subject to usual and customary employee payroll practices and all applicable withholding requirements. Except for the amounts specifically provided pursuant to Sections 8, 19 and 20, 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 these Sections shall not be treated as damages, but as compensation to which Employee may be 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 pursuant to Sections 8, 19 and 20 any amounts earned by Employee in other employment after termination of Employee's employment with the Company pursuant to this First Amended Agreement, or any amounts which might have been earned by Employee in other employment had Employee sought such other employment. The provisions of Sections 8, 19 and 20 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.

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

EMPLOYEE                                    COMPANY

                                            Callaway Golf Company,
                                            a Delaware corporation



  /s/ JOHN F. MELICAN                   By: /s/ RONALD A. DRAPEAU
----------------------------                ----------------------------------
John Melican                                Ronald A. Drapeau
                                            Chairman of the Board, President and
                                            Chief Executive Officer

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EXHIBIT A

TAX INDEMNIFICATION

Pursuant to Section 6 of Employee's First Amended 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 First Amended 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 a nationally recognized public accounting firm selected by the Company, consistent with the Company's policies and applicable law (hereinafter referred to as the "Accounting Firm"). 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

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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/her 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 (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;

13 John Melican

(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;

(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 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.

14 John Melican

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.

15 John Melican

EXHIBIT 10.23

[CALLAWAY GOLF LOGO]

Master Plan Document for the

Callaway Golf Company
Executive Deferred Compensation Plan

CALLAWAY GOLF COMPANY
2180 RUTHERFORD ROAD
CARLSBAD, CA 92008

[CALLAWAY GOLF LOGO]

Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

TABLE OF CONTENTS

                                                                                           PAGE
                                                                                           ----
Purpose..................................................................................    1

ARTICLE 1     Definitions................................................................    1

ARTICLE 2     Selection/Enrollment/Eligibility...........................................    7

      2.1     Selection by Committee.....................................................    7
      2.2     Enrollment Requirements....................................................    7
      2.3     Eligibility; Commencement of Participation.................................    7
      2.4     Termination of Participation and/or Deferrals..............................    7

ARTICLE 3     Deferral Commitments/Rollover Amounts/Company Matching
              Amounts/Company Contribution Amounts/Vesting/Crediting/Taxes ..............    8

      3.1     Minimum Deferrals..........................................................    8
      3.2     Maximum Deferral...........................................................    8
      3.3     Election to Defer; Effect of Election Form.................................    9
      3.4     Withholding of Annual Deferral Amounts.....................................    9
      3.5     Rollover Amount............................................................    9
      3.6     Annual Company Matching Amount.............................................    9
      3.7     Annual Company Contribution Amount.........................................   10
      3.8     Investment of Trust Assets.................................................   10
      3.9     Vesting....................................................................   10
     3.10     Crediting/Debiting of Account Balances.....................................   11
     3.11     FICA and Other Taxes.......................................................   13
     3.12     Distributions..............................................................   13

ARTICLE 4     Short-Term Payout/Unforeseeable Financial Emergencies/Withdrawal Election..   14

      4.1     Short-Term Payout..........................................................   14
      4.2     Other Benefits Take Precedence Over Short-Term............................    14
      4.3     Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies......   14
      4.4     Withdrawal Election........................................................   15

ARTICLE 5     Survivor Benefit...........................................................   15

      5.1     Survivor Benefit...........................................................   15

ARTICLE 6     Termination Benefit........................................................   15

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

       6.1   Termination Benefit ....................................    15
       6.2   Payment of Termination Benefit .........................    15

ARTICLE 7    Disability Waiver and Benefit...........................    16

       7.1   Disability Waiver ......................................    16
       7.2   Continued Eligibility; Disability Benefit ..............    16

ARTICLE 8    Beneficiary Designation.................................    17

       8.1   Beneficiary ............................................    17
       8.2   Beneficiary Designation; Change; Spousal Consent .......    17
       8.3   Acknowledgement ........................................    17
       8.4   No Beneficiary Designation .............................    17
       8.5   Doubt as to Beneficiary ................................    17
       8.6   Discharge of Obligations ...............................    17

ARTICLE 9    Leave of Absence........................................    18

       9.1   Paid Leave of Absence ..................................    18
       9.2   Unpaid Leave of Absence ................................    18

ARTICLE 10   Termination/Amendment or Modification...................    18

      10.1   Termination ............................................    18
      10.2   Amendment ..............................................    19
      10.3   Plan Agreement .........................................    19
      10.4   Effect of Payment ......................................    19

ARTICLE 11   Administration..........................................    19

      11.1   Committee Duties .......................................    19
      11.2   Administration Upon Change In Control ..................    19
      11.3   Agents .................................................    20
      11.4   Binding Effect of Decisions ............................    20
      11.5   Indemnity of Committee .................................    20
      11.6   Employer Information ...................................    20

ARTICLE 12   Other Benefits and Agreements...........................    20

      12.1   Coordination with Other Benefits .......................    20

ARTICLE 13   Claims Procedures.......................................    21

      13.1   Presentation of Claim ..................................    21
      13.2   Notification of Decision ...............................    21

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

      13.3   Review of a Denied Claim ...............................    21
      13.4   Decision on Review .....................................    22
      13.5   Mediation ..............................................    22
      13.6   Binding Arbitration ....................................    22

ARTICLE 14   Trust......................................... .........    22

      14.1   Establishment of the Trust .............................    22
      14.2   Interrelationship of the Plan and the Trust ............    22
      14.3   Distributions From the Trust ...........................    23

ARTICLE 15   Miscellaneous...........................................    23

      15.1   Status of Plan .........................................    23
      15.2   Unsecured General Creditor .............................    23
      15.3   Employer's Liability ...................................    23
      15.4   Nonassignability .......................................    23
      15.5   Not a Contract of Employment ...........................    23
      15.6   Furnishing Information .................................    24
      15.7   Terms ..................................................    24
      15.8   Captions ...............................................    24
      15.9   Governing Law ..........................................    24
     15.10   Notice .................................................    24
     15.11   Successors .............................................    24
     15.12   Spouse's Interest ......................................    24
     15.13   Validity ...............................................    24
     15.14   Incompetent ............................................    24
     15.15   Court Order ............................................    25
     15.16   Distribution in the Event of Taxation ..................    25
     15.17   Insurance ..............................................    25
     15.18   Legal Fees To Enforce Rights After Change in Control ...    26

iii

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

CALLAWAY GOLF COMPANY EXECUTIVE DEFERRED COMPENSATION PLAN

AMENDED AND RESTATED AS OF MAY 6, 2002

PURPOSE

The purpose of this Plan is to provide specified benefits to a select group of management and highly compensated Employees and Directors who contribute materially to the continued growth, development and future business success of Callaway Golf Company, a Delaware corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. This Plan shall amend and supersede in its entirety the Callaway Golf Company Executive Deferred Compensation Plan, as amended, dated August 1, 1994. Any and all balances accrued by a Participant under such predecessor plan shall be subject to the terms and conditions of this Plan and shall be referred to as the "Rollover Account."

ARTICLE 1
DEFINITIONS

For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:

1.1 "Account Balance" shall mean, with respect to a Participant, a credit on the records of the Employer equal to the sum of (i) the Rollover Account balance, (ii) the Deferral Account balance, (iii) the vested Company Matching Account balance, and (iv) the vested Company Contribution Account balance. The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.

1.2 "Annual Base Salary" shall mean the annual cash compensation relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, excluding bonuses, commissions, overtime, fringe benefits, stock options, restricted stock, relocation expenses, unused and unpaid excess vacation days, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Annual Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee.

1.3 "Annual Bonus" shall mean any compensation, in addition to Annual Base Salary, relating to services performed during any calendar year, whether or not paid in such calendar year or

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

      included on the Federal Income Tax Form W-2 for such calendar year,
      payable to a Participant as an Employee under any Employer's annual bonus
      and cash incentive plans, excluding stock options and restricted stock.

1.4   "Annual Company Contribution Amount" shall mean, for any one Plan Year,
      the amount determined in accordance with Section 3.7.

1.5   "Annual Company Matching Amount" shall mean, for any one Plan Year, the
      amount determined in accordance with Section 3.6.

1.6   "Annual Deferral Amount" shall mean that portion of a Participant's Annual
      Base Salary, Annual Bonus, Commissions and Directors Fees that a
      Participant elects to have, and is deferred, in accordance with Article 3,
      for any one Plan Year. In the event of a Participant's Disability (if
      deferrals cease in accordance with Section 7.1), death, or a Termination
      of Employment prior to the end of a Plan Year, such year's Annual Deferral
      Amount shall be the actual amount withheld prior to such event.

1.7   "Annual Installment Method" shall be an annual installment payment over
      the number of years (not to exceed 10) selected by the Participant in
      accordance with this Plan, calculated as follows: The Account Balance of
      the Participant shall be calculated as of the most recent Valuation Date.
      The annual installment shall be calculated by multiplying this balance by
      a fraction, the numerator of which is one, and the denominator of which is
      the remaining number of annual payments due the Participant. By way of
      example, if the Participant elects a 10-year Annual Installment Method,
      the first payment shall be 1/10 of the Account Balance as of the most
      recent Valuation Date. The following year, the payment shall be 1/9 of the
      Account Balance as of the most recent Valuation Date. Each annual
      installment shall be paid as soon as practicable after the amount is
      calculated, but not later than thirty days after the Valuation Date.

1.8   "Beneficiary" shall mean one or more persons, trusts, estates or other
      entities, designated in accordance with Article 8, that are entitled to
      receive benefits under this Plan upon the death of a Participant.

1.9   "Beneficiary Designation Form" shall mean the form established from time
      to time by the Committee that a Participant completes, signs and returns
      to the Committee to designate one or more Beneficiaries.

1.10  "Board" shall mean the board of directors of the Company.

1.11  "Change in Control" shall mean the first to occur of any of the following
      events:

        (a) 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

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

            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

        (b) 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

        (c) 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

(1)   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
      acquisition 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

(2)   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

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

1.12  "Claimant" shall have the meaning set forth in Section 13.1.

1.13  "Code" shall mean the Internal Revenue Code of 1986, as it may be amended
      from time to time.

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

1.14     "Commissions" shall mean any compensation in addition to Annual Base
         Salary and Annual Bonus relating to services performed during any
         calendar year, whether or not paid in such calendar year or included on
         the Federal Income Tax Form W-2 for such calendar year, payable to a
         Participant as an Employee under any Employer's commission agreement.

1.15  "Committee" shall mean the committee described in Article 11.

1.16  "Company" shall mean Callaway Golf Company, a Delaware corporation, and
      any successor to all or substantially all of the Company's assets or
      business.

1.17  "Company Contribution Account" shall mean (i) the sum of the Participant's
      Annual Company Contribution Amounts, plus (ii) amounts credited (net of
      amounts debited) in accordance with all the applicable crediting
      provisions of this Plan that relate to the Participant's Company
      Contribution Account, less (iii) all distributions made to the Participant
      or his or her Beneficiary pursuant to this Plan that relate to the
      Participant's Company Contribution Account.

1.18  "Company Matching Account" shall mean (i) the sum of all of a
      Participant's Annual Company Matching Amounts, plus (ii) amounts credited
      (net of amounts debited) in accordance with all the applicable provisions
      of this Plan that relate to the Participant's Company Matching Account,
      less (iii) all distributions made to the Participant or his or her
      Beneficiary pursuant to this Plan that relate to the Participant's Company
      Matching Account.

1.19  "Deduction Limitation" shall mean the following described limitation on a
      benefit that may otherwise be distributable pursuant to the provisions of
      this Plan. Except as otherwise provided, this limitation shall be applied
      to all distributions that are "subject to the Deduction Limitation" under
      this Plan. If an Employer determines in good faith prior to a Change in
      Control that there is a reasonable likelihood that any compensation paid
      to a Participant for a taxable year of the Employer would not be
      deductible by the Employer solely by reason of the limitation under Code
      Section 162(m), then to the extent deemed necessary by the Employer to
      ensure that the entire amount of any distribution to the Participant
      pursuant to this Plan prior to the Change in Control is deductible, the
      Employer may defer all or any portion of a distribution under this Plan.
      Any amounts deferred pursuant to this limitation shall continue to be
      credited/debited with additional amounts in accordance with Section 3.10
      below, even if such amount is being paid out in installments. The amounts
      so deferred and amounts credited thereon shall be distributed to the
      Participant or his or her Beneficiary (in the event of the Participant's
      death) at the earliest possible date, as determined by the Employer in
      good faith, on which the deductibility of compensation paid or payable to
      the Participant for the taxable year of the Employer during which the
      distribution is made will not be limited by Section 162(m), or if earlier,
      the effective date of a Change in Control. Notwithstanding anything to the
      contrary in this Plan, the Deduction Limitation shall not apply to any
      distributions made after a Change in Control.

1.20  "Deferral Account" shall mean (i) the sum of all of a Participant's Annual
      Deferral Amounts, plus (ii) amounts credited in accordance with all the
      applicable crediting provisions of this Plan that relate to the
      Participant's Deferral Account, less (iii) all distributions made to the
      Participant or his or her Beneficiary pursuant to this Plan that relate to
      his or her Deferral Account.

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

1.21  "Director" shall mean any member of the board of directors of the
      Employer.

1.22  "Director Fees" shall mean the annual fees paid by any Employer, including
      retainer fees and meeting fees, as compensation for serving on the board
      of directors.

1.23  "Disability" shall mean a period of disability during which a Participant
      qualifies for permanent disability benefits under the Participant's
      Employer's long-term disability plan, or, if a Participant does not
      participate in such a plan, a period of disability during which the
      Participant would have qualified for permanent disability benefits under
      such a plan had the Participant been a participant in such a plan, as
      determined in the sole discretion of the Committee. If the Participant's
      Employer does not sponsor such a plan, or discontinues to sponsor such a
      plan, Disability shall be determined by the Committee in its sole
      discretion.

1.24  "Disability Benefit" shall mean the benefit set forth in Article 7.

1.25  "Election Form" shall mean the form established from time to time by the
      Committee that a Participant completes, signs and returns to the Committee
      to make an election under the Plan.

1.26  "Employee" shall mean a person who is an employee of any Employer.

1.27  "Employer(s)" shall mean the Company and/or any of its subsidiaries (now
      in existence or hereafter formed or acquired) that have been selected by
      the Board to participate in the Plan and have adopted the Plan as a
      sponsor.

1.28  "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
      it may be amended from time to time.

1.29  "Participant" shall mean any Employee or Director (i) who is selected to
      participate in the Plan, (ii) who elects to participate in the Plan, (iii)
      who signs a Plan Agreement, an Election Form and a Beneficiary Designation
      Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary
      Designation Form are accepted by the Committee, (v) who commences
      participation in the Plan, and (vi) whose Plan Agreement has not
      terminated. A spouse or former spouse of a Participant shall not be
      treated as a Participant in the Plan or have an account balance under the
      Plan, even if he or she has an interest in the Participant's benefits
      under the Plan as a result of applicable law or property settlements
      resulting from legal separation or divorce.

1.30  "Plan" shall mean the Callaway Golf Company Executive Deferred
      Compensation Plan, which shall be evidenced by this instrument and by each
      Plan Agreement, as they may be amended from time to time.

1.31  "Plan Agreement" shall mean a written agreement, as may be amended from
      time to time, which is entered into by and between an Employer and a
      Participant. Each Plan Agreement executed by a Participant and the
      Participant's Employer shall provide for the entire benefit to which such
      Participant is entitled under the Plan; should there be more than one Plan
      Agreement, the Plan Agreement bearing the latest date of acceptance by the
      Employer shall supersede all previous Plan Agreements in their entirety
      and shall govern such entitlement. The terms of any Plan Agreement may be
      different for any Participant, and any Plan Agreement may provide
      additional

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

      benefits not set forth in the Plan or limit the benefits otherwise
      provided under the Plan; provided, however, that any such additional
      benefits or benefit limitations must be agreed to by both the Employer and
      the Participant.

1.32  "Plan Year" shall mean a period beginning on January 1 of each calendar
      year and continuing through December 31 of such calendar year.

1.33  "Predecessor Nonqualified Executive Deferred Compensation Plan" shall mean
      the Callaway Golf Company Executive Deferred Compensation, dated August 1,
      1994, as amended.

1.34  "401(k) Plan" shall be that certain Callaway Golf Company defined
      contribution plan intended to satisfy the requirements of Sections 401(a),
      401(k), 401(m), and 414(i) of the Code, as adopted by the Company.

1.35  "Rollover Amount" shall mean the amount determined in accordance with
      Section 3.5.

1.36  "Rollover Account" shall mean (i) the sum of the Participant's Rollover
      Amount, plus (ii) amounts credited or debited in accordance with all the
      applicable crediting and debiting provisions of this Plan that relate to
      the Participants Rollover Account, less (iii) all distributions made to
      the Participant or his or her Beneficiary pursuant to this Plan that
      relate to the Participant's Rollover Account.

1.37  "Short-Term Payout" shall mean the payout set forth in Section 4.1.

1.38  "Survivor Benefit" shall mean the benefit set forth in Article 5.

1.39  "Termination Benefit" shall mean the benefit set forth in Article 6.

1.40  "Termination of Employment" or "Terminate" shall mean the severing of
      employment with all Employers, or service as a Director of all Employers,
      voluntarily or involuntarily, for any reason other than Disability, death
      or an authorized leave of absence. If a Participant is both an Employee
      and a Director, a Termination of Employment shall occur only upon the
      termination of the last position held; provided, however, that such a
      Participant may elect, at least thirteen (13) months before Termination of
      Employment and in accordance with the policies and procedures established
      by the Committee, to be treated for purposes of this Plan as having
      experienced a Termination of Employment at the time he or she ceases
      employment with an Employer as an Employee.

1.41  "Trust" shall mean one or more trusts established pursuant to that certain
      Master Trust Agreement, dated as of May 6, 2002 between the Company and
      the trustee named therein, as amended from time to time.

1.42  "Unforeseeable Financial Emergency" shall mean an unanticipated emergency
      that is caused by an event beyond the control of the Participant that
      would result in severe financial hardship to the Participant resulting
      from (i) a sudden and unexpected illness or accident of the Participant or
      a dependent of the Participant, (ii) a loss of the Participant's property
      due to casualty, or (iii) such other extraordinary and unforeseeable
      circumstances arising as a result of events beyond the control of the
      Participant, all as determined in the sole discretion of the Committee.

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

1.43  "Years of Service" shall mean the total number of years in which a
      Participant has been employed by one or more Employers. For purposes of
      this definition, a year of employment shall be a 365 day period (or 366
      day period in case of a leap year) that, for the first year of employment,
      commences on the Employee's date of hiring and that, for any subsequent
      year, commences on an anniversary of that hiring date. The Committee shall
      make a determination as to the number of Years of Service a Participant
      shall be deemed to have completed, including whether any partial year of
      employment shall be counted, and any such determination may, in the sole
      discretion of the Committee, take into account any similar definitions or
      provisions contained in the Qualified Plan.

                                    ARTICLE 2
                        SELECTION/ENROLLMENT/ELIGIBILITY

2.1   SELECTION BY COMMITTEE. Participation in the Plan shall be limited to a
      select group of management and highly compensated Employees and Directors
      of the Employers, as determined by the Committee in its sole discretion.
      From that group, the Committee shall select, in its sole discretion,
      Employees and Directors to participate in the Plan.

2.2   ENROLLMENT REQUIREMENTS. As a condition to participation, each selected
      Employee or Director shall complete, execute and return to the Committee a
      Plan Agreement, an Election Form and a Beneficiary Designation Form, all
      within thirty (30) days after he or she is selected to participate in the
      Plan. In addition, the Committee shall establish from time to time such
      other enrollment requirements as it determines in its sole discretion are
      necessary.

2.3   ELIGIBILITY; COMMENCEMENT OF PARTICIPATION. Provided an Employee or
      Director selected to participate in the Plan has met all enrollment
      requirements set forth in this Plan and required by the Committee,
      including returning all required documents to the Committee within the
      specified time period, that Employee or Director shall commence
      participation in the Plan on the first day of the month following the
      month in which the Employee or Director completes all enrollment
      requirements. If an Employee or a Director fails to meet all such
      requirements within the period required, in accordance with Section 2.2,
      that Employee or Director shall not be eligible to participate in the Plan
      until the first day of the Plan Year following the delivery to and
      acceptance by the Committee of the required documents.

2.4   TERMINATION OF PARTICIPATION AND/OR DEFERRALS. If the Committee determines
      in good faith that a Participant no longer qualifies as a member of a
      select group of management or highly compensated employees, as membership
      in such group is determined in accordance with Sections 201(2), 301(a)(3)
      and 401(a)(1) of ERISA, the Committee shall have the right, in its sole
      discretion, to (i) terminate any deferral election the Participant has
      made for the remainder of the Plan Year in which the Participant's
      membership status changes, (ii) prevent the Participant from making future
      deferral elections and/or (iii) immediately distribute the Participant's
      then Account Balance as a Termination Benefit and terminate the
      Participant's participation in the Plan.

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

ARTICLE 3
DEFERRAL COMMITMENTS/ROLLOVER AMOUNTS/COMPANY MATCHING AMOUNTS/COMPANY
CONTRIBUTION AMOUNTS/VESTING/CREDITING/TAXES

3.1 MINIMUM DEFERRALS.

(a) ANNUAL BASE SALARY, ANNUAL BONUS AND DIRECTOR FEES. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Annual Base Salary, Annual Bonus, Commissions and/or Director Fees in the following minimum amount:

     DEFERRAL             MINIMUM AMOUNT
-------------------      -----------------
Annual Base Salary,
Commissions and/or
   Annual Bonus          $ 5,000 aggregate
   Director Fees         $     0

If an election is made for less than such minimums or if no election is made, the amount deferred shall be zero.

(b) SHORT PLAN YEAR. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the minimum Annual Deferral Amount shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12.

3.2 MAXIMUM DEFERRAL.

(a) ANNUAL BASE SALARY, ANNUAL BONUS AND DIRECTORS FEES. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Annual Base Salary, Annual Bonus and/or Director Fees up to the following maximum percentages for each deferral elected:

     DEFERRAL         MAXIMUM AMOUNT
------------------    --------------
Annual Base Salary          75%
   Commissions             100%
   Annual Bonus            100%
  Director Fees            100%

(b) SHORT PLAN YEAR. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the First Plan Year of the Plan itself, the maximum Annual Deferral Amount with respect to Annual Base Salary, Annual Bonus and/or Director Fees shall be limited to the amount of compensation not yet earned by the Participant as of the date the Participant submits a Plan Agreement and Election Form to the Committee for acceptance.

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

3.3 ELECTION TO DEFER; EFFECT OF ELECTION FORM.

(a) FIRST PLAN YEAR. In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee.

(b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year.

3.4 WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS. For each Plan Year, the Annual Base Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Annual Base Salary payroll in equal amounts over each pay period, as adjusted from time to time for increases and decreases in Annual Base Salary. The Commissions, Annual Bonus and/or Director Fees portion of the Annual Deferral Amount shall be withheld at the time the Commissions, Annual Bonus or Director Fees are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself.

3.5 ROLLOVER AMOUNT. With respect to Participants who participated in the Predecessor Nonqualified Executive Deferred Compensation Plan, an amount equal to their "Account" as set forth in the Predecessor Nonqualified Executive Deferred Compensation Plan, valued as of December 31, 2001, shall be credited to the Participant's Rollover Account under this Plan on January 1, 2002. The Rollover Amount shall be subject to the terms and conditions of this Plan and any Participant with a Rollover Amount shall have no right to demand distribution of such amounts other than as provided for herein.

3.6 ANNUAL COMPANY MATCHING AMOUNT. For each Plan Year, the Company, at its sole discretion, shall determine whether to credit Participants with an Annual Company Matching Amount. A Participant's Annual Company Matching Amount, if any, shall be a sum not to exceed all Pay Period Company Matching Contributions, if any, for the Plan Year. For this purpose, a Pay Period Company Matching Contribution shall mean an amount which, when added to the matching contribution allocated to the Participant's account under the 401(k) Plan for the same pay period, equals the match the Participant would have received under the 401(k) Plan during the corresponding plan year of the 401(k) Plan, if the portion of Annual Base Salary elected to be deferred had instead been elected and contributed as a salary deferral contribution under the 401(k) Plan (determined as if the
401(k) Plan was not subject to the limitations imposed under

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

Code Sections 401(a)(17), 401(k)(3), 402(g) and 415). The Company shall, at its discretion, determine when to credit any Plan Year's Annual Company Matching Amount. Notwithstanding any provision of this Plan to the contrary, the Company shall have the right, in its sole and absolute discretion, to alter the manner in which the Annual Company Matching Amount is calculated.

3.7 ANNUAL COMPANY CONTRIBUTION AMOUNT. For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant's Company Contribution Account under this Plan, which amount shall be for that Participant the Annual Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Company Contribution Amount for that Plan Year. The Annual Company Contribution Amount, if any, shall be credited as of the last day of the Plan Year. If a Participant is not employed by an Employer as of the last day of a Plan Year other than by reason of his or her death while employed, the Annual Company Contribution Amount for that Plan Year shall be zero.

3.8 INVESTMENT OF TRUST ASSETS. The Trustee of the Trust shall be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement.

3.9 VESTING.

(a) A Participant shall at all times be 100% vested in his or her Rollover Account and Deferral Account.

(b) The Committee, in its sole discretion, will determine over what period of time and in what percentage increments a Participant shall vest in his or her Company Contribution Account. The Committee may credit some Participants with larger or smaller vesting percentages than other Participants, and the vesting percentage credited to any Participant for a Plan Year may be zero, even though one or more other Participants have a greater vesting percentage credited to them for that Plan Year. Absent the exercise of such discretion, a Participant shall be fully vested upon attainment of age 62.

(c) A Participant shall be vested in his or her Annual Company Matching Amount in accordance with the following schedule:

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Master Plan Document for the

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  YEARS OF SERVICE ON DATE       VESTED PERCENTAGE OF ANNUAL
OF TERMINATION OF EMPLOYMENT       COMPANY MATCHING ACCOUNT
----------------------------     ---------------------------
      Less than 1 year                     0%
          1 year                          25%
          2 years                         50%
          3 years                         75%
      4 or more years                    100%

Regardless of the number of Years of Service, a Participant shall be fully vested upon attainment of age 62.

(d) Notwithstanding anything in this Section to the contrary, except as provided in subsection (e) below, in the event of a Change in Control, a Participant's Company Contribution Account and Company Matching Account shall immediately become 100% vested (without regard to whether it is already vested in accordance with the above vesting schedules).

(e) Notwithstanding subsection (d) above, the vesting schedule for a

            Participant's Company Contribution Account and/or Company Matching
            Account shall not be accelerated to the extent that the Committee
            determines that such acceleration would cause the deduction
            limitations of Section 280G of the Code to become effective. In the
            event that all of a Participant's Company Contribution Account is
            not vested pursuant to such a determination, the Participant may
            request independent verification of the Committee's calculations
            with respect to the application of Section 280G. In such case, the
            Committee must provide to the Participant within thirty (30)
            business days of such a request an opinion from a
            nationally-recognized accounting firm selected by the Committee (the
            "Accounting Firm"). The opinion shall state the Accounting Firm's
            opinion that any limitation in the vested percentage hereunder is
            necessary to avoid the limits of Section 280G and contain supporting
            calculations. The cost of such opinion shall be paid for by the
            Company.

3.10  CREDITING/DEBITING OF ACCOUNT BALANCES. In accordance with, and subject
      to, the rules and procedures that are established from time to time by the
      Committee, in its sole discretion, amounts shall be credited or debited to
      a Participant's Account Balance in accordance with the following rules:

      (a)   ELECTION OF MEASUREMENT FUNDS. A Participant, in connection with his
            or her initial deferral election in accordance with Section 3.3(a)
            above, shall elect, on the Election Form, one or more Measurement
            Fund(s) to be used to determine the additional amounts to be
            credited to his or her Account Balance for the first business day in
            which the Participant commences participation in the Plan and
            continuing thereafter for each subsequent day in which the
            Participant participates in the Plan, unless changed in

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

accordance with the next sentence. Commencing with the first business day that follows the Participant's commencement of participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the Plan, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the additional amounts to be credited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply to the next business day and continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence.

(b) PROPORTIONATE ALLOCATION. In making any election described in
Section 3.10(a) above, the Participant shall specify on the Election Form, in increments of five percentage points (5%), the percentage of his or her Account Balance to have gains and losses measured by a Measurement Fund.

(c) MEASUREMENT FUNDS. From time to time, the Committee in its sole discretion shall select and announce to Participants its selection of mutual funds, insurance company separate accounts, indexed rates or other methods (each, a "Measurement Fund"), for the purpose of providing the basis on which gains and losses shall be attributed to Account Balances under the Plan. The Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund at any time. Each such action will take effect as of the first day of the calendar quarter that follows by thirty (30) days the day on which the Committee gives Participants advance written notice of such change.

(d) CREDITING OR DEBITING METHOD. The performance of each elected Measurement Fund (either positive or negative) will be determined by the Committee, in its reasonable discretion, based on available reports of the performance of the Measurement Funds. A Participant's Account Balance shall be credited or debited on a daily basis based on the performance of each Measurement Fund selected by the Participant, as determined by the Committee in its sole discretion, as though (i) a Participant's Account Balance were invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such day, as of the close of business on such day, at the closing price on such date; (ii) the portion of the Annual Deferral Amount that was actually deferred during any day were invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such day, no later than the close of business on the first business day after the day on which such amounts are actually deferred from the Participant's Annual Base Salary through reductions in his or her payroll, at the closing price on such date; and (iii) any distribution made to a Participant that decreases such Participant's Account Balance ceased being invested in the Measurement Fund(s), in the

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

percentages applicable to such day, no earlier than one business day prior to the distribution, at the closing price on such date.

(e) NO ACTUAL INVESTMENT. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation to his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company.

3.11 FICA AND OTHER TAXES.

(a) ANNUAL DEFERRAL AMOUNTS. For each Plan Year in which an Annual Deferral Amount is being withheld from an Employee Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Annual Base Salary, Annual Bonus and/or Commissions that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section.

(b) COMPANY MATCHING AMOUNTS. When a participant becomes vested in a portion of his or her Company Matching Account, the Participant's Employer(s) shall withhold from the Participant's Annual Base Salary, Annual Bonus and/or Commissions that is not deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant's Company Matching Account in order to comply with this Section.

            portion of his or her Annual Company Contribution Amounts, the
            Participant's Employer(s) shall withhold from the Participant's
            Annual Base Salary, Annual Bonus and/or Commissions that is not
            deferred, in a manner determined by the Employer(s), the
            Participant's share of FICA and other employment taxes. If
            necessary, the Committee may reduce the vested portion of the
            Participant's aforementioned amounts in order to comply with this
            Section.

3.12  DISTRIBUTIONS. The Participant's Employer(s), or the trustee of the Trust,
      shall withhold from any payments made to a Participant under this Plan all
      federal, state and local income, employment and other taxes required to be
      withheld by the Employer(s), or the trustee of the

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. The Employer(s) and the trustee of the Trust shall also be authorized to withhold any amount validly owed to the Employer for which the Employer has previously requested but not received payment.

ARTICLE 4
SHORT-TERM PAYOUT/UNFORESEEABLE FINANCIAL EMERGENCIES/
WITHDRAWAL ELECTION

4.1 SHORT-TERM PAYOUT. In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to such Annual Deferral Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount plus amounts credited or debited in the manner provided in Section 3.10 above on that amount, determined at the time that the Short-Term Payout becomes payable (rather than the date of a Termination of Employment). Subject to the Deduction Limitation and the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid out during a sixty (60) day period commencing immediately after the last day of any Plan Year designated by the Participant that is at least three Plan Years after the end of the Plan Year in which the Annual Deferral Amount is actually deferred. By way of example, if a three year Short-Term Payout is elected for Annual Deferral Amounts that are deferred in the Plan Year commencing January 1, 2002, the three year Short-Term Payout would become payable during a sixty (60) day period commencing January 1, 2006. In addition, subject to the terms and conditions of this Section 4.1, Section 4.2 and all other provisions of this Plan, any similar elections made pursuant to the terms of the Predecessor Nonqualified Deferred Compensation Plan, shall be deemed to remain in effect under this Plan. The distribution date selected by a Participant in connection with such election(s) under the Predecessor Nonqualified Deferred Compensation Plan shall remain binding on the parties. The Committee shall, in its discretion, determine how any amounts deferred under the Predecessor Nonqualified Deferred Compensation Plan shall be treated pursuant to the language of Article 4 and the Plan.

4.2 OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM. Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount, plus amounts credited or debited thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with
Section 4.1 but shall be paid in accordance with the other applicable Article.

4.3 WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within sixty

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

(60) days of the date of approval. The payment of any amount under this
Section 4.3 shall not be subject to the Deduction Limitation.

4.4 WITHDRAWAL ELECTION. A Participant (or, after a Participant's death, his or her Beneficiary) may elect, at any time, to withdraw all or a portion of his or her Account Balance, calculated as if there had occurred a Termination of Employment as of the day of the election, less a withdrawal penalty equal to 10% of the portion of the Account Balance so elected for withdrawal (the net amount shall be referred to as the "Withdrawal Amount"). The Participant making such election shall be precluded from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from the Participant's Annual Base Salary, Annual Bonus, Commissions, and/or Directors Fees for a six month period commencing as of the date the Withdrawal Amount is received. Notwithstanding anything in this Plan to the contrary, Participants who have Terminated may only elect to withdraw their entire Account Balance. The election can be made at any time, before or after Disability, death, or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within sixty (60) days of his or her election. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation.

ARTICLE 5
SURVIVOR BENEFIT

5.1 SURVIVOR BENEFIT. Subject to the Deduction Limitation, if the Participant dies before he or she experiences a Termination of Employment or suffers a Disability prior to such date, the Participant's Beneficiary shall be entitled to receive the Termination Benefit described in Section 6.2 as if Participant Terminated his or her employment with the Company and the Election Form on file with the Company shall control the manner in which Termination Benefit is paid. Should the Participant die or suffer a Disability after the Termination of Employment, but before the Termination Benefit is paid in full, the unpaid balance shall continue to be paid to the Beneficiary according to the Annual Installment Method previously selected by the Participant.

ARTICLE 6
TERMINATION BENEFIT

6.1 TERMINATION BENEFIT. Subject to the Deduction Limitation, a Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance if a Participant experiences a Termination of Employment prior to his or her death or Disability.

6.2 PAYMENT OF TERMINATION BENEFIT. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Termination Benefit in a lump sum or pursuant to the Annual Installment Method. The Termination Benefit will be paid

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

not later than 60 days after the end of the Plan Year in which the Participant terminates his or her employment. The Participant may annually change his or her election to an allowable alternative payout period by submitting new Election Form to the Committee, provided that any such Election Form is submitted at least thirteen months prior the Participant's Termination and is accepted by the Committee, in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Termination Benefit. If a Participant does not make any election with respect to the payment of the Termination Benefit, then such benefit shall be payable in a lump sum. Any payment made shall be subject to the Deduction Limitation. Notwithstanding the foregoing or anything in this Plan to the contrary, to the extent a Participant's Account Balance is less than $25,000 at the time of Termination of Employment, the Committee shall cause the Termination Benefit to be paid in a lump sum.

ARTICLE 7
DISABILITY WAIVER AND BENEFIT

7.1 DISABILITY WAIVER.

(a) WAIVER OF DEFERRAL. A Participant who is determined by the Committee to be suffering from a Disability shall be (i) excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Annual Base Salary, Annual Bonus, Commissions and/or Directors Fees for the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan.

(b) RETURN TO WORK. If a Participant returns to employment, or service as a Director, with an Employer, after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above.

7.2 CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed, or in the service of an Employer as a Director, and shall be eligible for the benefits provided for in Articles 4, 5, or 6 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee, in its sole and absolute discretion and for purposes of this Plan only, shall have the right to deem the Participant to have experienced a Termination of Employment at any time after such Participant is determined to be suffering a Disability, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the Committee's determination. The Disability Benefit shall be paid in a lump sum or pursuant to the Annual Installment Method of up to ten years, with the lump sum or first installment payable within sixty
(60) days of the Committee's exercise of such right. Any payment made shall be subject to the Deduction Limitation.

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Master Plan Document for the

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ARTICLE 8
BENEFICIARY DESIGNATION

8.1 BENEFICIARY. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. A Participant's designation of a spouse as a Beneficiary shall automatically be revoked following the issuance of a final judgment of divorce between the parties.

8.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse (with such signature witnessed either by a notary public or a member of the Committee) and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.

8.3 ACKNOWLEDGMENT. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent.

8.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary as provided in Sections 8.1, 8.2, and 8.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate.

8.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction.

8.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits.

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

ARTICLE 9
LEAVE OF ABSENCE

9.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3.

9.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld.

ARTICLE 10
TERMINATION/AMENDMENT OR MODIFICATION

10.1  TERMINATION. Although each Employer anticipates that it will continue the
      Plan for an indefinite period of time, there is no guarantee that any
      Employer will continue the Plan or will not terminate the Plan at any time
      in the future. Accordingly, each Employer reserves the right to
      discontinue its sponsorship of the Plan and/or to terminate the Plan at
      any time with respect to any or all of its participating Employees and
      Directors, by action of its board of directors. Upon the termination of
      the Plan with respect to any Employer, the Plan Agreements of the affected
      Participants who are employed by that Employer, or in the service of that
      Employer as Directors, shall terminate and their Account Balances,
      determined as if they had experienced a Termination of Employment on the
      date of Plan termination, shall be paid to the Participants as follows:
      Prior to a Change in Control, if the Plan is terminated with respect to
      all of its Participants, an Employer shall have the right, in its sole
      discretion, and notwithstanding any elections made by the Participant, to
      pay such benefits in a lump sum or pursuant to the Annual Installment
      Method of up to ten (10) years, with amounts credited and debited during
      the installment period as provided herein. If the Plan is terminated with
      respect to less than all of its Participants, an Employer shall be
      required to pay such benefits in a lump sum. After a Change in Control,
      the Employer shall be required to pay such benefits in a lump sum. The
      termination of the Plan shall not adversely affect any Participant or
      Beneficiary who has become entitled to the payment of any benefits under
      the Plan as of the date of termination; provided however, that the
      Employer shall have the right to accelerate installment payments without a
      premium or prepayment penalty by paying the Account Balance in a lump sum
      or pursuant to the Annual Installment Method using fewer years (provided
      that the present value of all payments that will have been received by a
      Participant at any given point of time under the different payment
      schedule shall equal or exceed the present value of all payments that
      would have been received at that point in time under the original payment
      schedule).

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

10.2  AMENDMENT. The Employer's board of directors delegates to the Chief
      Executive Officer, or his designee(s), the authority to modify, amend, or
      restate the Plan as appropriate in their discretion, as well as the
      authority to act on behalf of the Employer in discharging the duties of
      the Employer in administering the Plan; provided, however, that no
      amendment or modification shall be effective to decrease or restrict the
      value of a Participant's Account Balance in existence at the time the
      amendment or modification is made, calculated as if the Participant had
      experienced a Termination of Employment as of the effective date of the
      amendment or modification. The amendment or modification of the Plan shall
      not affect any Participant or Beneficiary who has become entitled to the
      payment of benefits under the Plan as of the date of the amendment or
      modification; provided, however, that the Employer shall have the right to
      accelerate installment payments by paying the Account Balance in a lump
      sum or pursuant to the Annual Installment Method using fewer years
      (provided that the present value of all payments that will have been
      received by a Participant at any given point of time under the different
      payment schedule shall equal or exceed the present value of all payments
      that would have been received at that point in time under the original
      payment schedule).

10.3  PLAN AGREEMENT. Despite the provisions of Sections 10.1 and 10.2 above, if
      a Participant's Plan Agreement contains benefits or limitations that are
      not in this Plan document, the Employer may only amend or terminate such
      provisions with the consent of the Participant.

10.4  EFFECT OF PAYMENT. The full payment of the applicable benefit under
      Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all
      obligations to a Participant and his or her designated Beneficiaries under
      this Plan and the Participant's Plan Agreement shall terminate.

                                   ARTICLE 11
                                 ADMINISTRATION

11.1  COMMITTEE DUTIES. Except as otherwise provided in this Article 11, this
      plan shall be administered by a Committee, which shall consist of those
      persons appointed by the Chief Executive Officer of the Company. Members
      of the Committee may be Participants under this Plan. The Committee shall
      also have the discretion and authority to (i) make, amend, interpret, and
      enforce all appropriate rules and regulations for the administration of
      this Plan and (ii) decide or resolve any and all questions including
      interpretations of this Plan, as may arise in connection with the Plan.
      Any individual serving on the Committee who is a Participant shall not
      vote or act on any matter relating solely to himself or herself. When
      making a determination or calculation, the Committee shall be entitled to
      rely on information furnished by a Participant or the Company.

11.2  ADMINISTRATION UPON CHANGE IN CONTROL. For purposes of this Plan, the
      Company shall be the "Administrator" at all times prior to the occurrence
      of a Change in Control. Upon and after the occurrence of a Change in
      Control, the "Administrator" shall be an independent third party selected
      by the Trustee and approved by the individual who, immediately prior to
      such event, was the Company's Chief Executive Officer or, if not available
      or willing to assume such responsibility, the Company's highest ranking
      officer (the "Ex-CEO"). The Administrator shall have the discretionary
      power to determine all questions arising in connection with the

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

      administration of the Plan and the interpretation of the Plan and Trust
      including, but not limited to benefit entitlement determinations;
      provided, however, upon and after the occurrence of a Change in Control,
      the Administrator shall have no power to direct the investment of Plan or
      Trust assets or select any investment manager or custodial firm for the
      Plan or Trust. Upon and after the occurrence of a Change in Control, the
      Company must: (1) pay all reasonable administrative expenses and fees of
      the Administrator; (2) indemnify the Administrator against any costs,
      expenses and liabilities including, without limitation, attorney's fees
      and expenses arising in connection with the performance of the
      Administrator hereunder, except with respect to matters resulting from the
      gross negligence or willful misconduct of the Administrator or its
      employees or agents; and (3) supply full and timely information to the
      Administrator or all matters relating to the Plan, the Trust, the
      Participants and their Beneficiaries, the Account Balances of the
      Participants, the date of circumstances of the Disability, death or
      Termination of Employment of the Participants, and such other pertinent
      information as the Administrator may reasonably require. Upon and after a
      Change in Control, the Administrator may be terminated (and a replacement
      appointed) by the Trustee only with the approval of the Ex-CEO. Upon and
      after a Change in Control, the Administrator may not be terminated by the
      Company.

11.3  AGENTS. In the administration of this Plan, the Committee may, from time
      to time, employ agents and delegate to them such administrative duties as
      it sees fit (including acting through a duly appointed representative) and
      may from time to time consult with counsel who may be counsel to any
      Employer.

11.4  BINDING EFFECT OF DECISIONS. The decision or action of the Administrator
      with respect to any question arising out of or in connection with the
      administration, interpretation and application of the Plan and the rules
      and regulations promulgated hereunder shall be final and conclusive and
      binding upon all persons having any interest in the Plan.

11.5  INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless
      the members of the Committee, and any Employee to whom the duties of the
      Committee may be delegated, and the Administrator against any and all
      claims, losses, damages, expenses or liabilities arising from any action
      or failure to act with respect to this Plan, except in the case of willful
      misconduct by the Committee, any of its members, any such Employee or the
      Administrator.

11.6  EMPLOYER INFORMATION. To enable the Committee and/or Administrator to
      perform its functions, the Company and each Employer shall supply full and
      timely information to the Committee and/or Administrator, as the case may
      be, on all matters relating to the compensation of its Participants, the
      date and circumstances of the Disability, death or Termination of
      Employment of its Participants, and such other pertinent information as
      the Committee or Administrator may reasonably require.

                                   ARTICLE 12
                          OTHER BENEFITS AND AGREEMENTS

12.1  COORDINATION WITH OTHER BENEFITS. The benefits provided for a Participant
      and Participant's Beneficiary under the Plan are in addition to any other
      benefits available to such Participant

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.

ARTICLE 13
CLAIMS PROCEDURES

13.1  PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased
      Participant (such Participant or Beneficiary being referred to below as a
      "Claimant") may deliver to the Committee a written claim for a
      determination with respect to the amounts distributable to such Claimant
      from the Plan. If such a claim relates to the contents of a notice
      received by the Claimant, the claim must be made within sixty (60) days
      after such notice was received by the Claimant. All other claims must be
      made within 180 days of the date on which the event that caused the claim
      to arise occurred. The claim must state with particularity the
      determination desired by the Claimant.

13.2  NOTIFICATION OF DECISION. The Committee shall consider a Claimant's claim
      within a reasonable time, and shall notify the Claimant in writing:

      (a)   that the Claimant's requested determination has been made, and that
            the claim has been allowed in full; or

      (b)   that the Committee has reached a conclusion contrary, in whole or in
            part, to the Claimant's requested determination, and such notice
            must set forth in a manner calculated to be understood by the
            Claimant:

            (i)   the specific reason(s) for the denial of the claim, or any
                  part of it;

            (ii)  specific reference(s) to pertinent provisions of the Plan upon
                  which such denial was based;

            (iii) a description of any additional material or information
                  necessary for the Claimant to perfect the claim, and an
                  explanation of why such material or information is necessary;
                  and

            (iv)  an explanation of the claim review procedure set forth in
                  Section 13.3 below.

13.3  REVIEW OF A DENIED CLAIM. Within sixty (60) days after receiving a notice
      from the Committee that a claim has been denied, in whole or in part, a
      Claimant (or the Claimant's duly authorized representative) may file with
      the Committee a written request for a review of the denial of the claim.
      Thereafter, but not later than thirty (30) days after the review procedure

began, the Claimant (or the Claimant's duly authorized representative):

(a) may review pertinent documents;

(b) may submit written comments or other documents; and/or

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

13.4  DECISION ON REVIEW. The Committee shall render its decision on review
      promptly, and not later than sixty (60) days after the filing of a written
      request for review of the denial, unless a hearing is held or other
      special circumstances require additional time, in which case the
      Committee's decision must be rendered within 120 days after such date.
      Such decision must be written in a manner calculated to be understood by

the Claimant, and it must contain:

(a) specific reasons for the decision;

(b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and

13.5  MEDIATION. Should the parties be unable to resolve the dispute pursuant to
      these procedures, the claim shall be referred to non-binding mediation,
      conducted by the San Diego panel of Judicial Arbitration Mediation
      Services ("JAMS"), in accordance with JAMS' standard mediation rules. A
      mutually agreeable mediator will be selected. The parties shall share all
      costs of the mediation equally, including attorney fees. Not sooner than
      20 days following the mediator's final determination, either party may
      request binding arbitration.

13.6  BINDING ARBITRATION. Following the expiration of the 20 day period
      referenced in Section 13.5, either party may initiate binding arbitration
      by making a written demand for it on the other party. Such binding
      arbitration shall be conducted under the applicable rules of the American
      Arbitration Association using a mutually selected arbitrator in San Diego
      County. The cost of the arbitration shall be borne by the non-prevailing
      party or as otherwise determined by the arbitrator.

                                   ARTICLE 14
                                      TRUST

14.1  ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and
      each Employer shall at least annually transfer over to the Trust such
      assets as the Employer determines, in its sole discretion, are necessary
      to provide, on a present value basis, for its respective future
      liabilities created with respect to the Rollover Amounts, Annual Company
      Contribution Amounts, Company Matching Contribution Amounts, and Annual
      Deferral Amounts for such Employer's Participants for all periods prior to
      the transfer, as well as any debits and credits to the Participants'
      Account Balances for all periods prior to the transfer, taking into
      consideration the value of the assets in the trust at the time of the
      transfer.

14.2  INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan
      and the Plan Agreement shall govern the rights of a Participant to receive
      distributions pursuant to the Plan. The provisions of the Trust shall
      govern the rights of the Employers, Participants and the creditors of the
      Employers to the assets transferred to the Trust. Each Employer shall at
      all times remain liable to carry out its obligations under the Plan.

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

14.3  DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the Plan
      may be satisfied with Trust assets distributed pursuant to the terms of
      the Trust, and any such distribution shall reduce the Employer's
      obligations under this Plan.

                                   ARTICLE 15
                                  MISCELLANEOUS

15.1  STATUS OF PLAN. The Plan is intended to be a plan that is not qualified
      within the meaning of Code Section 401(a) and that "is unfunded and is
      maintained by an employer primarily for the purpose of providing deferred
      compensation for a select group of management or highly compensated
      employee" within the meaning of ERISA Sections 201(2), 301(a)(3) and
      401(a)(1). The Plan shall be administered and interpreted to the extent
      possible in a manner consistent with that intent.

15.2  UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs,
      successors and assigns shall have no legal or equitable rights, interests
      or claims in any property or assets of an Employer. For purposes of the
      payment of benefits under this Plan, any and all of an Employer's assets
      shall be, and remain, the general, unpledged unrestricted assets of the
      Employer. An Employer's obligation under the Plan shall be merely that of
      an unfunded and unsecured promise to pay money in the future.

15.3  EMPLOYER'S LIABILITY. An Employer's liability for the payment of benefits
      shall be defined only by the Plan and the Plan Agreement, as entered into
      between the Employer and a Participant. An Employer shall have no
      obligation to a Participant under the Plan except as expressly provided in
      the Plan and his or her Plan Agreement.

15.4  NONASSIGNABILITY. Neither a Participant nor any other person shall have
      any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
      or otherwise encumber, transfer, hypothecate, alienate or convey in
      advance of actual receipt, the amounts, if any, payable hereunder, or any
      part thereof, which are, and all rights to which are expressly declared to
      be, unassignable and non-transferable. No part of the amounts payable
      shall, prior to actual payment, be subject to seizure, attachment,
      garnishment or sequestration for the payment of any debts, judgments,
      alimony or separate maintenance owed by a Participant or any other person,
      be transferable by operation of law in the event of a Participant's or any
      other person's bankruptcy or insolvency or be transferable to a spouse as
      a result of a property settlement or otherwise.

15.5  NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall
      not be deemed to constitute a contract of employment between any Employer
      and the Participant. Such employment is hereby acknowledged to be an "at
      will" employment relationship that can be terminated at any time for any
      reason, or no reason, with or without cause, and with or without notice,
      unless expressly provided in a written employment agreement. Nothing in
      this Plan shall be deemed to give a Participant the right to be retained
      in the service of any Employer, either as an Employee or a Director, or to
      interfere with the right of any Employer to discipline or discharge the
      Participant at any time.

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           Master Plan Document for the
           Callaway Golf Company Executive Deferred Compensation Plan

15.6  FURNISHING INFORMATION. A Participant or his or her Beneficiary will
      cooperate with the Committee by furnishing any and all information
      requested by the Committee and take such other actions as may be requested
      in order to facilitate the administration of the Plan and the payments of
      benefits hereunder, including but not limited to taking such physical
      examinations as the Committee may deem necessary.

15.7  TERMS. Whenever any words are used herein in the masculine, they shall be
      construed as though they were in the feminine in all cases where they
      would so apply; and whenever any words are used herein in the singular or
      in the plural, they shall be construed as though they were used in the
      plural or the singular, as the case may be, in all cases where they would
      so apply.

15.8  CAPTIONS. The captions of the articles, sections and paragraphs of this
      Plan are for convenience only and shall not control or affect the meaning
      or construction of any of its provisions.

15.9  GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be
      construed and interpreted according to the internal laws of the State of
      Delaware without regard to its conflicts of laws principles.

15.10 NOTICE. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Vice President & Controller Callaway Golf Company
2180 Rutherford Road
Carlsbad, CA 92008

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.

15.11 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries.

15.12 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of in testate succession.

15.13 VALIDITY. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.

15.14 INCOMPETENT. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.

15.15 COURT ORDER. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to that spouse or former spouse.

15.16 DISTRIBUTION IN THE EVENT OF TAXATION.

(a) IN GENERAL. If, for any reason, all or any portion of a Participant's benefits under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within ninety (90) days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan.

(b) TRUST. If the Trust terminates in accordance with Section 3.6(e) of the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions.

15.17 INSURANCE. The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance.

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Master Plan Document for the

Callaway Golf Company Executive Deferred Compensation Plan

15.18 LEGAL FEES TO ENFORCE RIGHTS AFTER CHANGE IN CONTROL. The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of a Participant's Employer (which might then be composed of new members) or a shareholder of the Company or the Participant's Employer, or of any successor corporation might then cause or attempt to cause the Company, the Participant's Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant's Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant's Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement hereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant's Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Participant's Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant's Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant's Employer or any successor thereto in any jurisdiction. Notwithstanding anything in this
Section or the Plan to the contrary, the Company and/or the Participant's employer shall have no obligation under this Section to the extent there is a judicial determination or final mediation decision that the litigation or other legal action brought by the Participant is frivolous.

IN WITNESS WHEREOF, the Company has signed this Plan document as of May 6, 2002.

"Company"

Callaway Golf Company, a Delaware corporation

/s/ Bradley J. Holiday
__________________________________
BRADLEY J. HOLIDAY
Executive Vice President and
Chief Financial Officer

EXHIBIT 10.24

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Trust Agreement for the
Callaway Golf Company
Executive Deferred Compensation Plan

CALLAWAY GOLF COMPANY
2180 RUTHERFORD ROAD
CARLSBAD, CA 92008

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

TRUST AGREEMENT

TABLE OF CONTENTS

ARTICLE                                                                                                PAGE
-------                                                                                                ----
ARTICLE 1    Name, Intentions, Irrevocability, Deposit and Definitions................................   1

      1.1    Name.....................................................................................   1
      1.2    Intentions...............................................................................   1
      1.3    Irrevocability; Creditor Claims..........................................................   1
      1.4    Initial Deposit..........................................................................   2
      1.5    Additional Definitions...................................................................   2
      1.6    Grantor Trust............................................................................   3

ARTICLE 2    General Administration...................................................................   3

      2.1    Committee Directions and Administration Before Change in Control.........................   3
      2.2    Administration Upon Change in Control....................................................   4
      2.3    Contributions............................................................................   4
      2.4    Trust Fund...............................................................................   4
      2.5    Distribution of Excess Trust Fund to Employers...........................................   4

ARTICLE 3    Powers and Duties of Trustee.............................................................   5

      3.1    Investment Directions....................................................................   5
      3.2    Investment Upon Change In Control........................................................   5
      3.3    Management of Investments................................................................   5
      3.4    Duty of Care.............................................................................   7
      3.5    Securities...............................................................................   8
      3.6    Substitution.............................................................................   8
      3.7    Distributions............................................................................   8
      3.8    Trustee Responsibility Regarding Payments on Insolvency..................................  11
      3.9    Costs of Administration..................................................................  13
      3.10   Trustee Compensation and Expenses........................................................  13
      3.11   Professional Advice......................................................................  13
      3.12   Payment on Court Order...................................................................  13
      3.13   Protective Provisions....................................................................  14
      3.14   Indemnifications.........................................................................  14

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

ARTICLE 4    Insurance Contracts......................................................................  15

      4.1    Types of Contracts.......................................................................  15
      4.2    Ownership................................................................................  15
      4.3    Restrictions on Trustee's Rights.........................................................  15

ARTICLE 5    Trustee's Accounts.......................................................................  16

      5.1    Records..................................................................................  16
      5.2    Annual Accounting; Final Accounting......................................................  16
      5.3    Valuation................................................................................  16
      5.4    Delegation of Duties.....................................................................  17

ARTICLE 6    Resignation or Removal of Trustee........................................................  17

      6.1    Resignation; Removal.....................................................................  17
      6.2    Successor Trustee........................................................................  17
      6.3    Settlement of Accounts...................................................................  18

ARTICLE 7    Controversies, Legal Actions and Counsel.................................................  18

      7.1    Controversy..............................................................................  18
      7.2    Joinder of Parties.......................................................................  18

ARTICLE 8    Insurers.................................................................................  18

      8.1    Insurer Not a Party......................................................................  18
      8.2    Authority of Trustee.....................................................................  18
      8.3    Contract Ownership.......................................................................  19
      8.4    Limitation of Liability..................................................................  19
      8.5    Change of Trustee........................................................................  19

ARTICLE 9    Amendment and Termination................................................................  19

      9.1    Amendment................................................................................  19
      9.2    Final Termination........................................................................  20

ARTICLE 10   Miscellaneous............................................................................  20

      10.1   Directions Following Change in Control...................................................  20
      10.2   Taxes....................................................................................  20
      10.3   Third Persons............................................................................  21
      10.4   Nonassignability; Nonalienation..........................................................  21
      10.5   The Plan.................................................................................  21
      10.6   Applicable Law...........................................................................  21

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

10.7   Notices and Directions...................................................................  21
10.8   Successors and Assigns...................................................................  21
10.9   Gender and Number........................................................................  21
10.10  Headings.................................................................................  22
10.11  Counterparts.............................................................................  22
10.12  Beneficial Interest......................................................................  22
10.13  The Trust and Plan.......................................................................  22
10.14  Effective Date...........................................................................  22

iii

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

TRUST AGREEMENT
FOR THE
CALLAWAY GOLF COMPANY
EXECUTIVE DEFERRED COMPENSATION PLAN

THIS TRUST AGREEMENT ("Trust Agreement") is made and entered into as of May 6, 2002, between Callaway Golf Company, Inc., a Delaware corporation (the "Company"), and U.S. Trust Company, N. A. (the "Trustee"), to evidence the trust (the "Trust") to be established, pursuant to the Callaway Golf Company Executive Deferred Compensation Plan (the "Plan") that requires the establishment of a trust, for the benefit of a select group of management, highly compensated employees and/or Directors who contribute materially to the continued growth, development and business success of the Company and those subsidiaries of the Company, if any, that participate in the Plan (collectively, "Subsidiaries," or singularly, "Subsidiary").

ARTICLE 1
NAME, INTENTIONS, IRREVOCABILITY,
DEPOSIT AND DEFINITIONS

1.1 NAME. The name of the Trust created by this Agreement (the "Trust") shall be:

TRUST FOR THE CALLAWAY GOLF COMPANY
EXECUTIVE DEFERRED COMPENSATION PLAN

1.2 INTENTIONS. The Company wishes to establish the Trust and to contribute to the Trust assets that shall be held therein, subject to the claims of the Company's and the Subsidiaries' creditors in the event of their Insolvency (as defined below) until paid to Participants and their Beneficiaries in such manner and at such times as specified in the Plan or until the Trust is terminated as provided herein. It is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing supplemental compensation for a select group of management, highly compensated employees and/or Directors for purposes of Title I of ERISA (as defined below). In addition, it is the intention of the Company and the Subsidiaries to make contributions to the Trust to provide themselves with a source of funds to assist them in the meeting of their liabilities under the Plan.

1.3 IRREVOCABILITY; CREDITOR CLAIMS. The Trust hereby established shall be irrevocable. Except as otherwise provided in Sections 2.5 and 9.2, the principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of the Company and the Subsidiaries and shall be used exclusively for the uses and purposes of the Participants and their Beneficiaries and the general creditors of the Company and the Subsidiaries as herein set forth and as provided in the

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

Plan. The Participants and their Beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of the Participants and their Beneficiaries against the Company and the Subsidiaries. Any assets held by the Trust will be subject to the claims of the Company's and the Subsidiaries' general creditors under federal and state law in the event of Insolvency as provided in Section 3.8.

1.4 INITIAL DEPOSIT. The Company hereby deposits with the Trustee in trust $100, which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement.

1.5 ADDITIONAL DEFINITIONS. In addition to the definitions set forth above, for purposes hereof, unless otherwise clearly apparent from the context, the following terms have the following indicated meanings:

(a) "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with a Plan, that are entitled to receive benefits under a Plan upon the death of a Participant.

(b) "Board" shall mean the board of directors of the Company.

(d) "Committee" shall mean the administrative committee appointed by the Board or its designees to administer this Trust.

(e) "Director" shall mean any member of the board of directors of the Company or any Subsidiary.

(f) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

(g) "Insolvent" shall have the meaning set forth in Section 3.8(a) below.

(h) "Insolvent Entity" shall have the meaning set forth in Section 3.8(a) below.

(i) "IRS" shall mean the Internal Revenue Service.

(j) "Participant" shall mean a person who is a participant in the Plan in accordance with its terms and conditions.

(k) "Payment Schedule" shall have the meaning set forth in Section 3.7(b) below.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

(l) "Plan" shall mean the Callaway Golf Company Executive Deferred Compensation Plan.

(m) "Plan Year" shall mean the Plan Year chosen for this Trust Agreement by the Board.

(n) "Trust Fund" shall mean the assets held by the Trustee pursuant to the terms of this Trust Agreement and for the purposes of the Plan.

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

ARTICLE 2
GENERAL ADMINISTRATION

2.1 COMMITTEE DIRECTIONS AND ADMINISTRATION BEFORE CHANGE IN CONTROL. Until a Change in Control has occurred, this Section 2.1 shall be effective and the Committee shall direct the Trustee as to the administration of the Trust in accordance with the following provisions:

(a) The Committee members shall be identified to the Trustee by a written notice from the Company's Chief Executive Officer or Chief Financial Officer appointing the Committee. In the absence thereof, the Board shall be the Committee. Persons authorized to give directions to the Trustee on behalf of the Committee shall be identified to the Trustee by written notice from the Committee, and such notice shall contain specimens of the authorized signatures. The Trustee shall be entitled to rely on such written notice as evidence of the identity and authority of the persons appointed until a written cancellation of the appointment, or the written appointment of a successor, is received by the Trustee.

(b) Directions by the Committee, or its delegate, to the Trustee shall be in writing and signed by the Committee or persons authorized by the Committee, or may be made by such other method as is acceptable to the Trustee.

(c) The Trustee may conclusively rely upon directions from the Committee in taking any action with respect to this Trust Agreement, including the making of payments from the Trust Fund and the investment of the Trust Fund pursuant to this Trust Agreement. The Trustee shall have no liability for actions taken, or for failure to act, on the direction of the Committee. The Trustee shall have no liability for failure to act in the absence of directions from the Committee where the Committee's directions are required by this Trust Agreement.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

(d) The Trustee may request instructions from the Committee and shall have no duty to act or liability for failure to act if such instructions are not forthcoming from the Committee. If requested instructions are not received within a reasonable time, the Trustee may, but is under no duty to, act on its own discretion to carry out the provisions of this Trust Agreement in accordance with this Trust Agreement and the Plan.

2.2 ADMINISTRATION UPON CHANGE IN CONTROL. In the event of a Change in Control, the authority of the Committee to administer the Trust and direct the Trustee, as set forth in Section 2.1 above, shall cease, and the Trustee shall have complete authority to administer the Trust.

2.3 CONTRIBUTIONS. Except as provided in any Plan, the Company and the Subsidiaries, in their sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Participant or Beneficiary shall have any right to compel such additional deposits. The Trustee shall have no duty to collect or enforce payment to it of any contributions or to require that any contributions be made, and shall have no duty to compute any amount to be paid to it nor to determine whether amounts paid comply with the terms of the Plan; provided, however, that following a Change in Control, the Trustee shall have the right, in its sole and absolute discretion, to compel a contribution to the Trust from the Company and the Subsidiaries to make-up for any shortfall between (i) the anticipated benefit obligations and administrative expenses that are to be paid under the Plan and Trust and
(ii) the assets of the Trust Fund.

2.4 TRUST FUND. The contributions received by the Trustee from the Company and the Subsidiaries shall be held and administered pursuant to the terms of this Trust Agreement as a single fund without distinction between income and principal and without liability for the payment of interest thereon except as expressly provided in this Trust Agreement. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested.

2.5 DISTRIBUTION OF EXCESS TRUST FUND TO EMPLOYERS. Prior to a Change in Control, in the event that the Committee determines that the Trust Fund exceeds 125 percent of the anticipated benefit obligations and administrative expenses that are to be paid under the Plan, the Trustee, at the direction of the Committee shall distribute to the Company and the Subsidiaries such excess portion of the Trust Fund.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

ARTICLE 3
POWERS AND DUTIES OF TRUSTEE

3.1 INVESTMENT DIRECTIONS. Except as provided in this Section and Section 3.2 below, the Committee shall provide the Trustee with all investment instructions. The Trustee shall neither affect nor change investments of the Trust Fund, except as directed in writing by the Committee or as provided in Section 3.2 following a Change in Control, and shall have no right, duty or responsibility to recommend investments or investment changes; provided, that the Trustee may, pending the Committee's investment direction or pending disbursement of cash from the Trust, deposit cash on hand from time to time in any bank savings account, certificate of deposit, or other instrument creating a deposit liability for a bank, including the Trustee's own banking department, or those of its affiliates if the Trustee is a bank, without such prior direction.

3.2 INVESTMENT UPON CHANGE IN CONTROL. In the event of a Change in Control, the authority of the Committee to direct investments of the Trust Fund shall cease and the Trustee shall have complete authority to direct investments of the Trust Fund. The person who was the Chief Executive Officer of the Company immediately prior to the Change in Control or, if not available or willing to assume such responsibility, the Company's next highest ranking officer prior to the Change in Control (the "Ex-CEO") shall notify the Trustee in writing when a Change in Control has occurred. The Trustee has no duty to inquire whether a Change in Control has occurred and may rely on the Ex-CEO's notification of a Change in Control; provided, however, that if any officer, former officer, director, or former director of the Company or any Subsidiary, or any Participant notifies the Trustee that there has been or there may be a Change in Control, the Trustee shall have the duty to satisfy itself as to whether a Change in Control has in fact occurred. The Company and the Subsidiaries shall indemnify and hold harmless the Trustee for any damages or costs (including attorneys' fees) that may be incurred because of reliance on the former chief executive officer's notice or lack thereof.

3.3 MANAGEMENT OF INVESTMENTS. Subject to Section 3.1 above, the Trustee shall have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein, and all rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by or rest with Participants or their Beneficiaries. The Trustee shall have full power and authority to invest and reinvest the Trust Fund in any investment permitted by law, exercising the judgment and care that persons of prudence, discretion and intelligence would exercise under the circumstances then prevailing, considering the probable income and safety of their capital, including, without limiting the generality of the foregoing, the power:

(a) To invest and reinvest the Trust Fund, together with the income therefrom, in common stock, preferred stock, convertible preferred stock, mutual funds, bonds, debentures, convertible debentures and bonds, mortgages, notes, time certificates of deposit,

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

commercial paper and other evidences of indebtedness (including those issued by the Trustee or any of its affiliates), other securities, policies of life insurance, annuity contracts, options to buy or sell securities or other assets, and other property of any kind (personal, real, or mixed, and tangible or intangible); provided, however, that in no event may the Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by the Company or the Subsidiaries, other than a de minimis amount held in common investment vehicles in which the Trustee invests;

(b) To deposit or invest all or any part of the assets of the Trust Fund in savings accounts or certificates of deposit or other deposits which bear a reasonable interest rate in a bank, including the commercial department of the Trustee, if such bank is supervised by the United States or any State;

(c) To hold, manage, improve, repair and control all property, real or personal, forming part of the Trust Fund and to sell, convey, transfer, exchange, partition, lease for any term, even extending beyond the duration of this Trust, and otherwise dispose of the same from time to time in such manner, for such consideration, and upon such terms and conditions as the Trustee shall determine;

(d) To have, respecting securities, all the rights, powers and privileges of an owner, including the power to give proxies, pay assessments and other sums deemed by the Trustee to be necessary for the protection of the Trust Fund, to vote any corporate stock either in person or by proxy, with or without power of substitution, for any purpose; to participate in voting trusts, pooling agreements, foreclosures, reorganizations, consolidations, mergers and liquidations, and in connection therewith to deposit securities with and transfer title to any protective or other committee under such terms as the Trustee may deem advisable; to exercise or sell stock subscriptions or conversion rights; and, regardless of any limitation elsewhere in this instrument relative to investment by the Trustee, to accept and retain as an investment any securities or other property received through the exercise of any of the foregoing powers;

(e) To hold in cash, without liability for interest, such portion of the Trust Fund which, in its discretion, shall be reasonable under the circumstances, pending investments, or payment of expenses, or the distribution of benefits;

(f) To employ such agents including custodians and counsel as may be reasonably necessary and to pay them reasonable compensation; to settle, compromise or abandon all claims and demands in favor of or against the Trust assets;

(g) To cause title to property of the Trust to be issued, held or registered in the individual name of the Trustee, or in the name of its nominee(s) or agents, or in such form that title will pass by delivery;

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

(h) To exercise all of the further rights, powers, options and privileges granted, provided for, or vested in trustees generally under the laws of the State whose laws are applicable to this Trust Agreement, as provided in Section 10.6 below, so that the powers conferred upon the Trustee herein shall not be in limitation of any authority conferred by law, but shall be in addition thereto;

(i) To borrow money from any source (including the Trustee) and to execute promissory notes, mortgages or other obligations and to pledge or mortgage any Trust assets as security;

(j) To institute, compromise and defend actions and proceedings; to pay or contest any claim; to settle a claim by or against the Trustee by compromise, arbitration, or otherwise; to release, in whole or in part, any claim belonging to the Trust to the extent that the claim is uncollectible;

(k) To use securities depositories or custodians and to allow such securities as may be held by a depository or custodian to be registered in the name of such depository or its nominee or in the name of such custodian or its nominee;

(l) To invest the Trust Fund from time to time in one or more investment funds, which funds shall be registered under the Investment Company Act of 1940; and

(m) To do all other acts necessary or desirable for the proper administration of the Trust Fund, as if the Trustee were the absolute owner thereof.

Nothing in this section shall be construed to mean the Trustee assumes any responsibility for the performance of any investment made by the Trustee in its capacity as trustee under the operations of this Trust Agreement; provided that the foregoing shall not relieve the Trustee from liability for breaching its duty of care in making an investment selection hereunder (other than at the direction of the Committee). Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code of 1986, as amended.

3.4 DUTY OF CARE. The Trustee shall perform its duties hereunder with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction given by the Committee prior to a Change in Control which is contemplated by, and in conformity with, the terms of the Plan or this Trust.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

3.5 SECURITIES. Voting or other rights in securities shall be exercised by the person or entity responsible for directing such investments, and the Trustee shall have no duty to exercise voting or proxy or other rights relating to any investment managed or directed by the Committee. If any foreign securities are purchased pursuant to the direction of the Committee, it shall be the responsibility of the person or entity responsible for directing such investments to advise the Trustee in writing of any laws or regulations, either foreign or domestic, that apply to such foreign securities or to the receipt of dividends or interest on such securities.

3.6 SUBSTITUTION. Notwithstanding any provision of any Plan or the Trust to the contrary, the Company and/or any Subsidiary shall at all times have the power to reacquire the Trust Fund by substituting readily marketable securities (other than stock, a debt obligation or other security issued by the Company or any Subsidiary) and/or cash of an equivalent value and such other property shall, following such substitution, constitute the Trust Fund. Notwithstanding the foregoing, after a Change in Control, the Trustee, the Company and/or any Subsidiary shall have no power to substitute readily marketable securities for the Trust Fund.

3.7 DISTRIBUTIONS.

(a) The establishment of the Trust and the payment or delivery to the Trustee of money or other property shall not vest in any Participant or Beneficiary any right, title, or interest in and to any assets of the Trust. To the extent that any Participant or Beneficiary acquires the right to receive payments under any of the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company and the Subsidiaries and such Participant or Beneficiary shall have only the unsecured promise of the Company and the Subsidiaries that such payments shall be made.

(b) Concurrent with the establishment of this Trust, the Company shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Participant (and his or her Beneficiaries), provides a formula or formulas or other instructions acceptable to the Trustee for determining the amounts so payable, specifies the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. The Payment Schedule shall be updated annually and upon a Change in Control and from time to time as is necessary thereafter. Except as otherwise provided herein, prior to a Change in Control, the Trustee shall make payments to the Participants and their Beneficiaries in accordance with such Payment Schedule. After a Change in Control, the Trustee shall make payments in accordance with the payment schedules provided by the Administrator (as defined in Section 3.7(i)). The Trustee, at the direction of the Committee or, after a Change in Control, on its own volition, may make any distribution required to be made by it hereunder by delivering:

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

(i) Its check payable to the person to whom such distribution is to be made, to the person, or, if prior to a Change in Control, to the Company for redelivery to such person; provided that before a Change in Control, the Committee may direct the Trustee to deliver one or more lump sum checks payable to the Company, and the Company shall prepare and deliver individual checks for each Participant or Beneficiary; or

(ii) Its check payable to an insurer for the benefit of such person, to the insurer, or, if prior to a Change in Control, to the Company for redelivery to the insurer; or

(iii) Contracts held on the life of the Participant to whom or with respect to whom the distribution is being made, to the Participant or Beneficiary, or, if prior to a Change in Control, to the Company for redelivery to the person to whom such distribution is to be made; or

(iv) If a distribution is being made, in whole or in part, of other assets, assignments or other appropriate documents or certificates necessary to effect a transfer of title, to the Participant or Beneficiary, or, if prior to a Change in Control, to the Company for redelivery to such person.

Notwithstanding the foregoing, if directed by the Committee and upon receipt of such documentation satisfactory to the Trustee, the Trustee shall pay all or part of a distribution to which a Participant or Beneficiary would otherwise be entitled under the terms of a Plan to the Company or Subsidiary in satisfaction of amounts validly owed by the Participant to the Company or Subsidiary for which the Company or Subsidiary previously requested but did not receive payment.

(c) If the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, the Company and the Subsidiaries shall make the balance of each such payment as it falls due. The Trustee shall notify the Company and the Subsidiaries when principal and earnings are not sufficient. To the extent that the total Trust assets available to make benefit payments to Participants or Beneficiaries who are currently entitled to payment are less than the liability of the Plan, the Trustee shall make benefit payments proportionate to the ratio of assets available to pay benefits to the total values of the liabilities.

(d) The Company and the Subsidiaries may make payment of benefits directly to Participants or their Beneficiaries as they become due under the terms of the Plan. The Company and the Subsidiaries shall notify the Trustee of their decisions to make payment of benefits directly prior to the time amounts are payable to Participants or their Beneficiaries.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

(e) Notwithstanding anything contained in this Trust Agreement to the contrary, if at any time the Trust is finally determined by the IRS not to be a "grantor trust" with the result that the income of the Trust Fund is not treated as income of the Company or the Subsidiaries pursuant to Sections 671 through 679 of the Internal Revenue Code of 1986, as amended, or if a federal income tax is finally determined by the IRS to be payable by one or more Participants or Beneficiaries with respect to any interest in the Plan or the Trust Fund prior to payment of such interest to any such Participant or Beneficiary, the Trustee shall, upon direction by the Committee (or upon application to the Trustee by a Participant or Beneficiary after a Change in Control), distribute such share in a lump sum to each Participant or Beneficiary entitled thereto, regardless of whether such Participant's employment has terminated (provided such Participant has a vested interest in his or her accrued benefits under the Plan) and regardless of form and time of payments specified in or pursuant to the Plan. Any remaining assets (less any expenses or costs due under Sections 3.9 and 3.10 of this Trust Agreement) shall then be paid by the Trustee to the Company and the Subsidiaries in such amounts, and in the manner instructed by the Committee. If the value of the Trust Fund is less than the benefit obligations under the Plan, the foregoing described distributions will be limited to a Participant's share of the Trust Fund, determined by allocating assets to the Participant based on the ratio of the Participant's benefit obligations under the Plan to the total benefit obligations under the Plan. Prior to a Change in Control, the Trustee shall rely solely on the directions of the Committee with respect to the occurrence of the foregoing events and the resulting distributions to be made, and the Trustee shall not be responsible for any failure to act in the absence of such direction.

(f) The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company and the Subsidiaries.

(g) Prior to a Change in Control, payments by the Trustee shall be delivered or mailed to addresses supplied by the Committee and the Trustee's obligation to make such payments shall be satisfied upon such delivery or mailing. Prior to a Change in Control, the Trustee shall have no obligation to determine the identity of persons entitled to benefits or their mailing addresses. After a Change in Control, the Trustee shall have such obligations.

(h) Prior to a Change in Control, the entitlement of a Participant or his or her Beneficiaries to benefits under the Plan shall be determined by the Company and the Subsidiaries or such party as they shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

(i) Notwithstanding Section 3.7(h), upon and after the occurrence of a Change in Control, the Plan shall be administered by an independent third party (the "Administrator") selected by the Trustee and approved by the Ex-CEO. The Administrator shall have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan and Trust including, but not limited to benefit entitlement determinations; provided, however, upon and after the occurrence of a Change in Control, the Administrator shall have no power to direct the investment of Plan or Trust assets or select any investment manager or custodial firm for the Plan or Trust. Upon and after the occurrence of a Change in Control, the Company must: (1) pay all reasonable administrative expenses and fees of the Administrator;
(2) indemnify the Administrator against any costs, expenses and liabilities including, without limitation, attorney's fees and expenses arising in connection with the performance of the Administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; and (3) supply full and timely information to the Administrator or all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the date of circumstances of the Retirement, Disability, death or Termination of Employment of the Participants, and such other pertinent information as the Administrator may reasonably require. Upon and after a Change in Control, the Administrator may be terminated (and a replacement appointed) by the Trustee only with the approval of the Ex-CEO. Upon and after a Change in Control, the Administrator may not be terminated by the Company.

3.8 TRUSTEE RESPONSIBILITY REGARDING PAYMENTS ON INSOLVENCY.

(a) The Trustee shall cease payment of benefits to Participants and their Beneficiaries as provided in subsection (b) if the Company, or any Subsidiary, is Insolvent (the "Insolvent Entity"). The Insolvent Entity shall be considered "Insolvent" for purposes of this Trust Agreement if:

(i) the Insolvent Entity is unable to pay its debts as they become due, or

(ii) the Insolvent Entity is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.

For purposes of this Section 3.8, if an entity is determined to be Insolvent, each Subsidiary in which such entity has an equity interest shall also be deemed to be an Insolvent Entity. However, the insolvency of a Subsidiary will not cause a parent corporation to be deemed Insolvent.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

(b) At all times during the continuance of this Trust, as provided in
Section 1.3 above, the principal and income of the Trust shall be subject to claims of the general creditors of the Company and its Subsidiaries under federal and state law as set forth below:

(i) The Board and the chief executive officer of the Company shall have the duty to inform the Trustee in writing of the Company's or any Subsidiary's Insolvency. If a person claiming to be a creditor of the Company or any Subsidiary alleges in writing to the Trustee that the Company or any Subsidiary has become Insolvent, the Trustee shall determine whether the Company or any Subsidiary is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to the Insolvent Entity's Participants or their Beneficiaries. Prior to a Change in Control, the Trustee may conclusively rely on any determination it receives from the Board or the chief executive officer of the Company with respect to the Insolvency of the Company or any Subsidiary.

(ii) Unless the Trustee has actual knowledge of the Company's or a Subsidiary's Insolvency, or has received notice from the Company, a Subsidiary, or a person claiming to be a creditor alleging that the Company or a Subsidiary is Insolvent, the Trustee shall have no duty to inquire whether the Company or any Subsidiary is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's or any Subsidiary's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's or any Subsidiary's solvency. In this regard, the Trustee may rely upon a letter from the Company's or a Subsidiary's auditors as to the Company's or any Subsidiary's financial status.

(iii) If at any time the Trustee has determined that the Company or any Subsidiary is Insolvent, the Trustee shall discontinue payments to the Insolvent Entity's Participants or their Beneficiaries, and shall hold the portion of the assets of the Trust allocable to the Insolvent Entity for the benefit of the Insolvent Entity's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their Beneficiaries to pursue their rights as general creditors of the Insolvent Entity with respect to benefits due under the Plan or otherwise.

(iv) The Trustee shall resume the payment of benefits to Participants or their Beneficiaries in accordance with this Article 3 of this Trust Agreement only after the Trustee has determined that the alleged Insolvent Entity is not Insolvent (or is no longer Insolvent).

(c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to
Section 3.8(b) hereof and subsequently resumes such

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            Trust Agreement for the
            Callaway Golf Company Executive Deferred Compensation Plan

            payments, the first payment following such discontinuance shall
            include the aggregate amount of all payments due to Participants or
            their Beneficiaries under the terms of the Plan for the period of
            such discontinuance, without interest thereon to reflect delayed
            payment, less the aggregate amount of any payments made to
            Participants or their Beneficiaries by the Company or any Subsidiary
            in lieu of the payments provided for hereunder during any such
            period of discontinuance. Prior to a Change in Control, the
            Committee shall instruct the Trustee as to such amounts, and after a
            Change in Control, the Trustee shall determine such amounts in
            accordance with the terms and provisions of the Plan.

3.9   COSTS OF ADMINISTRATION. The Trustee is authorized to incur reasonable
      obligations in connection with the administration of the Trust, including
      attorneys' fees, Administrator fees, other administrative fees and
      appraisal fees. Such obligations shall be paid by the Company and the
      Subsidiaries. The Trustee is authorized to pay such amounts from the Trust
      Fund if the Company or the Subsidiaries fail to pay them within 60 days of
      presentation of a statement of the amounts due that is not contested by
      the Company in writing before the expiration of such 60-day period. If any
      amounts payable hereunder are contested by the Company, the parties hereto
      shall cooperate to determine whether such amount should be paid.

3.10  TRUSTEE COMPENSATION AND EXPENSES. The Trustee shall be entitled to
      reasonable compensation for its services as from time to time agreed upon
      between the Trustee and the Company. If the Trustee and the Company fail
      to agree upon a rate of compensation, or following a Change in Control,
      the Trustee shall be entitled to compensation at a rate equal to the rate
      charged by the Trustee for similar services rendered by it during the
      current fiscal year for other trusts similar to this Trust. The Trustee
      shall be entitled to reimbursement for expenses incurred by it in the
      performance of its duties as the Trustee, including reasonable fees for
      legal counsel. The Trustee's compensation and expenses shall be paid by
      the Company and the Subsidiaries. The Trustee is authorized to withdraw
      such amounts from the Trust Fund if the Company or the Subsidiaries fail
      to pay them within 60 days of presentation of a statement of the amounts
      due that is not contested by the Company in writing before the expiration
      of such 60-day period. If any amounts payable hereunder are contested by
      the Company, the parties hereto shall cooperate to determine whether such
      amount should be paid..

3.11  PROFESSIONAL ADVICE. The Company and the Subsidiaries specifically
      acknowledge that the Trustee and/or the Administrator may find it
      desirable or expedient to retain legal counsel (who may also be legal
      counsel for the Company generally) or other professional advisors to
      advise it in connection with the exercise of any duty under this Trust
      Agreement, including, but not limited to, any matter relating to or
      following a Change in Control or the Insolvency of the Company or any
      Subsidiary.

3.12  PAYMENT ON COURT ORDER. To the extent permitted by law, the Trustee is
      authorized to make any payments directed by court order in any action in
      which the Trustee has been named as a

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            Trust Agreement for the
            Callaway Golf Company Executive Deferred Compensation Plan

      party. The Trustee is not obligated to defend actions in which the Trustee
      is named, but shall notify the Company or Committee of any such action and
      may tender defense of the action to the Company, Committee, Participant or
      Beneficiary whose interest is affected. The Trustee shall defend any
      action in which the Trustee is named, and for which the Company has
      refused to provide defense of the action, and any expenses incurred by the
      Trustee shall be paid by the Company and the Subsidiaries if required
      under Section 3.13. The Trustee is authorized to pay such amounts from the
      Trust Fund if the Company or the Subsidiaries fail to pay them within
      sixty (60) days of presentation of a statement of the amounts due that is
      not contested by the Company in writing before the expiration of such
      60-day period. If any amounts payable hereunder are contested by the
      Company, the parties hereto shall cooperate to determine whether such
      amount should be paid.

3.13  PROTECTIVE PROVISIONS. Notwithstanding any other provision contained in
      this Trust Agreement to the contrary, the Trustee shall have no obligation
      to (i) determine the existence of any conversion, redemption, exchange,
      subscription or other right relating to any securities purchased of which
      notice was given prior to the purchase of such securities and shall have
      no obligation to exercise any such right unless the Trustee is advised in
      writing by the Committee both of the existence of the right and the
      desired exercise thereof within a reasonable time prior to the expiration
      of the right to exercise, or (ii) advance any funds to the Trust.
      Furthermore, the Trustee is not a party to the Plan.

3.14  INDEMNIFICATIONS.

      (a)   The Company and the Subsidiaries shall indemnify and hold the
            Trustee harmless from and against all loss or liability (including
            expenses and reasonable attorneys' fees) to which it may be subject
            by reason of its execution of its duties under this Trust, or by
            reason of any acts taken in good faith in accordance with any
            directions, or acts omitted in good faith due to absence of
            directions, from the Company, the Committee or a Participant, except
            that the Trustee will not be so indemnified if such loss or
            liability is finally adjudged by a court of competent jurisdiction,
            or is determined by any other proceeding mutually agreeable to the
            Company and the Trustee, to have resulted from the Trustee's
            negligence or misconduct, or breach of its duties under this Trust
            Agreement. The indemnity described herein shall be provided by the
            Company and the Subsidiaries.

      (b)   The Company and the Subsidiaries shall indemnify and hold the
            Administrator harmless from and against all loss or liability
            (including expenses and reasonable attorneys' fees) to which it may
            be subject by reason of its execution of its duties under this
            Trust, or by reason of any acts taken in good faith in accordance
            with any directions, or acts omitted in good faith due to absence of
            directions, from the Company, the Committee or a Participant, unless
            such loss or liability is due to the Administrator's negligence or

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

misconduct. The indemnity described herein shall be provided by the Company and the Subsidiaries.

(c) The Trustee shall indemnify and hold the Company, Subsidiaries and the Committee members harmless from and against all loss or liability (including expenses and reasonable attorneys' fees) to which they may be subject by reason of the Trustee's negligence or misconduct, or breach of its duties under this Trust Agreement, except that the Company, Subsidiaries and the Committee will not be so indemnified if such loss or liability is finally adjudged by a court of competent jurisdiction or is determined by any other proceeding mutually agreeable to the Trustee and the Company, to have resulted from the Company's negligence or misconduct, or breach of its duties under this Trust Agreement.

(d) All releases and indemnities provided in this Trust Agreement shall survive the termination of this Trust Agreement.

ARTICLE 4
INSURANCE CONTRACTS

4.1 TYPES OF CONTRACTS. To the extent that the Trustee is directed by the Committee prior to a Change in Control to invest part or all of the Trust Fund in insurance contracts, the type and amount thereof shall be specified by the Committee. The Trustee shall be under no duty to make inquiry as to the propriety of the type or amount so specified.

4.2 OWNERSHIP. Each insurance contract issued shall provide that the Trustee shall be the owner thereof with the power to exercise all rights, privileges, options and elections granted by or permitted under such contract or under the rules of the insurer. The exercise by the Trustee of any incidents of ownership under any contract shall, prior to a Change in Control, be subject to the direction of the Committee.

4.3 RESTRICTIONS ON TRUSTEE'S RIGHTS. The Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. Despite the foregoing, the Trustee may (i) loan to the Company or any Subsidiary the proceeds of any borrowing against an insurance policy held in the Trust Fund or (ii) assign all, or any portion, of a policy to the Company or any Subsidiary if under other provisions of this Trust Agreement the Company or any Subsidiary is entitled to receive assets from the Trust.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

ARTICLE 5
TRUSTEE'S ACCOUNTS

5.1 RECORDS. The Trustee shall maintain accurate records and detailed accounts of all investments, receipts, disbursements and other transactions hereunder. The Trustee shall separately account for the assets contributed by the Company and each of its Subsidiaries. Such records shall be available at all reasonable times for inspection by the Company and Subsidiaries or their authorized representative. The Trustee, at the direction of the Committee, shall submit to the Committee and to any insurer such valuations, reports or other information as the Committee may reasonably require and, in the absence of fraud or bad faith, the valuation of the Trust Fund by the Trustee shall be conclusive.

5.2 ANNUAL ACCOUNTING; FINAL ACCOUNTING.

(a) Within 60 days following the end of each Plan Year and within 60 days after the removal or resignation of the Trustee or the termination of the Trust, the Trustee shall file with the Committee a written account setting forth a description of all properties purchased and sold, all receipts, disbursements and other transactions effected by it during the Plan Year or, in the case of removal, resignation or termination, since the close of the previous Plan Year, and listing the properties held in the Trust Fund as of the last day of the Plan Year or other period and indicating their values. Such values shall be either cost or market as directed by the Committee in accordance with the terms of the Plan.

(b) The Committee may approve such account either by written notice of approval delivered to the Trustee or by its failure to express written objection to such account delivered to the Trustee within 60 days after the date of which such account was delivered to the Committee.

(c) The approval by the Committee of an accounting shall be binding as to all matters embraced in such accounting on all parties to this Trust Agreement and on all Participants and Beneficiaries, to the same extent as if such accounting had been settled by a judgment or decree of a court of competent jurisdiction in which the Trustee, the Committee, the Company, the Subsidiaries and all persons having or claiming any interest in any Plan or the Trust Fund were made parties.

(d) Despite the foregoing, nothing contained in this Trust Agreement shall deprive the Trustee of the right to have an accounting judicially settled, if the Trustee, in the Trustee's sole discretion, desires such a settlement.

5.3 VALUATION. The assets of the Trust Fund shall be valued at their respective fair market values on the date of valuation, as determined by the Trustee based upon such sources of information

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

as it may deem reliable, including, but not limited to, stock market quotations, statistical valuation services, newspapers of general circulation, financial publications, advice from investment counselors, brokerage firms or insurance companies, or any combination of sources. Prior to a Change in Control, the Committee shall instruct the Trustee as to the value of assets for which market values are not readily obtainable by the Trustee. If the Committee fails to provide such values, the Trustee may take whatever action it deems reasonable, including employment of attorneys, appraisers, life insurance companies or other professionals, the expense of which shall be an expense of administration of the Trust Fund and payable by the Company and the Subsidiaries. The Trustee may rely upon information from the Company and the Subsidiaries, the Committee, appraisers or other sources and shall not incur any liability for an inaccurate valuation based in good faith upon such information.

5.4 DELEGATION OF DUTIES. The Company or the Committee, or both, may at any time employ the Trustee as their agent to perform any act, keep any records or accounts and make any computations that are required of the Company, any Subsidiary or the Committee by this Trust Agreement or the Plan. The Trustee may be compensated for such employment and such employment shall not be deemed to be contrary to the Trust. Nothing done by the Trustee as such agent shall change or increase its responsibility or liability as Trustee hereunder.

ARTICLE 6
RESIGNATION OR REMOVAL OF TRUSTEE

6.1 RESIGNATION; REMOVAL. The Trustee may resign at any time by written notice to the Company, which shall be effective 60 days after receipt of such notice unless the Company and the Trustee agree otherwise. Prior to a Change in Control, the Trustee may be removed by the Company on 60 days notice or upon shorter notice when accepted by the Trustee. After a Change in Control, the Trustee may only be removed by the Ex-CEO on 60 days notice or upon shorter notice accepted by the Trustee.

6.2 SUCCESSOR TRUSTEE. If the Trustee resigns or is removed, a successor shall be appointed by the Company, in accordance with this Section, by the effective date of the resignation or removal under Section 6.1 above. The successor shall be a bank, trust company, or similar independent third party that is granted corporate trustee powers under state or federal law. After the occurrence of a Change in Control, a successor Trustee may not be appointed without the consent of the Ex-CEO. If no such appointment has been made by the effective date of the resignation or removal, the Trustee may appoint a successor trustee or may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

6.3 SETTLEMENT OF ACCOUNTS. Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee in cash and/or in kind as directed the Committee, or after a Change of Control, as determined by the Trustee in consultation with the successor trustee. The transfer shall be completed within 90 days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. Upon the transfer of the assets, the successor Trustee shall succeed to all of the powers and duties given to the Trustee in this Trust Agreement. The resigning or removed Trustee shall render to the Committee an account in the form and manner and at the time prescribed in Section 5.2. The approval of such accounting and discharge of the Trustee shall be as provided in such Section.

ARTICLE 7
CONTROVERSIES, LEGAL ACTIONS AND COUNSEL

7.1 CONTROVERSY. If any controversy arises with respect to the Trust, the Trustee shall take action as directed by the Committee or, in the absence of such direction or after a Change in Control, as it deems advisable, whether by legal proceedings, compromise or otherwise. The Trustee may retain the funds or property involved without liability pending settlement of the controversy. The Trustee shall be under no obligation to take any legal action of whatever nature unless there shall be sufficient property in the Trust to indemnify the Trustee with respect to any expenses or losses to which it may be subjected.

7.2 JOINDER OF PARTIES. In any action or other judicial proceedings affecting the Trust, it shall be necessary to join as parties the Trustee, the Committee, the Company and the Subsidiaries. No Participant or other person shall be entitled to any notice or service of process. Any judgment entered in such a proceeding or action shall be binding on all persons claiming under the Trust. Nothing in this Trust Agreement shall be construed as to deprive a Participant or Beneficiary of his or her right to seek adjudication of his or her rights by administrative process or by a court of competent jurisdiction.

ARTICLE 8
INSURERS

8.1 INSURER NOT A PARTY. No insurer shall be deemed to be a party to the Trust and an insurer's obligations shall be measured and determined solely by the terms of contracts and other agreements executed by it.

8.2 AUTHORITY OF TRUSTEE. An insurer shall accept the signature of the Trustee to any documents or papers executed in connection with such contracts. The signature of the Trustee shall be conclusive proof to the insurer that the person on whose life an application is being made is

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

eligible to have a contract issued on his or her life and is eligible for a contract of the type and amount requested.

8.3 CONTRACT OWNERSHIP. An insurer shall deal with the Trustee as the sole and absolute owner of any insurance contracts and shall have no obligation to inquire whether any action or failure to act on the part of the Trustee is in accordance with or authorized by the terms of the Plan or this Trust Agreement.

8.4 LIMITATION OF LIABILITY. An insurer shall be fully discharged from any and all liability for any action taken or any amount paid in accordance with the direction of the Trustee and shall have no obligation to see to the proper application of the amounts so paid. An insurer shall have no liability for the operation of the Trust or the Plan, whether or not in accordance with their terms and provisions.

8.5 CHANGE OF TRUSTEE. An insurer shall be fully discharged from any and all liability for dealing with a party or parties indicated on its records to be the Trustee until such time as it shall receive at its home office written notice of the appointment and qualification of a successor Trustee.

ARTICLE 9
AMENDMENT AND TERMINATION

9.1 AMENDMENT. Subject to the limitations set forth in this Section 9.1, this Trust Agreement may be amended by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable after it has become irrevocable in accordance with Section 1.3 above.

(a) Writing and Consent. Any amendment to this Trust Agreement shall be set forth in writing and signed by the Company and the Trustee. Any amendment may be current, retroactive or prospective, in each case as provided therein.

(b) The Company and Trustee. In connection with the exercise of the rights under this Section 9.1(b):

(i) prior to a Change in Control, the Trustee shall have no responsibility to determine whether any proposed amendment complies with the terms and conditions of the Plan and may conclusively rely on the directions of the Committee with respect thereto, unless the Trustee has knowledge of a proposed transaction or transactions that would result in a Change in Control; and

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

(ii) after a Change in Control, the power of the Company to amend this Trust Agreement shall cease, and the power to amend that was previously held by the Company shall, instead, be exercised by the Ex-CEO, with the consent of the Trustee.

(c) Taxation. This Trust Agreement shall not be amended, altered, changed or modified in a manner that would cause the Participants and/or Beneficiaries under any Plan to be taxed on the benefits under any Plan in a year other than the year of actual receipt of benefits.

9.2 FINAL TERMINATION. The Trust shall not terminate until the date on which
(a) Participants and their Beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan and all of the expenses of the Trust have been paid, or (b) the Company obtains written approval of all Participants and Beneficiaries with benefits accrued under the Plan at such time to terminate the Trust. Upon termination of the Trust, any assets remaining in the Trust shall be returned to the Company and the Subsidiaries. Such remaining assets shall be paid by the Trustee to the Company and the Subsidiaries in such amounts and in the manner instructed by the Company, whereupon the Trustee shall be released and discharged from all obligations hereunder. From and after the date of termination and until final distribution of the Trust Fund, the Trustee shall continue to have all of the powers provided herein as are necessary or expedient for the orderly liquidation and distribution of the Trust Fund.

ARTICLE 10
MISCELLANEOUS

10.1  DIRECTIONS FOLLOWING CHANGE IN CONTROL. Despite any other provision of
      this Trust Agreement that may be construed to the contrary, following a
      Change in Control, all powers of the Committee, the Company and the Board
      to direct the Trustee under this Trust Agreement shall terminate, and the
      Trustee shall act on its own discretion to carry out the terms of this
      Trust Agreement in accordance with the Plan and this Trust Agreement.

10.2  TAXES. The Company and the Subsidiaries shall from time to time pay taxes
      of any and all kinds whatsoever that at any time are lawfully levied or
      assessed upon or become payable in respect of the Trust Fund, the income
      or any property forming a part thereof, or any security transaction
      pertaining thereto. To the extent that any taxes lawfully levied or
      assessed upon the Trust Fund are not paid by the Company and the
      Subsidiaries, the Trustee shall have the power to pay such taxes out of
      the Trust Fund and shall seek reimbursement from the Company and the
      Subsidiaries. Prior to making any payment, the Trustee may require such
      releases or other documents from any lawful taxing authority as it shall
      deem necessary. The Trustee shall contest the validity of taxes in any
      manner deemed appropriate by the Company or its counsel, but at the
      Company's and the Subsidiaries' expense, and only if it has received an
      indemnity

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            Trust Agreement for the
            Callaway Golf Company Executive Deferred Compensation Plan

      bond or other security satisfactory to it to pay any such expenses. Prior
      to a Change in Control, the Trustee (i) shall not be liable for any
      nonpayment of tax when it distributes an interest hereunder on directions
      from the Committee, and (ii) shall have no obligation to prepare or file
      any tax return on behalf of the Trust Fund, any such return being the sole
      responsibility of the Committee. The Trustee shall cooperate with the
      Committee in connection with the preparation and filing of any such
      return. After a Change in Control, the Trustee shall have such duties and
      obligations.

10.3  THIRD PERSONS. All persons dealing with the Trustee are released from
      inquiring into the decisions or authority of the Trustee and from seeing
      to the application of any moneys, securities or other property paid or
      delivered to the Trustee.

10.4  NONASSIGNABILITY; NONALIENATION. Benefits payable to Participants and
      their Beneficiaries under this Trust Agreement may not be anticipated,
      assigned (either at law or in equity), alienated, pledged, encumbered or
      subjected to attachment, garnishment, levy, execution or other legal or
      equitable process.

10.5  THE PLAN. The Trust and the Plan are parts of a single, integrated
      employee benefit plan system and shall be construed together. In the event
      of any conflict between the terms of this Trust Agreement and the
      agreements that constitute the Plan, such conflict shall be resolved in
      favor of this Trust Agreement.

10.6  APPLICABLE LAW. Except to the extent, if any, preempted by ERISA, this
      Trust Agreement shall be governed by and construed in accordance with the
      internal laws of the State of California. Any provision of this Trust
      Agreement prohibited by law shall be ineffective to the extent of any such
      prohibition, without invalidating the remaining provisions hereof.

10.7  NOTICES AND DIRECTIONS. Whenever a notice or direction is given by the
      Committee to the Trustee, it shall be in the form required by Section 2.1.
      Actions by the Company shall be by the Board or a duly authorized officer,
      with such actions certified to the Trustee by an appropriately certified
      copy of the action taken. The Trustee shall be protected in acting upon
      any such notice, resolution, order, certificate or other communication
      believed by it to be genuine and to have been signed by the proper party
      or parties.

10.8  SUCCESSORS AND ASSIGNS. This Trust Agreement shall be binding upon and
      inure to the benefit of the Company, the Subsidiaries and the Trustee and
      their respective successors and assigns.

10.9  GENDER AND NUMBER. Words used in the masculine shall apply to the feminine
      where applicable, and when the context requires, the plural shall be read
      as the singular and the singular as the plural.

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Trust Agreement for the
Callaway Golf Company Executive Deferred Compensation Plan

10.10 HEADINGS. Headings in this Trust Agreement are inserted for convenience of reference only and any conflict between such headings and the text shall be resolved in favor of the text.

10.11 COUNTERPARTS. This Trust Agreement may be executed in an original and any number of counterparts, each of which shall be deemed to be an original of one and the same instrument.

10.12 BENEFICIAL INTEREST. The Company and the Subsidiaries are the true beneficiaries hereunder in that the payment of benefits, directly or indirectly to or for a Participant or Beneficiary by the Trustee, is in satisfaction of the Company's and the Subsidiaries' liability therefore under the Plan. Nothing in this Trust Agreement shall establish any beneficial interest in any person other than the Company and the Subsidiaries.

10.13 THE TRUST AND PLAN. This Trust, the Plan and each Participant's Plan Agreement are part of and constitute a single, integrated employee benefit plan and trust, shall be construed together as the entire agreement between the Company, the Trustee, the Participants and the Beneficiaries with regard to the subject matter thereof, and shall supersede all previous negotiations, agreements and commitments with respect thereto.

10.14 EFFECTIVE DATE. The effective date of this Trust Agreement shall be May 6, 2002.

IN WITNESS WHEREOF the Company and the Trustee have signed this Trust Agreement as of the date first written above.

TRUSTEE:                                       THE COMPANY:

U. S. Trust Company, N. A.                     Callaway Golf Company
                                               a Delaware corporation,

By:  /s/ Dennis M. Kunisaki                     /s/ Bradley J. Holiday
    ----------------------------------         ---------------------------------
                                               BRADLEY J. HOLIDAY
Its:  Senior Vice President                    Executive Vice President and
                                               Chief Financial Officer

                                                                   EXHIBIT 10.25

NOTICE OF GRANT OF STOCK OPTION                     CALLAWAY GOLF COMPANY
AND OPTION AGREEMENT                                ID: 95-3797580
                                                    2180 RUTHERFORD ROAD
                                                    CARLSBAD, CA 92008-8815

[NAME OF DIRECTOR]                            PLAN: 2001 NON-EMPLOYEE DIRECTOR
                                                    STOCK OPTION PLAN

1. GRANT OF OPTION. Effective __________ ("Effective Date"), you have been granted a Non-qualified Stock Option ("Option") to buy shares of Callaway Golf Company (the "Company") common stock upon the following terms:

  Shares     Exercise Price   Scheduled Vesting Date   Scheduled Expiration Date
---------   ---------------   ----------------------   ------------------------
[NUMBER     $______________   ______________________   _________________________
   OF
SHARES]

This stock option award is granted to you pursuant to the terms and conditions of this Notice of Grant of Stock Option and Option Agreement (this "Agreement"), and the Company's 2001 Non-Employee Directors Stock Option Plan (as amended and restated from time to time, the "Plan"), the provisions of which Plan are by this reference incorporated in this Agreement. In the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall be controlling. The Company has provided you with a copy of the Plan.

The exercise price must be paid in the form of cash, unless otherwise determined by the Company in its discretion.

2. VESTING. Subject to any accelerated vesting provisions contained in the Plan, the Option shall vest in accordance with the vesting schedule set forth above. The Company may, in its discretion, accelerate the vesting schedule (in which case it may impose whatever conditions it considers appropriate on the accelerated portion).

3. TERM AND TERMINATION. The Option shall expire on the earlier of (i) the scheduled expiration date set forth above or (ii) in the case of an Option that has vested, one (1) year from the date on which you cease to be a director of the Company for any reason including death. Subject to Section 2 (Vesting), if you cease for any reason to be a director of the Company for any reason including death, that portion of the Option which has not yet vested shall be terminated.

4. GOVERNING LAW. This Agreement shall be interpreted and construed in accordance with the internal laws of the State of Delaware and applicable federal law.

CALLAWAY GOLF COMPANY

By: _____________________

EXHIBIT 10.28

NOTICE OF GRANT OF STOCK CALLAWAY GOLF COMPANY
OPTION AND OPTION AGREEMENT ID: 95-3797580

2180 RUTHERFORD ROAD
CARLSBAD, CA 92008

[NAME OF OPTIONEE] PLAN: 2004 EQUITY INCENTIVE PLAN

1. GRANT OF OPTION. Effective _____________ ("Effective Date"), you have been granted a Non-qualified Stock Option ("Option") to buy shares of Callaway Golf Company (the "Company") common stock upon the following terms:

 SHARES            EXERCISE PRICE           SCHEDULED VESTING DATE              SCHEDULED EXPIRATION DATE
 ------            --------------           ----------------------              -------------------------
[# OF SHARES]       $_______                   _____________                        _____________

[# OF SHARES]       $_______                   _____________                        _____________

[# OF SHARES]       $_______                   _____________                        _____________

The Option is granted to you pursuant to the terms and conditions of this Notice of Grant of Stock Option and Option Agreement (this "Agreement"), and the Company's 2004 Equity Incentive Plan (as amended and restated from time to time, the "Plan"), the provisions of which Plan are by this reference incorporated in this Agreement. In the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall be controlling. The Company has provided you with a copy of the Plan.

The exercise price must be paid in the form of cash, unless otherwise determined by the Board of Directors or committee administering the Plan ("Committee") in their sole discretion.

2. VESTING. Subject to Section 3 (Term and Termination) and Section 4 (Cancellation, Forfeiture and Rescission) of this Agreement, and subject to the accelerated vesting provisions, if any, set forth in any employment agreement between you and the Company or its subsidiary, as the same may be amended, modified, extended or renewed from time to time, the Option shall vest in accordance with the vesting schedule set forth above. The Committee may in its discretion accelerate the vesting schedule (in which case it may impose whatever conditions it considers appropriate on the accelerated portion). Notwithstanding any vesting provisions of the Option or anything else herein to the contrary, the entire Option shall vest and become exercisable immediately prior to any change in control, if you are an employee of the Company or its subsidiary at that time. For purposes hereof, "change in control" shall have the meaning set forth in EXHIBIT A attached hereto.

3. TERM AND TERMINATION. Subject to Section 4 (Cancellation, Forfeiture and Rescission) hereof, the Option shall expire on the earlier of (i) the scheduled expiration date set forth above or (ii) in the case of an Option that has vested, one (1) year from the date on which you cease to be an employee or consultant of the Company or its subsidiary for any reason including death. Subject to Section 2 (Vesting), if you cease for any reason to be an employee of the Company or its subsidiary, that portion of the Option which has not yet vested shall be terminated.

4. CANCELLATION, FORFEITURE AND RESCISSION.

(a) If during your employment or during any period thereafter that you are receiving Special Severance from the Company, you directly or indirectly disclose or misuse any confidential information or trade secrets of the Company then:

(1) any unexercised portion of the Option is automatically cancelled as of the date you first committed the act or acts described above (the "Cancellation Date"); and

(2) any exercise of all or any portion of the Option exercised on or after the Cancellation Date or during the "Look-Back Period" preceding the Cancellation Date shall be rescinded, and you shall be required to pay to the Company, within ten days of receiving written notice from the

Company, the amount of any gain realized as the result of any such rescinded exercise (the "Option Gain").

The Company shall notify you in writing of any such rescission within two years of any such exercise. If you are still an employee on the Cancellation Date, the "Look-Back Period" is ninety days. If you are no longer an employee on the Cancellation Date, the "Look-Back Period" is the longer of ninety days or the number of days elapsed from the date of termination of your employment to the Cancellation Date. For purposes of this Agreement, an "indirect" use of the Company's confidential information or trade secrets shall be presumed to have occurred if you take a comparable position with a competitor in which case you shall have the burden of proving that no use or disclosure of confidential information or trade secrets occurred or will occur. For purposes of this Agreement, and in the absence of proof of actual gain on the date of exercise, "Option Gain" shall mean the New York Stock Exchange closing price on the date of exercise minus the exercise price of the Option, multiplied by the number of shares you purchased upon the exercise, without regard to any subsequent market price decrease or increase.

(b) For purposes of this Section 4, ownership of interests in a broadly based mutual fund shall not constitute ownership of the stocks held by the fund. In lieu of paying to the Company any Option Gain required to be paid to Company pursuant to this Section 4, you may return to the Company the number of shares purchased upon exercise of the Option. You hereby agree that the Company may set off against any amount the Company may now or hereafter owe you the amount of any Option Gain required to be paid by you to Company under this
Section 4. This Section 4 does not limit any other legal or equitable remedy available to the Company. As a condition of each exercise of all or any portion of the Option, you will be required to certify to the Company on a form of notice of exercise acceptable to the Company that you have not committed any of the acts described in paragraph (a) above.

YOU ACKNOWLEDGE THAT YOU HAVE READ EACH PROVISION OF THIS SECTION 4 AND HAVE HAD AN OPPORTUNITY TO ASK QUESTIONS WITH RESPECT TO THIS SECTION. YOU ACKNOWLEDGE THAT YOU UNDERSTAND THAT THE COMPANY IS GRANTING THE OPTION SUBJECT TO THE TERMS OF THIS SECTION 4.
__________ (OPTIONEE)

5. SEVERABILITY. The provisions of this Agreement shall be deemed to be severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any person or any circumstance, is held to be invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severed, and in lieu thereof there shall automatically be added as part of this Agreement a suitable and equitable provision in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision.

6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware and applicable federal law.

7. ARBITRATION.

(a) YOU 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, THAT CANNOT BE RESOLVED BY MUTUAL AGREEMENT OF THE PARTIES SHALL BE SUBMITTED TO BINDING ARBITRATION. YOU AND THE COMPANY ALSO 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) YOU AND THE COMPANY AGREE THAT THE ARBITRATOR SHALL HAVE THE AUTHORITY TO ISSUE PROVISIONAL RELIEF. YOU AND THE COMPANY FURTHER AGREE THAT EACH HAS THE RIGHT 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 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. YOU AND THE COMPANY 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 THE FEDERAL ARBITRATION ACT.

(g) THE PROVISIONS OF THIS SECTION 7 SHALL SURVIVE THE EXPIRATION OR TERMINATION OF THE AGREEMENT, AND SHALL BE BINDING UPON THE PARTIES.

THE PARTIES HAVE READ SECTION 7 AND IRREVOCABLY AGREE TO ARBITRATE ANY DISPUTE IDENTIFIED ABOVE.

_________ (OPTIONEE)

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the Effective Date.

CALLAWAY GOLF COMPANY [NAME OF OPTIONEE]

By:______________________________ ___________________________ Optionee ID:

EXHIBIT A

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

(a) 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 subsidiaries and any employee benefit or stock ownership plan of the Company or its subsidiaries 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

(b) 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

(c) 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

(i) 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

(ii) 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

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

EXHIBIT 10.34

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT is effective as of the 7th day of April 2004, by and between Callaway Golf Company, a Delaware corporation (the "Company"), and Anthony S. Thornley ("Indemnitee"), a director of the Company.

WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance covering directors, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance;

WHEREAS, although the Company currently has directors liability insurance, the coverage of such insurance is such that many claims which may be brought against Indemnitee may not be covered, or may not be fully covered, and the Company may be unable to maintain such insurance;

WHEREAS, the Company and the Indemnitee further recognize the substantial increase in corporate litigation subjecting directors to expensive litigation risks at the same time that liability insurance has been severely limited;

WHEREAS, the current protection available may not be adequate given the present circumstances, and Indemnitee may not be willing to serve as a director without adequate protection;

WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as directors of the Company and to indemnify its directors so as to provide them with the maximum protection permitted by law;

NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:

1. DEFINITIONS. The following terms, as used herein, have the following meaning:

1.1 Affiliate. "Affiliate" means, (i) with respect to any corporation, any officer, director or 10% or more shareholder of such corporation, or (ii) with respect to any individual, any partner or immediate family member of such individual or the estate of such individual, or (iii) with respect to any partnership, trust or joint venture, any partner, co-venturer or trustee of such partnership, trust of joint venture, or any beneficiary or owner having 10% or more interest in the equity, property or profits of such partnership, trust or joint venture, or (iv) with respect to any Person, any other Person which, directly or indirectly, controls, is controlled by, or is under common control with such Person or any Affiliate of such Person.

1.2 Agreement. "Agreement" shall mean this Indemnification Agreement, as the same may be amended from time to time hereafter.

1.3 DGCL. "DGCL" shall mean the Delaware General Corporation Law, as amended.

1.4 Person. "Person" shall mean any individual, partnership, corporation, joint venture, trust, estate, or other entity.

1.5 Subsidiary. "Subsidiary" shall mean any corporation of which the Company owns, directly or indirectly, through one or more subsidiaries, securities having more than 50% of the voting power of such corporation.

2. INDEMNIFICATION

2.1 Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or witness or other participant in, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director of the Company or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while a director of the Company or any Subsidiary, and/or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all expense, liability and loss (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful and provided, further, that the Company has determined that such indemnification is otherwise permitted by applicable law.

The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in the best interests of the Company or that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful.

2.2 Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or a witness or other participant in or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company or any Subsidiary to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director of the Company or any Subsidiary, by reason of any action or inaction on the part of

Indemnitee while a director of the Company or a Subsidiary or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all expense, liability and loss (including attorneys' fees) and amounts paid in settlement (if such settlement is court-approved) actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its shareholders and provided, further, that the Company has determined that such indemnification is otherwise permitted by applicable law. No indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of Indemnitee's duties to the Company and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine.

2.3 Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 2.1 or 2.2 or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith.

2.4 Enforcing the Agreement. If Indemnitee properly makes a claim for indemnification or an advance of expenses which is payable pursuant to the terms of this Agreement, and that claim is not paid by the Company, or on its behalf, within ninety days after a written claim has been received by the Company, the Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also all expenses actually and reasonably incurred in connection with prosecuting such claim.

2.5 Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.

3. EXPENSES; INDEMNIFICATION PROCEDURE

3.1 Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1 or 2.2 hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee

is not entitled to be indemnified by the Company as authorized hereby or that such indemnification is not otherwise permitted by applicable law. The advances to be made hereunder shall be paid by the Company to Indemnitee within thirty
(30) days following delivery of a written request therefor or by Indemnitee to the Company.

3.2 Determination of Conduct. Any indemnification (unless ordered by a court) shall be made by the Company only as authorized in the specified case upon a determination that indemnification of Indemnitee is proper under the circumstances because Indemnitee has met the applicable standard of conduct set forth in Sections 2.1 or 2.2 of this Agreement. Such determination shall be made by any of the following: (1) the Board of Directors (or by an executive committee thereof) by a majority vote of directors (or committee members) who are not parties to such action, suit or proceeding, even though less than a quorum, (2) if there are no such disinterested directors, or if such disinterested directors so direct, by independent legal counsel in a written opinion, (3) by the shareholders, with the shares owned by Indemnitee not being entitled to vote thereon, or (4) the court in which such proceeding is or was pending upon application made by the Company or Indemnitee or the attorney or other person rendering services in connection with the defense, whether or not such application by Indemnitee, the attorney or the other person is opposed by the Company.

3.3 Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be given in the manner set forth in Section 10.3 hereof and to the address stated therein, or such other address as the Company shall designate in writing to Indemnitee. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power.

3.4 Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 3.3 hereof, the Company has director liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable actions to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

3.5 Selection of Counsel. In the event the Company shall be obligated under Section 3.1 hereof to pay the expenses of any proceeding against Indemnitee, the Company shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (a) Indemnitee shall have the right to

employ separate counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company (subject to the provisions of this Agreement).

4. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY

4.1 Application. The provisions of this Agreement shall be deemed applicable to all actual or alleged actions or omissions by Indemnitee during any and all periods of time that Indemnitee was, is, or shall be serving as a director of the Company or a Subsidiary.

4.2 Scope. The Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law (except as set forth in Section 8 hereof), notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any changes, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors, such changes shall be, ipso facto, within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute, or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors, such changes, except to the extent otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder.

4.3 Non-Exclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which an Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of shareholders or disinterested directors, the DGCL, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for an action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding.

5. PARTIAL INDEMNIFICATION

If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by Indemnitee in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceedings but not, however,

for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for that portion to which Indemnitee is entitled.

6. MUTUAL ACKNOWLEDGMENT

Both the Company and Indemnitee acknowledge that in certain instances, federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee.

7. LIABILITY INSURANCE

The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable, insurance companies providing the directors with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all such policies of liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors. Notwithstanding the foregoing, the Company shall have no obligation, to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or Subsidiary of the Company.

8. SEVERABILITY

Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the

balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

9. EXCEPTIONS

9.1 Exceptions to Company's Obligations. Any other provision to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement for the following:

(a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, unless said proceedings or claims were authorized by the board of directors of the Company.

(b) Improper Personal Benefit. To indemnify Indemnitee against liability for any transactions from which Indemnitee, or any Affiliate of Indemnitee, derived an improper personal benefit, including, but not limited to, self-dealing or usurpation of a corporate opportunity.

(c) Dishonesty. To indemnify Indemnitee if a judgment or other final adjudication adverse to Indemnitee established that Indemnitee committed acts of active and deliberate dishonesty, with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated.

(d) Insured Claims; Paid Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee (i) by an insurance carrier under a policy of liability insurance maintained by the Company, or (ii) otherwise by any other means.

(e) Claims Under Section 16(b). To indemnify Indemnitee for an accounting of profits in fact realized from the purchase and sale of securities within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

10. MISCELLANEOUS

10.1 Construction of Certain Phrases.

(a) For purposes of this Agreement, references to the "Company" shall include any resulting or surviving corporation in any merger or consolidation in which the Company (as then constituted) is not the resulting or surviving corporation so that Indemnitee will continue to have the full benefits of this Agreement.

(b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which impose duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "reasonably believed to be in the best interests of the Company and its shareholders" as referred to in this Agreement.

10.2 Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. Notwithstanding the foregoing, the Indemnitee shall have no right or power to voluntarily assign or transfer any rights granted to Indemnitee, or obligations imposed upon the Company, by or pursuant to this Agreement. Further, the rights of the Indemnitee hereunder shall in no event accrue to the benefit of, or be enforceable by, any judgment creditor or other involuntary transferee of the Indemnitee.

10.3 Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if mailed by domestic certified or registered mail with postage prepaid, properly addressed to the parties at the addresses set forth below, or to such other address as may be furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be, on the third business day after the date postmarked, or (ii) otherwise notice shall be deemed received when such notice is actually received by the party to whom it is directed.

If to Indemnitee:              Anthony S. Thornley
                               President and Chief Operating Officer
                               QUALCOMM Incorporated
                               5775 Morehouse Drive
                               San Diego, CA 92121

If to Company:                 Callaway Golf Company
                               2180 Rutherford Road
                               Carlsbad, CA 92008
                               Attention: Chief Legal Officer

10.4 Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or related

to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California.

10.5 Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the internal laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware, and without regard to choice of law principles.

10.6 IRREVOCABLE ARBITRATION OF DISPUTES.

(a) INDEMNITEE 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 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, AND VIOLATION OF ANY STATUTORY, CONTRACTUAL OR COMMON LAW RIGHTS. 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) INDEMNITEE AND THE COMPANY AGREE THAT THE ARBITRATOR SHALL HAVE THE AUTHORITY TO ISSUE PROVISIONAL RELIEF. INDEMNITEE 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 COMMERCIAL RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA") IN SAN DIEGO. THE ARBITRATION SHALL BE CONDUCTED IN SAN DIEGO BY A FORMER OR RETIRED JUDGE OR ATTORNEY WITH AT LEAST 10 YEARS EXPERIENCE IN COMMERCIAL-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 COMMERCIAL/BUSINESS DISPUTES. THE COMPANY SHALL PAY THE COSTS OF THE ARBITRATOR'S FEES.

(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.

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

I HAVE READ SECTION 10.6 AND IRREVOCABLY AGREE TO ARBITRATE ANY DISPUTE IDENTIFIED ABOVE.

         /s/ AST                                               /s/ RAD
 ----------------------                                     --------------------
(INDEMNITEE'S INITIALS)                                    (COMPANY'S INITIALS)

10.7 Entire Agreement. The provisions of this Agreement contain the entire agreement between the parties. This Agreement may not be released, discharged, abandoned, changed or modified in any manner except by an instrument in writing signed by the parties.

10.8 Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument.

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

CALLAWAY GOLF COMPANY

  /s/ RONALD A. DRAPEAU
------------------------------------
Ronald A. Drapeau
Chairman and Chief Executive Officer

INDEMNITEE

  /s/ ANTHONY S. THORNLEY
------------------------------------
Anthony S. Thornley

EXHIBIT 10.50

GRANTOR STOCK TRUST

AMENDMENT NO. 2
TO
TRUST AGREEMENT

This Amendment No. 2 to Trust Agreement is made and entered into effective as of October 21, 2004, by Callaway Golf Company, a Delaware corporation ("Callaway Golf" or the "Company").

BACKGROUND

A. Effective on or about July 14, 1995, Callaway Golf and Sanwa Bank California ("Sanwa") entered into a certain Trust Agreement (the "Trust Agreement") establishing the Callaway Golf Company Grantor Stock Trust.

B. Effective on or about August 24, 2000, Sanwa assigned to Arrowhead Trust Incorporated, California, a California trust company ("Arrowhead" or "Trustee"), all of Sanwa's right, and Arrowhead assumed all of Sanwa's obligations, under the Trust Agreement.

C. Effective as of June 29, 2001, Callaway Golf entered into Amendment No. 1 to Trust Agreement ("Amendment No. 1").

D. Callaway Golf, pursuant to Section 14.1 of the Trust Agreement, desires to amend the Trust Agreement and Amendment No. 1 upon the following terms.

AGREEMENT

In consideration of the foregoing Background, Callaway Golf does hereby amend the Trust Agreement and Amendment No. 1 as follows:

1. Section 1.11 of the Trust Agreement is hereby deleted in its entirety, and in lieu thereof, the following shall be inserted:

1.11 "Director" shall mean the most senior officer at Callaway Golf in charge of human resources.

2. Schedule A to the Trust Agreement is hereby deleted in its entirety, and in lieu thereof, the Schedule A-(R2) attached hereto shall be inserted.

3. After the date of this Amendment, each reference in the Trust Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import, shall mean and refer to the Trust Agreement as amended by Amendment No. 1 and this Amendment No. 2. The Trust Agreement and Amendment No. 1, as amended hereby, shall remain in full force and effect in accordance with its terms and is hereby ratified and confirmed. In addition, each reference to "Sanwa" or "Sanwa Bank" shall be deemed to be a reference to Trustee.

4. This Amendment shall be governed by and construed in accordance with the laws of the State of California.

IN WITNESS WHEREOF, the undersigned has executed this Amendment No. 2 to Trust Agreement as of the date first above written.

CALLAWAY GOLF COMPANY:

By:    /s/ BRADLEY J. HOLIDAY
    ----------------------------------------------
Print Name:  Bradley J. Holiday
Print Title: Senior Executive Vice President and
             Chief Financial Officer

SCHEDULE A - (R2)

Plans

1991 Stock Incentive Plan
1995 Employee Stock Incentive Plan
1996 Stock Option Plan
1998 Stock Incentive Plan
2004 Equity Incentive Plan
Employee Stock Purchase Plan 401(k) Plan Executive Deferred Compensation Plan
Medical and Health Insurance Plan
Dental Insurance Plan
Vision Plan
Regular Salary and Overtime
Trust to fund any of the above mentioned Plans.

Consent

The undersigned, Arrowhead Trust Incorporated, effective as of October 21, 2004, pursuant to Section 14.1 of that certain Trust Agreement dated July 14, 1995, does hereby consent to the foregoing Amendment No. 2 to Trust Agreement.

ARROWHEAD TRUST INCORPORATED:

By: /s/ CHARLES J. PAOLINO
    ------------------------------------
Print Name:  Charles J. Paolino
Print Title: Vice President

.
.

Exhibit 21.1

                                                        STATE OR COUNTRY
                                                      OF INCORPORATION OR
SUBSIDIARIES                                              ORGANIZATION
------------                                          -------------------
Callaway Golf Interactive, Inc.                       Texas
Callaway Golf Sales Company                           California
CGV, Inc.                                             California
All-American Golf LLC                                 California
Callaway Golf Canada Ltd.                             Canada
Callaway Golf Europe Ltd.                             United Kingdom
Callaway Golf (Germany) GmbH                          Germany
Callaway Golf K.K.                                    Japan
Callaway Golf Korea Ltd.                              Korea
Callaway Golf Ltd. & Co. KG                           Germany
Callaway Golf South Pacific Pty Ltd.                  Australia
The Top-Flite Golf Company                            Delaware

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following registration statements of Callaway Golf Company, (1) 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. 333-242, No. 333-5719, No. 333-5721, No. 333-24207, No. 333-27089, No. 333-39095, No. 333-61889, No. 333-84716, No. 333-84724, No. 333-95601, and No. 333-95603 on Form S-8, and (2) No. 33-77024 on Form S-3, of our reports dated March 9, 2005, relating to the consolidated financial statements and financial statement schedule of Callaway Golf Company and subsidiaries and management's report on internal control over financial reporting appearing in this Annual Report on Form 10-K of Callaway Golf Company for the year ended December 31, 2004.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California


March 9, 2005

EXHIBIT 24.1

FORM OF POWER OF ATTORNEY

Each of Samuel H. Armacost, Ronald S. Beard, John C. Cushman, III, Yotaro Kobayashi, Richard L. Rosenfield and Anthony S. Thornley executed the following power of attorney, except that his 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, 2004, 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 effective as of March 3, 2005.

[NAME OF DIRECTOR]

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, William C. Baker, certify that:

1. I have reviewed this annual report on Form 10-K of Callaway Golf Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:


	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	/s/ William C. Baker

	William C. Baker
	Chairman and Chief Executive Officer

Date: March 9, 2005

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Bradley J. Holiday, certify that:

1. I have reviewed this annual report on Form 10-K of Callaway Golf Company;


	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	/s/ Bradley J. Holiday

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

Date: March 9, 2005

Exhibit 32.1

CERTIFICATION PURSUANT

TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Callaway Golf Company, a Delaware corporation (the “Company”), does hereby certify with respect to the Annual Report of the Company on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission (the “10-K Report”), that:


	(1) the 10-K Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2) the information contained in the 10-K Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The undersigned have executed this Certification effective as of March 9, 2005.


	/s/ William C. Baker

	William C. Baker
	Chairman and Chief Executive Officer

	/s/ Bradley J. Holiday

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

A signed original of this Certification has been provided to Callaway Golf Company and will be retained by Callaway Golf Company and furnished to the Securities and Exchange Commission or its staff upon request.


	purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item.

⁽⁴⁾	The Company has an unfunded, non-qualified deferred compensation plan. The plan allows officers, certain other employees and directors of the Company to defer all or part of their compensation, to be paid to the participants or their designated beneficiaries upon retirement, death or separation from the Company. To support the deferred compensation plan, the Company has elected to purchase Company-owned life insurance. The cash surrender value of the Company-owned insurance related to deferred compensation is included in other assets and was $9.8 million at December 31, 2004. The liability for the deferred compensation is included in long-term liabilities and was $8.7 million at December 31, 2004.

⁽⁵⁾	During the third quarter of 2001, the Company entered into a derivative commodity instrument to manage electricity costs in the volatile California energy market. The contract was originally effective through May 2006. During the fourth quarter of 2001, the Company notified the energy supplier that, among other things, the energy supplier was in default of the energy supply contract and that based upon such default, and for other reasons, the Company was terminating the energy supply contract. The Company continues to reflect the $19.9 million derivative valuation account on its balance sheet, subject to periodic review, in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The $19.9 million represents unrealized losses resulting from changes in the estimated fair value of the contract and does not represent contractual cash obligations. The Company believes the energy supply contract has been terminated and, therefore, the Company does not have any further cash obligations under the contract. Accordingly, the energy derivative valuation account is not included in the table. There can be no assurance, however, that a party will not assert a future claim against the Company or that a bankruptcy court or arbitrator will not ultimately nullify the Company’s termination of the contract. No provision has been made for contingencies or obligations, if any, under the contract beyond November 2001. See below Note 13 “Commitments and Contingencies — Supply of Electricity and Energy Contracts.”