10-K

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 October 31, 2007

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

For the transition period from                      to                     

Commission file number: 001-14547

Ashworth, Inc.

Delaware
(State or other jurisdiction of
incorporation or organization) 84-1052000
(I.R.S. Employer
Identification No.)

2765 LOKER AVENUE WEST, CARLSBAD, CA 92010
(Address of Principal Executive Office, including Zip Code)

(760) 438-6610
(Registrant’s Telephone Number, including Area Code)

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

Title of each class
Common Stock, $.001 par value
Rights to Purchase Common Stock Name of each exchange on which registered
The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: none

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o No þ

     The aggregate market value of the Registrant’s common stock held by non-affiliates based upon the last reported sales price of its common stock on April 30, 2007 as reported on the NASDAQ Global Market was $101,059,949.65.

     There were 14,713,511 shares of common stock, $.001 par value, outstanding at the close of business on December 31, 2007.

TABLE OF CONTENTS

PART I
	Item 1. BUSINESS
	Item 1A. RISK FACTORS
	Item 1B. UNRESOLVED STAFF COMMENTS
	Item 2. PROPERTIES
	Item 3. LEGAL PROCEEDINGS
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
	Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
	Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	Item 9A. CONTROLS AND PROCEDURES
	Item 9B. OTHER INFORMATION
	Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	Item 11. EXECUTIVE COMPENSATION
	Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
	Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.(ap)
EXHIBIT 10.(aq)
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

DOCUMENTS INCORPORATED BY REFERENCE

     PART III of this Form 10-K incorporates certain information by reference from either the Registrant’s definitive proxy statement for its 2008 Annual Meeting of Stockholders or a Form 10-K/A to be filed with the Commission within 120 days of October 31, 2007, which information is incorporated herein by reference.

CAUTIONARY STATEMENTS

This report contains certain forward-looking statements related to the Company’s market position, finances, operating results, marketing and business plans and strategies within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may contain the words “believe,” “anticipate,” “expect,” “predict,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, changed circumstances or unanticipated events unless required by law. Forward-looking statements and the Company’s plans and expectations are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. For more information on the risks to which the Company is subject, see Part I, Item 1A. Risk Factors below.

PART I

Item 1. BUSINESS.

GENERAL DEVELOPMENTS OF THE COMPANY

     Ashworth, Inc., based in Carlsbad, California, was incorporated in Delaware on March 19, 1987. As used in this report, the terms “we,” “us,” “our,” “Ashworth” and the “Company” refer to Ashworth, Inc., its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. The Company designs, markets, distributes and licenses quality sports apparel, headwear and accessories under the Ashworth^®, The Game^® and Kudzu^® labels. The Company holds a license to design, source, market and sell Callaway Golf apparel primarily in the United States, Europe, and Canada.

     Ashworth earns revenues and income and generates cash through the design, marketing and distribution of quality men’s and women’s sports apparel, headwear and accessories under the Ashworth, Callaway Golf apparel, Kudzu and The Game brands. The Company’s products are sold in the United States, Europe, Canada and various other international markets to selected golf pro shops, resorts, off-course specialty shops, upscale department stores, retail outlet stores, colleges and universities, entertainment complexes, sporting goods dealers that serve the high school and college markets, NASCAR/racing markets, outdoor sports distribution channels, and top specialty-advertising firms for the corporate market.

     In October 2007, the Company announced the appointment of Allan H. Fletcher to the position of Chief Executive Officer and the appointment of Greg W. Slack to the position of Chief Financial Officer. These announcements were part of a management reorganization which included the departure of Peter M. Weil, the Company’s former Chief Executive Officer and Director who resigned effective October 24, 2007. Eric R. Hohl, the Company’s former Executive Vice President, Chief Financial Officer and Treasurer also left his position at the Company effective October 24, 2007.

     On June 6, 2007, the Company, through its wholly-owned subsidiary Gekko Brands, LLC, entered into two and five year employment and non-competition agreements with certain selling members of Gekko Brands, LLC who are currently employees of Gekko Brands, LLC (the “Gekko Employees”). The employment and non-competition agreements guarantee payment of the contingent consideration installment payments for fiscal years 2007 and 2008, thereby amending Sections 1.2(c) and 1.3 of the Membership Interests Purchase Agreement, dated July 6, 2004 (the “Purchase Agreement”), relating to the acquisition of Gekko Brands, LLC by the Company. Under the Purchase Agreement, an additional $6,500,000 would be

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paid to the Gekko Employees if the subsidiary achieved certain specified EBIT and other operating targets which were to be accounted for as additional cost of the acquired entity. From July 7, 2004 through October 31, 2006, Gekko Brands, LLC achieved the specified EBIT and other operating targets entitling the Gekko Employees to additional consideration of $3,150,000 recorded as an adjustment to goodwill. Under the new employment and non-competition agreements entered into with the Gekko Employees, the guaranteed installment payments for fiscal years 2007 and 2008 totaling $3,350,000 will be accounted for as compensation and recognized as expense on a straight-line basis over the term of the employment and non-competition agreements.

Available Information

     Our website address is www.ashworthinc.com. You may obtain free electronic copies of our reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports on the “Investor Relations” portion of our website, under the heading “SEC Filings.” These reports are available on our website as soon as reasonably practicable after we electronically file them with the Securities and Exchange Commission.

ASHWORTH PRODUCTS

     The Ashworth Men’s Division designs Authentics^TM, AWS^TM (Ashworth Weather Systems^®) and fashion collections. Each fashion collection typically consists of knit and woven shirts, pullovers, jackets, sweaters, vests, pants, shorts, headwear and accessories. Product design focuses on classic, timeless designs with emphasis on quality and innovation.

     The Ashworth Women’s Division designs Authentics^TM, AWS^TM and fashion collections. The collections focus on timeless, elegant designs that are functional and sophisticated for the woman with a fashion sense and an active lifestyle.

     In May 2001, Ashworth agreed to a multi-year exclusive licensing agreement with Callaway Golf Company to create lines of men’s and women’s Callaway Golf apparel. The first product offering was designed for Fall 2002 and included three separate collections.

     The Callaway Golf apparel men’s Collection and Sport range includes classic and fashion lines featuring knit and woven shirts, pullovers, jackets, sweaters, vests, pants, shorts, headwear and accessories. The Collection range designs focus on sophisticated styling using luxury fabrics while the Sport range designs aim to appeal to the active consumer.

     The Callaway Golf apparel X Series product line combines fashion with technical performance fabrication, and features knit shirts, pullovers, vests, jackets, pants, shorts, headwear and waterproof rainwear.

     Callaway Golf is a trademark of Callaway Golf Company. Ashworth, Inc. is an Official Apparel Licensee of Callaway Golf Company. The multi-year agreement has various annual requirements for marketing expenditures and royalty payments based on the level of net revenues.

DISTRIBUTION CHANNELS

     The Company warehouses and ships the majority of its products from its embroidery and distribution centers in Oceanside, California; Phenix City, Alabama; and Basildon, England. Product is also drop-shipped from off-shore factories directly to our subsidiaries, divisions and international distributors.

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     The Company currently distributes and sells its products primarily through the following distribution channels:

U.S. Golf Pro Shops, Resorts and Off-Course Golf Specialty Shops

     The Company’s core customers are golf pro shops located at golf courses and resorts as well as off-course specialty retailers. The Company refers to this channel as the green grass distribution channel which accounted for 33.2% of net sales in fiscal 2007. The Company currently distributes its products in nearly all of the 50 states.

U.S. Collegiate Bookstores

     The Game brand products are marketed primarily under licenses to over 1,000 colleges and universities, resorts and sporting goods team dealers that serve the high school and college markets. The Game brand is one of the leading headwear brands in the College/Bookstore distribution channel. During fiscal 2007, The Game accounted for 14.1% of net sales.

U.S. NASCAR and Outdoor Market

     The Kudzu brand products are sold into NASCAR/racing markets and through outdoor sports distribution channels, including fishing and hunting. The NASCAR/racing and outdoor sports distribution channel accounted for 8.2% of net sales in fiscal 2007.

U.S. Department Stores and Specialty Stores

     The Company currently sells its Ashworth and Callaway Golf apparel products to selected upscale department and specialty stores, including Macy’s, Lord & Taylor, Bloomingdale’s, Belk, and Nordstrom. During fiscal 2007, the Department and Specialty Stores distribution channel accounted for 8.0% of our net sales.

U.S. Corporate Market

     The Company markets its products to top specialty-advertising firms that re-sell the Company’s products to Fortune 500 companies and other corporations for use in their company stores, sales meetings, catalogs and corporate events. Our Corporate distribution channel accounted for 12.2% of our net sales during fiscal 2007.

International Market

     The Company has a wholly-owned subsidiary in Basildon, England that distributes Ashworth and Callaway Golf apparel product to customers, either directly or through independent sales representatives, in the United Kingdom and other European countries such as Germany, France, Spain, Sweden, Ireland and Portugal. The Company distributes Ashworth and Callaway Golf apparel, headwear and accessories in Canada through two separate divisions, operated by Fletcher Leisure Group, Inc., formerly Almec Leisure Group.

     The Company has entered into licensing and distribution agreements with various partners in countries such as China, Japan, Hong Kong, Singapore, Taiwan, Australia and South Korea. Under these agreements, the licensees import certain product lines from Ashworth and manufacture other approved licensed products designed specifically for their market.

     The Company also uses distributors to sell Ashworth products in other locations such as United Arab Emirates, South Africa, Mexico, Guam and Saipan. The Company’s International distribution channel, which includes our wholly-owned European subsidiary, Canadian divisions, and international licensees and distributors, accounted for 18.5% of our net sales in fiscal 2007.

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Ashworth Retail Stores

     The Company operates, through wholly-owned subsidiaries, 18 retail stores in Arizona, California, Florida, Georgia, Illinois, Massachusetts, Nevada, New York, Texas, Utah, Virginia and Washington. The main purpose of these stores is to help control and manage inventory by selling prior season and irregular merchandise. The Company also sells its excess and irregular inventory through select clearance retailers. During fiscal 2007, the Ashworth Retail Stores distribution channel accounted for 5.8% of our net sales.

SALES AND MARKETING

     The Company’s products are sold in the United States, Europe and Canada largely by independent sales representatives who are not employees of the Company or its subsidiaries. At December 31, 2007, the Company had approximately 154 independent and 25 employee sales representatives worldwide. The Company also uses several different distributors and licensees in various international locations.

     In an effort to add exposure and consumer credibility to its Ashworth brand, the Company has contracts with golf celebrities who wear and endorse the Company’s products. At October 31, 2007, these individuals included: Fred Couples, Chris DiMarco, Nick Watney, Steve Flesch, Nicole Castrale, Brett Wetterwich and others. The Company uses these players and celebrities in advertisements, in-store displays, and for trade shows, store and other special appearances.

     The Ashworth marketing platform is designed to heighten brand awareness, brand strength and brand growth globally through print, moving media, communications, promotional, tradeshow initiatives and tour exposure.

     Ashworth continued its in-store shop program in 2007 and has a distinct in-store presence in many golf shops and department stores throughout the United States. This modular fixture program is designed to help create an in-store shop for Ashworth and Callaway Golf apparel products coupled with pictures and displays of our spokespersons and golf professionals.

     In an effort to introduce new young customers to the Ashworth brand, the Company supports high school and collegiate golf by providing team uniforms to selected high school, college and university golf teams.

     Concurrent with its acquisition of Gekko, the Company began marketing to the collegiate sports market. In an effort to create brand awareness and promote sell through at the consumer level, the Company has promotional agreements with college sports coaches who wear and endorse The Game brand products.

     The Company’s apparel business continues to be seasonal, with the highest revenues traditionally in the period from January through July and the lowest revenues in the period from August through December.

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     Net revenues in fiscal 2007 were $202.2 million which was a decrease of 3.5% from net revenues of $209.6 million in fiscal 2006. During the last three fiscal years, the Company had the following domestic and international net revenues:

	Years Ended October 31,
	2007		2006		2005
	(In thousands)
Consolidated Net Revenues:
Domestic:
Domestic, excluding Gekko	$	119,630	$	129,360	$	133,176
Gekko		45,208		41,768		37,511
Total Domestic		164,838		171,128		170,687
International:
Ashworth U.K., Ltd.		27,236		27,987		23,416
Other international		10,115		10,485		10,685
Total International		37,351		38,472		34,101
Total Net Revenues	$	202,189	$	209,600	$	204,788

     See “Note 1 of Notes to Consolidated Financial Statements, The Company and Summary of Significant Accounting Policies, Business” for revenues, operating income and identifiable assets of Ashworth U.K., Ltd., and “Note 12, Segment Information” for market segment information.

     The Company’s revenues from its international operations may be adversely affected by currency fluctuations, taxation and laws or policies of the foreign countries in which the Company conducts business, as well as laws and policies of the United States affecting foreign trade, investment and taxation.

     For more information regarding the risks of currency fluctuations that could affect the Company’s ability to sell its products in foreign markets, the value in U.S. dollars of revenues received in foreign currencies, the impact of such fluctuations on the Company’s international segment and strategies the Company may use to manage the risks presented by currency exchange rate fluctuations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Currency Fluctuations,” “Item 7A, Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Exchange Rate Risk,” and “Note 1 of Notes to Consolidated Financial Statements, Foreign Currency.”

     At December 31, 2007, the Company had a sales order backlog of approximately $63,187,000 from independent third parties, which is approximately $4,170,000 or 7.1% higher than the comparable backlog at December 31, 2006. Backlog reflects sales orders that are placed with the Company prior to the period in which the goods are to be shipped, as opposed to “at-once” sales orders that are received in the period in which the goods are expected to be shipped. The current backlog covers orders for goods expected to be shipped through approximately October 2008. The amount of the sales order backlog at a particular time is affected by a number of factors, including the timely flow of product from suppliers which can impact the Company’s ability to ship on time, and the timing of customers’ orders. Accordingly, a comparison of sales order backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments in any period. In addition, sales orders may be changed or canceled prior to shipment, preventing the Company from converting backlog into revenue.

INVENTORY

     The Company seeks to maintain sufficient levels of inventory to support its Ashworth Authentics and Callaway Classics programs, increased sales volume, and to meet increased customer demand for at-once ordering. Disposal of excess prior season inventory is an ongoing part of the Company’s business, and inventory write-downs may impair the Company’s financial performance in any period. Certain inventory may be subject to multiple write-downs if the Company’s initial reserve estimates for inventory obsolescence or lack of throughput prove to be too low. These risks increase as inventory grows.

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COMPETITION

     The golf apparel market is not dominated by any single company, and is highly competitive both in the United States and abroad. The Company competes not only with golf apparel manufacturers, but also with other branded sports and sportswear apparel manufacturers, including Nike and Adidas, that have entered the golf apparel market in recent years. Many of the Company’s competitors have greater financial resources. Ashworth competes with other golf apparel manufacturers on design, product quality, customer service and brand image.

PRODUCT SOURCING

Full Package Finished Goods

     The Company’s products are manufactured to the Company’s quality and styling specifications and imported into the United States, Canada, and the United Kingdom as “full package” finished goods produced by independent third party suppliers. Nearly all the Company’s merchandised goods are manufactured in Asia, including China, Hong Kong, Korea, Macao, Malaysia, the Philippines, Taiwan, Thailand and Vietnam. We also manufacture goods with independent factories in Peru and Mexico. Our largest single apparel manufacturer operates in Thailand and Hong Kong and accounted for approximately 21% of the total fiscal 2007 apparel production. Our largest single headwear manufacturer is located in China and accounted for approximately 50% of the total fiscal 2007 headwear production.

In-House Embroidery

     The Company embroiders custom golf course, tournament, collegiate, NASCAR/racing, outdoor sports, and corporate logos in its Oceanside, California, Phenix City, Alabama and Basildon, England embroidery and distribution centers using approximately 124 multi-head, computer-controlled embroidery machines with a total of approximately 832 sewing heads. The embroidery design libraries contain over 117,000 Ashworth, Callaway, The Game, Kudzu and customer designs. Embroidery is applied to both garments and finished headwear. On average, the Company embroiders 68,000 logos per week on approximately 71,000 product units.

Duties and Quotas

     Virtually all of our merchandise imported into the United States, Canada and the United Kingdom is subject to duties. Until January 1, 2005, our apparel merchandise was also subject to quotas. Quotas represent the right, pursuant to bilateral or other international trade arrangements, to export amounts of certain categories of merchandise into a country or territory pursuant to a visa or license. Under the Agreement on Textiles and Clothing, quotas on textile and apparel products were eliminated on January 1, 2005 for World Trade Organization (the “WTO”) member countries, including the United States, Canada, United Kingdom and European countries. Notwithstanding quota eliminations, China’s accession agreement for membership in the WTO provides that WTO member countries (including the United States, Canada and the United Kingdom) may re-impose quotas on specific categories of products in the event it is determined that imports from China have surged and are threatening to create a market disruption for such categories of products (so-called “safeguard quota provisions”). In response to surging imports, in November 2005 the United States and China agreed to a new quota arrangement which will impose quotas on certain textile products through the end of 2008. In addition, the European Union also agreed with China on a new textile arrangement which imposed quotas through the end of 2007. The United States and other countries may also unilaterally impose additional duties in response to a particular product being imported (from China, Vietnam or other countries) in such increased quantities as to cause (or threaten) serious damage to the relevant domestic industry (generally known as “anti-dumping” actions). China has imposed an export tax on all textile products

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manufactured in China. Although there can be no assurance, the Company does not believe this tax or quota will have a material impact on our business.

     Ashworth is also subject to other international trade agreements and regulations, such as the North American Free Trade Agreement and the Andean Trade Promotion and Drug Eradication Act. In addition, each of the countries in which our products are sold has laws and regulations covering imports. The United States and the other countries in which our products are manufactured and sold may, from time to time, impose new duties, tariffs, surcharges or other import controls or restrictions, including the imposition of “safeguard quota”, or adjust presently prevailing duty or tariff rates or levels. In an effort to minimize our potential exposure to import risk, the Company actively monitors import restrictions and quota fill rates and if needed can shift production to other countries or manufacturers.

TRADEMARKS AND LICENSE

     The Company owns and utilizes numerous trademarks, principal among which are the Ashworth typed and design marks, the Golfman design mark, and the Weather Systems stylized mark. The Ashworth typed and design marks, the Golfman design marks, the Weather Systems stylized mark and Ashworth’s two bar design have been registered on the Principal Register of the United States Patent and Trademark Office for one or all of the following classes, apparel, shoes, leather goods and/or golf bags. Additionally, the Company has several other pending trademark applications and trademark registrations in the United States for the AWS and Two Bar Design marks.

     The Company has registered the Ashworth typed and design marks, the Golfman design marks and/or the Weather Systems stylized marks and has pending applications for apparel, shoes, leather goods and/or golf bags internationally. The application process varies from country to country and can take approximately one to three years to complete.

     The Company has EZ-TECHâ as a registered trademark in the United States, Australia, Canada and the United Kingdom.

     Concurrent with its acquisition of Gekko, the Company acquired the registered trademarks of The Game and Kudzu.

     Ashworth regards its trademarks and other proprietary rights as valuable assets and believes that they have significant value in the marketing of its products. Although Ashworth believes that it has the exclusive right to use the trademarks and intends to vigorously protect its trademarks against infringement, there can be no assurance that Ashworth can successfully protect the trademarks from conflicting uses or claims of ownership in cases where the trademarks were used and/or registered prior to Ashworth’s lawful registrations.

     Callaway Golf is a trademark of Callaway Golf Company. The Company is an Official Apparel Licensee of Callaway Golf Company. The Company has licensed the use of the Callaway Golf trademark pursuant to a multi-year, exclusive licensing agreement to design, source and sell Callaway Golf brand apparel primarily in the United States, Europe and Canada. The agreement, effective until December 31, 2010, provides for, among other matters, minimum annual royalty payments and other sales and marketing commitments regardless of the Company’s actual sales of Callaway-branded products. It may be extended for one five-year term at Ashworth’s sole discretion, provided that Ashworth meets or exceeds certain performance requirements for calendar years 2008 and 2009.

EMPLOYEES

     At December 31, 2007, Ashworth had approximately 598 regular employees and 98 seasonal temporary employees. We believe that relations between Ashworth and its employees are generally good.

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Executive Officers

     The following are our current officers and former executive officers who resigned during fiscal 2007 and their principal business experience for the past five years.

Name	Age		Position with the Company
Current Officers as of December 31, 2007
Allan H. Fletcher		63	Chief Executive Officer
Edward J. Fadel		52	President
Greg W. Slack		46	Chief Financial Officer, Principal Accounting Officer
Paul A. Bourgeois		58	Senior Vice President, Sales
Former Officers as of December 31, 2007
Winston E. Hickman		65	Executive Vice President and Chief Financial Officer
Gary I. (“Sims”) Schneiderman		46	President
Peter E. Holmberg		56	Executive Vice President — Green Grass Sales and Merchandising
Peter M. Weil		56	Chief Executive Officer and Director
Eric R. Hohl		46	Executive Vice President, Chief Financial Officer and Treasurer

Current Officers as of December 31, 2007:

Allan H. Fletcher
Chief Executive officer

Mr. Fletcher was appointed Chief Executive Officer of the Company on October 24, 2007. Mr. Fletcher is the founder of Fletcher Leisure Group, Inc. (“FLG”), which has been one of Canada’s leading suppliers of branded golf apparel, sportswear and golf equipment for over 40 years and is a long-standing business partner of the Company. Mr. Fletcher was responsible for the operations and strategic direction of FLG and served as its President until December 2003 when he became and continues to serve as the Chairman and Chief Executive Officer. Mr. Fletcher is also an officer of Fletcher Leisure Group, Ltd., a management consulting company serving the golf industry, which provides Mr. Fletcher’s services to the

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Company under a consulting agreement. Mr. Fletcher’s son, Mark Fletcher, currently serves as the President of FLG and oversees its operations.

Edward J. Fadel
President

Mr. Fadel was appointed President of the Company effective May 23, 2007. Mr. Fadel most recently served as Vice President of Merchandising at Greg Norman / Reebok. Previously, from 2005 to 2006, he served as Chief Strategist of Apparel at Ahead, Inc. where he formulated apparel and headwear strategies for both the Ahead men’s line and Kate Lord women’s line. Prior to that, Mr. Fadel served as Senior Vice President of Merchandising and Design at the Company from 2002 to 2004. Mr. Fadel joined the Company in 2001 and served as Vice President — Callaway Golf Apparel Merchandising & Design until his promotion in 2002. Mr. Fadel worked as a consultant with various apparel manufacturers from 2000 until 2001. Prior to that, Mr. Fadel founded and served as President of Elandale Golfwear, a women’s sportswear producer, from 1995 to 2000 and as President of Cutter & Buck Big & Tall (a division of The Jeremy Dold Co.) from 1992 to 1995.

Greg W. Slack
Chief Financial Officer and Principal Accounting Officer

Mr. Slack was appointed Chief Financial Officer and Principal Accounting officer on October 24, 2007. He had previously served as the Company’s Vice President — Finance, Corporate Controller & Principal Accounting Officer until July 2007. Prior to returning to the Company, Mr. Slack served as Vice President of Finance of Pivotstor LLC from August 1, 2007 to October 23, 2007. Mr. Slack initially joined the Company as Director of Internal Audit in October 2005, was promoted to Corporate Controller in February 2006, promoted to Vice President — Finance in July 2006 and appointed Principal Accounting Officer in October 2006. From September 2004 until October 2005, Mr. Slack worked on the Company’s Sarbanes-Oxley project as an independent consultant. Mr. Slack was with JMC Management, Inc. from December 2001 through August 2004, where he served as the Chief Financial Officer from January 2003 to August 2004 and as the Controller from December 2001 to January 2003. Prior to that, Mr. Slack held various accounting related positions at Bay Logics, Inc. and PricewaterhouseCoopers LLP. He holds a Certified Public Accountant license from the State of California and a B.S. degree in Accountancy from San Diego State University.

Paul A. Bourgeois
Senior Vice President of Sales

Mr. Bourgeois was appointed Senior Vice President of Sales for all domestic sales channels on October 1, 2007. Mr. Bourgeois most recently served as Vice President of Sales and Marketing for the E. Magrath/Byron Nelson Golf Division of VF Imagewear from May 2005 to September 2007. He was responsible for developing all sales and marketing initiatives along with working very closely with merchandising and design on product development. Prior to this, he was Vice President of Sales for the Cutter & Buck Golf Division and responsible for developing budgets, selling initiatives, and all sales plans. Mr. Bourgeois spent nine years with Cutter & Buck from June 1995 to April 2004 and was promoted to Vice President of Sales in March 2002.

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Former Officers as of December 31, 2007:

Peter M. Weil
Chief Executive Officer and Director

Mr. Weil resigned his position as Chief Executive Officer and as a Director of the Company, effective October 24, 2007. He previously served as a full-time consultant and member of the Company’s Office of the Chairman (an interim executive body utilized until a new CEO was identified) from September 12, 2006 until October 30, 2006 when he was appointed as Chief Executive Officer. Mr. Weil was appointed to the Company’s Board of Directors on May 8, 2006 and continued to serve as a member of the Board until his resignation. During Mr. Weil’s tenure as the Company’s CEO, he was an inactive Partner of Lighthouse Retail Group LLC, a consulting firm specializing in improving operating and positioning strategies for retailers. From 1996 to 2004, Mr. Weil served as Senior Vice President/Director of Management Horizons (formerly, PricewaterhouseCoopers — retail consulting group). His consulting clients have included Hewlett Packard, Disney, Brooks Brothers, Nordstrom, Family Dollar and Loblaws. Mr. Weil previously held Senior Vice President positions with Macy’s, Marshalls and J Baker/Morse Shoe in merchandising and supply chain management. Mr. Weil holds an M.B.A. from the Harvard Business School and a B.A. from the University of Michigan.

Gary I. (“Sims”) Schneiderman
President

Mr. Schneiderman joined the Company in September 2001 and resigned from his position with the Company effective May 21, 2007. Mr. Schneiderman was appointed President of the Company effective September 12, 2006. He served as Vice President of Sales for Ashworth and Callaway Golf apparel Retail Sales until January 2004, when he was promoted to Senior Vice President of Sales and became responsible for Callaway Golf apparel Green Grass Sales. In September 2005, Mr. Schneiderman was promoted to Executive Vice President of Sales, Marketing and Customer Service. Prior to joining the Company, Mr. Schneiderman served in a number of capacities at Tommy Hilfiger USA, including National Sales Manager for men’s sportswear. He served as a Regional Sales Manager for Pincus Brothers Maxwell Tailored Clothing from 1985 to 1990.

Winston E. Hickman
Executive Vice President and Chief Financial Officer

Mr. Hickman joined the Company on February 23, 2006 and resigned from his position with the Company effective November 17, 2006. Mr. Hickman most recently served as Executive Vice President and Chief Financial Officer of REMEC, Inc., a NASDAQ-listed designer and manufacturer of advanced wireless subsystems used in commercial and defense communications applications. Mr. Hickman joined REMEC in 2003 from privately-held Paradigm Wireless System, Inc. where, beginning in 2000, he was an investor, Chief Financial Officer and a member of the board of directors. Mr. Hickman has also previously served as board member, Chief Financial Officer, and financial advisor to a number of public and private companies. Mr. Hickman served as Chief Financial Officer of Pacific Scientific Company, a NYSE-listed company, and earlier held senior financial positions at Rockwell International, Allied-Signal, and Vans, Inc. Mr. Hickman holds an M.B.A. from the University of Southern California and a B.A. from California State University, Long Beach.

Peter E. Holmberg
Executive Vice President — Green Grass Sales and Merchandising

Mr. Holmberg resigned from the Company effective May 21, 2007. He was appointed Executive Vice President — Green Grass Sales and Merchandising on October 25, 2006. Mr. Holmberg joined the Company in July 1998 and served as the Director of Corporate Sales until December 1999. He served as Vice President of Corporate Sales from December 1999 to August 2001 when he was promoted to Senior Vice President of Sales and had the added responsibility of Ashworth Green Grass Sales. Mr. Holmberg then served as the Senior Vice President of Merchandising and Design from May 2005 until September 2005 when he was promoted to Executive Vice President of Merchandising, Design and Production.

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Prior to joining the Company, Mr. Holmberg served as National Corporate Sales Manager for Cutter & Buck, Inc. from 1995 to 1998 and as Regional Manager and Buyer for Patrick James, Inc. from 1992 to 1995. Mr. Holmberg was the proprietor of The Country Gentleman, an upscale retail store in Bellevue, Washington, from 1975 to 1992.

Eric R. Hohl
Executive Vice President, Chief Financial Officer and Treasurer

Mr. Hohl left his position as Executive Vice President, Chief Financial Officer and Treasurer of the Company, effective October 24, 2007. He was appointed Executive Vice President, Chief Financial Officer and Treasurer effective March 19, 2007. Mr. Hohl joined the Company from ISE Corporation where he served as Chief Financial Officer since April 2005. ISE Corporation designs, engineers and assembles hybrid and hydrogen drive systems for heavy duty vehicles. From March 2004 to April 2005, Mr. Hohl served as the Chief Financial Officer and Chief Operating Officer at B.B. Dakota, Inc., a women’s apparel company. From September 2000 to February 2004, Mr. Hohl served as Chief Financial Officer for Ritz Interactive, Inc., an E-commerce company.

Item 1A. RISK FACTORS.

The Company’s business is subject to certain risks that could affect the value of the Company’s common stock. These risks include, but are not limited to, the following:

Risks Related to Our Business

If we are unable to successfully retain executive leadership and other key personnel, the Company’s ability to successfully develop and market its products and operate its business may be harmed.

The Company has experienced a high level of turnover in its executive leadership, including the departures of its chief executive officer and its chief financial officer in October 2007. Both executive positions have been filled and, although the new executive management team is experienced in the industry and familiar with the Company, they may encounter some difficulty transitioning into their new positions and effectively managing the Company’s business processes, which may have a negative impact on the Company’s near term results of operations and financial position. Near term changes to the Company’s executive officers or the inability to retain other qualified management personnel could delay the development and introduction of new products, harm the Company’s ability to sell its products, damage the image of the Company’s brands and/or prevent the Company from executing its business strategy.

Our products face intense competition.

The market for golf apparel and sportswear is extremely competitive. The Company has several strong competitors, including Nike and Adidas, which have greater financial resources and larger market share and presence outside of the Company’s core green grass market. Price competition or industry consolidation could weaken the Company’s competitive position. Our competitors’ product offerings, technologies, marketing expenditures (including for advertising and endorsements), pricing, costs of production, and customer service are areas of intense competition. This competition, in addition to rapid changes in technology and consumer preferences in our markets, constitutes a significant risk factor in our operations. If we do not adequately and timely anticipate and respond to our competitors or our consumers, our costs may increase or the consumer demand for our products may decline significantly.

Failure to implement the Enterprise Resource Planning system may adversely affect the Company’s operations and financial results.

In December 2005, the Company signed purchase contracts for a new Enterprise Resource Planning (“ERP”)

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system that was initially scheduled to be installed over the following two fiscal years. In December 2007, the new ERP system was placed into service in the United Kingdom. The initial implementation of the system in the United Kingdom was originally scheduled for May 2007, but was delayed six months due to difficulties experienced in the final design and rollout phase of the project. The Company intends to monitor and evaluate the operating benefits and efficiencies of the system in the United Kingdom over the next several months before implementing the system at the Company’s corporate headquarters which is not expected to take place before October 31, 2009. The Company may continue to experience difficulties in implementing the new ERP system in the United States and other related systems that could disrupt its ability to timely and accurately process and report key components of the results of its consolidated operations, its financial position and cash flows. Any disruptions or difficulties that may occur in connection with implementing the new ERP system or any future systems could also adversely affect the Company’s ability to complete the evaluation of its internal control over financial reporting and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. System failure or malfunctioning may result in disruption of operations and the inability to process transactions and could adversely affect the Company’s financial results.

If our embroidery and distribution center fails to operate as anticipated, the Company could incur additional expense.

The Company’s results of operations would continue to be adversely affected if the Company’s embroidery and distribution center (the “EDC”) does not operate as anticipated or functionality problems are encountered. We have been operating at an overall downtime percentage of under 2% for the second half of fiscal 2006 and fiscal 2007. The EDC has operated substantially below its designed production capacity since its inception on November 1, 2004. A disaster recovery plan has also been in place for major disasters since the first quarter of fiscal 2007. Nonetheless, major long term functionality issues could occur. Any such operational problems may cause the Company to incur additional expense, experience delays in customer shipments, or require the Company to lease additional distribution space. In addition, the Company’s results of operations could be negatively impacted if future sales volume growth does not reach significantly higher levels and the facility’s additional distribution capacity is not fully utilized, or if the Company does not achieve projected cost savings from the distribution facilities as soon as, or in the amounts, anticipated.

Failure to determine adequate inventory levels may result in decreased operating margins and harm our business.

The Company maintains high levels of inventory to support its Authentics program as well as the Callaway Golf apparel classics program. Additional products, greater sales volume and customer trends toward increased “at-once” ordering may require increased inventory. Disposal of excess prior season inventory is an ongoing part of the Company’s business, and write-downs of inventories have materially impaired the Company’s financial position in the past and may do so again in the future. Particular inventories may be subject to multiple write-downs if the Company’s initial reserve estimates for inventory obsolescence or lack of sell-through prove to be too low. Conversely, if we underestimate consumer demand for our products or if manufacturers fail to supply the products that we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers or result in lost sales, negatively impact retailer and distributor relationships, and diminish brand loyalty.

Failure to meet certain performance requirements could cause the Company to lose its exclusive licensing agreement with Callaway Golf.

The Company is party to a multi-year licensing agreement to design, source and sell Callaway Golf apparel primarily in the United States, Europe and Canada. The agreement provides for, among other matters, minimum annual royalty payments and other sales and marketing commitments regardless of the Company’s actual sales of Callaway-branded products. In addition, the Company must meet certain performance requirements for calendar years 2008 and 2009 in order to have the option to extend the licensing agreement

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for an additional five-year term after December 31, 2010. If the Company fails to meet these requirements, future agreements with Callaway Golf apparel may not be available and the Company’s revenues would materially decline.

Changes in the retail industry could cause a decrease in the number of retail stores in which our products are carried.

In recent years, the retail industry has experienced consolidation and other ownership changes. In the future, retailers in the United States and in foreign markets may undergo changes that could decrease the number of stores that carry our products or increase the ownership concentration within the department store retail industry, including: consolidating their operations; undergoing restructurings or reorganizations; or realigning their affiliations. These situations concentrate our credit risk in a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity, it would increase the risk that their outstanding payables to us may not be paid.

Sales of our product are dependent on the economy, popularity of golf, and weather conditions.

Demand for the Company’s products may decrease significantly if the economy weakens, if the popularity of golf decreases, if consolidation of golf properties continues, or if unusual weather conditions or other factors cause a reduction in rounds played.

Development of fashions or styles that are not well received would negatively impact our revenues and net profits.

Like other apparel manufacturers, the Company must correctly anticipate and help direct fashion trends within its industry. The Company’s results of operations and financial position would suffer if the Company develops fashions or styles that are not well received in any season. In the past, the Company has developed fashions and styles that were not well received by consumers, resulting in slower than anticipated sell-through of the Company’s products which required significant markdown allowances that materially impaired the Company’s financial position and adversely affected the results of operations. The Company may experience similar circumstances in the future.

Poor sell-through of the Company’s products could cause reduced revenues and net profit.

The Company sells a significant portion of its products to customers in the department store retail channel. If the department stores do not sell-through the Company’s products in a timely manner, they often request markdown allowances from the Company or delay future purchases of the Company’s products which could cause the Company to lose sales or receive lower margins. The Company’s products have experienced less than anticipated sell-through in the past and may do so again in the future.

Our international sourcing involves inherent risks which could result in harm to our business.

The Company does not own or operate any manufacturing facilities and depends exclusively on independent third parties for the manufacture of all our products. Our products are manufactured to our specifications primarily by international manufacturers in Asian countries. Our largest single apparel and manufacturer operates in Thailand and Hong Kong and accounted for approximately 21% of our total apparel production during fiscal 2007. Our largest single headwear manufacturer is located in China and accounted for approximately 50% of our total headwear production during fiscal 2007. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a substantial reduction in purchase prices, any of which could have a material adverse effect on our financial condition and results of operations.

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Contractors may be unable to deliver the Company’s products if necessary raw materials are not available.

The Company’s domestic and foreign suppliers rely on readily available supplies of raw materials at reasonable prices. If these raw materials are in short supply or are only available at inflated prices, the contractors may be unable to deliver the Company’s products in sufficient quantities or at expected prices and the Company could lose sales and have lower gross profit margins.

Failure of our contractors to comply with labor laws and codes of conduct followed by the Company could disrupt our shipments and damage our reputation.

The Company seeks to require its licensees and independent manufacturers to operate in compliance with applicable laws and regulations, and certain codes of conduct. While our internal and vendor operating guidelines promote ethical business practices and our staff periodically visits and monitors the operations of our independent manufacturers, we do not control these manufacturers or their labor practices. The violation of laws or codes of conduct by an independent manufacturer used by the Company or one of our licensees, or the divergence of an independent manufacturer’s or licensee’s labor practices from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these developments, in turn, could have a material adverse effect on our financial condition and results of operations.

Currency exchange rate fluctuations could result in higher costs and decreased margins.

Fluctuations in foreign currency exchange rates could affect the Company’s ability to sell its products in foreign markets and the value in U.S. dollars of revenues received in foreign currencies. The Company’s revenues from its international segment may also be adversely affected by taxation and laws or policies of the foreign countries in which the Company has operations, as well as laws and policies of the United States affecting foreign trade, investment and taxation.

The Company’s international operations involve inherent risk which could result in harm to our business.

As a result of its international business, the Company is exposed to increased risks inherent in conducting business outside of the United States. In addition to foreign currency risks and increased difficulty in protecting the Company’s intellectual property rights and trade secrets, these risks include (i) unexpected government action or changes in legal or regulatory requirements, (ii) social, economic or political instability, (iii) the effects of any anti-American sentiments on the Company’s brands or sales of the Company’s products, (iv) 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 (v) increased exposure to interruptions in air carrier or shipping services which could significantly adversely affect the Company’s ability to obtain timely delivery of products 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 its financial performance and condition.

The Company may be adversely affected by the financial health of our customers.

If economic conditions deteriorate, the ability of the Company’s customers to pay current obligations may be adversely impacted and the Company may experience an increase in delinquent and uncollectible accounts.

The Company is subject to periodic litigation which could result in unexpected expense of time and resources.

The Company is from time to time party to claims and litigation proceedings. Such matters are subject to

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many uncertainties and the Company cannot predict with assurances the outcomes and ultimate financial impacts of them. There can be no guarantees that actions that have been or may be brought against the Company in the future will be resolved in the Company’s favor or that insurance carried by the Company will be available or paid to cover any litigation exposure. Any losses resulting from settlements or adverse judgments arising out of these claims could materially and adversely affect the Company’s financial position and results of operations.

Failure to adequately protect our intellectual property rights could adversely affect our business.

The Company’s success depends to a significant degree upon its ability to protect and preserve its intellectual property, including copyrights, trademarks, patents, service marks, trade secrets and similar intellectual property. The Company relies on the intellectual property, patent, trademark and copyright laws of the United States and other countries to protect its proprietary rights. However, the Company may be unable to prevent third parties from using its intellectual property without its authorization, particularly in those countries where the laws do not protect its proprietary rights as fully as in the United States. The use of the Company’s intellectual property by others could reduce or eliminate any competitive advantage the Company has developed, causing it to lose sales or otherwise harm its business. If it became necessary for the Company to resort to litigation to protect these rights, any proceedings could be burdensome and costly and the Company may not prevail.

Failure to retain and continue to obtain high quality endorsers of our products could harm our business.

One of the key elements of the Company’s marketing strategy has been to obtain endorsements from professional golfers and celebrities, which contributes to the authenticity and image of our brands. Management believes that this strategy has been an effective means of gaining brand exposure worldwide and creating broad appeal for our products. There can be no assurance that the Company will be able to maintain its existing relationships with these individuals in the future or that it will be able to attract new athletes and celebrities to endorse its products.

Our business is affected by seasonality and consumer discretionary spending, which could result in fluctuations in our operating results.

The apparel industry has historically been subject to substantial cyclical variations. As domestic and international economic conditions change, trends in discretionary consumer spending become unpredictable and could be subject to reductions due to uncertainties about the future. When consumers reduce discretionary spending, purchases of specialty apparel may decline. A general reduction in consumer discretionary spending due to a recession in the domestic and/or international economies or uncertainties regarding future economic prospects could have a material adverse effect on the Company’s results of operations.

Our substantial indebtedness could adversely affect our operations, financial condition and the ability to enter into certain change of control transactions.

The Company has a significant amount of indebtedness. As of October 31, 2007, the Company had a total of $60.8 million of indebtedness. $30.9 million of indebtedness that was outstanding under the Company’s term loan and revolving credit facility with Union Bank of California, N.A. (“Union Bank”) was paid off by the Company on the date that the new senior revolving credit facility (the “Credit Facility”) of up to $55.0 million (subject to borrowing base availability), including a $15.0 million sub-limit for letters of credit (letters of credit will be 100% reserved against borrowing availability) with Bank of America, N.A., (“B of A”) was consummated. The Company’s indebtedness under the Credit Facility could have important consequences, such as:

• limiting our ability to obtain additional financing to fund growth, acquisitions, working capital, capital expenditures, debt service requirements or other cash requirements;

• limiting our operational flexibility due to the covenants in the Credit Facility;

• limiting our ability to invest operating cash flow in our business due to debt service requirements;

• limiting our ability to compete with companies that are less leveraged and that may be better positioned to withstand economic downturns;

• increasing our vulnerability to economic downturns and changing market conditions; and

• making us vulnerable to fluctuations in market interest rates, to the extent that our debt is subject to floating interest rates.

If our cash from operations is not sufficient to meet our expenses and obligations under the Credit Facility, we may be required to refinance our debt, sell assets, borrow additional money or raise equity.

We expect to generate the funds necessary to pay our expenses and to pay the principal and interest on our outstanding debt from our operations. Because our business is seasonal, our borrowings under the Company’s revolving credit facility usually fluctuate during the year, generally peaking during March through May.

Our ability to generate cash to meet our expenses and debt service obligations will depend on our future performance, which will be affected by financial, business, economic and other factors, including potential changes in consumer preferences, the success of our products, pressure from competitors and other matters discussed in this Annual Report on Form 10-K (including this “Risk Factors” section). Many of these factors are beyond our control. Any factor that negatively affects our results of operations, including our cash flow, may also negatively affect our ability to pay the principal and interest on the Credit Facility.

If we do not have enough cash to pay the Credit Facility, we may be required to amend it, refinance it, sell assets, incur additional indebtedness or raise equity. We cannot assure you that we will be able, at any given time, to take any of these actions on terms acceptable to us or at all.

Restrictive covenants in the Credit Facility may restrict our operational flexibility. Our ability to comply with these restrictions depends on many factors beyond our control.

The Credit Facility includes certain covenants that, among other things, limits or restricts our ability to:

• incur or guarantee additional debt;

• incur liens;

• pay dividends, repurchase stock or make other distributions;

• sell assets;

• make loans and investments;

• enter into consolidations or mergers; and

• enter into transactions with affiliates.

The Credit Facility may also limit our ability to agree to certain change of control transactions, because a “change of control” (as defined in the Credit Facility) will result in an event of default.

A breach of any of the covenants or restrictions contained in the Credit Facility could result in an event of default under the Credit Facility in which case the amounts outstanding under the Credit Facility could be declared immediately due and payable. If the payment of the indebtedness is accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness and any other indebtedness that would become due as a result of any acceleration.

The Credit Facility is subject to variable rates of interest, which could negatively impact the Company’s net profitability.

Borrowings against the Credit Facility are at variable rates of interest and expose the Company to interest rate risk. If interest rates increase, the Company’s debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and its net income and cash flows would decrease.

Anti-takeover devices may prevent a sale, or changes in the management, of the Company.

The Company has in place several anti-takeover devices, including a stockholder rights plan that may have

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the effect of delaying or preventing a sale, or changes in the management, of the Company. For example, the Company’s bylaws require stockholders to give written notice of any proposal or director nomination to the Company within a specified period of time prior to any stockholder meeting.

Item 1B. UNRESOLVED STAFF COMMENTS.

None.

Item 2. PROPERTIES.

     The Company owns an embroidery and distribution center (the “EDC”) and an adjacent undeveloped seven acres of land, located in Oceanside, California. The EDC consists of approximately 203,000 square feet of useable office and warehouse space used by the Company to warehouse, embroider, finish, package and distribute apparel and related accessories. The EDC was financed with an $11.7 million secured loan agreement with a remaining principal balance of $11.0 million as of October 31, 2007, that carries a fixed interest rate of 5% amortized over 30 years, due and payable on May 1, 2014. The Company leases its principal executive offices, which are located in Carlsbad, California.

     The Company and its subsidiaries currently have the following material leases for administrative and distribution facilities:

			Lease		Min./Current		Maximum
	Square		Expiration		Base		Base Rent
Location	Footage		Date		Rent Per Month		Per Month
					($)		($)
Administrative and Distribution Centers:
Carlsbad, CA		93,900		12/31/10		104,058		104,058
Essex, England		31,900		8/31/13		36,719		36,719
Phenix City, AL		117,568		8/06/12		38,060		49,466

     The Company and its subsidiaries also lease a total of approximately 53,000 square feet of retail space for its 18 retail stores. The leases expire through August 2016 and require total current base rent per month of approximately $145,000 and total maximum base rent per month of approximately $179,000. The Company also pays percentage rent based on revenues that exceed certain breakpoints for all of the retail store leases. In addition, the Company leased a showroom in New York at a fixed annual rent of $95,000 payable in monthly installments of $7,910. The lease on the showroom expired in April 2007; at that time the Company continued to lease the showroom on a month to month basis through November 2007. In December 2007, the Company leased a showroom at a new location in New York at a fixed annual rent of $143,550 payable in monthly installments of $11,963 for the first three years and an annual rent of $156,600 payable in monthly installments of $13,050 for the last two years. All of the leases require the Company to pay its pro rata share of taxes, insurance and maintenance expenses. The Company guarantees a portion of several leases held by Ashworth subsidiaries.

Item 3. LEGAL PROCEEDINGS.

     On February 27, 2007, the Law Offices of Herbert Hafif filed a class action in the United States District Court for the Central District of California alleging that the Company willfully violated the Fair

17

Credit Reporting Act by printing on credit or debit card receipts more than the last five digits of the credit or debit card number and/or the expiration date. The plaintiff sought statutory and punitive damages, attorney’s fees and injunctive relief on behalf of the purported class. The suit against Ashworth was one of hundreds of suits filed against different retailers nationwide. The proposed class representative for the putative class filed his motion to certify this matter as a class action. The Company filed an opposition to the motion and the court entered an order denying the class certification. On November 13, 2007, the parties entered into a settlement on the record whereby Ashworth would pay the plaintiff $1,000 and the plaintiff would dismiss his individual claim with prejudice. Ashworth admitted no liability and continues to dispute any allegation that it willfully violated the Fair Credit Reporting Act. The parties subsequently entered into a written stipulation to that effect and the court dismissed the complaint.

     The Company is party to other claims and litigation proceedings arising in the normal course of business. Although the legal responsibility and financial impact with respect to such claims and litigation cannot currently be ascertained, the Company does not believe that these matters will result in payment by the Company of monetary damages, net of any applicable insurance proceeds, that, in the aggregate, would be material in relation to the consolidated financial position or results of operations of the Company.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     The Company held its 2007 Annual Meeting of Stockholders on August 30, 2007. The information required by this Item 4 was included in the Company’s third quarter Form 10-Q which was filed on September 10, 2007 with the Securities and Exchange Commission and is incorporated into this Item 4 by reference.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

     The Company’s common stock is traded on the NASDAQ Global Market under the symbol “ASHW.” The following table sets forth the high and low sale prices on the NASDAQ Global Market for the quarters indicated.

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	High		Low
Fiscal 2007
Quarter ended January 31, 2007	$	8.01	$	6.75
Quarter ended April 30, 2007		8.61		6.96
Quarter ended July 31, 2007		8.57		6.13
Quarter ended October 31, 2007		7.20		5.19

	High		Low
Fiscal 2006
Quarter ended January 31, 2006	$	9.03	$	7.00
Quarter ended April 30, 2006		10.45		8.17
Quarter ended July 31, 2006		10.32		8.14
Quarter ended October 31, 2006		8.24		6.17

Holders

     The Company has only one class of common stock. As of December 31, 2007, there were 458 stockholders of record and approximately 3,200 beneficial owners of the Company’s common stock.

Dividends

     No dividends have ever been declared with respect to the Company’s common stock. In the past, the Board of Directors has chosen to reinvest profits in the Company rather than declare a dividend. The Company does not currently intend to pay cash dividends for the foreseeable future. For restrictions on dividends see “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There were no stock repurchases made during the quarter ended October 31, 2007.

Equity Compensation Plan Information

See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” below.

Performance Graph

Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder returns on the Company’s common stock over a five-year period with the cumulative total return of the NASDAQ Stock Market (U.S. Companies) and the stocks of companies in the same Standard Industrial Classification as the Company (SIC 2300-2399). The graph assumes that $100.00 was

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invested on October 31, 2002 in the Company’s common stock and each index and that all dividends were reinvested. The comparisons in the graph are not intended to forecast nor are they necessarily indicative of possible future performance of the Company’s common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Ashworth, Inc., The NASDAQ Composite Index
And SIC Code 2300 - 2399

* $100 invested on 10/31/02 in stock or index-including reinvestment of dividends.
Fiscal year ending October 31.

	10/31/02		10/31/03		10/31/04		10/31/05		10/31/06		10/31/07
Ashworth, Inc.		100.00		158.70		158.49		132.64		132.45		104.91
NASDAQ Composite		100.00		144.06		149.55		161.38		182.42		221.36
SIC Code 2300 - 2399		100.00		115.73		128.72		123.65		159.91		161.63

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.

     The statements of operations data set forth below with respect to the fiscal years ended October 31, 2007, 2006 and 2005 and the balance sheet data as of October 31, 2007 and 2006 are derived from, and should be read in conjunction with, the audited Consolidated Financial Statements and the Notes thereto included elsewhere in this annual report on Form 10-K. The statement of operations data set forth below with respect to the fiscal years ended October 31, 2004 and 2003 and the balance sheet data as of October 31, 2005, 2004 and 2003 are derived from audited financial statements not included in this annual report on Form 10-K. No dividends have been paid for any of the periods presented.

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	Years Ended October 31,
	2007			2006		2005			2004 (1)		2003
	(In thousands, except for per share amounts)
Statements of Operations Data:
Net revenues	$	202,189		$	209,600	$	204,788		$	173,102	$	149,438
Gross profit		77,767			85,813		76,913			72,130		60,811
Selling, general and administrative expenses		85,814			81,475		75,441			54,087		48,122
Income (loss) from operations		(8,047	)		4,338		1,472			18,043		12,689
Net income (loss)		(14,116	)		951		(727	)		8,203		7,328
Net income (loss) per basic share		(0.97	)		0.07		(0.05	)		0.61		0.56
Weighted average basic shares outstanding		14,576			14,400		13,872			13,401		13,006
Net income (loss) per diluted share		(0.97	)		0.07		(0.05	)		0.60		0.56
Weighted average diluted shares outstanding		14,576			14,514		13,872			13,728		13,198

					As of October 31,
	2007		2006		2005		2004		2003
	(In thousands)
Balance Sheet Data:
Working capital	$	52,091	$	61,496	$	59,272	$	71,758	$	74,112
Total assets		160,414		164,043		164,714		159,486		105,906
Long-term debt (less current portion)		13,844		15,671		17,320		27,186		2,631
Stockholders’ equity		99,637		108,634		102,562		101,216		88,555

(1)	On July 6, 2004 the Company acquired Gekko Brands, LLC (Gekko). The financial information above includes the results of operations for Gekko from July 7, 2004 (approximately four months for fiscal year 2004) and 12 months for fiscal years 2005, 2006 and 2007.
	For the years ended October 31, 2007 and October 31, 2005 the diluted net loss per share was calculated using the basic weighted average shares outstanding as the effect of stock options would be anti-dilutive due to the Company’s loss position in those periods.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

General

     The Company operates in an industry that is highly competitive and must accurately anticipate fashion trends and consumer demand for its products. There are many factors that could cause actual results to differ materially from the projected results contained in certain forward-looking statements in this annual report on Form 10-K. For additional information, see “Cautionary Statements” and “Item 1A. Risk Factors” in Part I.

Critical Accounting Policies and Estimates

     The SEC’s Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR 60”), encourages companies to provide additional disclosure and commentary on those accounting policies considered to be critical. The Company has identified the following

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critical accounting policies that affect its significant judgments and estimates used in the preparation of its consolidated financial statements.

     Revenue Recognition. Based on its terms of F.O.B. shipping point, where risk of loss and title transfer to the buyer at the time of shipment, the Company recognizes revenue at the time products are shipped or, for Company stores, at the point of sale. The Company records sales in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Under these guidelines, revenue is recognized when all of the following exist: persuasive evidence of a sale arrangement exists, delivery of the product has occurred, the price is fixed or determinable, and payment is reasonably assured. The Company also includes payments from its customers for shipping and handling in its net revenues line item in accordance with Emerging Issues Task Force (“EITF”) 00-10, Accounting of Shipping and Handling Fees and Costs. Provisions are made for estimated sales returns and other allowances.

     Sales Returns, Markdowns and Other Allowances. Management must make estimates of potential future product returns and other allowances related to current period product revenues. Management analyzes historical returns, current economic trends, changes in customer demand, and sell-through of our products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Material differences may result with respect to the amount and timing of our revenues for any period if management makes different judgments or utilizes different estimates. The reserves for sales returns, markdowns and other allowances amounted to $3.9 million at October 31, 2007 compared to $4.0 million at October 31, 2006.

     Allowance for Doubtful Accounts. Management must also make estimates of the collectability of accounts receivable. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense. Management determines the adequacy of this allowance by analyzing current economic conditions, historical bad debts and continually evaluating individual customer receivables while considering the customer’s financial condition. The Company has credit insurance to cover many of its major accounts. Our trade accounts receivable balance was $34.5 million, net of allowances for doubtful accounts of $1.0 million, at October 31, 2007, as compared to the balance of $34.0 million, net of allowances for doubtful accounts of $1.1 million, at October 31, 2006. Allowances for doubtful accounts as a percentage of trade accounts receivable was 2.9% at October 31, 2007 and 3.1% at October 31, 2006.

     Inventory. The Company writes down its inventory by amounts equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about the age of the inventory, future demand and market conditions. This process provides for a new basis for the inventory until it is sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Our inventory balance was $50.5 million, net of inventory write-downs of $4.6 million, at October 31, 2007, as compared to an inventory balance of $45.0 million, net of inventory write-downs of $3.5 million, at October 31, 2006. Inventory write-downs as a percentage of inventories were 8.3% at October 31, 2007 compared to 7.1% at October 31, 2006.

     Deferred Taxes. SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these

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future tax consequences could materially impact our financial position, results of operations or cash flows. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5, Accounting for Contingencies (“SFAS 5”).

     Share-based compensation. The Company accounts for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Off-Balance Sheet Arrangements

     At October 31, 2007 and 2006, 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. In addition, the Company does not engage in trading activities involving non-exchange traded contracts that rely on estimation techniques to calculate fair value. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.

Overview

     The Company earns revenues and income and generates cash through the design, marketing and distribution of quality men’s and women’s sports apparel, headwear and accessories under the Ashworth, Callaway Golf apparel, Kudzu and The Game and brands. The Company’s products are sold in the United States, Europe, Canada and various other international markets to selected golf pro shops, resorts, off-course specialty shops, upscale department stores, retail outlet stores, colleges and universities, entertainment complexes, sporting goods dealers that serve the high school and college markets, NASCAR/racing markets, outdoor sports distribution channels, and to top specialty-advertising firms for the corporate market. All of the Company’s apparel production in fiscal 2007 was through “full package” purchases of ready-made goods with nearly all of the apparel and all of the headwear being manufactured in Asian countries. The Company embroiders a majority of these garments with custom golf course, tournament, collegiate and corporate logos for its customers.

     On June 6, 2007, the Company, through its wholly-owned subsidiary Gekko Brands, LLC entered into two and five year employment and non-competition agreements with certain selling members of Gekko Brands, LLC who are currently employees of Gekko Brands, LLC (“the Gekko Employees”). The employment and non-competition agreements guarantee payment of the contingent consideration installment payments for fiscal years 2007 and 2008, thereby amending Sections 1.2(c) and 1.3 of the Membership Interests Purchase Agreement, dated July 6, 2004 (the “Purchase Agreement”), relating to the acquisition of Gekko Brands, LLC by the Company. Under the Purchase Agreement, an additional $6,500,000 would be paid to the Gekko Employees if the subsidiary achieved certain specified EBIT and other operating targets which were to be accounted for as additional cost of the acquired entity. From July 7, 2004 through October 31, 2006, Gekko Brands, LLC (“Gekko”) achieved the specified EBIT and other operating targets entitling the Gekko Employees to additional consideration of $3,150,000 recorded as an adjustment to goodwill. Under the new employment and non-competition agreements entered into with the Gekko Employees, the guaranteed installment payments for fiscal years 2007 and 2008, totaling $3,350,000, will be accounted for as compensation and recognized into expense on a straight-line basis over the term of the employment and

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non-competition agreements. From March 1, 2007 through October 31, 2007, the Company recorded approximately $0.7 million in compensation expense related to the employment agreements.

     During the financial close for the year ended October 31, 2007, the Company performed its annual assessment of its net deferred tax assets in accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 limits the ability to use future taxable income to support the realization of deferred tax assets when a company has experienced recent losses even if the future taxable income is supported by detailed forecasts and projections. After considering the Company’s three-year cumulative losses for fiscal years ended October 31, 2007, 2006, and 2005, the Company concluded that it could no longer rely on future taxable income as the basis for realization of its net deferred tax asset.

     Accordingly, the Company recorded tax charges during fiscal year ended October 31, 2007 of $7.3 million to increase a valuation allowance against deferred tax assets. These tax charges are recorded in the provision for income taxes in the accompanying consolidated statements of operations. The Company expects to continue to record the valuation allowance against its deferred tax assets until other positive evidence is sufficient to justify realization.

     Technology. In December 2005, the Company signed purchase contracts for a new Enterprise Resource Planning (“ERP”) system. The current computer system was initially installed in 1993 and lacks the sophistication required to efficiently operate a multi-currency, multi-subsidiary business. The new ERP system is expected to provide management with timely, consolidated information to gain better visibility into our business drivers. In December 2007, the new ERP system was placed into service in the United Kingdom. The initial implementation of the system in the United Kingdom was originally scheduled for May 2007 but was delayed six months due to difficulties experienced in the final design and rollout phase of the project. The Company intends to monitor and evaluate the operating benefits and efficiencies of the new ERP system in the United Kingdom over an extended period before management begins implementing the system at the Company’s corporate headquarters which is not expected to take place before October 2009.

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Fiscal 2007 Compared To Fiscal 2006

     The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage change and as a percent of total revenue (all dollar amounts in millions):

													% of Total
							Change						Revenue
	2007			2006			$			%			2007			2006
Net revenues:
Retail distribution	$	16.3		$	22.7		$	(6.4	)		(28.2	)%		8.0	%		10.8	%
Domestic green grass		67.1			70.3			(3.2	)		(4.6	)%		33.2	%		33.6	%
Domestic corporate		24.6			25.8			(1.2	)		(4.7	)%		12.2	%		12.3	%
Domestic outlet store		11.7			10.5			1.2			11.4	%		5.8	%		5.0	%
Total domestic		119.6			129.3			(9.6	)		(7.4	)%		59.2	%		61.7	%
Gekko		45.2			41.8			3.4			8.1	%		22.3	%		19.9	%
Ashworth U. K.		27.2			28.0			(0.8	)		(2.9	)%		13.5	%		13.4	%
Other international		10.1			10.5			(0.4	)		(3.8	)%		5.0	%		5.0	%
Total net revenues		202.2			209.6			(7.4	)		(3.5	)%		100.0	%		100.0	%
Cost of goods sold		124.4			123.8			0.6			0.5	%		61.6	%		59.0	%
Selling, general and administrative expenses		85.8			81.5			4.3			5.3	%		42.4	%		38.9	%
Total operating expenses		210.2			205.3			4.9			2.4	%		104.0	%		97.9	%
Income (loss) from operations		(8.0	)		4.3			(12.3	)		(283.5	)%		(4.0	)%		2.1	%
Interest expense, net		(2.8	)		(2.8	)		—			0.0	%		(1.4	)%		(1.3	)%
Other expense, net		(0.2	)		0.3			(0.5	)		(166.7	)%		(0.1	)%		0.1	%
Income (loss) before provision for income taxes		(11.0	)		1.8			(12.8	)		(711.1	)%		(5.5	)%		0.9	%
Provision for income taxes		3.1			0.8			2.3			287.5	%		1.5	%		0.4	%
Net income (loss)	$	(14.1	)	$	1.0		$	(15.1	)		1510.0	%		(7.0	)%		0.5	%

     Consolidated net revenues were $202.2 million for fiscal 2007, a decrease of 3.5% from net revenues of $209.6 million in fiscal 2006. The Company experienced decreases in all domestic and international distribution channels except for the Company’s outlet store and Collegiate channels.

     Net revenues for the domestic segment (excluding Gekko) decreased 7.4% to $119.6 million in fiscal 2007 from $129.3 million in fiscal 2006.

     Net revenues from the Company’s retail distribution channel decreased $6.4 million or 28.2% to $16.3 million in fiscal 2007 from $22.7 million in fiscal 2006. The decrease in the Company’s retail distribution channel was primarily driven by prior management’s decision to reduce the presence of the Ashworth brand in this channel.

     Net revenues from the domestic green grass and off-course specialty distribution channel decreased $3.2 million or 4.6% to $67.1 million for fiscal 2007 from $70.3 million in fiscal 2006. For the year, revenues in the Company’s golf channel were somewhat affected by customer consolidation within the off-course specialty channel of distribution and continuing competitive pressure.

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     Net revenues in the Company’s domestic corporate distribution channel decreased $1.2 million or 4.7% to $24.6 million in fiscal 2007 from $25.8 million in fiscal 2006. The decline in the corporate distribution channel resulted from missed sales opportunities due to out-of-stock positions in certain styles throughout the year.

     Net revenues in the Company’s domestic outlet store distribution channel increased $1.2 million or 11.4% to $11.7 million in fiscal 2007 from $10.5 million in fiscal 2006, primarily due to the full year effect of the four new outlet locations opened during the second half of the fiscal year 2006. Sales from comparable stores opened for more than a year were down 1.6%.

     Net revenues for Gekko increased $3.4 million or 8.1% to $45.2 million in fiscal 2007 as compared to $41.8 million in the prior fiscal year, primarily due to increased sales of apparel and headwear into the collegiate/bookstore channel and increases in tour events. These increases were partially offset by a decrease in the NASCAR/racing and outdoor sporting channels.

     Net revenues for Ashworth U.K., Ltd. decreased $0.8 million or 2.9% to $27.2 million in fiscal 2007 as compared to $28.0 million in fiscal 2006. The decrease was primarily due to licensed sales of the Ryder Cup Championship event played in September of 2006 not included in fiscal 2007 results. This decrease was partly offset by the favorable effect of exchange rate fluctuations of $2.4 million.

     Net revenues for the other international segment decreased $0.4 million or 3.8% to $10.1 million in fiscal 2007 as compared to $10.5 million in fiscal 2006.

     The consolidated gross profit margin for fiscal 2007 decreased 240 basis points to 38.5% as compared to 40.9% in fiscal 2006. The decrease resulted principally from higher discounting to clear excess inventory as well as the underutilization of the Company’s Embroidery and Distribution Center in Oceanside, California due to lower sales volumes in the Company’s domestic distribution channels (excluding Gekko).

     Selling, general and administrative (“SG&A”) expenses increased 5.3% to $85.8 million in fiscal 2007 compared to $81.5 million in fiscal 2006. As a percentage of net revenues, SG&A expenses increased to 42.4% of net revenues in fiscal 2007 as compared to 38.9% in fiscal 2006. The increase in SG&A expenses was due to an approximate $1.9 million increase in trade shows, sales meetings and licensing fees, a net increase in employee severance of approximately $0.8 million, approximately $0.7 million due to the full-year effect of the four new outlets stores added in the second half of fiscal 2006 as well as recognition of approximately $0.7 million of additional compensation expense related to five officers of Gekko. This additional compensation resulted from a change in the nature of certain contingent acquisition obligations which previously were accounted for as additional purchase price of the acquisition.

     Net other expenses increased $0.4 million to $3.0 million in fiscal 2007 as compared to $2.6 million in fiscal 2006, primarily due to a net foreign currency translation loss in fiscal 2007 as compared to a gain in fiscal 2006.

     The effective income tax rate applicable to the Company for fiscal 2007 decreased to (27.8%) compared to the 45.7% effective income tax rate for fiscal 2006. The decrease in the effective income tax rate for fiscal 2007 compared to fiscal 2006 results from an increase in the valuation allowance against deferred tax assets, since it was determined to be likely that all or a portion of the deferred tax assets will not be realized due to projected taxable losses.

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Fiscal 2006 Compared To Fiscal 2005

     The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage change and as a percent of total revenue (all dollar amounts in millions):

													% of Total
							Change						Revenue
	2006			2005			$			%			2007			2006
Net revenues:
Retail distribution	$	22.7		$	15.5			7.2			46.5	%		10.8	%		7.6	%
Domestic green grass		70.3			86.2			(15.9	)		(18.4	)%		33.6	%		42.1	%
Domestic corporate		25.8			23.8			2.0			8.4	%		12.3	%		11.6	%
Domestic outlet store		10.5			7.7			2.8			36.4	%		5.0	%		3.8	%
Total domestic, excluding Gekko		129.3			133.2			(3.9	)		(2.9	)%		61.7	%		65.1	%
Gekko		41.8			37.5			4.3			11.4	%		19.9	%		18.3	%
Ashworth U. K.		28.0			23.4			4.6			19.7	%		13.4	%		11.4	%
Other international		10.5			10.7			(0.2	)		(1.9	)%		5.0	%		5.2	%
Total net revenues		209.6			204.8			4.8			2.3	%		100.0	%		100.0	%
Cost of goods sold		123.8			127.9			(4.1	)		(3.2	)%		59.0	%		62.5	%
Selling, general and administrative expenses		81.5			75.4			6.1			8.1	%		38.9	%		36.8	%
Total operating expenses		205.3			203.3			2.0			1.0	%		97.9	%		99.3	%
Income from operations		4.3			1.5			2.9			186.7	%		2.1	%		0.7	%
Interest expense, net		(2.8	)		(2.3	)		(0.5	)		21.7	%		(1.3	)%		(1.1	)%
Other expense, net		0.3			(0.5	)		0.8			(160.0	)%		0.1	%		(0.2	)%
Income (loss) before provision for income taxes		1.8			(1.3	)		3.1			(238.5	)%		90.0	%		(0.6	)%
Provision (benefit) for income taxes		0.8			(0.6	)		1.4			(233.3	)%		0.4	%		(0.3	)%
Net income (loss)	$	1.0		$	(0.7	)		1.7			(242.9	)%		0.5	%		(0.3	)%

     Consolidated net revenues were $209.6 million for fiscal 2006, an increase of 2.3% from net revenues of $204.8 million in fiscal 2005. The increase was primarily due to increased net sales in the Gekko and Ashworth UK, Ltd, subsidiaries and continued growth in the Company’s retail, corporate and Company-owned outlet store distribution channels, partially offset by a decline in net revenues from the Company’s golf-related distribution channel and the other international segment.

     Net revenues for the domestic segment (excluding Gekko) decreased 2.9% to $129.3 million in fiscal 2006 from $133.2 million in fiscal 2005.

     Net revenues from the Company’s retail distribution channel increased $7.2 million or 46.4% to $22.7 million from $15.5 million in fiscal 2005, primarily driven by the Company’s enhanced merchandising strategy focused on classic key item products with a lower percentage of fashion products. This change in product mix improved full priced sell-through of Spring/Summer product and the Company effectively delivered Fall/Holiday products later in the season to maximize product turn and profitability that resulted in lower experienced and projected requests from major customers for margin assistance as compared to fiscal 2005.

     Net revenues from the domestic green grass and off-course specialty distribution channel decreased $15.9 million or 18.4% to $70.3 million for fiscal 2006 from $86.2 million in fiscal 2005, primarily due to the

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Company’s decision to reduce the amount of off-price sales, increased competitive pressure and a continued softness in the golf market. Despite the softness in demand, the Company saw growth in both of its Ashworth AWS and Callaway X series technical performance product offerings.

     Net revenues in the Company’s domestic corporate distribution channel increased $2.0 million or 8.4% to $25.8 million in fiscal 2006 from $23.8 million in fiscal 2005. Growth in the corporate distribution channel was attributable to certain sales promotions and the addition of technical performance product offerings.

     Net revenues in the Company’s domestic outlet store distribution channel increased $2.8 million or 36.4% to $10.5 million in fiscal 2006 from $7.7 million in fiscal 2005, primarily due to the opening of four new outlet locations during the second half of fiscal 2006 and the full year effect of four outlets opened during fiscal 2005.

     Net revenues for Gekko increased $4.3 million or 11.4% to $41.8 million in fiscal 2006 as compared to $37.5 million in fiscal 2005, primarily due to increased sales of apparel into the collegiate/bookstore channel and the addition of a multi-year exclusive on-site merchandiser license with the Kentucky Derby that began in 2006.

     Net revenues for Ashworth U.K., Ltd. increased $4.6 million or 19.7% to $28.0 million in fiscal 2006 as compared to $23.4 million in fiscal 2005, primarily due to a year-over-year increase in both the Ashworth and Callaway Golf apparel brands in the golf, resort and corporate distribution channels including an increase in net revenues associated with licensed product sales contributed by the 2006 Ryder Cup championships event played in September 2006.

     Net revenues for the other international segment decreased $0.2 million or 1.9% to $10.5 million as compared to $10.7 million in fiscal 2005.

     The consolidated gross profit margin for fiscal 2006 increased to 40.9% as compared to 37.6% in fiscal 2005. The increase was primarily due to a decrease in granted markdown allowances in the Company’s domestic retail distribution channel driven by the Company’s focus on classic key item products with a lower percentage of fashion products. This strategy improved full priced sell-through, reduced levels of domestic inventory and realized direct labor efficiencies at the Company’s EDC. These improvements in gross margin were partly offset by lower than forecasted full priced sales in the Company’s green grass distribution channel that directly contributed to the under-utilization of the EDC’s embroidery capacity.

     SG&A expenses increased 8.1% to $81.5 million in fiscal 2006 compared to $75.4 million in fiscal 2005. As a percentage of net revenues, SG&A expenses increased to 38.9% of net revenues in fiscal 2006 as compared to 36.8% in fiscal 2005. Primary drivers of the higher SG&A expense included the net addition of four new Company stores and the full year effect of the four new outlets added during fiscal 2005, expenses associated with the previously-announced resignation of the Company’s former Chairman and CEO and other organizational charges, consulting and legal fees associated with the 2006 Annual Meeting of Stockholders and the strategic alternatives process, and an increase in licensed/royalty products.

     Net other expenses decreased $0.3 million to $2.5 million in fiscal 2006 as compared to $2.8 million in fiscal 2005, primarily due to a net foreign currency transaction gain in fiscal 2006 compared to a net loss in the prior year, offset partly by an increase in interest expense due to higher average borrowings on the revolving credit facility and incrementally higher interest rates throughout fiscal 2006.

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     The effective income tax (benefit) rate applicable to the Company for fiscal 2006 increased to 45.7% compared to the (43.6%) effective income tax (benefit) rate for fiscal 2005. The increase in the effective income tax (benefit) rate for fiscal 2006 compared to fiscal 2005 results from an increase in non-deductible permanent tax differences due principally to the accounting for incentive stock options under SFAS 123R.

     During fiscal 2006, the Company recorded net income of $1.0 million or $0.07 per basic and diluted share, as compared to a net loss of ($0.7) million or ($0.05) per basic and diluted share in the prior year. The increase in net income in fiscal 2006 was primarily attributable to the higher gross profit margins as outlined above.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

     Historically, the Company’s primary sources of liquidity have been generated from cash flows from operations, the working capital line of credit with its bank and other financial alternatives such as leasing. However, the Company has incurred losses in the recent periods and negative cash flows from operations during fiscal year 2007. As of or for the year ended October 31, 2007, the Company incurred a net loss of $14.1 million and cash and cash equivalents declined by $1.4 million compared to the balance at October 31, 2006. The Company requires cash for capital expenditures and other requirements associated with its domestic and international production, distribution and sales activities, as well as for general working capital purposes. The Company’s need for working capital is seasonal with the greatest requirements existing from approximately December through the end of July each year. The Company typically builds up its inventory early during this period to provide product for shipment for the Spring/Summer selling season.

     On January 11, 2008, the Company and its material domestic subsidiaries as co-borrowers entered into and consummated a new senior revolving credit facility (the “Credit Facility”) of up to $55.0 million (subject to borrowing base availability), including a $15.0 million sub-limit for letters of credit (letters of credit will be 100% reserved against borrowing availability) with Bank of America, N.A., (“B of A”). Proceeds of $30.9 million under the Credit Facility were used by the Company on January 11, 2008 to payoff its existing term loan, revolving credit facility and cash collateralize all outstanding letters of credit with Union Bank of California, N.A., (“Union Bank”) and to pay related fees and expenses. The Credit Facility is anticipated to be used in the future by the Company to issue standby or commercial letters of credit and to finance ongoing working capital needs. The Credit Facility expires on January 11, 2012 and is collateralized by a substantial portion of the assets of the Company and its subsidiaries party thereto (excluding real estate and certain other assets).

     Loans under the Credit Facility bear interest at a rate based either on (i) B of A’s referenced base rate or (ii) LIBOR (as defined in the Credit Facility), subject in each case to performance pricing adjustments based on the Company’s fixed charge coverage ratio that range between LIBOR plus 1.25% and LIBOR plus 1.75%. Interest will be set at LIBOR plus 1.25% for the first six months of the agreement and adjusting thereafter. The initial interest rate applicable to borrowings under the Credit Facility is 7.25%.The Company also is required to pay customary fees under the Credit Facility. At December 31, 2007, the six month LIBOR was 5.95% All interest and per annum fees are calculated on the basis of actual number of days elapsed in a year of 360 days.

     The borrowing base under the Credit Facility at any time equals the lesser of (i) $55.0 million, minus the amount of any outstanding letters of credit other than that have not been cash collateralized and those that constitute charges owing to B of A, and (ii) the sum of (a) eighty-five percent (85%) of the value of eligible

29

accounts receivable, provided, however that such percentage shall be reduced by 1.0% for each whole percentage point that the dilution percent exceeds 5.0%; plus (b) the least of (x) $45.0 million, (y) between 65% and 70% (seasonal advance rate) of the Company’s eligible inventory and eligible in-transit inventory, plus a percentage of slow moving inventory (set at 65% for the first year, and dropping to 0% by the fourth year) and (z) 85% of the appraised net orderly liquidation value of eligible inventory (including eligible in-transit inventory and eligible slow moving inventory); minus (c) certain reserves; minus (d) outstanding obligations under the loan facility anticipated to be provided by the Bank to Ashworth U.K., Ltd., as described below (the “UK Loan Facility”) The borrowing base as of January 11, 2008 was approximately $41.5 million. Unused availability, as of January 11, 2008,was approximately $5.6 million.

     The Credit Facility contains restrictive covenants limiting the ability of the Company and its subsidiaries to take certain actions, including covenants limiting the Company’s ability to incur or guarantee additional debt, incur liens, pay dividends, repurchase stock or make other distributions, sell assets, make loans and investments, prepay certain indebtedness, enter into consolidations or mergers, and enter into transactions with affiliates. The Credit Facility limits the ability of the Company to agree to certain change of control transactions, because a “change of control” (as defined in the Credit Facility) is an event of default. The Credit Facility also contains customary representations and warranties, affirmative covenants, events of default, indemnities and other terms and conditions.

     The foregoing summary of the Credit Facility is qualified by reference to the Loan and Security Agreement dated as of January 11, 2008 attached as Exhibit 10(aq) to the Company’s Form 10-K filed with the Commission on January 14, 2008. Please see the Loan and Security Agreement for a more detailed description of the terms of the Credit Facility.

     The Company and B of A are currently in the process of negotiating a UK Loan Facility in an amount anticipated to be up to $10.0 million. The applicable interest rate and fees under the UK Loan Facility are anticipated to be comparable to the applicable interest rate and fees under the Credit Facility. As noted above, loans and letters of credit under the UK Loan Facility are anticipated to reduce the borrowing base under the Credit Facility. The Company believes that the UK Credit Facility will enhance the Company’s ability to meet its current and long-term operating needs in the UK. Although there can be no assurance that the UK Loan Facility will be consummated on the above-referenced terms or at all, the Company anticipates that the UK Credit Facility will be completed during the second quarter of fiscal 2008.

     Net cash used by operating activities of $4.6 million for the fiscal year ended October 31, 2007 was primarily attributable to an operating loss of $14.1 million and an increase in inventory of $5.7 million, partly offset by non-cash depreciation and amortization expense of $6.3 million, decreases of current and deferred income tax assets of $5.2 and increases in trade payables and other accrued liabilities of $3.3 million.

     Net cash used in investing activities of $5.6 million for the fiscal year ended October 31, 2007 was primarily attributable to implementation costs of the Company’s new ERP system in the United Kingdom and additional purchase price associated with the fiscal 2004 Gekko Brands, LLC aquisition.

     Net cash provided by financing activities of $5.9 million for the fiscal year ended October 31, 2007 was due primarily to net borrowings on the Company’s line of credit of $5.6 million, proceeds from the exercise of stock options of $1.2 million, net borrowings and principal payments of notes payable and long-term debt of $1.6 million and a decrease in restricted cash of $0.7 million. The effect on cash due to foreign currency exchange was a gain of $3.0 million.

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     The Company anticipates that sufficient cash flows will be generated from operations so that in combination with other financing alternatives available, including cash on hand, borrowings under its new bank credit facility and leasing alternatives, the Company will be able to meet all of its debt service, capital expenditures and working capital requirements for at least the next twelve months.

     On July 6, 2004, the Company entered into a loan agreement with Union Bank of California, N.A., as the administrative agent, and two other lenders (collectively referred to as the “Bank”). The loan agreement was comprised of a $20.0 million term loan and a $35.0 million revolving credit facility, is due to expire on July 6, 2009 and is collateralized by substantially all of the assets of the Company, other than the Company’s EDC in Oceanside, California.

     Under this loan agreement, interest on the $20.0 million term loan was fixed at 5.4% for the term of the loan. Interest on the revolving credit facility is charged at the Bank’s reference rate. At October 31, 2007, the bank’s reference rate was 8.0%. The loan agreement also provides for optional interest rates based on London inter-bank offered rates (“LIBOR”) for periods of at least 30 days in increments of $0.5 million.

     On September 3, 2004, the Company entered into the First Amendment to the loan agreement to amend Section 6.12(a), Tangible Net Worth. The loan agreement, as amended, contains certain financial covenants that include a requirement that the Company maintain (1) a minimum tangible net worth of $74.0 million plus the net proceeds from any equity securities issued (including net proceeds from stock option exercises) after the date of the loan agreement for the period ending October 31, 2004, and a minimum tangible net worth of $74.0 million plus 90% of net income after taxes (without subtracting losses) earned in each quarterly accounting period commencing after January 31, 2005, plus the net proceeds from any equity securities issued (including net proceeds from stock option exercises) after the date of the loan agreement, (2) a minimum EBITDA determined on a rolling four quarter basis ranging from $16.5 million at July 6, 2004 and increasing over time to $27.0 million at October 31, 2008 and thereafter, (3) a minimum ratio of cash and accounts receivable to current liabilities of 0.75:1.00 for fiscal quarters ending January 31 and April 30 and 1.00:1.00 for fiscal quarters ending July 31 and October 31, and (4) a minimum fixed charge coverage ratio of 1.10:1.00 at July 31, 2004 and 1.25:1.00 thereafter. The loan agreement limits annual lease and equipment rental expense associated with the Company’s distribution center in Oceanside, California as well as annual capital expenditures in any single fiscal year on a consolidated basis in excess of certain amounts allowed for the acquisition of real property and equipment in connection with the distribution center. The loan agreement had an additional requirement where, for any period of 30 consecutive days, the total indebtedness under the revolving credit facility may not be more than $15.0 million. The loan agreement also limits the annual aggregate amount the Company may spend to acquire shares of its common stock.

     On May 27, 2005 and September 8, 2005, the Company entered into the Second and Third Amendments, respectively, to the loan agreement. The Second Amendment to the loan agreement amended Section 6.12(e), Capital Expenditures, to increase the spending limitation to acquire fixed assets from not more than $5 million in any single fiscal year on a consolidated basis to a total of $20.0 million for fiscal years 2004 and 2005 together, for the acquisition of real property and equipment in connection with the distribution center located in Oceanside, California. The Third Amendment waived non-compliance with various financial covenants of the loan agreement, solely for the period ended July 31, 2005.

     On January 26, 2006, the Company entered into the Fourth Amendment to the loan to amend several sections of the credit facility and to waive non-compliance with financial covenants at October 31, 2005. Under the terms of the revised loan agreement, the revolving loan commitment was adjusted to $42.5 million and the term loan commitment was adjusted to $6.8 million. Based on the revised loan agreement, the term loan commenced January 31, 2006 and has equal monthly installments of principal in the amount of $125,000, plus all accrued interest for each monthly installment period, with a balloon installment for the entire unpaid principal balance and all accrued and unpaid interest due in full on the maturity date of July 6, 2009.

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     Concurrent with the signing of the Fourth Amendment, the Company borrowed $7.5 million against the revolving credit facility and paid down the term loan by the same amount. The Company also paid bank fees totaling $125,000 related to the Fourth Amendment. The balance sheet at October 31, 2005 and the cash flow statement for the year ended October 31, 2005 in the accompanying financial statements have been adjusted to record these transactions as if the Fourth Amendment had been in effect as of October 31, 2005. See “Note 5 – Line of Credit,” in the accompanying notes to Consolidated Financial Statements.

     The loan agreement was also modified, pursuant to the Fourth Amendment, to reflect the change to a borrowing base commitment. The primary requirements under the borrowing base denote that the Bank shall not be obligated to advance funds under the revolving credit facility at any time that Company’s aggregate obligations to the Bank exceed the sum of (a) seventy five percent (75%) of the Company’s eligible accounts receivables, and (b) fifty-five percent (55%) of the Company’s eligible inventory. If at any time the Company’s obligations to the Bank under the referenced facilities exceed the permitted sum, the Company shall immediately repay to the Bank such excess. The applicable rate schedule was adjusted to reflect an additional pricing tier based on the average daily funded debt to EBITDA ratio. The Fourth Amendment also amended certain financial covenants and maintenance requirements under the loan agreement as follows:

1)	Minimum tangible net worth equal to the sum of $75.0 million; plus the sum of 90% of net income after income taxes (without subtracting losses) earned in each quarterly accounting period commencing after January 31, 2006; plus, the net proceeds from any equity securities issued after the date of the Fourth Amendment, including net proceeds from stock options exercised;
2)	A ratio of quick assets to current liabilities (including the outstanding amount of loans and letter of credit obligations) of at least 0.90:1.00, except for the fiscal quarters ending January 31 and April 30, as to which the ratio of quick assets to current liabilities shall be at least 0.75:1.00;
3)	Capital expenditures are not to exceed $7.0 million in any fiscal year;
4)	Fixed charge coverage ratio as of the last day of any fiscal quarter is required to be not less than 1.25 to 1.00; provided that, for the fiscal quarter ending January 31, 2006, the fixed charge coverage ratio shall not be less than 0.80 to 1.00; and for purposes of determining the fixed charge coverage ratio only, the Company’s inventory write-down of $4.4 million shall be added back to EBITDA for the Company’s fiscal quarter ending April 30, 2006 and the Company’s maintenance capital expenditures shall be $4.0 million through the fiscal year ending October 31, 2006; and
5)	The requirement where, for any period of 30 consecutive days, the total indebtedness under the revolving credit facility may not be more than $15.0 million was eliminated.

     The Company was not in compliance with the required quick asset ratio in the first quarter of fiscal year 2006. The Company obtained a written waiver of the quick assets to current liabilities covenant requirement from its lenders for the period ended January 31, 2006.

     On March 7, 2007, the Company entered into the Sixth Amendment to the loan agreement with the Bank to eliminate the ratio of quick assets to current liabilities covenant requirement and waive non-compliance with financial covenants at January 31, 2007.

     At April 30, 2007, the Company’s fixed charge coverage ratio of (0.18) to 1:00 and minimum tangible net worth of $79.8 million were not in compliance with the Company’s loan agreement covenants.

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On June 15, 2007, the Company obtained a written waiver of the fixed charge coverage ratio and minimum tangible net worth covenant requirements from its lenders for the period ended April 30, 2007.

     On July 27, 2007, the Company entered into the Eighth Amendment to its Revolving/Term Loan Credit Agreement with Union Bank of California, N.A. dated July 6, 2004.  This and previous recent amendments were necessary to align the covenant and collateral requirements of the agreement with the Company’s expected operating results during the remaining term of the agreement. The Eighth Amendment modified certain provisions of the Loan Agreement, which include the following:

1.	The borrowing base calculation was changed and denotes that the Lenders shall not be obligated to advance funds under the revolving credit facility at any time that the Company’s aggregate obligations to the Lenders exceed the sum of (a) eighty-five percent (85%) of Borrower’s Eligible Accounts, and (b) the lesser of (i) sixty-five percent (65%) of Borrower’s Eligible Inventory and (ii) eighty-five percent (85%) of the appraised net recovery value of Borrower’s Inventory, as such terms are defined in the amended Loan Agreement.
2.	A Control Account was established wherein any immediately available funds in the account will be automatically applied to the Company’s obligation under the revolving line of credit to minimize the Company’s interest expense.
3.	A Minimum Borrowing Base Availability provision was added which states that the Company must maintain a difference between the Borrowing Base and the aggregate outstanding obligations under the Credit Agreement of at least $7.5 million, except if the Company has achieved at least two (2) consecutive quarters of a Fixed Charge Coverage Ratio in excess of 1:10 to 1:00. If the Company is not in compliance with this provision for five (5) consecutive business days, this will constitute a “Triggering Event” and will result in the Control Account becoming the property of the Company’s bank as partial payment for the Company’s outstanding obligations under the Credit Agreement. Such a Triggering Event may be cured by maintaining the difference of at least $7.5 million for thirty (30) consecutive days.
4.	The Minimum Tangible Net Worth requirement was modified and is now equal to the sum of at least $70.0 million; plus 50% of net income after income taxes (without subtracting losses) earned in each quarterly accounting period commencing after April 30, 2007; plus, the net proceeds from any equity securities issued after the date of the Eighth Amendment (inclusive of securities issued in connection with stock-based compensation).
5.	The Minimum Fixed Charge Coverage Ratio (FCCR) was set at no less than 1:10 to 1:00 for periods after the earlier of two (2) consecutive quarters ended with a FCCR in excess of 1.10:1.00 or July 31, 2008. The FCCR may be used in determining the Applicable Rate.
6.	Capital Expenditures (including the total amount of any capital leases) are limited to $4.0 million in any one fiscal year on a consolidated basis. The Company may invest any net proceeds from the sale of any existing real property and equipment used in connection with the Company’s Oceanside, California Embroidery and Distribution Center in like assets within two (2) years of disposal of such assets and such investment will be in addition to the $4.0 million permitted in each fiscal year provided no event of default has occurred, is continuing or would result after giving effect to such investment.
7.	The Applicable Rate schedule was modified and is now based on the Fixed Charge Coverage Ratio or average daily Borrowing Base Availability instead of the Funded Debt to EBITDA Ratio.

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     The revolving credit facility under the loan agreement may also be used to finance commercial letters of credit and standby letters of credit. Commercial letters of credit outstanding under the loan agreement totaled $1.5 million at October 31, 2007 as compared to $2.9 million outstanding at October 31, 2006. The Company had $19.6 million outstanding against the revolving credit facility under this loan agreement at October 31, 2007, compared to $14.0 million outstanding at October 31, 2006. The increase in borrowings under the revolving credit facility is primarily due to decreased cash flow from operations. Net loss increased by $15.1 million to $14.1 million in fiscal 2007 from a $1.0 million net income in 2006. The Company had $4.1 million outstanding on the term loan at October 31, 2007 versus $5.6 million as of October 31, 2006. The decrease in borrowings on the term loan is due to regular monthly payments of principal. At October 31, 2007, $11.9 million was available for borrowings against the revolving credit facility under this loan agreement, subject to borrowing base limitations.

     For the fiscal year ended October 31, 2007, the Company’s capital expenditures were approximately $4.15 million which exceeded the annual capital expenditure limitation of $4.0 million permitted under the Company’s Union Bank loan agreement as amended on July 13, 2007 and on January 11, 2008, the Company paid off its loan balances with Union Bank and entered into a new line of credit agreement with B of A.

     On February 7, 2007, the Company entered into a capital lease agreement with Mazuma Capital to purchase two trade show booths constructed to the Company’s specification with total payments of $683,837. The terms of the lease agreement call for 36 monthly payments of $20,917 in advance with a deposit for the last payment paid at the beginning of the lease. The last payment is due on January 1, 2010. The total interest paid over the life of the agreement will be $69,189. The trade show booths have an estimated life of three years.

     During the year ended October 31, 2006, the Company entered into a capital lease agreement for the purchase of a software license. The lease began in April 2006 for a 36 month term, ending in March 2009 for $556,000. The lease agreement calls for 12 quarterly payments of $53,450 with an imputed interest rate of 9.08%. The software license asset is expected to be placed into service in the first quarter of fiscal year 2010. It will be depreciated over a three year life using the straight-line method. During the fiscal year ended October 31, 2005, the Company did not acquire any equipment under capital leases.

     On April 30, 2006 the Company entered into a lease agreement with Key Equipment Finance, a Division of Key Corporate Capital, Inc. (“KEF” or the “Lessor”) for an IBM server with all applicable software, accessories and upgrade package with total payments of $595,166. The terms of the lease agreement call for 42 monthly payments of $14,171, in advance. The last payment will be made on September 30, 2009. The total interest paid over the life of the agreement will be $8,394. The equipment has an estimated five year life. The Company has determined that the lease meets the criteria for treatment as an operating lease.

     On August 30, 2004, the Company agreed to a schedule with KEF thereby completing the Master Equipment Lease Agreement (the “Lease”), dated as of June 23, 2003, and previously entered into by Ashworth and KEF. Under the terms of the Lease, the Company is leasing the equipment for the EDC in Oceanside, California. The aggregate cost of the equipment was approximately $10.4 million. The initial term of the Lease is for ninety-one (91) months beginning on September 1, 2004 and the monthly rent payment is $128,800. At the end of the initial term, the Company will have the option to (1) purchase all, but not less than all, equipment on the initial term expiration date at a price equal to the greater of (a) the then fair market sale value thereof, or (b) 12% of the total cost of the equipment (plus, in each case, applicable sales taxes), (2) renew the Lease on a month to month basis at the same rent payable at the expiration of the initial lease term, (3) renew the Lease for a minimum period of not less than 12 consecutive months at the then current fair

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market rental value, or (4) return such equipment to the Lessor pursuant to, and in the condition required by, the Lease.

     On October 25, 2002, the Company entered into an agreement to purchase the land and a building, to be built to the Company’s specifications for the EDC, in the Ocean Ranch Corporate Center in Oceanside, California. The building was constructed with approximately 203,000 square feet of useable office and warehouse space and is used by the Company to warehouse, embroider, finish, package and distribute clothing products and related accessories. On April 2, 2004, the Company completed the purchase of the new distribution center for approximately $13.7 million and entered into a secured loan agreement with a bank to finance $11.65 million of the purchase price. The loan is amortized over 30 years, but is due and payable on May 1, 2014 with a balloon payment of $9.6 million. To fulfill certain requirements under the mortgage loan agreement, the Company created Ashworth EDC, LLC, a special purpose entity, to be the purchaser and mortgagor. Ashworth EDC, LLC is a wholly owned limited liability company organized under the laws of the state of Delaware and its results are reported in the consolidated statements included in this annual report on Form 10-K.

     On June 6, 2007, the Company, through its wholly-owned subsidiary Gekko Brands, LLC, entered into two and five year employment and non-competition agreements with certain selling members of Gekko Brands, LLC who are currently employees of Gekko Brands, LLC (the “Gekko Employees”). The employment and non-competition agreements guarantee payment of the contingent consideration installment payments for fiscal years 2007 and 2008, thereby amending Sections 1.2(c) and 1.3 of the Membership Interests Purchase Agreement, dated July 6, 2004 (the “Purchase Agreement”), relating to the acquisition of Gekko Brands, LLC by the Company. Under the Purchase Agreement, an additional $6,500,000 would be paid to the Gekko Employees if the subsidiary achieved certain specified EBIT and other operating targets which were to be accounted for as additional cost of the acquired entity. From July 7, 2004 through October 31, 2006, Gekko Brands, LLC achieved the specified EBIT and other operating targets entitling the Gekko Employees to additional consideration of $3,150,000 recorded as an adjustment to goodwill. Under the new employment and non-competition agreements entered into with the Gekko Employees, the guaranteed installment payments for fiscal years 2007 and 2008 totaling $3,350,000 will be accounted for as compensation and recognized into expense on a straight-line basis over the term of the employment and non-competition agreements.

     During fiscal 2007, common stock and capital in excess of par value increased by $2.1 million of which $1.2 million is due to the issuance of 193,000 shares of common stock on the exercise of options and $0.9 million due to SFAS123R compensation expense. There was no related tax benefit recorded in fiscal 2007.

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Contractual Obligations

     The following table sets forth our contractual obligations as of October 31, 2007 (in 000’s):

			Less						More
			Than 1		1-3		3-5		than 5
Contractual Obligations	Total		year		years		years		years
Long-term debt	$	15,375	$	1,944	$	3,004	$	465	$	9,962
Long-term debt interest		3,692		749		1,165		1,036		742
Line of Credit obligations		19,615		19,615		—		—		—
Capital lease obligations		829		416		413		—		—
Capital lease obligations interest		65		48		17		—		—
Operating lease obligations		43,470		7,301		14,258		11,729		10,182
Endorsement contracts		3,561		426		2,135		1,000		—
Minimum licensing guarantees		15,411		4,335		9,036		2,040		—
Purchase obligations		35,996		35,996		—		—		—
Other long-term liabilities		84		84		—		—		—
Totals	$	138,098	$	70,914	$	30,028	$	16,270	$	20,886

Currency Fluctuations

     Ashworth U.K., Ltd. is a wholly-owned subsidiary of the Company operating in England which maintains its books of account in British pounds. Ashworth Canada and Ashworth Golf Apparel Canada are divisions of the Company operating in Canada and maintain their books of account in Canadian dollars. For consolidation purposes, the assets and liabilities of Ashworth U.K., Ltd., Ashworth Canada and Ashworth Golf Apparel Canada are converted to U.S. dollars at the month-end exchange rate and results of operations are converted using an average rate during the month. A translation difference arises for share capital and retained earnings, which are converted at rates other than the month-end rate, and this amount is reported in the stockholders’ equity section of the balance sheets.

     Ashworth U.K., Ltd. sells the Company’s products to other countries in Europe, with revenues largely denominated in the local currency. Fluctuations in the currency rates between the United Kingdom and those other countries give rise to a loss or gain that is reported in earnings. (See “Note 1 to Consolidated Financial Statements, Foreign Currency”).

     Ashworth Canada and Ashworth Golf Apparel Canada sell the Company’s products within Canada with the revenues denominated in Canadian dollars; ordinarily there is no transaction adjustment for currency exchange rates for the Company for sales transactions. Ashworth U.K., Ltd., Ashworth Canada and Ashworth Golf Apparel Canada purchase products from the Company in U.S. dollars; therefore, there are transaction adjustments for currency exchange rates for purchase transactions.

     All export revenues by Ashworth, Inc. are U.S. dollar denominated and ordinarily there is no transaction adjustment for currency exchange rates for the Company. However, with respect to export revenues to Ashworth U.K., Ltd., Ashworth Canada and Ashworth Golf Apparel Canada, the foreign entities are at risk on their indebtedness to Ashworth, Inc. The foreign entities maintain their accounts with Ashworth, Inc. in British pounds or Canadian dollars, but owe Ashworth, Inc. in U.S. dollars. At the end of

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every accounting period, the debt is adjusted to British pounds or Canadian dollars by multiplying the indebtedness by the closing British pound/U.S. dollar or U.S. dollar/Canadian dollar exchange rate to ensure that the account has sufficient British pounds or Canadian dollars to meet its U.S. dollar obligation. This re-measurement is either income or expense in each entity’s financial statements. When the financial statements of Ashworth U.K., Ltd., Ashworth Canada and Ashworth Golf Apparel Canada are consolidated with the financial statements of Ashworth, Inc., the gain or loss on transactions that are of a long-term investment nature is eliminated from the income statement and appears in the stockholders’ equity section of the consolidated balance sheet under “Accumulated other comprehensive income (loss).”

     The Company purchases nearly all of its products from offshore manufacturers. All of these purchases were denominated either in U.S. dollars, or in British pounds for Ashworth U.K., Ltd., and consequently there was no foreign currency exchange risk related to these transactions apart from the foreign currency exchange risk associated from translating the financial statements of Ashworth U.K., Ltd from the functional currency of British pounds to the reporting currency of U.S. dollars.

Inflation

     Management believes that inflation has not had a material effect on our results of operations during the three most recent fiscal years. There can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company’s results of operations.

New Accounting Standards

     On February 15, 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard No. 159, Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS 159”). The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified elections dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157, Fair Value Measurements. The Company is currently evaluating the impact, if any, this new standard will have on its consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 clarifies the definition of exchange price as the price between market participants in an orderly transaction to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, which market is the principal or most advantageous market for the asset or liability. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, this new standard will have on its consolidated financial statements.

     In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The Company was required to adopt FIN 48 effective November 1, 2007. The cumulative effect of initially

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adopting FIN 48 will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. Only tax positions that meet the more than likely than not recognition threshold at the effective date may be recognized on adoption of FIN 48. The Company is currently evaluating the impact this new standard will have on its future results of operations and financial position.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

     The Company’s debt consists of a term loan, mortgage note, notes payable, capital lease and line of credit obligations which had a total balance of $35.8 million at October 31, 2007. The debt bears interest at fixed rates ranging from 3.5% to 9.08%, which approximates fair value based on current rates offered for debt with similar risks and maturities. The Company had $19.6 million outstanding at October 31, 2007 on its revolving line of credit with interest charged at the Bank’s reference rate plus a pre-defined spread based on the Company’s funded debt to EBITDA ratio (the “Applicable Rate”). At October 31, 2007, the Applicable Rate was 8.0%. A hypothetical 10% increase in interest rates during the year ended October 31, 2007 would have resulted in a $175,000 increase in net loss.

Foreign Currency Exchange Rate Risk

     The Company’s ability to sell its products in foreign markets and the U.S. dollar value of the sales made in foreign currencies can be significantly influenced by foreign currency fluctuations. A decrease in the value of foreign currencies relative to the U.S. dollar could result in downward price pressure for the Company’s products or losses from currency exchange rates. From time to time the Company and its U.K. subsidiary enter into short-term foreign exchange contracts with its bank to hedge against the impact of currency fluctuations between the U.S. dollar and the British pound. The contracts provide that, on specified dates, the Company would sell the bank a specified number of British pounds in exchange for a specified number of U.S. dollars. Additionally, the Company’s U.K. subsidiary from time to time enters into similar contracts with its bank to hedge against currency fluctuations between the British pound and other European currencies. Realized gains and losses on these contracts are recognized in the same period as the hedged transaction. These contracts have maturity dates that do not normally exceed 12 months. The Company had no foreign currency related derivatives at October 31, 2007 or 2006. The Company will continue to assess the benefits and risks of strategies to manage the risks presented by currency exchange rate fluctuations. There is no assurance that any strategy will be successful in avoiding losses due to exchange rate fluctuations, or that the failure to manage currency risks effectively would not have a material adverse effect on the Company’s results of operations.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The following financial statements with respect to the Company are submitted herewith:

1.	Report of Independent Registered Public Accounting Firm, page F-1 and F-2.
2.	Consolidated Balance Sheets – October 31, 2007 and 2006, pages F-3 and F-4.
3.	Consolidated Statements of Operations for the years ended October 31, 2007, 2006 and 2005, page F-5.
4.	Consolidated Statements of Stockholders’ Equity for the years ended October 31, 2007, 2006 and 2005, page F-6.
5.	Consolidated Statements of Cash Flows for the years ended October 31, 2007, 2006 and 2005, pages F-7 and F-8.
6.	Notes to Consolidated Financial Statements, pages F-9 through F-44.

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7.	Report of Independent Registered Public Accounting Firm, pages F-45.
8.	Supplementary Schedule, page F-46.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

     None

Item 9A. CONTROLS AND PROCEDURES.

1. Evaluation of Disclosure Controls and Procedures

     The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports it files pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management designed the disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.

The Company carried out an evaluation, under the supervision and with the participation of its management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of October 31, 2007. Based on this evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective as of October 31, 2007.

We believe our financial statements fairly present in all material respects the financial position, results of operations and cash flows for the interim and annual periods presented in our annual report on Form 10-K and quarterly reports on Form 10-Q. The unqualified opinion of our independent registered public accounting firm on our financial statements for the year ended October 31, 2007 is included in this Form 10-K.

2. Management’s Report on Internal Control over Financial Reporting

     The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting refers to the process designed by, or under the supervision of, the Company’s CEO and CFO, 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, and includes those 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 Company’s assets;

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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 the Company’s receipts and expenditures are being made only in accordance with the authorization of the Company’s management and directors; 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.

     During the year ended October 31, 2007, management completed the corrective action to remediate the material weakness discussed in Item 9A, Controls and Procedures of its Form 10-K for the fiscal year ended October 31, 2006. Management tested the operational effectiveness of the controls put in place or strengthened to eliminate this material weakness. As a result of these measures, management believes the material weakness has been remediated.

     Management has used the framework set forth in the report entitled Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, as a basis for evaluating the effectiveness of the Company’s internal control over financial reporting. As a result of this assessment, management has not identified any material weakness in internal control over financial reporting.

Changes in Internal Control over Financial Reporting

As disclosed in the Form 8-K filing dated October 30, 2007, the Company’s CEO and CFO resigned from their positions with the Company effective October 24, 2007. A new CEO and CFO were appointed on this same date and have assumed the internal control duties of the prior CEO and CFO.

Except as noted above, there have been no significant changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended October 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. OTHER INFORMATION.

     None

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PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by this Item 10 will be included in either the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders under the caption “Directors and Executive Officers” or a Form 10-K/A which will be filed with the Securities and Exchange Commission no later than February 28, 2008 and is incorporated into this Item 10 by reference.

     The Company has adopted a Code of Business Conduct and Ethics that applies to all directors and employees, including the Company’s principal executive, financial and accounting officers. The Code of Business Conduct and Ethics is posted on the Company website at www.ashworthinc.com. The Company intends to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to provisions of our Code of Business Conduct and Ethics that apply to our directors and senior financial and executive officers by posting such information on the Company’s website.

Item 11. EXECUTIVE COMPENSATION.

     The information required by this Item 11 will be included in either the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders under the caption “Executive Compensation” or a Form 10-K/A which will be filed with the Securities and Exchange Commission no later than February 28, 2008 and is incorporated into this Item 11 by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

     The information required by this Item 12 with respect to security ownership of certain beneficial owners and management will be included in either the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” or a Form 10-K/A which will be filed with the Securities and Exchange Commission no later than February 28, 2008 and is incorporated into this Item 12 by reference.

EQUITY COMPENSATION PLAN INFORMATION

Securities Available for Issuance Under the Company’s Equity Compensation Plans

     The following table provides information with respect to the Company’s equity compensation plans as of October 31, 2007, which plans are as follows: The Company’s 2007 Nonstatutory Stock Option Plan, the 2000 Equity Incentive Plan (the “2000 Plan”), the Incentive Stock Option Plan (the “ISO Plan”), and the Nonqualified Stock Option Plan (the “NQO Plan”). The ISO Plan and the NQO Plan were each terminated at the time of adoption of the 2000 Plan in December 1999, and no additional awards may be granted under such terminated plans.

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					(c) Number of Securities
					Remaining Available for
	(a) Number of				Future Issuance under
	Securities to be Issued		(b) Weighted-average		Equity Compensation
	upon Exercise of		Exercise Price of		Plans (Excluding
	Outstanding Options,		Outstanding Options,		Securities Reflected in
Plan Category	Warrants and Rights		Warrants and Rights		Column (a))
Equity compensation plans approved by security holders		919,000	$	7.95		285,000
Equity compensation plans not approved by security holders		100,000		5.48		100,000
Total		1,019,000	$	7.70		385,000

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

          The information required by this Item 13 will be included in either the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders under the caption “Certain Relationships and Related Transactions” or a Form 10-K/A which will be filed with the Securities and Exchange Commission no later than February 28, 2008 and is incorporated into this Item 13 by reference.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

          The information required by this Item 14 will be included in either the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders under the caption “Independent Registered Public Accounting Firm Fees and Services” or a Form 10-K/A which will be filed with the Securities and Exchange Commission no later than February 28, 2008 and is incorporated into this Item 14 by reference.

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this report:

1.	Financial Statements
	Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets — October 31, 2007 and 2006 Consolidated Statements of Operations for the years ended October 31, 2007, 2006 and 2005 Consolidated Statements of Stockholders’ Equity for the years ended October 31, 2007, 2006 and 2005

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	Consolidated Statements of Cash Flows for the years ended October 31, 2007, 2006 and 2005 Notes to Consolidated Financial Statements — October 31, 2007, 2006 and 2005
2.	Financial Statement Schedule
	Report of Independent Registered Public Accounting Firm on Supplementary Schedule Schedule II — Valuation and Qualifying Accounts
3.	Exhibits.
	See Item (b) below.

(b) Exhibits

3(a)	Certificate of Incorporation as filed March 19, 1987 with the Secretary of State of Delaware, Amendment to Certificate of Incorporation as filed August 3, 1987 and Amendment to Certificate of Incorporation as filed April 26, 1991 (filed as Exhibit 3(a) to the Company’s Registration Statement dated February 21, 1992 (File No. 33-45078) and incorporated herein by reference) and Amendment to Certificate of Incorporation as filed April 6, 1995 (filed as Exhibit 3(a) to the Company’s Form 10-K for the fiscal year ended October 31, 1994 (File No. 001-14547) and incorporated herein by reference).
3(b)	Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K on February 23, 2000 (File No. 001-14547) and incorporated herein by reference).
4(a)	Specimen certificate for Common Stock, par value $.001 per share, of the Company (filed as Exhibit 4(a) to the Company’s Registration Statement dated November 4, 1987 (File No. 33-16714-D) and incorporated herein by reference).
4(b)	Specimen certificate for Options granted under the Amended and Restated Nonqualified Stock Option Plan dated March 12, 1992 (filed as Exhibit 4(b) to the Company’s Form 10-K for the fiscal year ended October 31, 1993 (File No. 001-14547) and incorporated herein by reference).
4(c)	Specimen certificate for Options granted under the Incentive Stock Option Plan dated June 15, 1993 (filed as Exhibit 4(c) to the Company’s Form 10-K for the fiscal year ended October 31, 1993 (File No. 001-14547) and incorporated herein by reference).
4(d)	Rights Agreement dated as of October 6, 1998 and amended on February 22, 2000 by and between Ashworth, Inc. and American Securities Transfer & Trust, Inc. (filed as Exhibit 4.1 to the Company’s Form 8-K filed on March 14, 2000 (File No. 001-14547) and incorporated herein by reference).
10(a)*	Personal Services Agreement and Acknowledgement of Termination of Executive Employment effective December 31, 1998 by and between Ashworth, Inc. and Gerald W. Montiel (filed as Exhibit 10(b) to the Company’s Form 10-K for the fiscal year ended October 31, 1998 (File No.001-14547) and incorporated herein by reference).
10(b)*	Amendment to Personal Services Agreement effective January 1, 1999 by and between Ashworth, Inc. and Gerald W. Montiel (filed as Exhibit 10(c) to the Company’s Form 10-K for the fiscal year ended October 31, 1998 (File No. 001-14547) and incorporated herein by reference).

43

10(c)*	Amended and Restated Nonqualified Stock Option Plan dated November 1, 1996 (filed as Exhibit 10(i) to the Company’s Form 10-K for the fiscal year ended October 31, 2000 (File No. 001-14547) and incorporated herein by reference).
10(d)*	Amended and Restated Incentive Stock Option Plan dated November 1, 1996 (filed as Exhibit 10(j) to the Company’s Form 10-K for the fiscal year ended October 31, 2000 (File No. 001-14547) and incorporated herein by reference).
10(e)*	Amended and Restated 2000 Equity Incentive Plan dated December 14, 1999 adopted by the stockholders on March 24, 2000 (filed as Exhibit 4.1 to the Company’s Form S-8 filed on December 12, 2000 (File No. 333-51730) and incorporated herein by reference).
10(e)(1)	Credit Agreement dated July 6, 2004, between Ashworth, Inc. as Borrower, Union Bank of California, N.A., as Administrative Agent and Lender, Bank of the West and Columbus Bank and Trust as Lenders, expiring July 6, 2009 (filed as Exhibit 10(z)(1) to the Company’s Form 10-Q for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by reference).
10(e)(2)	Guaranty Agreement dated July 6, 2004 between Ashworth Store I, Inc., Ashworth Store II, Inc., Ashworth Acquisition Corp, Gekko Brands, LLC, Kudzu, LLC and The Game, LLC as Guarantors and Union Bank of California, N.A., as Administrative Agent on behalf of Ashworth, Inc. as the Borrower (filed as Exhibit 10(z)(2) to the Company’s Form 10-Q for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by reference).
10(e)(3)	Security Agreement effective as of July 6, 2004 to the Credit Agreement dated July 6, 2004, between Ashworth, Inc. as Pledgor, Union Bank of California, N.A., as Administrative Agent and Lender, Bank of the West and Columbus Bank and Trust as Lenders, expiring July 6, 2009(filed as Exhibit 10(z)(3) to the Company’s Form 10-Q for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by reference).
10(e)(4)	Security Agreement effective as of July 6, 2004 to the Credit Agreement dated July 6, 2004, between Ashworth Store I, Inc., Ashworth Store II, Inc., Ashworth Acquisition Corp, Gekko Brands, LLC, Kudzu, LLC and The Game, LLC as Pledgor, Union Bank of California, N.A., as Administrative Agent and Lender, Bank of the West and Columbus Bank and Trust as Lenders, expiring July 6, 2009 (filed as Exhibit 10(z)(4) to the Company’s Form 10-Q for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by reference).
10(e)(5)	Deed of Hypothec of Universality of Moveable Property effective as of July 6, 2004 to the Credit Agreement dated July 6, 2004, between Ashworth, Inc. as Grantor, Union Bank of California, N.A., as Administrative Agent and Lender, Bank of the West and Columbus Bank and Trust as Lenders, expiring July 6, 2009 (filed as Exhibit 10(z)(5) to the Company’s Form 10-Q for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by reference).
10(e)(6)	Equitable Mortgage Over Securities effective as of July 6, 2004 to the Credit Agreement dated July 6, 2004, between Ashworth, Inc. as Mortgagor, Union Bank of California, N.A., as Security Trustee and Beneficiary, Bank of the West and Columbus Bank and Trust as Beneficiaries, expiring July 6, 2009 (filed as Exhibit 10(z)(6) to the Company’s Form 10-Q for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by reference).

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10(e)(7)	First Amendment effective as of September 3, 2004 to the Credit Agreement dated July 6, 2004, between Ashworth, Inc. as Borrower, Union Bank of California, N.A., as Administrative Agent and Lender, Bank of the West and Columbus Bank and Trust as Lenders, expiring July 6, 2009 (filed as Exhibit 10(z)(7) to the Company’s Form 10-Q for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by reference).
10(f)	Promotion Agreement effective November 1, 1999 by and between Ashworth, Inc. and Fred Couples (filed as Exhibit 10(o) to the Company’s Form 10-K for the fiscal year ended October 31, 2000 (File No. 001-14547) and incorporated herein by reference).
10(g)*	Contract Termination Agreement effective October 31, 2002 by and among Ashworth, Inc., James Nantz, III and Nantz Communications, Inc. (filed as Exhibit 10(p) to the Company’s Form 10-K for the fiscal year ended October 31, 2002 (File No. 001-14547) and incorporated herein by reference).
10(h)*	Promotion Agreement effective October 31, 2002 by and among Ashworth, Inc., James W. Nantz, III and Nantz Enterprises, Ltd. (filed as Exhibit 10(q) to the Company’s Form 10-Q for the quarter ended January 31, 2003 (File No. 001-14547) and incorporated herein by reference).
10(i)	Agreement for Lease dated May 1, 2003 by and among Ashworth, Inc., Ashworth U.K. Limited and Juniper Developments Limited (filed as Exhibit 10(s) to the Company’s Form 10-Q for the quarter ended April 30, 2003 (File No. 001-14547) and incorporated herein by reference).
10(j)	Lease dated September 1, 2003 by and among Ashworth, Inc., Ashworth U.K. Limited and Juniper Developments Limited (filed as Exhibit 10(t) to the Company’s Form 10-Q for the quarter ended July 31, 2003 (File No. 001-14547) and incorporated herein by reference).
10(k)(1)	Master Equipment Lease Agreement dated as of June 23, 2003 by and between Key Equipment Finance and Ashworth, Inc. including Amendment 01, the Assignment of Purchase Agreement and the Certificate of Authority (filed as Exhibit 10(u) to the Company’s Form 10-Q for the quarter ended July 31, 2003 (File No. 001-14547) and incorporated herein by reference).
10(k)(2)	Equipment Schedule No. 01 dated as of August 30, 2004 by and between Ashworth, Inc. and Key Equipment Finance, a Division of Key Corporate Capital, Inc.(filed as Exhibit 99.1 to the Company’s Form 8-K on September 3, 2004 (File No. 001-14547) and incorporated herein by reference).
10(l)(1)†	License Agreement, effective May 14, 2001, by and between Ashworth, Inc. and Callaway Golf Company (filed as Exhibit 10(v) to the Company’s Form 10-K for the fiscal year ended October 31, 2003 (File No. 001-14547) and incorporated herein by reference).
10(l)(2)†	Amendment to License Agreement, effective December 16, 2003, by and between Ashworth, Inc. and Callaway Golf Company (filed as Exhibit 10(w) to the Company’s Form 10-K for the fiscal year ended October 31, 2003 (File No. 001-14547) and incorporated herein by reference).
10(l)(3)	Amendment to License Agreement, effective March 29, 2007, by and between Ashworth, Inc. and Callaway Golf Company (filed as Exhibit 99.1 to the Company’s Form 8-K on December 7, 2007 (File No. 001-14547) and incorporated herein by reference).
10(l)(4)	Amendment to License Agreement, effective December 3, 2007, by and between Ashworth, Inc. and Callaway Golf Company (filed as Exhibit 99.2 to the Company’s Form 8-K on December 7, 2007 (File No. 001-14547) and incorporated herein by reference).

45

10(m)(1)	Loan Agreement, effective April 2, 2004, by and between Ashworth EDC, LLC and Bank of America, N.A. (filed as Exhibit 10(x)(3) to the Company’s Form 10-Q for the quarter ended April 30, 2004 (File No. 001-14547) and incorporated herein by reference).
10(m)(2)	Promissory Note, effective April 2, 2004, by and between Ashworth EDC, LLC and Bank of America, N.A. (filed as Exhibit 10(x)(4) to the Company’s Form 10-Q for the quarter ended April 30, 2004 (File No. 001-14547) and incorporated herein by reference).
10(m)(3)	Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, effective April 2, 2004, by and between Ashworth EDC, LLC, PRLAP, Inc. and Bank of America, N.A. (filed as Exhibit 10(x)(5) to the Company’s Form 10-Q for the quarter ended April 30, 2004 (File No. 001-14547) and incorporated herein by reference).
10(m)(4)	Environmental Indemnity Agreement, effective April 2, 2004, by and between Ashworth EDC, LLC, Ashworth, Inc. and Bank of America, N.A. (filed as Exhibit 10(x)(6) to the Company’s Form 10-Q for the quarter ended April 30, 2004 (File No. 001-14547) and incorporated herein by reference).
10(n)(1)†	Membership Interests Purchase Agreement, dated July 6, 2004, by and among Ashworth Acquisition Corp. and the selling members, identified therein (filed as Exhibit 99.1 to the Company’s Form 8-K on July 21, 2004 (File No. 001-14547) and incorporated herein by reference).
10(n)(2)	Ashworth Acquisition Corp. Promissory Note in favor of W. C. Bradley Co. (filed as Exhibit 99.2 to the Company’s Form 8-K on July 21, 2004 (File No. 001-14547) and incorporated herein by reference).
10(n)(3)	Ashworth, Inc. Guaranty of Ashworth Acquisition Corp. Promissory Note in favor of W. C. Bradley Co. (filed as Exhibit 99.3 to the Company’s Form 8-K on July 21, 2004 (File No. 001-14547) and incorporated herein by reference).
10(n)(4)	Amended and Restated Lease Agreement, dated July 6, 2004, by and between 16 Downing, LLC as Lessor and Gekko Brands, LLC as Lessee (filed as Exhibit 99.4 to the Company’s Form 8-K July 21, 2004 (File No. 001-14547) and incorporated herein by reference).
10(n)(5)	Ashworth, Inc. Guaranty of Payments under the Amended and Restated Lease Agreement, dated July 6, 2004, by and between 16 Downing, LLC as Lessor and Gekko Brands, LLC as Lessee (filed as Exhibit 99.5 to the Company’s Form 8-K on July 21, 2004 (File No. 001-14547) and incorporated herein by reference).
10(n)(6)	Form of Executive Employment Agreement by and between Gekko Brands, LLC and certain selling members (filed as Exhibit 99.6 to the Company’s Form 8-K on July 21, 2004 (File No. 001-14547) and incorporated herein by reference).
10(o)*	Form of Stock Option Agreement for issuance of stock option grants to each of the Company’s executive officers and non-employee directors on December 21, 2004 (filed as Exhibit 10.1 to the Company’s Form 8-K on December 22, 2004 (File No. 001-14547) and incorporated herein by reference).

46

10(p)	Stipulation and Agreement of Settlement regarding shareholder class-action lawsuit in which the U.S. District Court entered a Final Approval of Settlement on November 8, 2004 (filed as Exhibit 10.1 to the Company’s Form 10Q on March 11, 2005 (File No. 001-14547) and incorporated herein by reference).
10(q)*	Second Amended and Restated Executive Employment Agreement with the Company’s President and Chief Executive Officer, Randall L. Herrel, Sr., effective as of February 28, 2006 (filed as Exhibit 10.1 to the Company’s Form 10-K/A on February 28, 2006 (File No. 001-14547) and incorporated herein by reference).
10(q)(1)*	Agreement as to Ashworth, Inc. Executive Employment Agreement with Randall L. Herrel, Sr. effective September 12, 2006 (filed as Exhibit 10.1 to the Company’s Form 8-K on September 13, 2006 (File No. 001-14547) and incorporated herein by reference).
10(q)(2)*	Amended and Restated Change In Control Agreement with the Company’s President and Chief Executive Officer, Randall L. Herrel, Sr., effective as of February 28, 2006 (filed as Exhibit 10.2 to the Company’s Form 10-K/A on February 28, 2006 (File No. 001-14547) and incorporated herein by reference).
10(r)(1)*	Amended and Restated Employment Agreement with the Company’s Executive Vice President of Sales and Marketing, Mr. Gary I. “Sims” Schneiderman, effective as of February 28, 2006 (filed as Exhibit 10.5 to the Company’s Form 10-K/A on February 28, 2006 (File No. 001-14547) and incorporated herein by reference).
10(r)(2)*	Amended and Restated Change In Control Agreement with the Company’s Executive Vice President of Sales and Marketing, , Mr. Gary I. “Sims” Schneiderman, effective as of February 28, 2006 (filed as Exhibit 10.6 to the Company’s Form 10-K/A on February 28, 2006 (File No. 001-14547) and incorporated herein by reference).
10(s)(1)*	Amended and Restated Employment Agreement with the Company’s Executive Vice President, Green Grass Sales and Merchandising, Peter E. Holmberg, effective as of October 25, 2006 (filed as Exhibit 10.1 to the Company’s Form 8-K on October 31, 2006 (File No. 001-14547) and incorporated herein by reference).
10(s)(2)*	Amended and Restated Change in Control Agreement with the Company’s Executive Vice President, Merchandising, Design and Production, Peter E. Holmberg, effective as of February 28, 2006 (filed as Exhibit 10.4 to the Company’s Form 10-K/A on February 28, 2006 (File No. 001-14547) and incorporated herein by reference).
10(t)	Fourth Amendment effective as of January 26, 2006 to the Credit Agreement dated July 6, 2004, between Ashworth, Inc. as Borrower, Union Bank of California, N.A., as Administrative Agent and Lender, Bank of the West and Columbus Bank and Trust as Lenders, expiring July 6, 2009 (filed as Exhibit 10.5 to the Company’s Form 10-K on February 1, 2006 (File No. 001-14547) and incorporated herein by reference).
10(u)*	Employment Letter with the Company’s Executive Vice President and Chief Financial Officer, Winston E. Hickman, effective as of February 23, 2006 (filed as Exhibit 10.7 to the Company’s Form 10-K/A on February 28, 2006 (File No. 001-14547) and incorporated herein by reference).

47

10(u)(1)*	Change in Control Agreement with the Company’s Executive Vice President and Chief Financial Officer, Winston E. Hickman, effective as of February 23, 2006 (filed as Exhibit 10.8 to the Company’s Form 10-K/A on February 28, 2006 (File No. 001-14547) and incorporated herein by reference).
10(u)(2)*	Release Agreement with the Company’s Executive Vice President and Chief financial Officer, Winston E. Hickman, dated November 16, 2006 (filed as Exhibit 10.1 to the Company’s Form 8-K on November 11, 2006 (File No. 001-14547) and incorporated herein by reference).
10(v)	Personal Services Agreement effective September 12, 2005 by and between Ashworth, Inc. and Peter M. Weil (filed as Exhibit 10.2 to the Company’s Form 8-K on September 13, 2006 (File No. 001-14547) and incorporated herein by reference).
10(v)(1)*	Employment Agreement with the Company’s Chief Executive Officer, Peter M. Weil, dated November 27, 2006 (filed as Exhibit 10.1 to the Company’s Form 8-K on November 28, 2006 (File No. 001-14547) and incorporated herein by reference).
10(w)	Settlement Agreement, dated May 5, 2006, by and among the Company and Knightspoint Partners II, L.P., Knightspoint Capital Management II LLC, Knightspoint Partners LLC, Michael S. Koeneke, David M. Meyer, Starboard Value and Opportunity Master Fund Ltd., Parche, LLC, Admiral Advisors, LLC, Ramius Capital Group, LLC, C4S & Co., LLC, Peter A. Cohen, Jeffrey M. Solomon, Morgan B. Stark, Thomas W. Strauss, Black Sheep Partners, LLC, Brian Black, and Peter M. Weil (filed as Exhibit 10.1 to the Company’s Form 8-K on May 9, 2006 (File No. 001-14547) and incorporated herein by reference).
10(x)*	Form of Indemnification Agreement by and between the Company and its Directors, Officers and Other Employees Designated by the Board (filed as Exhibit 10.1 to the Company’s Form 8-K on December 15, 2006 (File No. 001-14547) and incorporated herein by reference).
10(y)*	Offer of Employment Agreement effective October 10, 2005 by and between Ashworth, Inc. and Greg. W. Slack. (filed as Exhibit 10.(AA)(1) to the Company’s Form 10-K on January 16, 2007 (File No. 001-14547) and incorporated herein by reference).
10(y)(1)*	Change in Control Agreement effective as of February 9, 2006 by and between Ashworth, Inc. and Greg W. Slack. (filed as Exhibit 10.(AA)(2) to the Company’s Form 10-K on January 16, 2007 (File No. 001-14547) and incorporated herein by reference).
10(y)(2)*	Promotion and Retention Bonus Agreement effective February 10, 2006 by and between Ashworth, Inc. and Greg. W. Slack (filed as Exhibit 10.(AA)(3) to the Company’s Form 10-K on January 16, 2007 (File No. 001-14547) and incorporated herein by reference).
10(z)*	Employment Letter between Eric R. Hohl and the Company, dated March 5, 2007 (filed as Exhibit 10.1 to the Company’s Form 8-K on March 7, 2007(File No. 001-14547) and incorporated herein by reference).
10(aa)*	Employment Letter between Edward J. Fadel and the Company, dated May 23, 2007 (filed as Exhibit 10.1 to the Company’s Form 8-K on May 25, 2007 (File No. 001-14547) and incorporated herein by reference).

48

10(ab)*	Severance and Release Agreement between Gary I. (“Sims”) Schneiderman and the Company, dated May 25, 2007 (filed as Exhibit 10.2 to the Company’s Form 8-K on May 25, 2007 (File No. 001-14547) and incorporated herein by reference).
10(ac)*	Severance and Release Agreement between Peter E. Holmberg and the Company, dated May 25, 2007 (filed as Exhibit 10.3 to the Company’s Form 8-K on May 25, 2007 (File No. 001-14547) and incorporated herein by reference).
10(ad)*	Personal services agreement between Ashworth, Inc., a Delaware corporation and its successors or assignees, and Eric S. Salus (filed as Exhibit 10.1 to the Company’s Form 8-K on June 6, 2007 (File No. 001-14547) and incorporated herein by reference).
10(ae)†	Employment and Non-competition agreement by and between Gekko Brands, LLC, a wholly-owned subsidiary of Ashworth Inc., a Delaware Corporation and J. Neil Stillwell. (filed as Exhibit 10.1 to the Company’s Form 8-K on June 6, 2007 (File No. 001-14547) and incorporated herein by reference).
10(af)†	Employment and Non-competition agreement by and between Gekko Brands, LLC, a wholly-owned subsidiary of Ashworth Inc., a Delaware Corporation and Calvin J. Martin, Jr. (filed as Exhibit 10.2 to the Company’s Form 8-K on June 6, 2007 (File No. 001-14547) and incorporated herein by reference).
10(ag)†	Employment and Non-competition agreement by and between Gekko Brands, LLC, a wholly-owned subsidiary of Ashworth Inc., a Delaware Corporation and Phil R. Stillwell. (filed as Exhibit 10.3 to the Company’s Form 8-K on June 6, 2007 (File No. 001-14547) and incorporated herein by reference).
10(ah)†	Employment and Non-competition agreement by and between Gekko Brands, LLC, a wholly-owned subsidiary of Ashworth Inc., a Delaware Corporation and Jeffery N. Stillwell. (filed as Exhibit 10.4 to the Company’s Form 8-K on June 6, 2007 (File No. 001-14547) and incorporated herein by reference).
10(ai)†	Employment and Non-competition agreement by and between Gekko Brands, LLC, a wholly-owned subsidiary of Ashworth Inc., a Delaware Corporation and Thomas Patrick Allison, Jr. (filed as Exhibit 10.5 to the Company’s Form 8-K on June 6, 2007 (File No. 001-14547) and incorporated herein by reference).
10(aj)	Eighth Amendment effective as of July 13, 2007 to the Revolving / Term Loan Credit Agreement dated as of July 6, 2004 by and between Ashworth, Inc., as Borrower, each lender from time to time party thereto and Union Bank of California, N. A., as Agent (filed as Exhibit 10.1 to the Company’s Form 8-K on August 2, 2007 (file No. 001-14547) and incorporated herein by reference).
10(ak)	Employment letter between Allan H. Fletcher and the Company, dated October 24, 2007 (filed as Exhibit 10.1 to the Company’s Form 8-K on October 30, 2007 (File No. 001-14547) and incorporated herein by reference).
10(al)	Non-statutory stock option plan and agreement dated as of October 24, 2007 by and between Ashworth, Inc. and optionee (filed as Exhibit 10.2 to the Company’s Form 8-K filed on October 30, 2007 (File No. 001-14547) and incorporated herein by reference).

49

10(am)	Employment letter between Greg W. Slack and the Company, dated October 24, 2007 (filed as Exhibit 10.3 to the Company’s Form 8-K on October 30, 2007 (File No. 001-14547) and incorporated herein by reference).
10(an)	Separation and general release agreement between Peter M. Weil and the Company, dated October 24, 2007 (filed as Exhibit 10.4 to the Company’s Form 8-K on October 30, 2007 (File No. 001-14547) and incorporated herein by reference).
10(ao)	Amendment to the Company’s Code of Business Conduct and Ethics effective December 12, 2007 (filed as Exhibit 14.1 to the Company’s Form 8-K on December 14, 2007 (File No. 001-14547) and incorporated herein by reference).
10(ap)	Consulting agreement between Fletcher Leisure Group Ltd. and the Company, effective January 11, 2008.
10(aq)	Loan agreement, effective January 11, 2008 by and between the Company and Bank of America, N. A.
21	Subsidiaries of the Registrant.
23.1	Independent Registered Public Accounting Firm Consent.
31.1	Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Allan H. Fletcher.
31.2	Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Greg W. Slack.
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Allan H. Fletcher.
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Greg W. Slack.

*	Management contract or compensatory plan or arrangement required to be filed as an Exhibit pursuant to Item 15(b) of Form 10-K and applicable rules of the Securities and Exchange Commission.
†	Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission.

50

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS

To the Board of Directors and Stockholders of
Ashworth, Inc.

We have audited the accompanying consolidated balance sheets Ashworth, Inc. and subsidiaries as of October 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended October 31, 2007. We also have audited Ashworth, Inc.’s internal control over financial reporting as of October 31, 2007 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Ashworth, Inc.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

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 the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A Company’s internal control over financial reporting is a process designed 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 control over financial reporting includes those 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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

F-1

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ashworth, Inc. and subsidiaries as of October 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Ashworth, Inc. maintained, in all material respects, effective internal control over financial reporting as of October 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by COSO.

/s/ Moss Adams LLP

Irvine, California
January 14, 2008

F-2

ASHWORTH, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

October 31, 2007 and 2006

	October 31, 2007			October 31, 2006
Assets
Current assets:
Cash and cash equivalents	$	6,104,000		$	7,508,000
Accounts receivable — trade, net (Note 1)		34,545,000			33,984,000
Accounts receivable — other		147,000			526,000
Inventories, net		50,529,000			44,971,000
Income tax refund receivable		1,117,000			3,743,000
Other current assets		4,981,000			5,247,000
Deferred income tax asset		48,000			3,116,000
Total current assets		97,471,000			99,095,000
Property, plant and equipment, at cost:
Land		5,732,000			5,732,000
Buildings and improvements		10,480,000			10,503,000
Production and distribution equipment		14,309,000			13,970,000
Furniture and equipment		31,640,000			29,629,000
Leasehold improvements		6,334,000			6,124,000
		68,495,000			65,958,000
Less accumulated depreciation and amortization		(30,980,000	)		(26,832,000	)
Total property, plant and equipment, net		37,515,000			39,126,000
Goodwill		15,250,000			15,250,000
Intangible assets, net		9,806,000			10,245,000
Other assets		372,000			327,000
Total assets	$	160,414,000		$	164,043,000

(Continued)

See accompanying notes to consolidated financial statements

F-3

ASHWORTH, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

October 31, 2007 and 2006

	October 31, 2007		October 31, 2006
Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit payable (Note 5)	$	19,615,000	$	14,000,000
Current portion of long-term debt (Notes 5 and 6)		2,360,000		2,117,000
Accounts payable		12,728,000		10,724,000
Accrued liabilities:
Salaries and commissions		5,442,000		4,077,000
Other		5,235,000		6,681,000
Total current liabilities		45,380,000		37,599,000
Long-term debt, net of current portion (Notes 5 and 6)		13,844,000		15,671,000
Deferred income tax liability		1,469,000		1,965,000
Other long-term liabilities		84,000		174,000
Stockholders’ equity:
Common stock, $.001 par value; authorized 50,000,000 shares; issued and outstanding 14,713,000 and 14,520,000 shares in 2007 and 2006, respectively		15,000		15,000
Capital in excess of par value		50,325,000		48,256,000
Retained earnings		42,217,000		56,333,000
Accumulated other comprehensive income		7,080,000		4,030,000
Total stockholders’ equity		99,637,000		108,634,000
Total liabilities and stockholders’ equity	$	160,414,000	$	164,043,000

See accompanying notes to consolidated financial statements

F-4

ASHWORTH, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years Ended October 31, 2007, 2006 and 2005

	2007			2006			2005
Net revenues	$	202,189,000		$	209,600,000		$	204,788,000
Cost of goods sold		124,422,000			123,787,000			127,875,000
Gross profit		77,767,000			85,813,000			76,913,000
Selling, general and administrative expenses		85,814,000			81,475,000			75,441,000
Income (loss) from operations		(8,047,000	)		4,338,000			1,472,000
Other income (expense):
Interest income		134,000			55,000			62,000
Interest expense		(2,921,000	)		(2,897,000	)		(2,372,000	)
Net foreign currency exchange gain (loss)		(16,000	)		321,000			(222,000	)
Other expense, net		(199,000	)		(64,000	)		(228,000	)
Total other expense		(3,002,000	)		(2,585,000	)		(2,760,000	)
Income (loss) before provision for income taxes		(11,049,000	)		1,753,000			(1,288,000	)
Provision (benefit) for income taxes		3,067,000			802,000			(561,000	)
Net income (loss)	$	(14,116,000	)	$	951,000		$	(727,000	)
Net income (loss) per share:
Basic	$	(0.97	)	$	0.07		$	(0.05	)
Diluted	$	(0.97	)	$	0.07		$	(0.05	)
Weighted-average shares outstanding:
Basic		14,576,000			14,400,000			13,872,000
Diluted		14,576,000			14,514,000			13,872,000

See accompanying notes to consolidated financial statements

F-5

ASHWORTH, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the Years Ended October 31, 2007, 2006 and 2005

											Accumulated
					Capital in						Other
	Common Stock				Excess of			Retained			Comprehensive
	Shares		Amount		Par Value			Earnings			Income (Loss)			Total
Balance, October 31, 2004		13,706,000	$	14,000	$	42,171,000		$	56,109,000		$	2,922,000		$	101,216,000
Options exercised		368,000		—		2,064,000			—			—			2,064,000
Tax benefit on options exercised		—		—		520,000			—			—			520,000
Comprehensive loss:
Net loss		—		—		—			(727,000	)		—			(727,000	)
Translation adjustment		—		—		—			—			(511,000	)		(511,000	)
Total comprehensive income		—		—		—			—			(511,000	)		(1,238,000	)
Balance, October 31, 2005		14,074,000		14,000		44,755,000			55,382,000			2,411,000			102,562,000
Options exercised		446,000		1,000		2,531,000			—			—			2,532,000
Section 16 - profit disgorgement		—		—		(44,000	)		—			—			(44,000	)
Tax benefit on options exercised		—		—		533,000			—			—			533,000
FAS 123R Compensation Expense		—		—		481,000			—			—			481,000
Comprehensive income (loss):
Net income		—		—		—			951,000			—			951,000
Translation adjustment		—		—		—			—			1,619,000			1,619,000
Total comprehensive income		—		—		—			—			1,619,000			2,570,000
Balance, October 31, 2006		14,520,000		15,000		48,256,000			56,333,000			4,030,000			108,634,000
Options exercised		193,000		—		1,183,000			—			—			1,183,000
Section 16 - profit disgorgement		—		—		—			—			—			—
Tax benefit on options exercised		—		—		—			—			—			—
FAS 123R Compensation Expense		—		—		886,000			—			—			886,000
Comprehensive income (loss):
Net loss		—		—		—			(14,116,000	)		—			(14,116,000	)
Translation adjustment		—		—		—			—			3,050,000			3,050,000
Total comprehensive income		—		—		—			—			3,050,000			(11,066,000	)
Balance, October 31, 2007		14,713,000	$	15,000	$	50,325,000		$	42,217,000		$	7,080,000		$	99,637,000

See accompanying notes to consolidated financial statements

F-6

ASHWORTH, INC. AND SUBSIDIARIES

Statements of Cash Flows

For the Years Ended October 31, 2007, 2006 and 2005

	2007			2006			2005
Cash flows from operating activities:
Net income (loss)	$	(14,116,000	)	$	951,000		$	(727,000	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		6,321,000			5,842,000			5,118,000
(Gain) loss on disposal of property, plant and equipment		80,000			46,000			(1,000	)
Decrease (increase) in net deferred income taxes		2,572,000			319,000			(1,439,000	)
Provision for doubtful accounts, markdowns and sales returns		8,136,000			7,664,000			7,061,000
Non-cash inventory writedowns		179,000			291,000			3,337,000
Tax benefit from exercise of stock options		—			—			520,000
Excess tax benefits from share-based payment arrangements		—			(533,000	)		—
Stock compensation expense		886,000			481,000			—
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		(8,318,000	)		(3,815,000	)		(5,101,000	)
Decrease (increase) in inventories		(5,737,000	)		864,000			(214,000	)
Increase (decrease) in net income tax receivable/payable		2,626,000			825,000			(5,193,000	)
Decrease (increase) in other current assets		(388,000	)		1,564,000			(1,974,000	)
Decrease (increase) in other assets		(71,000	)		(48,000	)		(455,000	)
Increase (decrease) in accounts payable		2,004,000			(425,000	)		(3,475,000	)
Increase in accrued liabilities		1,304,000			1,017,000			1,841,000
Decrease in other long-term liabilities		(90,000	)		(90,000	)		(181,000	)
Net cash (used in) provided by operating activities		(4,612,000	)		14,953,000			(883,000	)
Cash flows from investing activities:
Net purchases of property, plant and equipment		(4,149,000	)		(6,464,000	)		(7,576,000	)
Proceeds from sale of property, plant and equipment		—			—			5,000
Purchase of Intangibles		(80,000	)		(116,000	)
Acquisition of subsidiary		(1,385,000	)		(1,225,000	)		(560,000	)
Net cash used in investing activities		(5,614,000	)		(7,805,000	)		(8,131,000	)
Cash flows from financing activities:
Principal payments on capital lease obligations		(328,000	)		(105,000	)		(79,000	)
Borrowings on line of credit		41,065,000			36,650,000			40,900,000
Payments on line of credit		(35,450,000	)		(42,150,000	)		(31,400,000	)
Bank overdrafts		—			—			715,000
Proceeds from long-term debt		683,000			556,000			—
Principal payments on notes payable and long-term debt		(1,939,000	)		(2,349,000	)		(4,423,000	)
Proceeds from exercise of stock options		1,183,000			2,487,000			2,064,000
Restrictions on cash		654,000			(654,000	)		10,000
Excess tax benefit from share-based payment arrangements		—			533,000			—
Net cash provided by (used in) financing activities		5,868,000			(5,032,000	)		7,787,000
Effect of exchange rate		2,954,000			1,553,000			(475,000	)
Net (decrease) increase in cash and cash equivalents		(1,404,000	)		3,669,000			(1,702,000	)
Cash and cash equivalents, beginning of year		7,508,000			3,839,000			5,541,000
Cash and cash equivalents, end of year	$	6,104,000		$	7,508,000		$	3,839,000

(Continued)

See accompanying notes to consolidated financial statements

F-7

ASHWORTH, INC. AND SUBSIDIARIES

Statements of Cash Flows

For the Years Ended October 31, 2007, 2006 and 2005

	2007			2006			2005
Supplemental disclosure of cash flow information:
Interest paid	$	3,132,000		$	2,716,000		$	1,643,000
Income taxes paid, net of refund		(2,152,000	)		(297,000	)		4,779,000
Supplemental disclosure of non-cash financing activities:
Repayment of term loan from borrowings against line of credit (Note 5)		—			—			7,500,000
Capital lease		(683,000	)		(556,000	)		—

     See accompanying notes to consolidated financial statements

F-8

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1)	The Company and Summary of Significant Accounting Policies
	Business
	Ashworth, Inc. (the “Company”), based in Carlsbad, California, designs, markets and distributes quality men’s and women’s sports apparel, headwear and accessories under the Ashworthâ, Callaway Golf apparel, Kudzuâ and The Gameâ brands. The Company’s products are sold in the United States, Europe, Canada and various other international markets to selected golf pro shops, resorts, off-course specialty shops, upscale department stores, retail outlet stores, colleges and universities, entertainment complexes, sporting goods dealers that serve the high school and college markets, NASCAR/racing markets, outdoor sports distribution channels, and to top specialty-advertising firms for the corporate market.
	In May 2001, Ashworth agreed to a multi-year exclusive licensing agreement with Callaway Golf Company to design, market and distribute complete lines of men’s and women’s Callaway Golf apparel. The agreement allows Ashworth to sell Callaway Golf apparel primarily in the United States, Europe, Canada and Australia. The initial Callaway Golf apparel products shipped in April 2002.
	The Company has wholly-owned subsidiaries that currently own and operate 18 Company outlet stores. A wholly-owned United Kingdom subsidiary distributes the Company’s products in Europe. The Company established one division in 1998 to sell and distribute its Ashworth products in Canada and a second division in 2002 to distribute its Callaway Golf apparel in Canada.
	The Company, together with its subsidiaries and divisions, had aggregate net foreign revenues in Europe, Canada, Singapore, United Arab Emirates, Australia, Japan, Taiwan, Mexico, Hong Kong, South Africa and other countries of approximately $37,351,000, $38,472,000 and $34,101,000 in the years ended October 31, 2007, 2006 and 2005, respectively. The Company’s wholly-owned United Kingdom subsidiary, Ashworth U.K., Ltd., had net revenues of $27,236,000, $27,987,000 and $23,416,000 and operating income of $1,070,000, $1,436,000 and $1,976,000 in the years ended October 31, 2007, 2006 and 2005, respectively. Ashworth U.K., Ltd. had identifiable assets of $25,733,000 and $22,517,000 as of October 31, 2007 and 2006, respectively.
	Principles of Consolidation
	The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
	Cash and Cash Equivalents
	The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
	Accounts Receivable
	The Company extends credit to customers in the normal course of business, subject to established credit limits. Accounts receivable, net, in the consolidated balance sheets consists of amounts due from customers net of allowances for doubtful accounts and reserves for sales returns, markdowns and other allowances. The allowance for doubtful accounts is determined by reviewing accounts receivable aging and evaluating individual customer receivables, considering customers’ financial condition, credit

F-9

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

history and current economic conditions. The following table summarizes the activity in the allowance for doubtful accounts for the years ended October 31, 2007, 2006 and 2005:

	2007			2006			2005
Balance, beginning of year	$	1,106,000		$	1,243,000		$	1,170,000
Provision for doubtful accounts		627,000			522,000			550,000
Deductions		(807,000	)		(659,000	)		(477,000	)
Balance, end of year	$	926,000		$	1,106,000		$	1,243,000

Management analyzes historical returns, current economic trends, changes in customer demand and sell-through of our products when evaluating the adequacy of the reserves for sales returns, markdowns and other allowances. See “Note 1 – Summary of Significant Accounting Policies and Business – Revenue Recognition,” below.

Inventories

Inventories are valued at the lower of cost (first-in, first-out) or market. Cost includes materials, labor, freight-in and overhead. Inventory write-downs are permanent reductions of cost until the inventory is sold. Below is a summary of the components of net inventories at October 31, 2007 and 2006:

	2007		2006
Raw Materials	$	135,000	$	93,000
Finished Goods		50,394,000		44,878,000
Total Inventories, net	$	50,529,000	$	44,971,000

Inventories are presented net of inventory write-downs at October 31, 2007 and 2006 of $4,602,000 and $3,449,000, respectively.

Other Current Assets

The Company had $654,000 in restricted cash as of October 31, 2006 recorded in other current assets. The restricted cash was reserved for payment under a rabbi trust agreement with a former CEO and disbursed in May 2007.

Property, Plant and Equipment

Property, plant and equipment are stated at cost.

F-10

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Depreciation and amortization have been provided using straight-line and accelerated methods over the following estimated useful lives:

Buildings and improvements	20 to 30 years
Production and distribution equipment	5 to 12 years
Furniture and equipment	3 to 7 years
Leasehold improvements	Shorter of life of lease or useful life

All maintenance and repair costs are charged to operations as incurred. When assets are sold or otherwise disposed of, the costs and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in operations.

Goodwill and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which requires that goodwill and intangibles with indefinite lives no longer be amortized, but instead be tested for impairment at least annually at the reporting unit level. If impairment is indicated, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Intangible assets with finite lives are amortized primarily on the straight-line basis over their estimated useful lives.

Other Assets

The Company had $272,000 and $251,000 in restricted cash as of October 31, 2007 and 2006, respectively, recorded in other assets. The restricted cash is in an interest bearing account on deposit with the Company’s bank pursuant to the lease agreement for the office and distribution facility in Basildon, England. The lessor has access to the bank account should the Company fail to pay its monthly rent. The cash will be on deposit for a maximum of five years from the inception of the lease agreement, which was May 1, 2003.

Advertising Expenses

Advertising costs, which consist primarily of product advertising, are included in selling, general and administrative expenses and are expensed in the period the costs are incurred. Advertising expenses for the years ended October 31, 2007, 2006 and 2005 were $2,354,000, $2,045,000 and $1,867,000, respectively.

The Company makes certain payments for cooperative advertising for specific placements in customers’ advertisements and catalogues and includes these costs in the selling, general and administrative line item of its statements of operations. Included in advertising expenses are cooperative advertising expenses of $379,000, $783,000 and $667,000 for the years ended October 31, 2007, 2006 and 2005, respectively.

Shipping and Handling Expenses

Shipping expenses, which consist primarily of payments made to freight companies, are reported in selling, general and administrative expenses. Shipping expenses for the years ended October 31, 2007, 2006 and 2005 were $2,490,000, $2,609,000 and $3,091,000, respectively.

F-11

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Stock-Based Compensation

On November 1, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No.123R”), which addresses the accounting for stock-based payment transactions in which an enterprise receives director and 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. In January 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and instead generally requires that such transactions be accounted for using a fair-value-based method. The Company uses the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair value of stock-based awards under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). The Company has elected the modified prospective transition method permitted by SFAS No. 123R and, accordingly, prior periods have not been restated to reflect the impact of SFAS No. 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning on November 1, 2005, the first day of the Company’s fiscal year 2006. Stock-based compensation expense for awards granted prior to November 1, 2005 is based on the grant date fair value as determined under the pro forma provisions of SFAS No.123. The Company has recorded an incremental stock-based compensation expense of $886,000 and $481,000 during fiscal 2007 and fiscal 2006, respectively, as a result of the adoption of SFAS No. 123R. In accordance with SFAS No. 123R, beginning in the first quarter of fiscal 2006 the Company has presented excess tax benefits from the exercise of stock-based compensation awards as a financing activity in the consolidated statements of cash flows.

There was not any income tax benefit related to stock-based compensation expense during fiscal 2007. As of October 31, 2007, $419,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of two and a half years. This compensation cost to be recognized in future periods as of October 31, 2007 does not consider or include the effect of stock options that may be issued in subsequent periods.

Prior to the adoption of SFAS No. 123R, the Company measured compensation expense for its employee and non-employee director stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25. The Company applied the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, as if the fair-value-based method had been applied in measuring compensation expense. Under APB Opinion No. 25, when the exercise price of the Company’s employee and non-employee

F-12

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

director stock options was equal to or greater than the market price of the underlying stock on the date of the grant, no compensation expense was recognized.

The following table illustrates the effect on net income after taxes and net income per common share as if the Company had applied the fair-value recognition provisions of SFAS No. 123R to stock-based compensation for the year ended October 31, 2005:

	2005
Net income (loss) — as reported	$	(727,000	)
Deduct: Stock-based employee and non-employee director compensation expense determined under the fair-value-based method for all awards, net of tax		(1,457,000	)
Net income (loss) — pro forma	$	(2,184,000	)
Net income (loss) per common share — as reported
Basic	$	(0.05	)
Diluted	$	(0.05	)
Net income (loss) per common share — pro forma
Basic	$	(0.16	)
Diluted	$	(0.16	)

SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the BSM option-pricing model, which incorporates various assumptions including volatility, expected life, interest rates and dividend yields. The expected volatility is based on the historic volatility of the Company’s common stock over the last 10 years commensurate with the estimated expected life of the Company’s stock options. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees and directors.

The assumptions used for the fiscal years ended October 31, 2007, 2006 and 2005 and the resulting estimates of weighted-average fair value of options granted during those periods are as follows:

	2007			2006			2005
Expected life (years)		4.53 — 5.01			3.64 — 3.81			3.55 — 3.87
Risk-free interest rate		3.99% — 5.18	%		4.45% — 5.02	%		2.89% — 4.30	%
Volatility		37.2% — 38.1	%		37.7% — 38.8	%		42.7% — 44.3	%
Dividend yields		—			—			—
Weighted -average fair value of options granted during the period	$	2.60		$	2.77		$	3.63

The Company did not reflect any stock-based employee compensation expense in the consolidated financial statements for the fiscal year ended October 31, 2005 presented in the above table.

F-13

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Earnings Per Share

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period plus the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued. The dilutive effect of outstanding options is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from outstanding options. For the 12 months ended October 31, 2007, 2006 and 2005 shares subject to outstanding options totaled 41,000, 114,000 and 317,000 respectively.

The following table sets forth the computation of basic and diluted earnings per share based on the requirements SFAS No. 128, Earnings Per Share:

	Years ended October 31,
	2007			2006		2005
Numerator:
Net Income
Numerator for basic and diluted income per share — income available to common stockholders	$	(14,116,000	)	$	951,000	$	(727,000	)
Denominator:
Denominator for basic income per share — weighted-average shares		14,576,000			14,400,000		13,872,000
Effect of dilutive securities:
stock options		41,310			114,000		317,000
Denominator for diluted income per share — adjusted weighted-average shares and assumed conversions		14,617,310			14,514,000		14,189,000
Basic earnings (loss) per share	$	(0.97	)	$	0.07	$	(0.05	)
Diluted earnings (loss) per share	$	(0.97	)	$	0.07	$	(0.05	)

Diluted income (loss) per share for the years ended October 31, 2007 and October 31, 2005 is calculated using basic weighted-average shares as the denominator because the effect of stock options would be anti-dilutive due to the Company’s loss position. The diluted weighted-average shares outstanding computation excludes 589,000, 323,000 and 643,000 options whose impact would have an anti-dilutive effect in 2007, 2006 and 2005, respectively.

Long-Lived Assets

The Company reviews the carrying amount of long-lived assets or groups of assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The determination of any impairment includes a comparison of the estimated future undiscounted operating cash flows anticipated to be generated during the remaining life of the asset or group of assets to the net carrying value of the asset or group of assets.

Foreign Currency

The Company’s reporting currency is the U.S. dollar. Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange at the balance sheet date, while

F-14

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

revenue and expenses are translated using the average exchange rate. Gains and losses on foreign currency transactions are recognized as incurred. Gains and losses on re-measurement of transactions denominated in currency other than the functional currency of individual subsidiaries are recognized at each balance sheet date. Cumulative translation adjustments resulting from the translation of the financial statements of foreign subsidiaries are included as a separate component of stockholders’ equity. The Company’s ability to sell its products in foreign markets and the U.S. dollar value of the sales made in foreign currencies can be significantly influenced by foreign currency fluctuations. A decrease in the value of foreign currencies relative to the U.S. dollar could result in downward price pressure for the Company’s products or losses from currency exchange rates. The Company periodically uses forward exchange contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted revenues and cost of sales denominated in other than local currencies. 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.

From time to time, the Company and its subsidiaries enter into short-term foreign exchange contracts with its bank to hedge against the impact of currency fluctuations. Such contracts are designated at inception to the related foreign currency exposures being hedged, which include anticipated Euro denominated sales and U. S. dollar denominated intercompany inventory purchases by the Company’s wholly-owned U.K. subsidiary. These contracts have maturity dates that do not normally exceed 12 months. The Company estimates the fair value of derivatives based on quoted market prices and records all derivatives on the balance sheet at fair value. The Company had no foreign currency related derivatives at October 31, 2007, 2006 or 2005.

For derivative instruments designated as cash flow hedges, the Company initially records the effective portions of the gain or loss on the derivative instrument in accumulated other comprehensive income (“OCI”) as a separate component of stockholders’ equity and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. The Company records the ineffective portion of the gain or loss, if any, in other income or expense immediately. The Company reports the effective portion of cash flow hedges in the same financial statement line item as the changes in value of the hedged item. For the years ended October 31, 2007, 2006 and 2005, the Company had no activity in accumulated other comprehensive income related to cash flow hedges and therefore no gains or losses were reclassified into earnings related to cash flow hedges.

For foreign currency forward contracts designated as cash flow hedges, the Company measures effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. Assessments of hedge effectiveness are performed using the dollar offset method and applying a hedge effectiveness ratio between 80% and 125%. During fiscal years ended October 31, 2007, 2006 and 2005, the Company did not discontinue any cash flow hedges for which it was probable that a forecasted transaction would not occur.

Revenue Recognition

The Company recognizes revenue at the time products are shipped based on its terms of FOB shipping point, where risk of loss and title transfer to the buyer or, for Company stores, at the point of sale. The Company records sales in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Under these guidelines, revenue is recognized when all of the following exist: persuasive

F-15

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

evidence of a sale arrangement exists, delivery of the product has occurred, the price is fixed or determinable, and payment is reasonably assured. Provision is made currently for estimated sales returns, markdowns and other allowances and is included in net revenues in the accompanying statements of operations.

Management analyzes historical returns, current economic trends, changes in customer demand and sell-through of our products when evaluating the adequacy of the reserves for sales returns, markdowns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the reserves for sales returns, markdowns and other allowances in any accounting period. Material differences may result in the amount and timing of our revenues for any period if management makes different judgments or utilizes different estimates. The following table summarizes the activity in reserve for sales returns, markdowns and other allowances for the years ended October 31, 2007, 2006 and 2005:

	2007			2006			2005
Balance, beginning of year	$	4,082,000		$	4,107,000		$	1,268,000
Provision for sales returns, markdowns and other allowances		7,509,000			7,142,000			6,511,000
Deductions		(7,687,000	)		(7,167,000	)		(3,672,000	)
Balance, end of year	$	3,904,000		$	4,082,000		$	4,107,000

Asset Purchase Agreements

In November 2000, the Company entered into an agreement with a third party whereby prior seasons’ slower selling inventory which was not damaged was exchanged for future asset purchase credits (“APCs”), which may be utilized by the Company to purchase future goods and services over a four-year period. The original value of the inventory exchanged (at cost) was $1.4 million, resulting in $1.4 million in future APCs. In December 2003, the Company amended its agreement with the third party to exchange $0.9 million of additional prior seasons’ slower selling inventory (at cost) for an additional $0.9 million in future APCs and an extension of the original November 2000 agreement through December 1, 2007. The Company has entered into contracts with several third party suppliers who have agreed to accept these APCs, in part, as payment for goods and services. The Company purchases products such as sales fixtures, office and packaging supplies, as well as temporary help, freight and printing services from such third party suppliers. Management reviews and estimates the likelihood of fully utilizing the APCs on a periodic basis. If the Company is unable to find suppliers who agree to accept the APCs in quantities as projected by management, a write-down of the value of the APCs may be required. At October 31, 2007, the Company had fully utilized all acquired APCs and does not intend to enter into any new contracts for APCs in exchange for prior season’s slower moving inventory at this time. There were no barter revenues for the years ended October 31, 2007, 2006 and 2005. Barter expenses for the years ended October 31, 2007, 2006 and 2005 were $0, $0 and $631,000, respectively.

F-16

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Shipping and Handling Revenue

The Company includes payments from its customers for shipping and handling in its net revenues line item in accordance with Emerging Issues Task Force (“EITF”) 00-10, Accounting of Shipping and Handling Fees and Costs.

Cost of Goods Sold

The Company includes FOB purchase price, inbound freight charges, duty, buying commissions and overhead in its cost of goods sold line item. Overhead costs include purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other costs associated with the Company’s distribution. The Company does not exclude any of these costs from cost of goods sold.

Royalty Expenses

Royalty expenses are recognized as incurred and are included in the selling, general and administrative expenses line item in the accompanying consolidated financial statements. For the years ended October 31, 2007, 2006 and 2005, royalty expenses were $7,073,000, $6,204,000 and $5,463,000, respectively.

Legal Fees

The Company expenses costs of settlement, damages and costs of defense when incurred. Costs that are probable and estimable are accrued. For the years ended October 31, 2007, 2006 and 2005, legal fees were $1,214,000, $1,451,000 and $725,000, respectively.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The fair value of the Company’s line of credit and long-term debt approximates the carrying value based on borrowing rates currently available to the Company for bank loans with similar terms and maturities. The carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash and cash equivalents, accounts receivable, accounts payable, bank overdrafts and forward exchange contracts) also approximate fair value due to the short-term nature of those instruments.

(2)

Employment and Non-Compete agreements with Gekko Brands, LLC Employees

On June 6, 2007, the Company, through its wholly-owned subsidiary Gekko Brands, LLC (“Gekko”) entered into two and five year employment and non-competition agreements with certain selling members of Gekko who are currently employees of Gekko (“the Gekko Employees”). The employment and non-competition agreements guarantee payment of the contingent consideration installment payments for fiscal years 2007 and 2008, thereby amending Sections 1.2(c) and 1.3 of the

F-17

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Membership Interests Purchase Agreement, dated July 6, 2004 (the “Purchase Agreement”), relating to the acquisition of Gekko by the Company. Under the Purchase Agreement, an additional $6,500,000 would be paid to the Gekko Employees if the subsidiary achieved certain specified EBIT and other operating targets which were to be accounted for as additional cost of the acquired entity. From July 7, 2004 through October 31, 2006, Gekko achieved the specified EBIT and other operating targets entitling the Gekko Employees to additional consideration of $3,150,000 recorded as an adjustment to goodwill. Under the new employment and non-competition agreements entered into with the Gekko Employees, the guaranteed installment payments for fiscal years 2007 and 2008 totaling $3,350,000 will be accounted for as compensation and recognized into expense on a straight-line basis over the term of the employment and non-competition agreements.

(3)	Goodwill and Other Intangible Assets.
	The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and certain intangible assets are not amortized but are subject to an annual impairment test. Changes in goodwill, trade names and customer-related intangibles during the year ended October 31, 2007, 2006 and 2005 were due to the acquisition of Gekko on July 6, 2004. Under terms of the Gekko Membership Interest Purchase Agreement (the “Purchase Agreement”), up to an additional $6,500,000 in additional consideration could have been paid to certain selling members of Gekko if the subsidiary achieves certain defined earnings before interest and taxes (“EBIT”) and other operating targets through Ashworth’s fiscal year 2008. The Company accounts for such contingent payments as additional costs of the acquired entity at the time the contingency was resolved. For the years ended October 31, 2006 and 2005 Gekko achieved the specified EBIT targets entitling certain selling members to additional consideration in the amount of $1,385,000 and $1,225,000. The additional consideration is included in goodwill at October 31, 2007, 2006 and 2005, respectively. For the year ended October 31, 2005 the Company recorded approximately $20,000 to goodwill related to pre-acquisition contingencies that were resolved within one year from the date of acquisition. At October 31, 2007, 2006 and 2005, goodwill, all of which is in the Gekko segment, totaled $15,250,000, $15,250,000 and $13,865,000, respectively. The Company anticipates that the entire amount of goodwill will be deductible for income tax purposes.
	On June 6, 2007, the Company, through its wholly-owned subsidiary Gekko entered into two and five year employment and non-competition agreements with certain selling members of Gekko who are the Gekko Employees as described above in Note 2 of Notes to Consolidated Financial Statements.

F-18

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

The following sets forth the intangible assets, excluding goodwill, by major category:

	October 31, 2007							October 31, 2006
	Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value
Indefinite life:
Tradenames	$	8,700,000	$	—		$	8,700,000	$	8,700,000	$	—		$	8,700,000
Finite life:
Customer lists		1,530,000		(767,000	)		763,000		1,530,000		(541,000	)		989,000
Non-competes		1,372,000		(1,238,000	)		134,000		1,372,000		(1,011,000	)		361,000
Customer sales backlog		190,000		(190,000	)		—		190,000		(190,000	)		—
Trademarks		1,582,000		(1,373,000	)		209,000		1,502,000		(1,307,000	)		195,000
Total intangible assets	$	13,374,000	$	(3,568,000	)	$	9,806,000	$	13,294,000	$	(3,049,000	)	$	10,245,000

Intangible assets with finite lives are amortized using the straight-line method over the estimated useful life. At October 31, 2007, the estimated useful lives and weighted-average useful lives for finite-lived intangible assets were as follows:

			Estimated
	Estimated		Weighted-
	Useful Life		Avg. Useful
	(Years)		Life (Years)
Finite life:
Customer lists		3-7		7
Non-competes		5		5
Customer sales backlog		1		1
Trademarks		5		5

F-19

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

During the years ended October 31, 2007, 2006 and 2005, aggregate amortization expense was approximately $519,000, $442,000 and $544,000, respectively. Amortization expense related to intangible assets at October 31, 2007 in each of the next five fiscal years is expected to be as follows:

2008	$	392,000
2009		287,000
2010		254,000
2011		167,000
2012		6,000
Total	$	1,106,000

(4) Leases

On February 7, 2007, the Company entered into a capital lease agreement with Mazuma Capital to purchase two trade show booths constructed to the Company’s specification with total payments of $683,837. The terms of the lease agreement call for 36 monthly payments of $20,917 in advance with a deposit for the last payment paid at the beginning of the lease. The last payment is due on January 1, 2010. The total interest paid over the life of the agreement will be $69,189. The trade show booths have an estimated life of three years.

During the year ended October 31, 2006, the Company entered into a capital lease agreement for the purchase of a software license. The lease began in April 2006 for a 36 month term, ending in March 2009 with total payments of $556,000. The lease agreement calls for 12 quarterly payments of $53,450 with an imputed interest rate of 9.08%. The software license asset is expected to be placed into service in the first quarter of fiscal year 2010. It will be amortized over a three year life using the straight-line method. During the years ended October 31, 2005 and 2004, the Company did not acquire any equipment under capital leases.

At October 31, 2007 and 2006, the accompanying consolidated balance sheets include the following licensing agreement and furniture and equipment under existing capital leases:

	2007			2006
Furniture and Equipment	$	684,000		$	—
Software License		556,000			556,000
Less accumulated amortization		(411,000	)		(83,000	)
Total furniture and equipment under capital lease, net	$	829,000		$	473,000

Amortization of assets held under capital leases is included in depreciation and amortization expense.

On April 30, 2006, the Company entered into a lease agreement with Key Equipment Finance, a Division of Key Corporate Capital, Inc. (“KEF” or the “Lessor”) for an IBM server with all applicable software, accessories and upgrade package with total lease payments of $586,772. The terms of the

F-20

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

lease agreement call for 42 monthly payments of $14,171, in advance. The last payment will be made on September 30, 2009. The Company has determined that the lease with KEF meets the criteria for treatment as an operating lease.

On August 30, 2004 the Company agreed to a schedule with KEF thereby completing the Master Equipment Lease Agreement, dated as of June 23, 2003, previously entered into by Ashworth and KEF. Under the terms of the schedule, the Company leases equipment for its distribution center in Oceanside, California. The aggregate cost of the equipment is approximately $10.4 million. The initial term of the lease is for ninety-one (91) months beginning on September 1, 2004 and the monthly rent payment is $129,000. At the end of the initial term, the Company will have the option to (1) purchase all, but not less than all, equipment on the initial term expiration date at a price equal to the greater of (a) the then fair market sale value thereof, or (b) 12% of the total cost of the equipment (plus, in each case, applicable sales taxes); (2) renew the lease on a month to month basis at the same rent payable at the expiration of the initial lease term; (3) renew the lease for a minimum period of not less than 12 consecutive months at the then current fair market rental value; or (4) return such equipment to the Lessor pursuant to, and in the condition required by, the lease. The Company has determined that the lease meets the criteria for treatment as an operating lease.

The Company and its subsidiaries also lease certain other production, warehouse and outlet store facilities, as well as certain production and office equipment, under operating leases. These leases expire in various fiscal years through August 2016. Rent expense recognized on a straight-line basis for the years ended October 31, 2007, 2006 and 2005 was $7,146,000, $6,752,000 and $6,158,000, respectively. Future minimum lease payments under non-cancelable operating leases and future minimum capital lease payments as of October 31, 2007 are:

	Capital			Operating
Years Ending October 31,	Leases			Leases
2008	$	465,000		$	7,301,000
2009		358,000			7,180,000
2010		71,000			7,078,000
2011		—			6,001,000
2012		—			5,728,000
Thereafter		—			10,182,000
Total minimum lease payments		894,000		$	43,470,000
Less amount representing interest at rates of 6.3665% and 9.0792%		(65,000	)
Present value of future minimum capital lease payments (Note 6)	$	829,000

(5) Line of Credit Agreement

On July 6, 2004, the Company entered into a new business loan agreement with Union Bank of California, N.A., as the administrative agent, and two other lenders. The loan agreement is comprised

F-21

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

of a $20.0 million term loan and a $35.0 million revolving credit facility, which expires on July 6, 2009 and is collateralized by substantially all of the assets of the Company other than the Company’s EDC.

Under this loan agreement, interest on the $20.0 million term loan was fixed at 5.4% for the term of the loan. Interest on the revolving credit facility is charged at the bank’s reference rate. At October 31, 2007, the bank’s reference rate was 8.00%. The loan agreement also provides for optional interest rates based on London inter-bank offered rates (“LIBOR”) for periods of at least 30 days in increments of $0.5 million.

On September 3, 2004, the Company entered into the First Amendment to the loan agreement to amend Section 6.12(a), Tangible Net Worth. The loan agreement, as amended, contains certain financial covenants that include requirements that the Company maintain (1) a minimum tangible net worth of $74.0 million plus the net proceeds from any equity securities issued (including net proceeds from stock option exercises) after the date of the loan agreement for the period ending October 31, 2004, and a minimum tangible net worth of $74.0 million plus 90% of net income after taxes (without subtracting losses) earned in each quarterly accounting period commencing after January 31, 2005, plus the net proceeds from any equity securities issued (including net proceeds from stock option exercises) after the date of the loan agreement, (2) a minimum earnings before interest, income taxes, depreciation and amortization (“EBITDA”) determined on a rolling four quarter basis ranging from $16.5 million at July 6, 2004 and increasing over time to $27.0 million at October 31, 2008 and thereafter, (3) a minimum ratio of cash and accounts receivable to current liabilities of 0.75:1.00 for fiscal quarters ending January 31 and April 30 and 1.00:1.00 for fiscal quarters ending July 31 and October 31, and (4) a minimum fixed charge coverage ratio of 1.10:1.00 at July 31, 2004 and 1.25:1.00 thereafter. The loan agreement limits annual lease and equipment rental expense associated with the Company’s distribution center in Oceanside, California as well as annual capital expenditures in any single fiscal year on a consolidated basis in excess of certain amounts allowed for the acquisition of real property and equipment in connection with the distribution center. The loan agreement had an additional requirement where, for any period of 30 consecutive days, the total indebtedness under the revolving credit facility may not be more than $15.0 million. The loan agreement also limits the annual aggregate amount the Company may spend to acquire shares of its common stock.

On May 27, 2005 and September 8, 2005, the Company entered into the Second and Third Amendments, respectively, to the loan agreement. The Second Amendment to the loan agreement amended Section 6.12(e), Capital Expenditures, to increase the spending limitation to acquire fixed assets from not more than $5.0 million in any single fiscal year on a consolidated basis to a total of $20.0 million for fiscal years 2004 and 2005 together, for the acquisition of real property and equipment in connection with the distribution center located in Oceanside, California. The Third Amendment waived non-compliance with various financial covenants of the loan agreement, solely for the period ended July 31, 2005.

On January 26, 2006, the Company entered into the Fourth Amendment to the loan agreement to amend several sections of the credit facility and to waive non-compliance with financial covenants at October 31, 2005. Under the terms of the revised loan agreement, the revolving credit facility was adjusted to $42.5 million and the term loan commitment was adjusted to $6.8 million. Based on the revised loan agreement, the term loan shall commence January 31, 2006 and have equal monthly installments of principal in the amount of $125,000, plus all accrued interest for each monthly installment period, with a balloon installment for the entire unpaid principal balance and all accrued and unpaid interest due in full on the maturity date of July 6, 2009.

F-22

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Concurrent with the signing of the Fourth Amendment, the Company borrowed $7.5 million against the revolving credit facility and paid down the term loan by the same amount. The Company also paid bank fees totaling $125,000 related to the Fourth Amendment. The balance sheet at October 31, 2005 and the cash flow statement for the year ended October 31, 2005 in the accompanying financial statements have been adjusted to record these transactions as if the Fourth Amendment had been in effect as of October 31, 2005.

The loan agreement was also modified, pursuant to the Fourth Amendment, to reflect the change to a borrowing base commitment. The primary requirements under the borrowing base denote that the bank shall not be obligated to advance funds under the revolving credit facility at any time that Company’s aggregate obligations to the bank exceed the sum of (a) seventy five percent (75%) of the Company’s eligible accounts receivables, and (b) fifty-five percent (55%) of the Company’s eligible inventory. If at any time the Company’s obligations to the bank under the referenced facilities exceed the permitted sum, the Company shall immediately repay to the bank such excess. The applicable rate schedule was adjusted to reflect an additional pricing tier based on the average daily funded debt to EBITDA ratio. The Fourth Amendment also amended certain financial covenants and maintenance requirements under the loan agreement as follows:

1)	Minimum tangible net worth equal to the sum of $75.0 million; plus the sum of 90% of net income after income taxes (without subtracting losses) earned in each quarterly accounting period commencing after January 31, 2006; plus, the net proceeds from any equity securities issued after the date of the Fourth Amendment including net proceeds from stock options exercised;
2)	A ratio of quick assets to current liabilities (including the outstanding amount of loans and letter of credit obligations) of at least 0.90:1.00, except for the fiscal quarters ending January 31 and April 30, as to which the ratio of quick assets to current liabilities shall be at least 0.75:1.00;
3)	Capital expenditures are not to exceed more than $7.0 million in any fiscal year;
4)	Fixed charge coverage ratio as of the last day of any fiscal quarter is required to be not less than 1.25 to 1.00; provided that, for the fiscal quarter ending January 31, 2006, the fixed charge coverage ratio shall not be less than 0.80 to 1.00; and for purposes of determining the fixed charge coverage ratio only, the Company’s inventory write-down of $4.4 million shall be added back to EBITDA for the Company’s fiscal quarter ending April 30, 2006 and the Company’s maintenance capital expenditures shall be $4.0 million through the fiscal year ending October 31, 2006; and
5)	The requirement where, for any period of 30 consecutive days, the total indebtedness under the revolving credit facility may not be more than $15.0 million was eliminated.

The Company was not in compliance with the required quick asset ratio in the first quarter of fiscal year 2006. The Company obtained a written waiver of the quick assets to current liabilities covenant requirement from its lenders for the period ended January 31, 2006.

On March 7, 2007, the Company entered into the Sixth Amendment to the loan agreement with the Bank to eliminate the ratio of quick assets to current liabilities covenant requirement and waive non-compliance with financial covenants at January 31, 2007.

At April 30, 2007, the Company’s fixed charge coverage ratio of (0.18) to 1:00 and minimum tangible net worth of $79.8 million were not in compliance with the Company’s loan agreement covenants. On June 15, 2007, the Company obtained a written waiver of the fixed charge coverage ratio and minimum

F-23

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

tangible net worth covenant requirements from its lenders for the period ended April 30, 2007.

On July 27, 2007, the Company entered into the Eighth Amendment to its Revolving/Term Loan Credit Agreement with Union Bank of California, N.A. dated July 6, 2004.  This and previous recent amendments were necessary to align the covenant and collateral requirements of the agreement with the Company’s expected operating results during the remaining term of the agreement. The Eighth Amendment modified certain provisions of the Loan Agreement, which include the following:

1.	The borrowing base calculation was changed and denotes that the Lenders shall not be obligated to advance funds under the revolving credit facility at any time that the Company’s aggregate obligations to the Lenders exceed the sum of (a) eighty-five percent (85%) of Borrower’s Eligible Accounts, and (b) the lesser of (i) sixty-five percent (65%) of Borrower’s Eligible Inventory and (ii) eighty-five percent (85%) of the appraised net recovery value of Borrower’s Inventory, as such terms are defined in the amended Loan Agreement.
2.	A Control Account was established wherein any immediately available funds in the account will be automatically applied to the Company’s obligation under the revolving line of credit to minimize the Company’s interest expense.
3.	A Minimum Borrowing Base Availability provision was added which states that the Company must maintain a difference between the Borrowing Base and the aggregate outstanding obligations under the Credit Agreement of at least $7.5 million, except if the Company has achieved at least two (2) consecutive quarters of a Fixed Charge Coverage Ratio in excess of 1:10 to 1:00. If the Company is not in compliance with this provision for five (5) consecutive business days, this will constitute a “Triggering Event” and will result in the Control Account becoming the property of the Company’s bank as partial payment for the Company’s outstanding obligations under the Credit Agreement. Such a Triggering Event may be cured by maintaining the difference of at least $7.5 million for thirty (30) consecutive days.
4.	The Minimum Tangible Net Worth requirement was modified and is now equal to the sum of at least $70.0 million; plus 50% of net income after income taxes (without subtracting losses) earned in each quarterly accounting period commencing after April 30, 2007; plus, the net proceeds from any equity securities issued after the date of the Eighth Amendment (inclusive of securities issued in connection with stock-based compensation).
5.	The Minimum Fixed Charge Coverage Ratio (FCCR) was set at no less than 1:10 to 1:00 for periods after the earlier of two (2) consecutive quarters ended with a FCCR in excess of 1.10:1.00 or July 31, 2008. The FCCR may be used in determining the Applicable Rate.
6.	Capital Expenditures (including the total amount of any capital leases) are limited to $4.0 million in any one fiscal year on a consolidated basis. The Company may invest any net proceeds from the sale of any existing real property and equipment used in connection with the Company’s Oceanside, California Embroidery and Distribution Center in like assets within two (2) years of disposal of such assets and such investment will be in addition to the $4.0 million permitted in each fiscal year provided no event of default has occurred, is continuing or would result after giving effect to such investment.
7.	The Applicable Rate schedule was modified and is now based on the Fixed Charge Coverage Ratio or average daily Borrowing Base Availability instead of the Funded Debt to EBITDA Ratio.

The revolving credit facility under the loan agreement may also be used to finance commercial letters of credit and standby letters of credit. Commercial letters of credit outstanding under the loan agreement totaled $1.5 million at October 31, 2007 as compared to $2.9 million outstanding at

F-24

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

October 31, 2006. The Company had $19.6 million outstanding against the revolving credit facility under this loan agreement at October 31, 2007, compared to $14.0 million outstanding at October 31, 2006 and $4.1 million outstanding on the term loan at October 31, 2007 compared to $5.6 million at October 31, 2006. At October 31, 2007, $11.9 million was available for borrowings against the revolving credit facility under the loan agreement, subject to the borrowing base limitations.

For the fiscal year ended October 31, 2007, the Company’s capital expenditures were approximately $4.15 million which exceeded the annual capital expenditure limitation of $4.0 million permitted under the Company’s Union Bank loan agreement as amended on July 13, 2007 and on January 11, 2008, the Company paid off its loan balances with Union Bank and entered into a new line of credit agreement with B of A. See Note 14 of Notes to Consolidated Financial Statements.

F-25

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(6)	Long-term Debt
	Amounts outstanding under long-term debt agreements at October 31, 2007 and 2006 consist of the following:

	2007			2006
Term loan payable to a bank, bearing interest at 5.4%, payable in monthly payments of $333,000 plus interest through December 31, 2005 and $125,000 plus interest thereafter and through maturity of July 6, 2009, collateralized by substantially all of the Company’s assets, excluding real estate. (Note 5)	$	4,083,000		$	5,583,000
Note payable to a bank, bearing interest at 5.0%, payable in monthly principal and interest payments of $63,000 through April 2014, with a balloon payment of approximately $9,700,000 payable at maturity of May 1, 2014; collateralized by land and building		11,042,000			11,228,000
Subordinated note payable to a third party, bearing simple interest at 3.5%, payable in annual principal payments of $250,000 plus interest on the outstanding principal balance due June 30, 2006, 2007 and 2008		250,000			500,000
Note payable to a finance company, bearing interest at 3.9%, payable in monthly payments of principal and interest $471 through maturity of July 26, 2007		—			4,000
Capital lease obligations (Note 4)		829,000			473,000
		16,204,000			17,788,000
Less current portion		(2,360,000	)		(2,117,000	)
Long-term debt	$	13,844,000		$	15,671,000

F-26

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Future maturities of long-term debt and capital lease obligations at October 31, 2007 are as follows:

Years Ending October 31,
2008	$	2,360,000
2009		3,129,000
2010		288,000
2011		227,000
2012		238,000
Thereafter		9,962,000
Total	$	16,204,000

(7)	Employees’ 401(k) Plan
	The Company maintains a defined contribution retirement plan covering substantially all full-time employees. Company contributions, which are voluntary and at the discretion of the Company’s Board of Directors, are currently being made at 50% of the amount the employee contributes up to 3% of compensation. The Company’s expense for the years ended October 31, 2007, 2006 and 2005 was $404,000, $314,000 and $249,000, respectively.
(8)	Stockholders’ Equity
	Common Stock Options
	On December 14, 1999, the Company adopted the Ashworth, Inc. 2000 Equity Incentive Plan which was subsequently amended (as amended to date, the “2000 Plan”). The stockholders adopted the 2000 Plan on March 24, 2000 and concurrently terminated the Company’s Incentive Stock Option Plan, the Founders’ Nonqualified Stock Option Plan and the Nonqualified Stock Option Plan (together, the “Terminated Plans”). With the adoption of the 2000 Plan and the concurrent termination of the Terminated Plans, the Company reduced the aggregate number of shares available for issuance under its stock plans from 2,041,439 under the Terminated Plans to 1,900,000 shares of common stock under the 2000 Plan. On December 12, 2000, the Company filed Form S-8 (File No. 333-51730) to register the 1,900,000 shares of common stock available for issuance under the 2000 Plan.
	As of October 31, 2007, of the 1,900,000 shares of common stock available for issuance under the 2000 Plan, the Company had outstanding options covering 919,000 shares of common stock with exercise prices ranging from $4.99 to $11.78 and expiration dates between November 2010 and September 2017. At October 31, 2007, a total of 285,000 shares of common stock remained available for issuance pursuant to awards granted under the 2000 Plan. As of October 31, 2007, the Company had no options covering shares of common stock outstanding under the Terminated Plans.
	On October 24, 2007 the Company adopted the 2007 Nonstatutory Stock Option Plan (the “2007 Nonstatutory Plan”). As of October 31, 2007, of the 200,000 shares of common stock available for issuance under the 2007 Nonstatutory Plan, the Company had outstanding options covering 100,000 shares of common stock with an exercise price of $5.48 and an expiration date of October 24, 2017.

F-27

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

The following is a summary of stock option activity under the 2000 Plan, Terminated Plans and the 2007 Nonstatutory Plan for the fiscal years ended October 31, 2005, October 31, 2006 and October 31, 2007:

	Shares									Weighted Average
	underlying			Option exercise price per share						Remaining		Aggregate
	outstanding							Weighted-		Contractual Term		Intrinsic
	options			Range				average		(in Years)		Value
Balance at October 31, 2004		1,652,000			4.00	—	16.94		7.26		4.4		12,012,588
Granted		470,000			6.87	—	11.78		10.07
Exercised		(368,000	)		4.03	—	10.19		5.42				1,531,000
Canceled or Expired		(403,000	)		6.00	—	16.94		11.19
Balance at October 31, 2005		1,351,000			4.16	—	11.78		7.60		5.6		902,704
Granted		215,000			6.55	—	9.80		7.90
Exercised		(446,000	)		4.16	—	8.12		5.68				1,387,000
Canceled or Expired		(249,000	)		5.59	—	11.03		9.78
Balance at October 31, 2006		871,000			4.16	—	11.78		8.10		7.2		285,905
Granted		516,000			5.48	—	8.40		6.73
Exercised		(193,000	)		4.16	—	8.09		6.12				248,000
Canceled or Expired		(175,000	)		5.40	—	10.75		8.54
Balance at October 31, 2007		1,019,000			4.99	—	11.78		7.70		6.2		14,000
Exercisable, October 31, 2007		737,000			4.99	—	11.78		8.25		4.9		6,030
Exercisable, October 31, 2006		756,000			4.16	—	11.78		8.12		6.9		270,639
Exercisable, October 31, 2005		1,299,000			4.16	—	11.78		7.63		4.4		883,364

The Company incurred stock-based employee compensation expense of $886,000, $481,000 and $0 in fiscal years 2007, 2006 and 2005, respectively.

F-28

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

The following is a summary of stock options outstanding at October 31, 2007:

	Options outstanding						Options exercisable
			Weighted-
			average		Weighted-				Weighted-
	Number		remaining		average		Number		average
Range of	outstanding		contractual		exercise		exercisable		exercise
exercise prices	(shares)		life (years)		price		(shares)		price
$4.99 — $  6.99		296,000		7.9	$	5.75		93,000	$	6.14
$7.00 — $  8.99		531,000		5.5	$	7.71		455,000	$	7.66
$9.00 — $11.89		192,000		5.5	$	10.70		189,000	$	10.72
		1,019,000		6.2	$	7.70		737,000	$	8.25

On October 26, 2005, the Company’s Board of Directors approved the accelerated vesting of all currently outstanding, “out-of-the-money,” unvested stock options (the “Options”) to purchase shares of common stock of the Company. These Options were previously awarded to directors, officers and employees under the 2000 Plan. These Options have an exercise price greater than $6.97, the closing price on October 26, 2005, which is the effective date of the acceleration. Outstanding unvested options that are “in-the-money” were not subject to acceleration and will continue to vest in accordance with their normal schedule.

Options to purchase approximately 328,000 shares of Ashworth, Inc. common stock, which would otherwise have vested from time to time over the next three years, became immediately exercisable as a result of the Board of Directors’ actions. One of the purposes of the accelerated vesting was to reduce future stock option compensation expense that the Company would otherwise have recognized in its results of operations with the adoption of SFAS No. 123R. The number of shares and exercise prices of the Options subject to the acceleration were unchanged. The remaining terms for each of the Options granted remained the same.

At October 31, 2007 and 2006, the number of shares of common stock underlying exercisable options was 737,000 and 756,000, respectively, and the weighted-average exercise price of those options was $8.25 and $8.12, respectively.

F-29

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

The following is a summary of unvested stock options:

				Weighted-Average
	Number of			Grant Date
	Shares			Fair Value
Unvested, October 31, 2004		221,000		$	2.62
Granted		470,000			3.62
Vested		(606,000	)		3.44
Canceled or Expired		(33,000	)		2.96
Unvested, October 31, 2005		52,000			2.62
Granted		215,000			2.95
Vested		(137,000	)		2.71
Canceled or Expired		(14,000	)		2.43
Unvested, October 31, 2006		116,000			2.54
Granted		517,000			2.65
Vested		(295,000	)		2.88
Canceled or Expired		(55,000	)		3.09
Unvested, October 31, 2007		283,000			2.41

The grant-date fair value of stock options issued to employees and directors granted during fiscal 2007, 2006 and 2005 was $1,367,000, $634,000 and $1,702,000, respectively. As of October 31, 2007, the total unrecognized compensation cost related to unvested shares was $419,000, which is expected to be recognized over a weighted-average period of 2.5 years, based on the vesting schedules.

Comprehensive Income

The Company includes the cumulative foreign currency translation adjustment as well as the net unrealized gains and loss on cash flow hedges as components of the comprehensive income in addition to net income for the period. The following table sets forth the components of other comprehensive income for the periods presented:

	Years ended October 31,
	2007		2006		2005
Foreign currency translation		3,050,000		1,619,000		(511,000	)
Total other comprehensive income	$	3,050,000	$	1,619,000	$	(511,000	)

(9)	Commitments and Contingencies
	Promotional Agreements with PGA Professionals and a Television Personality
	The Company has promotional agreements with several PGA professionals, including Fred Couples, a related party at the time of the agreement; Jim Nantz, a television personality and member of the Company’s Board of Directors until March 24, 2004, a related party; and a management company. Under the terms of these agreements, the Company is or was obligated to pay cash or other compensation and, in some cases, to issue options to purchase shares of the Company’s common stock.

F-30

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

The aggregate annual compensation expense recognized under these agreements using the straight-line method in fiscal 2007, 2006 and 2005 was $414,000, $1,652,000 and $1,837,000, respectively. Cash payments made to related parties under these agreements during the years ended October 31, 2007, 2006 and 2005 totaled $1,628,000, $1,328,000 and $1,602,000, respectively. In fiscal year 2007, the Company made cash payments of $1,628,000 for promotional agreements, including $1,000,000 paid to Fred Couples. The Company is obligated to make this annual $1,000,000 payment if Mr. Couples plays a minimum of 15 PGA tournaments during the year. In fiscal year 2007, Fred Couples played two tournaments, obligating the Company to make cash payments of $133,000 (two-fifteenths of $1,000,000) to him in fiscal year 2008. Future minimum commitments under these agreements are as follows:

			Future Minimum
	Total		Payments to
	Future Minimum		Related
Year Ending October 31,	Payments		Parties
2008	$	304,000	$	133,000
2009		1,134,500		1,000,000
2010		1,000,000		1,000,000
2011		1,000,000		1,000,000
2012		—		—
Thereafter		—		—
	$	3,438,500	$	3,133,000

Executive Employment Agreements, Termination of Employment and Change in Control Arrangements

The Company previously entered into executive employment agreements with: Allan H. Fletcher, the Chief Executive Officer, Edward J. Fadel, the President, Greg W. Slack, the Chief Financial Officer, Peter M. Weil, former Chief Executive Officer, Winston E. Hickman, former Executive Vice President, Chief Financial Officer and Treasurer; Peter E. Holmberg, former Executive Vice President of Green Grass Sales and Merchandising; Gary I. “Sims” Schneiderman, former President, and Eric R. Hohl, former Executive Vice President, Chief Financial Officer and Treasurer. Messrs. Weil, Hickman, Holmberg, Schneiderman and Hohl ceased employment with the Company effective October 24, 2007, November 17, 2006, May 21, 2007, May 21, 2007 and October 24, 2007, respectively.

Agreements With Current Executive Officers

The employment agreement between the Company and Mr. Fletcher, dated October 24, 2007, and the stock options granted to Mr. Fletcher under the 2007 Nonstatutory Plan on October 24, 2007 have been terminated.

F-31

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Effective January 11, 2008, the Company entered into a consulting agreement with Fletcher Leisure Group, Ltd., a New York corporation (“FLG Ltd.”), under which FLG Ltd. provides the services of a management consultant to act as the Company’s Chief Executive Officer (the “FLG Ltd. Consulting Agreement”). The initial management consultant designated by FLG Ltd. is Mr. Fletcher, and FLG Ltd. may not designate any other management consultant without the Company’s written permission. The Company paid FLG Ltd. a one-time fee of $75,000 upon execution of the FLG Ltd. Consulting Agreement and will pay FLG Ltd. a consulting fee of $9,000 per month during the term of the FLG Ltd. Consulting Agreement. FLG Ltd. is also eligible to receive a cash incentive fee, the amount of which will be determined by the Company’s Compensation and Human Resource Committee based on achievement of objectives for FLG Ltd. and the Company set out in the Company’s annual business plan. For the 2008 fiscal year, the target incentive fee will be $500,000, assuming achievement of all objectives. If the Company terminates the FLG Ltd. Consulting Agreement without cause during a fiscal year, the Company will pay FLG Ltd. a pro rata portion of the incentive fee determined by the Compensation and Human Resources Committee to have been earned for such fiscal year. In addition, the Company granted FLG Ltd. 100,000 options to purchase shares of the Company’s common stock at an exercise price of $5.48 per share. Half of the options vest on October 24, 2008, and the remaining options vest on October 24, 2009. The options will vest immediately upon termination of the FLG Ltd. Consulting Agreement without cause or a change of control of the Company and will terminate upon the earlier of one year after the termination of the FLG Ltd. Consulting Agreement and ten years after the date of grant.

The Company will also reimburse FLG Ltd. for the rental of reasonable residential or hotel accommodations in the Carlsbad, California area while the management consultant is providing services to the Company at the Company’s headquarters (if the Company does not itself make such accommodations available).

The FLG Ltd. Consulting Agreement contains terms customary for a consulting agreement regarding confidentiality of the proprietary information of the Company, the assignment of intellectual property to the Company, reimbursement of business expenses and FLG Ltd.’s status as an independent contractor.

The FLG Ltd. Consulting Agreement may be terminated at will by either party. The Company may terminate the FLG Ltd. Consulting Agreement for cause in certain circumstances, with the result that the options granted under the FLG Ltd. Consulting Agreement will be terminated immediately and FLG Ltd. will not be entitled to a pro rata portion of the incentive fee earned during that fiscal year. Under the FLG Ltd. Consulting Agreement, “cause” means material breach of the FLG Ltd. Consulting Agreement by FLG Ltd., any act or acts of personal dishonesty by FLG Ltd. or the management consultant, the conviction of FLG Ltd. or the management consultant of a felony, violation of the Company’s policies or code of conduct by FLG Ltd. or the management consultant, violation by FLG Ltd. or the management consultant of any confidentiality or non-competition agreement with the Company or any of the Company’s affiliates, or the willful misconduct of FLG Ltd. or the management consultant that is injurious to the Company. If FLG Ltd. terminates the FLG Ltd. Consulting Agreement because the duties to be performed by FLG Ltd. are reduced in scope, the termination will be deemed a termination by the Company without cause.

In connection with Mr. Fadel’s appointment as President, the Company entered into an employment agreement (the “Fadel Employment Agreement”) with Mr. Fadel that provides for compensation which includes: an annual base salary of $240,000; eligibility for up to a target bonus of 40% of base salary, with the actual payment subject to the board’s discretion and in accordance with any applicable bonus plan; the grant of options to purchase 40,000 shares of the Company’s common stock, with an exercise

F-32

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

price equal to the closing price of the Company’s common stock on May 23, 2007 and with half of the options vesting on each of the first two anniversaries of Mr. Fadel’s employment with the Company (and which immediately vest upon Mr. Fadel’s termination without cause); and, a monthly auto allowance of $1,000, a monthly housing allowance of $2,500 for 12 months and coverage under the Company’s benefits programs. If Mr. Fadel is terminated without cause as defined in the Fadel Employment Agreement and he delivers a fully executed release and waiver of all claims against the Company, the severance provisions of the Employment Agreement grant him a lump sum payment of 25% to 50% of his then current annual salary, depending on the timing and circumstances of his termination.

In connection with Mr. Slack’s appointment as Chief Financial Officer, the Company entered into an employment agreement with Mr. Slack (the “Slack Employment Agreement”) on October 24, 2007. The Slack Employment Agreement provides for compensation consisting of, among other things, an annual base salary of $225,000; a target bonus of $112,500 for fiscal year 2008 at the discretion of the Company’s Board of Directors; a clothing allowance in accordance with Company policy; and an auto-mobile allowance of $750 per month.

The Slack Employment Agreement also provides for a severance payment, in the event that Mr. Slack is terminated without cause and Mr. Slack delivers to the Company and thereafter does not revoke a release and waiver of all claims against the Company. In such case, the severance payment would be 50% of Mr. Slack’s then-current annual base salary, if such termination occurs on or prior to the one-year anniversary of Mr. Slack’s employment with the Company, or 100% of Mr. Slack’s then-current annual base salary, if such termination occurs after Mr. Slack’s one-year anniversary of employment with the Company.

The Company also authorized entry into its form indemnity agreement with Mr. Slack, which provides for indemnification by the Company on the same terms described above with respect to Mr. Fletcher’s indemnity agreement. The foregoing description of the Slack Employment Agreement is qualified in its entirety by the terms of such agreement, which was filed as Exhibit 10.3 to the Form 8-K filed on October 30, 2007 and is incorporated herein by reference.

On September 20, 2007, the Company entered into an employment agreement with Paul Bourgeois (the “Bourgeois Employment Agreement”) appointing him as the Senior Vice President, Sales, effective October 1, 2007. The Bourgeois Employment Agreement provides for compensation of $7,692 paid bi-weekly; a performance bonus opportunity of 30% of annual base salary under certain circumstances; an automobile expense allowance of $500 each month; a clothing allowance in accordance with Company policy and a residential allowance of $2,000 each month for a period of six months, which is reimbursable to the Company if Mr. Bourgeois resigns within the first two years of employment.

Agreements With Former Executive Officers

On November 27, 2006, the Company entered into an employment agreement effective as of October 30, 2006 with Peter M. Weil (the “Weil Employment Agreement”) appointing him as the Chief Executive Officer of Ashworth, Inc. The Weil Employment Agreement provided for compensation consisting of, among other things: an annual base salary of $400,000; a performance bonus opportunity of 50% of annual base salary under certain circumstances; a grant of options to purchase 100,000 shares of the Company’s common stock, with 50% of the options vesting on each of the first two anniversaries of the grant date; eligibility to participate in the Company’s 401(k) plan; coverage under the Company’s medical, dental and life insurance benefits programs; a clothing allowance in accordance with Company policy; an automobile allowance of $1,250 per month; and, an allowance for reasonable residential expenses, in lieu of moving expenses, and until such time as the Compensation and Human Resources

F-33

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Committee or the Board takes further action, which included housing and all reasonable expenses (to be grossed up for taxes, if applicable). If Mr. Weil is terminated without Cause (as defined in the Weil Employment Agreement), then Mr. Weil would receive (1) severance compensation in an amount equal to 12 months of his then current annual base salary and (2) accelerated vesting of all stock options granted under the Weil Employment Agreement. Mr. Weil’s option vesting will also be accelerated as a result of a change of control. In the event that Mr. Weil became disabled (as defined in the Weil Employment Agreement) during the term of this Agreement for a continuous period up to 90 days, or upon termination of his employment as a result of his death, the Company was obligated to pay a pro rata share of the annual bonus in the year in which Mr. Weil was disabled or died.

On October 24, 2007, the Company entered into a separation and release agreement with Mr. Weil (the “Weil Separation Agreement”). Under the Weil Separation Agreement, Mr. Weil is entitled to a severance payment of $400,000 paid as follows: $100,000 on January 2, 2008, with the balance of $300,000 paid thereafter in 19 equal semi-monthly installments on the 15th and last day of every month. The Weil Separation Agreement, provided certain requirements are met, also provides for the acceleration of Mr. Weil’s unvested stock options and an extension of the exercise period of such options until one year following Mr. Weil’s separation.

On February 23, 2006, the Company entered into an employment agreement with Winston E. Hickman (the “Hickman Employment Agreement”) which terminated in connection with his resignation effective November 17, 2006. The Hickman Employment Agreement provided for: a base salary of $300,000; a target bonus of 50% of base salary, with the actual payment subject to the Board’s discretion; the grant of options to purchase 50,000 shares of the Company’s common stock, with half of the options vesting on each of the first two anniversaries of Mr. Hickman’s employment with the Company; and coverage under the Company’s benefits programs. No bonus was awarded to Mr. Hickman for fiscal 2006. The Hickman Employment Agreement also provided that if Mr. Hickman had been terminated without Cause or resigned under certain specified circumstances, Mr. Hickman would have been entitled to: a lump sum payment of either one-half or all of his then current annual salary, depending on the timing and circumstances of his termination or resignation; a pro rata bonus; and immediate vesting of a pro rata number of stock options.

In connection with Mr. Hickman’s resignation effective November 17, 2006 as Executive Vice President and Chief Financial Officer, the Company entered into a release agreement with Mr. Hickman (the “Hickman Release Agreement”) on November 16, 2006 whereby Mr. Hickman provided a standard release of any claims, complaints and lawsuits against the Company and other related entities and persons. The Hickman Release Agreement also provided that Mr. Hickman will receive continuing medical, dental and Exec-U-Care insurance coverage for a period of 18 months from December 1, 2006 through May 31, 2008 in exchange for ten (10) full days of consulting services to be provided by Mr. Hickman on reasonable and mutually agreed upon dates between November 20, 2006 and May 30, 2008, to assist with a professional transition of Executive Vice President and Chief Financial Officer responsibilities and to advise on related matters.

Effective October 25, 2006, the Company and Mr. Holmberg entered into the Amended and Restated Employment Agreement (the “Holmberg Employment Agreement”). Under the Holmberg Employment Agreement, Mr. Holmberg was to receive an annual base salary of $225,000 and was eligible to earn an annual bonus up to a maximum of 40% of his annual base salary based and conditioned on the Company’s achievement of certain financial targets. Among other things, Mr. Holmberg also received an automobile allowance of $1,000 per month. If Mr. Holmberg were to be terminated within two years of the effective date of the Holmberg Employment Agreement as a result of a Qualifying Termination (as defined in the Holmberg Employment Agreement) and if

F-34

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Mr. Holmberg delivered and did not revoke a fully executed release and waiver of all claims against the Company, then the Company was obligated to pay Mr. Holmberg the equivalent of 12 months of his then-current annual base salary, which was to be in lieu of any other severance payment benefits that otherwise may at that time be available under the Company’s applicable policies; provided, however, that the Holmberg Employment Agreement was not intended to modify or supersede the change in control agreement between the Company and Mr. Holmberg.

On May 25, 2007, the Company entered into a severance and release agreement with Mr. Holmberg (the “Holmberg Severance Agreement”) which provided for a modification of prior employment agreements and arrangements with Mr. Holmberg. Under the Holmberg Severance Agreement, Mr. Holmberg was entitled to a lump sum severance payment of $112,500 and an automobile allowance of $6,000 and agreed to provide a customary release of all claims against the Company.

On September 7, 2005, the Company entered into an employment agreement with Gary I. “Sims” Schneiderman (the “Sims Employment Agreement”). The Sims Employment Agreement with Mr. Schneiderman provided for: a minimum base salary of $300,000; bonuses to be determined by the Board on the basis of merit and the Company’s financial success and progress up to a maximum of 82.5% of his base salary; three guaranteed minimum non-compete/retention payments of $85,000 on September 12, 2005, $85,000 on November 24, 2005 and $40,000 following the close of final accounting records for 2006; stock options to purchase 20,000 shares for each of fiscal years 2005, 2006 and 2007; an automobile allowance of $1,000 per month and a club membership. The Sims Employment Agreement also provided that if a Qualifying Termination (as defined in the agreement) occurs, Mr. Schneiderman would be entitled to receive severance payments equal to 12 months of his then-current annual base salary, an additional cash payment of $50,000, payment of insurance premiums for a period of 12 months, and immediate vesting of all options.

On May 25, 2007, the Company entered into a severance and release agreement with Mr. Schniderman (the “Sims Severance Agreement”) which provided for a modification of prior employment agreements and arrangements with Mr. Sims. Under the Sims Severance Agreement, Mr. Schniderman is entitled to the continuation of bi-weekly payments of his base salary, automobile allowance and club dues for nine (9) months, the continuation of his employee insurance benefits for twelve (12) months and a waiver of the requirement for Mr. Schniderman to reimburse the Company for the cost of the club membership of $45,000. Mr. Sims agreed to provide a customary release of all claims against the Company. Mr. Schniderman is also entitled to acceleration of 20,000 outstanding stock options that were not yet vested, which are deemed vested as of May 21, 2007.

Effective March 19, 2007, the Company and Eric R. Hohl entered into an employment agreement (the “Hohl Employment Agreement”) that appointed Mr. Hohl the Executive Vice President, Chief Financial Officer and Treasurer. The Hohl Employment Agreement provided for compensation which included: an annual base salary of $240,000; eligibility for up to a target bonus of 40% of base salary, with the actual payment subject to the Board’s discretion and in accordance with any applicable bonus plan; the grant of options to purchase 40,000 shares of the Company’s common stock, with an exercise price equal to the closing price of the Company’s common stock on March 19, 2007, and with half of the options vesting on each of the first two anniversaries of Mr. Hohl’s employment with the Company; and coverage under the Company’s benefits programs. If Mr. Hohl is terminated without cause as defined in the Hohl Employment Agreement and he delivers a fully executed release and waiver of all claims against the Company, the severance provisions of the Hohl Employment Agreement grant him: a lump sum payment of 25% to 50% of his then current annual salary, depending on the timing and circumstances of his termination and immediate vesting of the above stock options.

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ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Effective October 24, 2007, Eric R. Hohl left his position as Executive Vice President, Chief Financial Officer and Treasurer of the Company. Pursuant to the terms of the Hohl Employment Agreement, the vesting for 40,000 stock options was accelerated and will be exercisable for 90 days after his departure for incentive stock options and 180 days after his departure for non-qualified options. Mr. Hohl delivered a fully executed release and waiver of all claims against the Company and subsequently received a one-time severance payment from the Company of $96,000.

Legal Proceedings

On February 27, 2007, the Law Offices of Herbert Hafif filed a class action in the United States District Court for the Central District of California alleging that the Company willfully violated the Fair Credit Reporting Act by printing on credit or debit card receipts more than the last five digits of the credit or debit card number and/or the expiration date. The plaintiff sought statutory and punitive damages, attorney’s fees and injunctive relief on behalf of the purported class. The suit against Ashworth was one of hundreds of suits filed against different retailers nationwide. The proposed class representative for the putative class filed his motion to certify this matter as a class action. The Company filed an opposition to the motion and the court entered an order denying the class certification. On November 13, 2007, the parties entered into a settlement on the record whereby Ashworth would pay the plaintiff $1,000 and the plaintiff would dismiss his individual claim with prejudice. Ashworth admitted no liability and continues to dispute any allegation that it willfully violated the Fair Credit Reporting Act. The parties subsequently entered into a written stipulation to that effect and the court dismissed the complaint.

The Company is party to other claims and litigation proceedings arising in the normal course of business. Although the legal responsibility and financial impact with respect to such claims and litigation cannot currently be ascertained, the Company does not believe that these matters will result in payment by the Company of monetary damages, net of any applicable insurance proceeds, that, in the aggregate, would be material in relation to the consolidated financial position or results of operations of the Company.

Licensing Agreement with Callaway Golf Company

In May 2001, Ashworth agreed to a multi-year exclusive licensing agreement (the “License Agreement”) with Callaway Golf Company (“Callaway”) to design, market and distribute complete lines of men’s and women’s Callaway Golf apparel. The agreement allows Ashworth to sell Callaway Golf apparel primarily in the United States, Europe and Canada. The initial Callaway Golf apparel products shipped in April 2002. The multi-year agreement has various minimum annual requirements for marketing expenditures and royalty payments based on the level of net revenues. The Company believes that revenues from the Callaway Golf apparel product line will be sufficient to cover such minimum royalty payments. The agreement is effective until December 31, 2010 and, at Ashworth’s sole discretion, may be extended for one five-year term provided that Ashworth meets or exceeds certain minimum requirements for calendar years 2008 and 2009, that Ashworth gives notice of its intention to renew by January 1, 2010 and that Ashworth is not in material breach of the agreement.

On March 29, 2007, the Company and Callaway entered into a second amendment to the License Agreement between the Company and Callaway, dated May 14, 2001. Among other things, the second amendment to the License Agreement clarified the relationship of the parties in certain respects, updated the licensed trademarks to reflect Callaway’s current product lineup and changed the territories in which the Company may market products under the License Agreement.

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ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

	On December 3, 2007, the Company and Callaway entered into a third amendment to the License Agreement. Among other things, the third amendment created a new mid-price retail channel, with new trademarks for use in that channel, and changed the royalty payments owed to Callaway to a flat percentage of net sales of products sold under the License Agreement. Under the third amendment, the Company will pay royalties at two separate rates, one for the mid-price channel and another for all other sales channels. The flat royalty rates replaced the tiered royalty rates formerly paid by the Company.
(10)	Related-Party Transactions
	In October 2007, the Company announced the appointment of Allan H. Fletcher to the position of Chief Executive Officer. Mr. Fletcher is the founder of Fletcher Leisure Group, Inc. (“FLG”) which has been one of Canada’s leading suppliers of branded golf apparel, sportswear and golf equipment for over 40 years and is a long-standing business partner of the Company. The Company distributes Ashworth and Callaway Golf apparel, headwear and accessories in Canada through two separate divisions operated by FLG. Mr. Fletcher was responsible for the operations and strategic direction of FLG and served as its President until December 2003 when he became the Chairman of FLG. Mr. Fletcher’s son, Mark Fletcher, currently serves as the President of FLG and oversees its operations.
	On August 15, 2007, the Company entered into an agreement with FLG pursuant to which the Company has the exclusive right to distribute Sunice licensed products in the U.K., Ireland and selected countries of Continental Europe through Ashworth’s U.K. subsidiary for a fee equal to 10% of net sales of Sunice product. Under the agreement, terminable by the Company at the end of one year, FLG is responsible for all design and production and has agreed to deliver Sunice products to Ashworth on a consignment basis. During such first year Ashworth agreed to pay FLG 105% of the actual documented costs of the production and delivery of the Sunice products upon the sale of such products by Ashworth to third-party customers. The Company made no payments to FLG in fiscal 2007 but has a payable balance of $81,000 due to FLG at October 31, 2007.
	The Company leases its Phenix City, Alabama distribution facility from STAG II Phenix City, LLC, which purchased the building in fiscal 2006 from 16 Downing, LLC, which was a related party owned by certain members of Gekko Brands, LLC’s management. Total payments under the operating lease for this facility made during the years ended October 31, 2007, 2006 and 2005 were $457,000, $400,000 and $400,000, respectively. The lease agreement requires monthly payments of $38,060 through June 6, 2012.
	Seidensticker (Overseas) Limited (“Seidensticker”), a supplier of inventoried products to us, owned approximately 1.65% of our outstanding common stock at October 31, 2007. Additionally, the President and Chief Executive Officer of Seidensticker (Overseas) Limited was elected to the Company’s Board of Directors effective January 1, 2006. During the years ended October 31, 2007, 2006 and 2005, we purchased approximately $1,151,000, $1,571,000 and $5,800,000 of products from Seidensticker. We believe that the terms upon which we purchased the inventoried products from Seidensticker are consistent with the terms offered to other, unrelated parties.
	On May 5, 2006, the Company entered into a settlement agreement (the “Agreement”) with Knightspoint Partners II, L.P. and certain other entities and individuals, including Mr. David M. Meyer and Michael S. Koeneke (collectively, the “Knightspoint Group”) under which, among other matters, the Company agreed to appoint Mr. Meyer and Mr. Weil and a mutually agreeable third director to its Board of Directors (the “Board”). Pursuant to the Agreement, the Company reimbursed Knightspoint

F-37

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Group for its actual expenses incurred in connection with the proxy contest in the amount of approximately $165,000. Mr. Meyer is a managing member of Knightspoint Partners LLC, an affiliate of Knightspoint Partners II, L.P. Mr. Meyer currently serves as The Chairman of the Company’s Board of Directors.

On September 12, 2006, concurrent with his appointment to the Office of the Chairman, Mr. Weil, who is the former CEO and a Director of the Board, entered into an agreement with the Company to provide consulting services on corporate management and operations and decision-making within the Office of the Chairman (the “Weil Agreement”). Mr. Weil was paid approximately $48,000 for such services for the period of September 12, 2006 through October 29, 2006. Mr. Weil also received an option grant to purchase 25,000 shares with an exercise price of 100% of then-current fair market value, 12,900 of which vested and 12,100 were terminated as of October 30, 2006 pursuant to the terms of the Weil Agreement. The Weil Agreement was terminated upon Mr. Weil’s appointment as Chief Executive Officer effective October 30, 2006. Mr. Weil departed the Company on October 24, 2007.

(11) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The provision for income taxes for the years ended October 31, 2007, 2006 and 2005 is as follows:

	2007			2006			2005
Current provision (benefits):
Federal	$	(90,000	)	$	(285,000	)	$	(262,000	)
State		—			(80,000	)		365,000
Foreign		494,000			619,000			238,000
Total	$	404,000		$	254,000		$	341,000
Deferred provision (benefit):
Federal		2,356,000			(19,000	)		(1,074,000	)
State		194,000			55,000			(377,000	)
Foreign		23,000			(23,000	)		12,000
Total		2,573,000			13,000			(1,439,000	)
Tax benefit related to option exercises		90,000			535,000			537,000
Provision (benefit) for income taxes	$	3,067,000		$	802,000		$	(561,000	)

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ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

The Company’s income (loss) before provision for income taxes was allocated between domestic and foreign tax jurisdictions for the years ended October 31, 2007, 2006 and 2005 as follows:

	2007			2006			2005
Domestic	$	(12,697,000	)	$	(145,000	)	$	(2,126,000	)
Foreign		1,648,000			1,898,000			838,000
Total	$	(11,049,000	)	$	1,753,000		$	(1,288,000	)

U.S. income taxes were not provided for on a cumulative total of approximately $5.0 million of undistributed earnings for certain non-U.S. subsidiaries. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable. The Company currently intends to reinvest these earnings in operations outside the U.S.

The components of the Company’s deferred income tax assets and liabilities as of October 31, 2007 and 2006 are as follows:

	2007			2006
Deferred tax assets:
Allowance for doubtful accounts	$	324,000		$	379,000
Inventory reserves		1,622,000			1,177,000
Accrued compensation		810,000			303,000
Other nondeductible accruals		1,982,000			1,747,000
Other deductible capitalized cost		207,000			488,000
Federal and State Credit Carryovers		4,210,000			—
Total gross deferred tax assets		9,155,000			4,094,000
Valuation Allowance		(7,434,000	)		—
Net deferred tax assets	$	1,721,000		$	4,094,000
Deferred tax liabilities:
Deductible capitalized costs	$	1,760,000		$	1,350,000
State tax		—			30,000
Depreciation		1,382,000			1,562,000
Total gross deferred tax liabilities	$	3,142,000		$	2,942,000

F-39

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The temporary differences described above represent differences between the tax basis of assets or liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. A portion of the deferred tax assets recognized relates to federal, state and foreign deferred tax assets. Because the Company operates in multiple state and foreign jurisdictions, it considered the need for a valuation allowance on a federal, state and foreign basis, taking into account the effects of local tax law. Where a valuation allowance was not recorded, the Company believes that there was sufficient positive evidence to support its conclusion not to record a valuation allowance.

The Company has recorded a net deferred income tax liability of $1,421,000 and a net deferred income tax asset of $1,152,000 as of October 31, 2007 and 2006, respectively.

Management believes that it is more likely than not that the Company will not utilize a majority of the net deferred tax assets in the future because the Company has a recent history of cumulative tax losses, and has therefore booked a valuation allowance of $7,434,000. Management believes that the Company’s businesses will be profitable and will generate taxable income in the near term for federal and foreign purposes; however, there can be no assurance that the Company will generate taxable income or that all of deferred tax assets will be utilized. The realization of this net asset may be dependent on the Company’s ability to generate sufficient taxable income in future years. Since realization is not assured, management believes it is not more likely than not that the net deferred income tax asset will be realized.

A reconciliation of the provision for income taxes at the statutory rate to the Company’s effective rate is as follows:

	2007			2006			2005
Computed income tax (benefit) at the expected statutory rate	$	(3,757,000	)	$	596,000		$	(438,000	)
State income tax (benefit), net of federal tax benefits		(592,000	)		(71,000	)		(42,000	)
Nondeductible expenses		213,000			180,000			114,000
Foreign tax jurisdiction rate differential		(66,000	)		(76,000	)		(20,000	)
Credits generated and used		(262,000	)		(345,000	)		(382,000	)
Other		(11,000	)		33,000			27,000
Subpart F income		238,000			355,000			180,000
Increase in Valuation Allowance		7,304,000			130,000			—
Provision (benefit) for income taxes	$	3,067,000		$	802,000		$	(561,000	)

The Company has unused foreign tax credits at October 31, 2007 of $545,000 that expire 2017, but currently has a full valuation allowance against the credits since future tax benefits may not be realized due to cumulative tax losses. The Company also has unused alternative minimum tax credits at October 31, 2007 of $12,000 that do not expire, but currently has a full valuation allowance against the credits since future tax benefits may not be realized due to cumulative tax losses. In addition, the Company has an unused Federal net operating loss carryover at October 31, 2007 of $3,159,000 and state net operating loss carryovers of $494,000 that will expire by 2027, and currently has a full valuation

F-40

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

allowance against the credits since future tax benefits may not be realized due to cumulative tax losses. The utilization of the net operating losses and tax credit carryforwards may be further limited in the future if an ownership change occurs, as defined under Internal Revenue Code Section 382.

(12) Segment Information

The Company has the following four reportable segments: Domestic; Gekko Brands, LLC; Ashworth U.K., Ltd.; and Other International. Management evaluates segment performance based primarily on revenues and income from operations. Interest income and expense, unusual or infrequent items, and income tax expense are evaluated on a consolidated basis and are not allocated to the Company’s business segments. Segment information is summarized as follows as of and for the years ended October 31, 2007, 2006 and 2005:

F-41

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

	2007			2006			2005
Net revenues:
Domestic	$	119,630,000		$	129,360,000		$	133,176,000
Gekko Brands, LLC		45,208,000			41,768,000			37,511,000
Ashworth, U.K., Ltd.		27,236,000			27,987,000			23,416,000
Other International		10,115,000			10,485,000			10,685,000
Total	$	202,189,000		$	209,600,000		$	204,788,000
Income (loss) from operations:
Domestic	$	(14,178,000	)	$	(3,837,000	)	$	(7,914,000	)
Gekko Brands, LLC		2,699,000			4,095,000			4,540,000
Ashworth, U.K., Ltd.		1,070,000			1,437,000			1,976,000
Other International		2,362,000			2,643,000			2,870,000
Total	$	(8,047,000	)	$	4,338,000		$	1,472,000
Capital expenditures:
Domestic	$	3,511,000		$	5,676,000		$	6,443,000
Gekko Brands, LLC		453,000			571,000			963,000
Ashworth, U.K., Ltd.		185,000			217,000			170,000
Total	$	4,149,000		$	6,464,000		$	7,576,000
Total assets:
Domestic	$	80,715,000		$	92,337,000		$	102,745,000
Gekko Brands, LLC		45,217,000			42,597,000			38,217,000
Ashworth, U.K., Ltd.		25,733,000			22,517,000			18,999,000
Other International		8,749,000			6,592,000			4,753,000
Total	$	160,414,000		$	164,043,000		$	164,714,000
Long-lived assets, at cost:
Domestic	$	65,533,000		$	62,937,000		$	58,206,000
Gekko Brands, LLC		29,653,000			29,209,000			27,301,000
Ashworth, U.K., Ltd.		2,306,000			2,683,000			1,977,000
Total	$	97,492,000		$	94,829,000		$	87,484,000
Goodwill:
Gekko Brands, LLC	$	15,250,000		$	15,250,000		$	13,865,000
Depreciation expense:
Domestic	$	5,086,000		$	4,707,000		$	3,869,000
Gekko Brands, LLC		468,000			408,000			370,000
Ashworth, U.K., Ltd.		247,000			285,000			317,000
Total	$	5,801,000		$	5,400,000		$	4,556,000

F-42

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(13) Results By Quarter (Unaudited)

The unaudited results by quarter for the years ended October 31, 2007 and 2006 are shown below:

	First			Second			Third			Fourth
Year ended	Quarter			Quarter			Quarter			Quarter
October 31, 2007	(1)			(1)			(1)			(1)
Net revenues	$	38,272,000		$	59,864,000		$	49,461,000		$	54,592,000
Gross profit		15,617,000			23,241,000			18,883,000			20,026,000
Net income (loss)		(3,155,000	)		(2,533,000	)		(5,649,000	)		(2,779,000	)
Net income (loss) per basic share		(0.22	)		(0.17	)		(0.39	)		(0.19	)
Weighted-average basic shares outstanding		14,520,000			14,520,000			14,602,000			14,660,000
Net income (loss) per diluted share		(0.22	)		(0.17	)		(0.39	)		(0.19	)
Weighted-average diluted shares outstanding		14,520,000			14,520,000			14,602,000			14,660,000

	First			Second		Third		Fourth
Year ended	Quarter			Quarter		Quarter		Quarter
October 31, 2006	(1)			(1)		(1)		(1)
Net revenues	$	40,612,000		$	66,020,000	$	52,816,000	$	50,152,000
Gross profit		17,976,000			29,883,000		21,626,000		16,328,000
Net income (loss)		(50,000	)		4,675,000		681,000		(4,355,000	)
Net income (loss) per basic share		—			0.32		0.05		(0.30	)
Weighted-average basic shares outstanding		14,182,000			14,404,000		14,495,000		14,520,000
Net income (loss) per diluted share		—			0.32		0.05		(0.30	)
Weighted-average diluted shares outstanding		14,182,000			14,560,000		14,624,000		14,520,000

(1) The diluted EPS amounts for the first, second, third and fourth quarters of the year ended October 31 2007 and the first and fourth quarters of the year ended October 31, 2006 were calculated using the basic weighted-average shares as the effect of stock options would be anti-dilutive due to the Company’s loss position in those quarters.

(14) Subsequent Events

On January 11, 2008, the Company and its material domestic subsidiaries as co-borrowers entered into and consummated a new senior revolving credit facility, (the “Credit Facility”), of up to $55.0 million (subject to borrowing base availability), including a $15.0 million sub-limit for letters of credit (letters of credit will be 100% reserved against borrowing availability) with Bank of America, N.A., (“B of A”). Proceeds of $30.9 million under the Credit Facility were used by the Company on January 11, 2008 to payoff its existing term loan, revolving credit facility and cash collateralize all outstanding letters of credit with Union Bank of California, N.A., (“Union Bank”) and to pay related fees and expenses. The Credit Facility is anticipated to be used in the future by the Company to issue standby or

F-43

ASHWORTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

commercial letters of credit and to finance ongoing working capital needs. The Credit Facility expires on January 11, 2012 and is collateralized by a substantial portion of the assets of the Company and its subsidiaries party thereto (excluding real estate and certain other assets).

Loans under the Credit Facility bear interest at a rate based either on (i) B of A’s referenced base rate or (ii) LIBOR (as defined in the Credit Facility), subject in each case to performance pricing adjustments based on the Company’s fixed charge coverage ratio that range between LIBOR plus 1.25% and LIBOR plus 1.75%. Interest will be set at LIBOR plus 1.25% for the first six months of the agreement and adjusting thereafter. The initial interest rate applicable to borrowings under the Credit Facility is 7.25%. The Company also is required to pay customary fees under the Credit Facility. At December 31, 2007, The six month LIBOR was 5.95% All interest and per annum fees are calculated on the basis of actual number of days elapsed in a year of 360 days.

The borrowing base under the Credit Facility at any time equals the lesser of (i) $55.0 million, minus the amount of any outstanding letters of credit other than that have not been cash collateralized and those that constitute charges owing to B of A, and (ii) the sum of (a) eighty-five percent (85%) of the value of eligible accounts receivable, provided, however that such percentage shall be reduced by 1.0% for each whole percentage point that the dilution percent exceeds 5.0%; plus (b) the least of (x) $45.0 million, (y) between 65% and 70% (seasonal advance rate) of the Company’s eligible inventory and eligible in-transit inventory, plus a percentage of slow moving inventory (set at 65% for the first year, and dropping to 0% by the fourth year) and (z) 85% of the appraised net orderly liquidation value of eligible inventory (including eligible in-transit inventory and eligible slow moving inventory); minus (c) certain reserves; minus (d) outstanding obligations under the loan facility anticipated to be provided by the Bank to Ashworth U.K., Ltd., as described below (the “UK Loan Facility”) The borrowing base as of January 11, 2008 approximately $41.5 million. Unused availability, taking into account outstanding letters of credit, as of January 11, 2008, was approximately $5.6 million.

The Credit Facility contains restrictive covenants limiting the ability of the Company and its subsidiaries to take certain actions, including covenants limiting the Company’s ability to incur or guarantee additional debt, incur liens, pay dividends, repurchase stock or make other distributions, sell assets, make loans and investments, prepay certain indebtedness, enter into consolidations or mergers, and enter into transactions with affiliates. The Credit Facility limits the ability of the Company to agree to certain change of control transactions, because a “change of control” (as defined in the Credit Facility) is an event of default. The Credit Facility also contains customary representations and warranties, affirmative covenants, events of default, indemnities and other terms and conditions.

The foregoing summary of the Credit Facility is qualified by reference to the Loan and Security Agreement dated as of January 11, 2008 attached as Exhibit 10(aq) to the Company’s Form 10-K filed with the Commission on January 14, 2008. Please see the Loan and Security Agreement for a more detailed description of the terms of the Credit Facility.

The Company and B of A are currently in the process of negotiating a UK Loan Facility in an amount anticipated to be up to $10.0 million. The applicable interest rate and fees under the UK Loan Facility are anticipated to be comparable to the applicable interest rate and fees under the Credit Facility. As noted above, loans and letters of credit under the UK Loan Facility are anticipated to reduce the borrowing base under the Credit Facility. The Company believes that the UK Credit Facility will enhance the Company’s ability to meet its current and long-term operating needs in the UK. Although there can be no assurance that the UK Loan Facility will be consummated on the above-referenced terms or at all, the Company anticipates that the UK Credit Facility will be completed during the second quarter of fiscal 2008.

F-44

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Ashworth, Inc.:

Under date of January 14, 2008, we reported on the consolidated balance sheets of Ashworth, Inc. (a Delaware corporation) and subsidiaries as of October 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended October 31, 2007 and 2006. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audit.

In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Moss Adams, LLP

Irvine, California
January 14, 2008

F-45

ASHWORTH, INC. AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

	Allowances for Doubtful
	Accounts and Sales Returns,
	Markdowns and Other
Description	Allowances
Balance, October 31, 2004	$	2,438,000
Charged to Costs and Expenses		7,061,000
Deductions		(4,149,000	)
Balance, October 31, 2005		5,350,000
Charged to Costs and Expenses		7,664,000
Deductions		(7,826,000	)
Balance, October 31, 2006		5,188,000
Charged to Costs and Expenses		8,136,000
Deductions		(8,494,000	)
Balance, October 31, 2007	$	4,830,000

F-46

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.

	ASHWORTH, INC. (Registrant)
Date: January 14, 2008	BY:	/s/ Allan H. Fletcher
	Allan H. Fletcher
	Chief Executive Officer

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

Signature	Title	Date
/s/ Allan H. Fletcher Allan H. Fletcher	Chief Executive Officer	January 14, 2008
/s/ Greg W. Slack Greg W. Slack	Chief Financial Officer, Principal Accounting Officer	January 14, 2008
/s/ David M. Meyer David M. Meyer	Chairman	January 14, 2008
/s/ Stephen G. Carpenter Stephen G. Carpenter	Director	January 14, 2008
/s/ John M. Hanson, Jr. John M. Hanson, Jr.	Director	January 14, 2008
/s/ James B. Hayes James B. Hayes	Director	January 14, 2008
/s/ Detlef H. Adler Detlef H. Adler	Director	January 14, 2008
/s/ James G. O’Connor James G. O’Connor	Director	January 14, 2008
/s/ John W. Richardson John W. Richardson	Director	January 14, 2008
/s/ Eric S. Salus Eric S. Salus	Director	January 14, 2008
/s/ Michael S. Koeneke Michael S. Koeneke	Director	January 14, 2008

S-1

EXHIBIT INDEX

Exhibit
Number		Description of Exhibit
10(ap)		Consulting agreement between Fletcher Leisure Group Ltd. and the Company, effective January 11, 2008.
10(aq)		Loan agreement, effective January 11, 2008 by and between the Company and Bank of America, N. A.
	21	Subsidiaries of the Registrant.
	23.1	Independent Registered Public Accounting Firm Consent.
	31.1	Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Allan H. Fletcher.
	31.2	Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Greg W. Slack.
	32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Allan H. Fletcher.
	32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Greg W. Slack.

EX-10.(AP)

Exhibit 10 (ap)

Ashworth – FLG NY

Consulting Agreement

     THIS CONSULTING AGREEMENT (this “Agreement”) is made by and between Fletcher Leisure Group, Ltd., a New York corporation (“FLG NY”), and Ashworth, Inc., a Delaware corporation (the “Company”), effective as of January 11, 2008. This Agreement sets forth the services to be provided to the Company by FLG NY and the terms and conditions of the delivery of those services.

1. Engagement:

(a)	Subject to the terms of this Agreement, the Company hereby engages FLG NY to provide the Company with advisory and management consulting services that fulfill the duties required of the Office of the Chief Executive Officer (“CEO”) of the Company, through a management consultant designated by FLG NY (the “Management Consultant”). The initial Management Consultant designated by FLG NY to fulfill its contractual responsibilities under this Agreement will be Allan H. Fletcher. FLG NY shall not designate a different Management Consultant to provide services under this Agreement without the prior written consent of the Company.
(b)	In order to maintain the safety and security of the physical premises of the Company, FLG NY shall direct and cause the Management Consultant to perform contracted management consulting services on working days and hours, prescribed by FLG NY, that are to the maximum degree possible consistent with the Company’s working days and hours of work provided by the Company’s executive employees.
(c)	While remaining at all times solely as an employee of FLG NY, the Management Consultant may nonetheless be permitted to use the Company’s email system and letterhead and carry business cards identifying his responsibility or title at the Company, and be referenced in the organizational chart of the Company.
(d)	FLG NY will at all times during the term of this Agreement maintain compliance with all federal, state and local laws, regulations and ordinances, including, without limitation, U.S. employment, tax and immigration laws.
(e)	FLG NY shall not, directly or indirectly, employ, use, request or otherwise make available, the labor, talents or energy of any person not eligible for employment by FLG NY under the terms and conditions of the Immigration Reform and Control Act of 1986 (the “Act”), as it shall now exist or hereafter be modified or amended, at any time during the term of this Agreement. FLG NY shall supply all documents requested by the Company that relate to the eligibility of any person employed by FLG NY to provide services to the Company under this Agreement.

2. Duties: FLG NY shall cause the Management Consultant to perform the customary duties of a CEO, including, without limitation:

(a)	overseeing the development and execution by Company personnel of strategies and actions approved by the Company’s Board of Directors;
(b)	regularly reporting to the Company’s Board of Directors on the development and execution of the Company’s business plan;
(c)	overseeing the Company’s disclosure and disclosure controls, and signing the Company’s filings with the Securities and Exchange Commission; and
(d)	such other duties as are reasonably requested by the Board of Directors or Chairman of the Company.

3. Consulting Fees:

(a)	The Company will pay FLG NY a one-time fee of $75,000 upon execution of this Agreement.
(b)	The Company will pay FLG NY a monthly consulting fee of $9,000, payable in arrears.
(c)	FLG NY may receive a cash incentive fee, the amount of which, if any, will be determined annually by the Company’s Compensation and Human Resource Committee based on achievement of the Company’s objectives and FLG NY’s accomplishment of the prescribed objectives for the CEO. The objectives for the Company and the CEO will be set out in the Company’s annual business plan, to be developed by senior management of the Company and approved by the Board of Directors. The target incentive fee for fiscal year 2008 will be $500,000, assuming full achievement of the Company’s 2008 business plan objectives. If the Company terminates this Agreement without cause during a fiscal year, the Company shall promptly pay FLG NY as soon as practicable (but no later than 90 days after the applicable fiscal year end) a pro-rata portion of any cash incentive fee determined by the Compensation and Human Resources Committee to have been earned for such fiscal year.
(d)	Concurrent with the execution and delivery hereof, the Company will grant FLG NY 100,000 non-qualified options to purchase shares of the Company’s common stock at an exercise price of $5.48 per share. Options to purchase 50,000 shares of the Company’s common stock will vest on October 24, 2008 and the remaining options will vest on October 24, 2009. The option vesting will be accelerated and the options will become immediately exercisable upon the Company’s termination of this Agreement either without cause, as defined below, or as a result of a change in control. The foregoing options will be exercisable for a period of time from the vesting date until the earlier of (i) one year after termination of this Agreement, and (ii) ten years after the date of grant.

4. Business Expenses: FLG NY will be reimbursed by the Company for:

(a)	normal, ordinary and reasonable business expenses (including business class airfare) incurred by FLG NY in connection with the performance of FLG NY’s duties hereunder, upon submission of receipts substantiating the expenses claimed in accordance with Company policy; and
(b)	rental of reasonable residential or hotel accommodations in the Carlsbad, California area for the Management Consultant while he is providing services to the Company at its headquarters in the event the Company does not itself make such accommodations available.

5. Confidentiality; Non-Competition; Solicitation of Employees; Return of Property:

(a)

FLG NY acknowledges that, in the course of FLG NY’s engagement by the Company, it will have access to confidential information concerning the organization and functioning of the business of the Company and that such information is a valuable trade secret and the sole property of the Company. Accordingly, except as required by law, legal process, or in connection with any litigation between the parties hereto with respect to matters arising out of this Agreement, FLG NY shall not, and shall cause the Management Consultant and other of its employees to not, disclose or furnish any confidential information of the Company to any person other than an employee or director of the Company, at any time during the term of this Agreement or thereafter. FLG NY shall not, and shall cause the Management Consultant and other of its employees to not, use any confidential information of the Company for its or their own direct or indirect benefit.

(b)

For the purposes of this Agreement, information will not be considered “confidential information” to the extent that such information:

(i)	is in the public domain, or hereafter becomes generally known or available through no action or omission by FLG NY;
(ii)	is furnished by the Company or an affiliate to any person (other than a subsidiary or affiliate of the Company) without restriction on disclosure, provided that information furnished by, or at the direction of, the Management Consultant acting in his capacity as CEO under this Agreement will be considered confidential information, notwithstanding the absence of any restriction on disclosure;
(iii)	becomes known to FLG NY from a source other than the Company, or an affiliate of the Company, without a breach of this Agreement or any other agreement with the Company, or an affiliate of the Company, and without any restriction on disclosure; or
(iv)	is within the general knowledge or skill of any FLG NY employee to the extent acquired prior to this engagement.

(c) During the term of this Agreement and for a period of one year after the termination of this Agreement, FLG NY will not, and shall cause the Management Consultant and

other of its employees to not, directly or indirectly, provide services to any person or entity that competes or is planning to compete with the Company; provided, however, that neither (i) passive investment of up to 5% of the outstanding voting securities or similar equity interest in a publicly held entity, nor (ii) provision of services to affiliates of FLG NY, will constitute a breach of this Agreement.

(d) Excluding general employment solicitations directed at the public, during the term of this Agreement and for a period of two years after the termination of this Agreement, FLG NY will not, and shall cause the Management Consultant and other of its employees to not, directly or indirectly:

(i)	solicit, induce or attempt to influence any person or business that is an account, customer or client of the Company or any subsidiary to restrict or cancel the business of any such account, customer or client with the Company or any subsidiary; or
(ii)	solicit any employee or sales representative of the Company or any subsidiary or affiliate to leave his or her employment with or sales representation of the Company or any subsidiary or affiliate.

(e) If this Agreement is terminated, FLG NY shall return to an officer of the Company any and all confidential information of the Company then in its or its employees’ possession and shall provide passwords for computer files stored on the Company’s computers used by the Management Consultant.

6. Independent Contractor:

(a)

Nothing in this Agreement shall be construed as creating an employer-employee relationship, a partnership, a co-employment relationship or a joint venture between the Company and FLG NY or between the Company and the Management Consultant. FLG NY shall exercise sole and exclusive control over its employees, consultants or independent contractors who provide services to the Company on behalf of FLG NY, including the Management Consultant, and over the labor and employee relations policies and policies relating to wages, hours, working conditions or other conditions of its employees, consultants or independent contractors.

(b)

Notwithstanding any other term of this Agreement, the Management Consultant will be supervised and directed in the performance and fulfillment of FLG NY’s responsibilities under this Agreement solely by the Chief Executive Officer of FLG NY (“FLG NY’s CEO”) and report regularly to FLG NY’s CEO concerning developments, progress and challenges relating to or arising from the services of the Management Consultant under this Agreement. FLG NY’s CEO shall not be the same person as the Management Consultant. Accordingly, should the Company desire any changes in the performance of the Management Consultant’s services provided on behalf of FLG NY to the Company under this Agreement, the Company through its designated representative shall communicate such desired changes to FLG NY’s CEO so that FLG NY’s CEO may instruct the Management Consultant in any change in the rendition of management consulting services to the Company.

7. Inventions and Intellectual Property:

(a) The Company shall own, and FLG NY hereby disclaims, any right, title or interest whatsoever to, and in, all ideas, inventions, trade secrets, publications, works of authorship, copyrights, copyright applications, moral rights, know-how, drawings, sketches, configurations, models, prototypes, materials, machines, designs, concepts, schematics, layouts, processes, patents, patent applications and improvements (collectively, “Inventions and Intellectual Property”) that relate to:

(i)	the performance of this Agreement; or
(ii)	the Company’s actual or anticipated business or products at the time the Inventions and Intellectual Property are conceived or reduced to practice.

(b)

FLG NY shall promptly and fully disclose any Inventions and Intellectual Property to the Company.

(c)

FLG NY hereby assigns to the Company all right, title, and interest to and in any Inventions and Intellectual Property in the United States and elsewhere. FLG NY shall execute or cause to be executed all such documents and take all such further action as is necessary to confirm or fully vest all Inventions and Intellectual Property in the Company, including by providing assistance in securing patents, copyrights or other proprietary rights.

8. Benefits and Taxes:

(a)	Neither FLG NY nor the Management Consultant will be entitled to any benefits paid by the Company to its employees.
(b)	The Company will regularly report amounts paid to FLG NY by filing Form 1099-MISC with the Internal Revenue Service, as required by law. FLG NY and the Management Consultant will be solely responsible for any tax consequences applicable to FLG NY or the Management Consultant by reason of this Agreement. The Company will not be responsible for the payment of any federal, state or local taxes or contributions imposed under any employment insurance, social security, income tax or other tax law or regulation with respect to FLG NY’s performance of this Agreement.
(c)	FLG NY shall pay, as and when they become due, all taxes owed as a result of reimbursement of expenses, payment of consulting fees or the exercise of stock options, or that otherwise become payable in the United States or any other city, state, country or jurisdiction as a result of the performance of this Agreement.
(d)	FLG NY hereby agrees to indemnify the Company from and against any and all claims, losses, costs, fines, assessments, fees, liabilities, damages or injuries (collectively, “Damages”) suffered by the Company as a result of any breach by FLG NY of this Section 8. FLG NY further agrees to indemnify the Company for any Damages suffered by the Company as a result of any legal determination that FLG

NY or the Management Consultant is not an independent contractor. FLG NY acknowledges and affirms that it has not received any tax or other legal advice from the Company in connection with this Agreement.

9. Representations and Warranties:

(a) The Company represents and warrants to FLG NY that:

(i)	it is a corporation duly authorized and validly existing under the laws of the state of Delaware; and
(ii)	this Agreement has been duly authorized by all necessary corporate action and constitutes a binding agreement of the Company, enforceable against the Company in accordance with its terms.

(b) FLG NY represents and warrants to the Company that:

(i)	it is a corporation duly authorized and validly existing under the laws of the state of New York;
(ii)	this Agreement has been duly authorized by all necessary corporate action and constitutes a binding agreement of FLG NY, enforceable against FLG NY in accordance with its terms; and
(iii)	the initial Management Consultant is not obligated to assign Inventions and Intellectual Property to any entity other than FLG NY.

10. Term and Termination:

(a)	This Agreement will remain effective until terminated by either party.
(b)	This Agreement may be terminated by:

(i)	either party, without cause, by providing written notice of termination to the other party;
(ii)	the Company, for cause, effective immediately, by providing written notice to FLG NY specifying in reasonable detail the cause for termination; or
(iii)	FLG NY, for material breach of this Agreement by the Company, if the Company has not cured such breach within 7 days of receiving written notice thereof from FLG NY, by providing a written notice to the Company of termination.

(c) Any termination of this Agreement by FLG NY as a result of a reduction in the scope of the duties to be performed by FLG NY (including the Management Consultant) under this Agreement will be deemed a termination without cause by the Company for purposes of the vesting of the stock options granted to FLG NY under this Agreement.

(c)

In the event of any termination of this Agreement, whether voluntary or involuntary, or with or without cause, no additional payments or benefits will be provided, other than the acceleration of the stock options granted pursuant to Section 3(d) hereof under the specific circumstances described in Section 3(d) hereof and the possibility of a pro rata share of the cash incentive fee as provided in Section 3(c).

(d)

For purposes of this Agreement, “cause” shall mean:

(i)	material breach of this Agreement by FLG NY;
(ii)	any act or acts of personal dishonesty by FLG NY or the Management Consultant;
(iii)	the conviction of FLG NY or the Management Consultant of a felony;
(iv)	violation of the Company’s policies or code of conduct by FLG NY or the Management Consultant;
(v)	violation by FLG NY or the Management Consultant of any confidentiality or non-competition agreement with the Company or any affiliate of the Company; or
(vi)	the willful engaging by FLG NY or the Management Consultant in misconduct that is injurious to the Company.

(e)	The provisions of Section 5 will survive termination of this Agreement.
(f)	If this Agreement is terminated in the middle of any month, the Company shall promptly pay a prorated amount of the monthly consulting fee payable under Section 3(b).

11. Miscellaneous:

(a) All notices under this Agreement must be in writing and will be duly given under this Agreement: (i) upon delivery, if delivered by overnight courier with confirmation of delivery; or (ii) on the third business day after the postmark date, if mailed by certified or registered mail to the address listed below with postage prepaid. Addresses to either party are as provided below, or as subsequently modified by written notice to the other party.

               If to the Company:

Attention: Chairman of the Board
Ashworth, Inc.
2765 Loker Avenue West
Carlsbad, CA 90210

          If to FLG NY:

Attention: Chief Executive Officer
Fletcher Leisure Group Ltd.
2002 Ridge Road
Champlain, NY 12919

(b)	This Agreement will be interpreted and enforced in accordance with the internal laws of the State of Delaware. FLG NY hereby submits to the jurisdiction of, and consents to the enforcement of this Agreement in, the federal and state courts located in the State of Delaware.
(c)	This Agreement may not be modified, amended or rescinded except by a written agreement signed by both FLG NY and the Company’s Chairman of the Board. No waiver of any of the provisions of this Agreement will be deemed or will constitute a waiver of any other provisions hereof (whether or not similar); nor will such waiver constitute a continuing waiver.
(d)	This Agreement sets forth the entire agreement between the parties, and there are no prior or contemporaneous representations, promises or conditions, whether oral or written, to the contrary.
(e)	This Agreement may be executed in counterparts, each of which will be deemed an original, and both of which together will constitute the same document.

     IN WITNESS WHEREOF, this Agreement has been executed by the parties as of January 11, 2008.

	ASHWORTH, INC.
By:	/s/ David M. Meyer
	David M. Meyer
	Chairman of the Board

	FLETCHER LEISURE GROUP, LTD.
By:	/s/ Mark Fletcher
	Mark Fletcher
	Chief Executive Officer

[SIGNATURE PAGE TO CONSULTING AGREEMENT]

EX-10.(AQ)

Exhibit 10 (aq)

ASHWORTH, INC.,

together with any of its Subsidiaries now or in the future party hereto,

as Borrowers

LOAN AND SECURITY AGREEMENT

Dated as of January 11, 2008

$55,000,000

BANK OF AMERICA, N.A.,

as Lender

TABLE OF CONTENTS

	Page
SECTION 1 DEFINITIONS; RULES OF CONSTRUCTION		1
1.1 Definitions		1
1.2 Accounting Terms		25
1.3 Uniform Commercial Code		25
1.4 Certain Matters of Construction		26
SECTION 2 CREDIT FACILITIES		27
2.1 Revolver Commitment		27
2.2 [Intentionally Deleted]		28
2.3 Letter of Credit Facility		28
SECTION 3 INTEREST, FEES AND CHARGES		30
3.1 Interest		30
3.2 Fees		31
3.3 Computation of Interest, Fees, Yield Protection		31
3.4 Reimbursement Obligations		32
3.5 Illegality		32
3.6 Inability to Determine Rates		32
3.7 Increased Costs; Capital Adequacy		33
3.8 Mitigation		34
3.9 Funding Losses		34
3.10 Maximum Interest		34
SECTION 4 LOAN ADMINISTRATION		34
4.1 Manner of Borrowing and Funding Revolver Loans		34
4.2 Number and Amount of LIBOR Loans; Determination of Rate		35
4.3 Borrower Agent		35
4.4 One Obligation		36
4.5 Effect of Termination		36
SECTION 5 PAYMENTS		36
5.1 General Payment Provisions		36
5.2 Repayment of Revolver Loans		36
5.3 [Intentionally Deleted]		37
5.4 Payment of Other Obligations		37
5.5 Marshaling; Payments Set Aside		37
5.6 Application of Payments		37
5.7 Loan Account; Account Stated		37
5.8 Taxes		37
5.9 Nature and Extent of Each Borrower’s Liability		38
SECTION 6 CONDITIONS PRECEDENT		40
6.1 Conditions Precedent to Initial Loans		40
6.2 Conditions Precedent to All Credit Extensions		42
6.3 Limited Waiver of Conditions Precedent		42

	Page
SECTION 7 COLLATERAL		42
7.1 Grant of Security Interest		42
7.2 Lien on Deposit Accounts; Cash Collateral		43
7.3 [Intentionally Deleted]		44
7.4 Other Collateral		44
7.5 No Assumption of Liability		44
7.6 Further Assurances; Extent of Liens		44
7.7 Foreign Subsidiary Stock. Excluded Assets		44
SECTION 8 COLLATERAL ADMINISTRATION		45
8.1 Borrowing Base Certificates		45
8.2 Administration of Accounts		45
8.3 Administration of Inventory		46
8.4 Administration of Equipment		47
8.5 Administration of Deposit Accounts		47
8.6 General Provisions		48
8.7 Power of Attorney		49
SECTION 9 REPRESENTATIONS AND WARRANTIES		50
9.1 General Representations and Warranties		50
9.2 Complete Disclosure		55
SECTION 10 COVENANTS AND CONTINUING AGREEMENTS		55
10.1 Affirmative Covenants		55
10.2 Negative Covenants		58
SECTION 11 EVENTS OF DEFAULT; REMEDIES ON DEFAULT		63
11.1 Events of Default		63
11.2 Remedies upon Default		65
11.3 License		66
11.4 Setoff		66
11.5 Remedies Cumulative; No Waiver		66
SECTION 12 MISCELLANEOUS		67
12.1 Consents, Amendments and Waivers		67
12.2 Indemnity		67
12.3 Notices and Communications		67
12.4 Performance of Borrowers’ Obligations		68
12.5 Credit Inquiries		69
12.6 Severability		69
12.7 Cumulative Effect; Conflict of Terms		69
12.8 Counterparts		69
12.9 Entire Agreement		69
12.10 No Control; No Advisory or Fiduciary Responsibility		69
12.11 Confidentiality		70
12.12 [Intentionally Omitted]		70
12.13 GOVERNING LAW		70
12.14 Consent to Forum; Arbitration		70
12.15 Waivers by Borrowers		72

(ii)

	Page
12.16 Patriot Act Notice		72
12.17 Judgment Currency		72

LIST OF SCHEDULES

Schedule E	Existing Letters of Credit
Schedule G-1	Subsidiary Guarantors
Schedule P-1	Permitted Asset Disposition
Schedule P-2	Permitted Capital Leases
Schedule P-3	Permitted Investments
Schedule 6.1(h)	Foreign Qualifications
Schedule 8.2.6	Canadian Accounts
Schedule 8.5	Deposit Accounts
Schedule 8.6.1	Business Locations
Schedule 9.1.4	Names and Capital Structure
Schedule 9.1.5	Former Names and Companies
Schedule 9.1.9	Surety Obligations
Schedule 9.1.12	Patents, Trademarks, Copyrights and Licenses
Schedule 9.1.15	Environmental Matters
Schedule 9.1.17	Litigation
Schedule 9.1.19	Pension Plans
Schedule 9.1.21	Labor Relations
Schedule 10.1.12	Post-Closing Covenants
Schedule 10.2.1(d)	Borrowed Money
Schedule 10.2.2	Existing Liens
Schedule 10.2.17	Existing Affiliate Transactions

(iii)

LOAN AND SECURITY AGREEMENT

     THIS LOAN AND SECURITY AGREEMENT is dated as of January 11, 2008, among ASHWORTH, INC., a Delaware corporation (“Parent”), those of Parent’s Subsidiaries now or in the future signatory hereto (each such Subsidiary and Parent, individually a “Borrower”, and collectively, “Borrowers”), and BANK OF AMERICA, N.A., a national banking association (“Lender”).

R E C I T A L S:

     Borrowers have requested that Lender provide a credit facility to Borrowers to finance their mutual and collective business enterprise. Lender is willing to provide the credit facility on the terms and conditions set forth in this Agreement.

     NOW, THEREFORE, for valuable consideration hereby acknowledged, the parties agree as follows:

SECTION 1 DEFINITIONS; RULES OF CONSTRUCTION

     1.1 Definitions. As used herein, the following terms have the meanings set forth below:

     Account: as defined in the UCC, including all rights to payment for goods sold or leased, or for services rendered.

     Account Debtor: a Person who is obligated under an Account, Chattel Paper or General Intangible.

     Accounts Formula Amount: 85% of the Value of Eligible Accounts; provided, however, that such percentage shall be reduced by 1.0% for each whole percentage point (after rounding any partial percentage point to the nearest whole percentage point) that the Dilution Percent exceeds 5.0%.

     Acquisition Consideration: the purchase consideration for any Permitted Acquisition (other than Equity Interests in Parent) and all other payments paid to or for the benefit of any seller by any Borrower or any Subsidiary in exchange for, or as part of, or in connection with, any Permitted Acquisition, whether paid in cash or properties or otherwise and whether payable at or prior to the consummation of such Permitted Acquisition or deferred for payment at any future time, whether or not any such future payment is subject to the occurrence of any contingency, and includes any and all payments representing the purchase price and any assumptions of Debt, “earn-outs” and other agreements to make any payment the amount of which is, or the terms of payment of which are, in any respect subject to or contingent upon the revenues, income, cash flow or profits (or the like) of any person or business; provided that any such future payment that is subject to a contingency shall be considered Acquisition Consideration only to the extent of the reserve, if any, required under GAAP at the time of such sale to be established in respect thereof by any Borrower or any Subsidiary.

     Affiliate: with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. “Control” means the possession, directly or indirectly, of the power to direct or

cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have correlative meanings.

     Allocable Amount: as defined in Section 5.9.3.

     Anti-Terrorism Laws: any laws relating to terrorism or money laundering, including the Patriot Act.

     Applicable Inventory Advance Rate: 70% during each Seasonal Advance Rate Period; and 65% at all other times.

     Applicable Law: all laws, rules, regulations and governmental guidelines applicable to the Person, conduct, transaction, agreement or matter in question, including all applicable statutory law, common law and equitable principles, and all provisions of constitutions, treaties, statutes, rules, regulations, orders and decrees of Governmental Authorities.

     Applicable Margin: with respect to any Type of Loan, the margin set forth below, as determined by the Fixed Charge Coverage Ratio for the last Fiscal Quarter with respect to which financial statements have been delivered pursuant to Section 10.1.2:

		Base Rate	LIBOR
	Fixed Charge	Revolver	Revolver
Level	Coverage Ratio	Loans	Loans
I	> 1.40:1.00	0.00%	1.25%
II	> 1.20:1.00 < 1.40:1.00	0.00%	1.50%
III	< 1.20:1.00	0.00%	1.75%

Until May 1, 2008, margins shall be determined as if Level I were applicable. Thereafter, the margins shall be subject to increase or decrease upon receipt by Lender pursuant to Section 10.1.2 of the financial statements and corresponding Compliance Certificate for the last Fiscal Quarter, which change shall be effective on the first day of the calendar month following receipt. If, by the first day of a month, any financial statements and Compliance Certificate due in the preceding month have not been received, then the margins shall be determined as if Level III were applicable, from such day until the first day of the calendar month following actual receipt.

     Ashworth Store I: Ashworth Store I, Inc., a Delaware corporation.

     Ashworth Store II: Ashworth Store II, Inc., a Delaware corporation.

     Ashworth Store III: Ashworth Store III, Inc., a Delaware corporation.

     Ashworth UK: Ashworth U.K., Ltd.

     Asset Disposition: a sale, lease, license, consignment, transfer or other disposition of Property of an Obligor, including a disposition of Property in connection with a sale-leaseback transaction or synthetic lease.

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     Availability: the Borrowing Base minus the principal balance of all Revolver Loans.

     Availability Block: $5,000,000.

     Availability Reserve: the sum (without duplication) of (a) the Inventory Reserve; (b) the Rent and Charges Reserve; (c) the LC Reserve; (d) the Bank Product Reserve; (e) all accrued Royalties, whether or not then due and payable by a Borrower; (f) the aggregate amount of liabilities secured by Liens upon Collateral that are senior to Lender’s Liens (but imposition of any such reserve shall not waive an Event of Default arising therefrom); (g) the Availability Block; and (h) such additional reserves, in such amounts and with respect to such matters, as Lender in its Credit Judgment may elect to impose from time to time.

     Back-Up LC: the Letter of Credit issued hereunder for the benefit of Union Bank of California, which Back-Up L/C shall (i) be in the initial face (but declining) amount of, and (ii) only support drawings made under, the Existing Letters of Credit.

     Bank Product: any of the following products, services or facilities extended to any Borrower or Subsidiary by Lender or any of its Affiliates: (a) Cash Management Services; (b) products under Hedging Agreements; (c) commercial credit card and merchant card services; and (d) leases and other banking products or services as may be requested by any Borrower or Subsidiary, other than Letters of Credit or the Real Estate Term Loan or the UK Loan Facility.

     Bank Product Debt: Debt and other obligations of an Obligor relating to Bank Products.

     Bank Product Reserve: the aggregate amount of reserves established by Lender from time to time in its reasonable discretion in respect of Bank Product Debt.

     Bankruptcy Code: Title 11 of the United States Code.

     Base Rate: the rate of interest announced by Lender from time to time as its prime rate. Such rate is a rate set by Lender based upon various factors including its costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above or below such announced rate. Any change in such rate announced by Lender shall take effect at the opening of business on the day specified in the public announcement of such change.

     Base Rate Loan: any Loan that bears interest based on the Base Rate.

     Base Rate Revolver Loan: a Revolver Loan that bears interest based on the Base Rate.

     Board of Governors: the Board of Governors of the Federal Reserve System.

     Borrowed Money: with respect to any Obligor, without duplication, its (a) Debt that (i) arises from the lending of money by any Person to such Obligor, (ii) is evidenced by notes, drafts, bonds, debentures, credit documents or similar instruments, (iii) accrues interest or is a type upon which interest charges are customarily paid (excluding trade payables or taxes owing in the ordinary course of business), or (iv) was issued or assumed as full or partial payment for Property; (b) Capital Leases; (c) reimbursement obligations with respect to letters of credit; and (d) guaranties of any Debt of the foregoing types owing by another Person.

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     Borrower Agent: as defined in Section 4.3.

     Borrowing: a group of Loans of one Type that are made on the same day or are converted into Loans of one Type on the same day.

     Borrowing Base: on any date of determination, an amount equal to the lesser of (a) the Revolver Commitment, minus the LC Reserve, or (b) the sum of the Accounts Formula Amount, plus the Inventory Formula Amount, minus the Availability Reserve, minus all outstanding obligations under the UK Loan Facility.

     Borrowing Base Certificate: a certificate, in substantially the form agreed to by Lender and Borrower Agent prior to the date hereof or otherwise in form and substance reasonably satisfactory to Lender, by which Borrowers certify calculation of the Borrowing Base.

     Business Day: any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the laws of, or are in fact closed in, North Carolina and California, and if such day relates to a LIBOR Loan, any such day on which dealings in Dollar deposits are conducted between banks in the London interbank Eurodollar market.

     Capital Expenditures: all liabilities incurred, expenditures made or payments due (whether or not made) by a Borrower or Subsidiary for the acquisition of any fixed assets, or any improvements, replacements, substitutions or additions thereto with a useful life of more than one year, including the principal portion of Capital Leases, but excluding proceeds of Asset Dispositions re-invested in the business of the Borrower or Subsidiary making such Asset Disposition to the extent such re-investment is permitted hereunder. For purposes of this definition, the purchase price of equipment or other fixed assets that are purchased simultaneously with the trade-in of existing assets or with insurance proceeds shall be included in Capital Expenditures only to the extent of the net amount by which such purchase price exceeds the credit granted by the seller of such assets for the assets being traded in at such time or the amount of such insurance proceeds, as the case may be.

     Capital Lease: any lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

     Capital Lease Lien: a Lien that secures a Capital Lease, encumbering only the assets leased with such Capital Lease and accessions to, and products and proceeds (including insurance condemnation proceeds) of, such leased assets.

     Cash Collateral: cash, and any interest or other income earned thereon, that is delivered to Lender to Cash Collateralize any Obligations.

     Cash Collateral Account: a demand deposit, money market or other account maintained with Lender and subject to Lender’s Liens.

     Cash Collateralize: the delivery of cash to Lender, as security for the payment of Obligations, in an amount equal to (a) with respect to LC Obligations, 105% of the aggregate LC Obligations, and (b) with respect to any other Obligations (including Obligations arising under Bank Products) other than contingent Obligations, Lender’s good faith estimate of the amount due or to become due, including all fees and other amounts relating to such Obligations. “Cash Collateralization” has a correlative meaning.

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     Cash Equivalents: (a) marketable obligations issued or unconditionally guaranteed by, and backed by the full faith and credit of, the United States government, maturing within 12 months of the date of acquisition; (b) certificates of deposit, time deposits and bankers’ acceptances maturing within 12 months of the date of acquisition, and overnight bank deposits, in each case which are issued by a commercial bank organized under the laws of the United States or any state or district thereof, rated A-1 (or better) by S&P or P-1 (or better) by Moody’s at the time of acquisition, and (unless issued by Lender) not subject to offset rights; (c) repurchase obligations with a term of not more than 30 days for underlying investments of the types described in clauses (a) and (b) entered into with any bank meeting the qualifications specified in clause (b); (d) commercial paper rated A-1 (or better) by S&P or P-1 (or better) by Moody’s, and maturing within nine months of the date of acquisition; and (e) shares of any money market fund that has substantially all of its assets invested continuously in the types of investments referred to above, has net assets of at least $500,000,000 and has the highest rating obtainable from either Moody’s or S&P.

     Cash Management Services: any services provided from time to time by Lender or any of its Affiliates to any Borrower or Subsidiary in connection with operating, collections, payroll, trust, or other depository or disbursement accounts, including automated clearinghouse, e-payable, electronic funds transfer, wire transfer, controlled disbursement, overdraft, depository, information reporting, lockbox and stop payment services.

     CERCLA: the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. § 9601 et seq.).

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

     Change of Control: (a) Parent ceases to own and control, beneficially and of record, directly or indirectly, all Equity Interests in any Material Obligor (except in connection with a merger or consolidation permitted under Section 10.2.9); (b) a change in the majority of directors of Parent, unless approved by the then majority of directors; or (c) all or substantially all of the assets of a Subsidiary of the Parent or a Borrower are sold or transferred (except in connection with a merger or consolidation permitted under Section 10.2.9) without providing Lender at least 30 day’s prior written notice of such sale and obtaining the written consent of Lender which consent shall not be unreasonably withheld.

     Claims: all liabilities, obligations, losses, damages, penalties, judgments, proceedings, interest, costs and expenses of any kind (including remedial response costs, reasonable attorneys’ fees and Extraordinary Expenses) at any time (including after Full Payment of the Obligations) incurred by or asserted against any Indemnitee in any way relating to (a) any Loans, Letters of Credit, Loan Documents, or the use thereof or transactions relating thereto, (b) any action taken or omitted to be taken by any Indemnitee in connection with any Loan Documents, (c) the existence or perfection of any Liens, or realization upon any Collateral, (d) exercise of any rights or remedies under any Loan Documents or Applicable Law, or (e) failure by any Obligor to perform or observe any terms of any Loan Document, in each case including all costs and expenses relating to any investigation, litigation, arbitration or other proceeding (including an

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Insolvency Proceeding or appellate proceedings), whether or not the applicable Indemnitee is a party thereto.

     Closing Date: as defined in Section 6.1.

     Code: the Internal Revenue Code of 1986.

     Collateral: all Property described in Section 7.1, all Property described in any Security Documents as security for any Obligations, and all other Property that now or hereafter secures (or is intended to secure) any Obligations; provided, however, that the term “Collateral” shall not include, and no security interest hereunder or any other Loan Documents shall attach to, any Excluded Assets.

     Commitment Termination Date: the earliest to occur of (a) the Revolver Termination Date; (b) the date on which Borrowers terminate the Revolver Commitment pursuant to Section 2.1.3; or (c) the date on which the Revolver Commitment is terminated pursuant to Section 11.2.

     Commitments: the Revolver Commitment.

     Compliance Certificate: a certificate, in form and substance reasonably satisfactory to Lender, by which Borrowers certify compliance with Sections 10.1.2 and calculate the applicable Level for the Applicable Margin.

     Contingent Obligation: any obligation of a Person arising from a guaranty, indemnity or other assurance of payment or performance of any Debt, lease, dividend or other obligation (“primary obligations”) of another obligor (“primary obligor”) in any manner, whether directly or indirectly, including any obligation of such Person under any (a) guaranty, endorsement, co-making or sale with recourse of an obligation of a primary obligor; (b) obligation to make take-or-pay or similar payments regardless of nonperformance by any other party to an agreement; and (c) arrangement (i) to purchase any primary obligation or security therefor, (ii) to supply funds for the purchase or payment of any primary obligation, (iii) to maintain or assure working capital, equity capital, net worth or solvency of the primary obligor, (iv) to purchase Property or services for the purpose of assuring the ability of the primary obligor to perform a primary obligation, or (v) otherwise to assure or hold harmless the holder of any primary obligation against loss in respect thereof. The amount of any Contingent Obligation shall be deemed to be the stated or determinable amount of the primary obligation (or, if less, the maximum amount for which such Person may be liable under the instrument evidencing the Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability with respect thereto. For the avoidance of doubt, (i) the Specified Payments are not Contingent Obligations and (ii) each Borrower’s obligation under Section 5.9.1 are not Contingent Obligations.

     Credit Judgment: Lender’s judgment exercised reasonably and in good faith, based upon its consideration of any factor that it believes (a) could reasonably be expected to adversely affect the quantity, quality, mix or value of Collateral, the enforceability or priority of Lender’s Liens, or the amount that Lender could reasonably be expected to receive in liquidation of any Collateral (including any such Collateral consisting of Inventory subject to a License that restricts Lender’s right to dispose of such Inventory, unless Lender has received an appropriate Lien Waiver); (b) demonstrates that any collateral report or financial information delivered by any Obligor is incomplete, inaccurate or misleading in any material respect; (c) materially increases the likelihood of any Insolvency Proceeding involving an Obligor; or (d) creates or

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could reasonably be expected to result in a Default or Event of Default. In exercising such judgment, Lender may consider any factors related to the Borrowers and the business of the Borrowers that could reasonably be expected to increase the credit risk of lending to Borrowers on the security of the Collateral.

     CWA: the Clean Water Act (33 U.S.C. §§ 1251 et seq.).

     Debt: as applied to any Person, without duplication, (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (b) all obligations of such person to pay the deferred purchase price of property or services (other than deferred compensation and trade accounts payable, in each case in the ordinary course of business); (c) Capital Leases; (d) all Contingent Obligations; (e) all reimbursement obligations in connection with letters of credit issued for the account of such Person; and (f) in the case of a Borrower, the Obligations. The Debt of a Person shall include any recourse Debt of any partnership in which such Person is a general partner or joint venturer. For the avoidance of doubt, the Specified Payments do not constitute Debt.

     Default: an event or condition that, with the lapse of time or giving of notice, would constitute an Event of Default.

     Default Rate: for any Obligation (including, to the extent permitted by law, interest not paid when due), 2% plus the interest rate otherwise applicable thereto.

     Deposit Account Control Agreements: the Deposit Account control agreements to be executed by each institution maintaining a Deposit Account for a Borrower, in favor of Lender, as security for the Obligations.

     Dilution Percent: the percent, determined for Borrowers’ most recently completed 12 months, equal to (a) all non-cash reductions to Accounts, including, but not limited to, bad debt write-downs or write-offs, discounts, returns, promotions, credits, credit memos and other dilutive items with respect to Accounts, divided by (b) gross collections.

     Distribution: any declaration or payment of a distribution, interest or dividend on any Equity Interest; any distribution, advance or repayment of Debt to a holder of Equity Interests (in its capacity as such); or any purchase, redemption, or other acquisition or retirement for value of any Equity Interest, in each case other than payment-in-kind and other than dividend payments or other distributions payable solely in the common stock or other common equity interests of the person making such dividend or other distribution. For the avoidance of doubt, Specified Payments shall not constitute Distributions.

     Dollars: lawful money of the United States.

     Dominion Account: a special account established by Borrowers at Lender or a bank acceptable to Lender, over which Lender has exclusive control for withdrawal purposes.

     EBITDA: determined on a consolidated basis for Borrowers and Subsidiaries, net income, calculated before interest expense, provision for income taxes, depreciation and amortization expense, gains or extraordinary charges or non-cash charges or losses arising from the sale of capital assets, gains arising from the write-up of assets, and any extraordinary gains (in each case, to the extent included or deducted, as applicable, in determining net income).

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     EDC: Ashworth EDC, LLC, a Delaware limited liability company.

     Eligible Account: an Account owing to a Borrower that arises in the ordinary course of business from the sale of goods or rendition of services, is payable in Dollars or Canadian Dollars and is not excluded by the criteria set forth in the next succeeding sentence. No Account shall be an Eligible Account if (a) it is unpaid for more than 60 days after the original due date, or more than 120 days after the original invoice date; (b) 50% or more of the Accounts owing by the Account Debtor are not Eligible Accounts under clause (a) of this definition; (c) when aggregated with other Accounts owing by the Account Debtor, it exceeds 20% of the aggregate Eligible Accounts (or such higher percentage as Lender may establish for the Account Debtor from time to time); (d) it does not conform with a covenant or representation herein; (e) it is owing by a creditor or supplier, or is otherwise subject to a potential offset, counterclaim, dispute, deduction, discount, recoupment, reserve, defense, chargeback, credit or allowance (but ineligibility shall be limited to the amount thereof); (f) an Insolvency Proceeding has been commenced by or against the Account Debtor; or the Account Debtor has failed, has suspended or ceased doing business, is liquidating, dissolving or winding up its affairs, or is not Solvent; (g) the Account Debtor is organized or has its principal offices or assets outside the United States or Canada; (h) it is owing by the United States or any department, agency or instrumentality thereof, unless the Account has been assigned to Lender in compliance with the Assignment of Claims Act; (i) it is not subject to a duly perfected, first priority Lien in favor of Lender, or is subject to any other Lien (other than customary chargeback rights, and Permitted Liens specified in Sections 10.2.2(c), (d) and (g) and subject, in the case of the first priority nature of Lender’s Lien, to such specified Permitted Liens having priority by operation of applicable law over the Lien of the Lender); (j) the goods giving rise to it have not been delivered to and accepted by the Account Debtor, the services giving rise to it have not been accepted by the Account Debtor, or it otherwise does not represent a final sale; (k) it is evidenced by Chattel Paper or an Instrument of any kind, or has been reduced to judgment; (l) its payment has been extended, the Account Debtor has made a partial payment, or it arises from a sale on a cash-on-delivery basis; (m) it arises from a sale to an Affiliate, or from a sale on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment, or other repurchase or return basis; (n) it represents a progress billing or retainage; or (o) it includes a billing for interest, fees or late charges, but ineligibility shall be limited to the extent thereof. In calculating delinquent portions of Accounts under clauses (a) and (b), credit balances more than 60 days past due or more than 120 days from the invoice date for such Account will be excluded.

     Eligible In-Transit Inventory: Inventory owned by a Borrower that would be Eligible Inventory if it were not subject to a Document and in transit from a foreign location to a location of the Borrower within the United States or Canada, and that is not excluded by the following criteria. No Inventory shall be Eligible In-Transit Inventory unless it (a) is subject to a negotiable Document showing Lender (or, with the consent of Lender, the applicable Borrower) as consignee, which Document is in the possession of Lender or such other Person as Lender shall approve; (b) is fully insured in a manner satisfactory to Lender; (c) has been identified to the applicable sales contract and title has passed to the Borrower; (d) is not sold by a vendor that has a right to reclaim, divert shipment of, repossess, stop delivery, claim any reservation of title or otherwise assert Lien rights against the Inventory, or with respect to whom any Borrower is in default of any obligations; (e) is subject to purchase orders and other sale documentation satisfactory to Lender; (f) is shipped by a common carrier that is not affiliated with the vendor; and (g) is being handled by a customs broker, freight-forwarder or other handler that has delivered a Lien Waiver.

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     Eligible Inventory: Inventory owned by a Borrower that is not excluded by the following criteria. No Inventory shall be Eligible Inventory unless it (a) is finished goods, and not raw materials or work-in-process, packaging or shipping materials, labels, samples, display items, bags, replacement parts or manufacturing supplies; (b) is not held on consignment, nor subject to any deposit or down payment; (c) is in new and saleable condition and is not damaged, defective, shopworn or otherwise unfit for sale; (d) is not greater than 12 months old), obsolete or unmerchantable, and does not constitute returned or repossessed goods; (e) meets all standards imposed by any Governmental Authority, and does not constitute hazardous materials under any Environmental Law; (f) conforms with the covenants and representations herein; (g) is subject to Lender’s duly perfected, first priority Lien, and no other Lien (other than the Permitted Liens specified in Section 10.2.2(c), (d) and (g) and subject, in the case of the first priority nature of Lender’s Lien, to such specified Permitted Liens having priority by operation of applicable law over the Lien of the Lender); (h) is within the continental United States or Canada, is not in transit except between locations of Borrowers, and is not consigned to any Person; (i) is not subject to any warehouse receipt or negotiable Document; (j) [intentionally deleted] (k) is not located on leased premises or in the possession of a warehouseman, processor, repairman, mechanic, shipper, freight forwarder or other Person, unless the lessor or such Person has delivered a Lien Waiver or an appropriate Rent and Charges Reserve has been established; and (l) is reflected in the details of a current perpetual inventory report (provided, that Inventory that is in-transit or that is “pack and hold” Inventory does not need to meet the conditions of this clause (l)).

     Eligible Slow Moving Inventory: Inventory owned by a Borrower (a) that would be Eligible Inventory if it were not greater than 12 months old, (b) that is less than 24 months old.

     Enforcement Action: any action to enforce any Obligations or Loan Documents or to realize upon any Collateral (whether by judicial action, self-help, notification of Account Debtors, exercise of setoff or recoupment, or otherwise).

     Environmental Laws: all Applicable Laws (including all programs, permits and guidance promulgated by regulatory agencies), relating to public health (but excluding occupational safety and health, to the extent regulated by OSHA) or the protection or pollution of the environment, including CERCLA, RCRA and CWA.

     Environmental Notice: a written notice from any Governmental Authority or other Person of any possible noncompliance with, investigation of a possible violation of, litigation relating to, or potential fine or liability under any Environmental Law, or with respect to any Environmental Release, environmental pollution or hazardous materials, including any complaint, summons, citation, order, claim, demand or request for correction, remediation or otherwise.

     Environmental Release: a release as defined in CERCLA or under any other Environmental Law.

     Equity Interest: the ownership interest of any (a) shareholder in a corporation; (b) partner in a partnership (whether general, limited, limited liability or joint venture); (c) member in a limited liability company; or (d) other Person having any other form of equity security or ownership interest.

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     ERISA: the Employee Retirement Income Security Act of 1974.

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

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

     Event of Default: as defined in Section 11.

     Excluded Assets: (a) real property and any fixtures attached or appurtenant thereto, (b) any rights or property acquired by an Obligor under, or subject to, a lease, contract, or license, if and for so long as the grant of a Lien under Section 7.1 would constitute or result in (x) the abandonment, invalidation or unenforceability of any right, title or interest of such Obligor therein or (y) a breach or termination pursuant to the terms of, or a default under, any such lease, contract, or license (other than to the extent that any restriction on such assignment would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other Applicable Law or principles of equity), (c) any insurance or condemnation proceeds from any of the foregoing to the extent required to be maintained for the benefit of, and paid over to, a Person other than Parent, Borrowers or their Affiliates, (d) any insurance or condemnation proceeds covering any real property leased by an Obligor or fixtures attached or appurtenant thereto to the extent required to be maintained for the benefit of, and paid over to, the applicable landlord; any insurance or condemnation proceeds from any of the foregoing, (e) any insurance or condemnation proceeds covering any real property leased by an Obligor or fixtures attached or appurtenant thereto to the extent required to be maintained for the benefit of, and paid over to, the applicable landlord; provided, however, that at such time as the condition causing such abandonment, invalidation or unenforceability shall be no longer in effect with respect to any property, such property shall no longer constitute Excluded Assets, (f) so long as the Real Estate Term Loan or any other Debt outstanding under the Real Estate Term Loan documents are outstanding, the Equity Interests in EDC, and (g) the Union Bank Cash Collateral Account described on Schedule P-3.

     Excluded Tax: with respect to Lender or any other recipient of a payment to be made by or on account of any Obligation, taxes imposed on or measured by its overall net income (however denominated), and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is

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organized or in which its principal office is located or, in the case of Lender, in which its applicable lending office is located.

     Existing Credit Agreement: the Revolving/Term Loan Credit Agreement dated as of July 6, 2004 among Parent, as Borrower thereunder, Union Bank of California, N.A., as Administrative Agent, and the other lenders party thereto, as amended.

     Existing Letters of Credit: the letters of credit issued under the Existing Credit Agreement and identified on Schedule E.

     Extraordinary Expenses: all costs, expenses or advances that Lender may incur with respect to the Obligations during a Default or Event of Default, or during the pendency of an Insolvency Proceeding of an Obligor, including those relating to (a) any audit, inspection, repossession, storage, repair, appraisal, insurance, manufacture, preparation or advertising for sale, sale, collection, or other preservation of or realization upon any Collateral; (b) any action, arbitration or other proceeding (whether instituted by or against Lender, any Obligor, any representative of creditors of an Obligor or any other Person) in any way relating to any Collateral (including the validity, perfection, priority or avoidability of Lender’s Liens with respect to any Collateral), Loan Documents, Letters of Credit or Obligations, including any lender liability or other Claims; (c) the exercise, protection or enforcement of any rights or remedies of Lender in, or the monitoring of, any Insolvency Proceeding; (d) settlement or satisfaction of any taxes, charges or Liens with respect to any Collateral; (e) any Enforcement Action; and (f) negotiation and documentation of any modification, waiver, workout, restructuring or forbearance with respect to any Loan Documents or Obligations. Such costs, expenses and advances include transfer fees, Other Taxes, storage fees, insurance costs, permit fees, utility reservation and standby fees, legal fees, appraisal fees, brokers’ fees and commissions, auctioneers’ fees and commissions, accountants’ fees, environmental study fees, wages and salaries paid to employees of any Obligor or independent contractors in liquidating any Collateral, and travel expenses.

     Fiscal Quarter: each period of three months, commencing on the first day of a Fiscal Year.

     Fiscal Year: the fiscal year of Borrowers and Subsidiaries for accounting and tax purposes, ending on October 31 of each year.

     Fixed Charge Coverage Ratio: the ratio, determined on a consolidated basis for Borrowers and Subsidiaries, of (a) EBITDA minus Capital Expenditures (except those financed with Borrowed Money other than Revolver Loans) and cash taxes paid, to (b) Fixed Charges. Such ratio shall be measured on a Fiscal Year to date basis for measurement dates prior to the end of Fiscal Year 2008, and on a most recent four Fiscal Quarter basis for measurement dates thereafter.

     Fixed Charges: the sum of interest expense (other than payment-in-kind), principal payments made by any Obligor on Borrowed Money (other than the Obligations and the obligations under the UK Loan Facility), and Distributions made by Parent.

     FLSA: the Fair Labor Standards Act of 1938.

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     Foreign Plan: any employee benefit plan or arrangement (a) maintained or contributed to by any Obligor or Subsidiary that is not subject to the laws of the United States; or (b) mandated by a government other than the United States for employees of any Obligor or Subsidiary.

     Foreign Subsidiary: a Subsidiary that is a “controlled foreign corporation” under Section 957 of the Code.

     Full Payment: with respect to any Obligations, (a) if such Obligations are Obligations other than (i) LC Obligations, (ii) Obligations arising under Bank Products, or (iii) contingent indemnity Obligations, the full cash payment thereof, including any interest, fees and other charges accruing during an Insolvency Proceeding (whether or not allowed in the proceeding); and (b) if such Obligations are LC Obligations or Obligations arising under Bank Products, Cash Collateralization thereof (or delivery of a standby letter of credit acceptable to Lender in its discretion, in the amount of required Cash Collateral). The Revolver Loans shall not be deemed to have been paid in full until the Revolver Commitment has expired or been terminated.

     GAAP: generally accepted accounting principles in effect in the United States from time to time, including any changes permitted under such principles as set forth in Section 1.2.

     Gekko: Gekko Brands, LLC, an Alabama limited liability company.

     Governmental Approvals: all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and required reports to, all Governmental Authorities.

     Governmental Authority: any federal, state, municipal, foreign or other governmental department, agency, commission, board, bureau, court, tribunal, instrumentality, political subdivision, or other entity or officer exercising executive, legislative, judicial, regulatory or administrative functions for or pertaining to any government or court, in each case whether associated with the United States, a state, district or territory thereof, or a foreign entity or government.

     Guarantor Payment: as defined in Section 5.9.3.

     Guarantors: Each of Parent’s Subsidiaries set forth on Schedule G-1 and each other Person who guarantees payment or performance of any Obligations.

     Guaranty: each guaranty agreement executed by a Guarantor in favor of Lender.

     Hedging Agreement: an agreement relating to any swap, cap, floor, collar, option, forward, cross right or obligation, or combination thereof or similar transaction, with respect to interest rate, foreign exchange, currency, commodity, credit or equity risk.

     Immaterial Tax: a state or local Tax obligation of an Obligor, with respect to which the amount of all such Taxes is less than $500,000.

     Indemnified Taxes: Taxes other than Excluded Taxes.

     Indemnitees: Lender and its officers, directors, employees, Affiliates, agents and attorneys.

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     Insolvency Proceeding: any case or proceeding commenced by or against a Person under any state, federal or foreign law for, or any agreement of such Person to, (a) the entry of an order for relief under the Bankruptcy Code, or any other insolvency, debtor relief or debt adjustment law; (b) the appointment of a receiver, trustee, liquidator, administrator, conservator or other custodian for such Person or any part of its Property; or (c) an assignment or trust mortgage for the benefit of creditors.

     Insurance Assignment: each collateral assignment of insurance pursuant to which an Obligor assigns to Lender such Obligor’s rights under business interruption or other insurance policies as Lender reasonably deems appropriate, as security for the Obligations.

     Intellectual Property: all intellectual Property of a Person, including inventions, designs, patents, copyrights, trademarks, service marks, trade names, trade secrets, confidential or proprietary information, customer lists, know-how, software and databases; all embodiments or fixations thereof and all related documentation, applications, registrations and franchises; all licenses or other rights to use any of the foregoing; and all books and records relating to the foregoing.

     Intellectual Property Claim: any claim or assertion (whether in writing, by suit or otherwise) that a Borrower’s or Subsidiary’s ownership, use, marketing, sale or distribution of any Inventory, Equipment, Intellectual Property or other Property violates another Person’s Intellectual Property.

     Intercompany Subordination Agreement: the Intercompany Subordination Agreement executed by Parent, Borrowers and each of their Subsidiaries in form and substance satisfactory to Lender.

     Interest Period: as defined in Section 3.1.3.

     Inventory: as defined in the UCC, including all goods intended for sale, lease, display or demonstration; all work in process; and all raw materials, and other materials and supplies of any kind that are or could be used in connection with the manufacture, printing, packing, shipping, advertising, sale, lease or furnishing of such goods, or otherwise used or consumed in a Borrower’s business (but excluding Equipment).

     Inventory Formula Amount: the least of (i) $45,000,000; (ii) the sum of (x) the Applicable Inventory Advance Rate times the Value of Eligible Inventory; plus (y) the Applicable Inventory Advance Rate times the Value of Eligible In-Transit Inventory plus (z) the Slow Moving Inventory Advance Rate times the Value of Eligible Slow Moving Inventory, or (iii) 85% of the product of (y) NOLV Percentage multiplied by (z) the sum of (1) the Value of Eligible Inventory plus (2) the Value of Eligible In-Transit Inventory plus (3) the Value of Eligible Slow Moving Inventory.

     Inventory Reserve: reserves established by Lender to reflect factors that may negatively impact the Value of Inventory, including change in salability, obsolescence, seasonality, theft, shrinkage, imbalance, change in composition or mix, markdowns and vendor chargebacks.

     Inverse Inventory Advance Rate: for LC Obligations relating to documentary Letters of Credit issued to support Borrowers’ purchase of Inventory, a percentage equal to 100% minus the Applicable Inventory Advance Rate.

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     Investment: any acquisition of all or substantially all assets of a Person; any acquisition of record or beneficial ownership of any Equity Interests of a Person; or any advance or capital contribution to or other investment in a Person.

     IRS: the United States Internal Revenue Service.

     LC Application: an application by Borrower Agent to Lender for issuance of a Letter of Credit, in form and substance reasonably satisfactory to Lender.

     LC Conditions: the following conditions necessary for issuance of a Letter of Credit: (a) each of the conditions set forth in Section 6; (b) after giving effect to such issuance, total LC Obligations do not exceed the Letter of Credit Subline, no Overadvance exists and, if no Revolver Loans are outstanding, the LC Obligations do not exceed the Borrowing Base (without giving effect to the LC Reserve for purposes of this calculation); (c) the expiration date of such Letter of Credit is (i) no more than 365 days from issuance, in the case of standby Letters of Credit, (ii) no more than 120 days from issuance, in the case of documentary Letters of Credit, and (iii) at least 20 Business Days prior to the Revolver Termination Date; (d) the Letter of Credit and payments thereunder are denominated in Dollars; and (e) the purpose and form of the proposed Letter of Credit is satisfactory to Lender in its reasonable discretion.

     LC Documents: all documents, instruments and agreements (including LC Requests and LC Applications) delivered by Borrowers or any other Person to Lender in connection with issuance, amendment or renewal of, or payment under, any Letter of Credit.

     LC Obligations: the sum (without duplication) of (a) all amounts owing by Borrowers for any drawings under Letters of Credit; (b) the stated amount of all outstanding Letters of Credit; and (c) all fees and other amounts owing with respect to Letters of Credit.

     LC Request: a request for issuance of a Letter of Credit, to be provided by Borrower Agent, in form reasonably satisfactory to Lender.

     LC Reserve: the aggregate of all LC Obligations, other than (a) those that have been Cash Collateralized and (b) if no Default or Event of Default exists, those constituting charges owing to Lender. For purposes of this definition, (x) in the case of documentary Letters of Credit issued to support Borrowers’ purchase of Eligible In-Transit Inventory (and so long as such Letters of Credit have not become bankers acceptances), the reserve shall be limited to (i) the Inverse Inventory Advance Rate times (ii) the amount of LC Obligations attributable to such documentary Letters of Credit and (y) in the case of all other Letters of Credit (including the Back-Up LC) and bankers acceptances, the reserve shall equal 100% of the face amount of all outstanding Letters of Credit and bankers acceptances.

     Lender Professionals: attorneys, accountants, appraisers, auditors, business valuation experts, environmental engineers or consultants, turnaround consultants, and other professionals and experts retained by Lender.

     Letter of Credit: any standby or documentary letter of credit (including the Back-Up LC) issued by Lender for the account of a Borrower, or any indemnity, guarantee, exposure transmittal memorandum or similar form of credit support issued by Lender for the benefit of a Borrower.

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     Letter of Credit Subline: $15,000,000.

     LIBOR: for any Interest Period with respect to a LIBOR Loan, the per annum rate of interest (rounded upward, if necessary, to the nearest 1/100th of 1%), determined by Lender at approximately 11:00 a.m. (London time) two Business Days prior to commencement of such Interest Period, for a term comparable to such Interest Period, equal to (a) the British Bankers Association LIBOR Rate (“BBA LIBOR”), as published by Reuters (or other commercially available source designated by Lender); or (b) if BBA LIBOR is not available for any reason, the interest rate at which Dollar deposits in the approximate amount of the LIBOR Loan would be offered by Lender’s London branch to major banks in the London interbank Eurodollar market. If the Board of Governors imposes a Reserve Percentage with respect to LIBOR deposits, then LIBOR shall be the foregoing rate, divided by 1 minus the Reserve Percentage.

     LIBOR Loan: each set of LIBOR Revolver Loans having a common length and commencement of Interest Period.

     LIBOR Revolver Loan: a Revolver Loan that bears interest based on LIBOR.

     License: any license or agreement under which an Obligor is authorized to use Intellectual Property in connection with any manufacture, marketing, distribution or disposition of Collateral, any use of Property or any other conduct of its business.

     Licensor: any Person from whom an Obligor obtains the right to use any Intellectual Property.

     Lien: any Person’s interest in Property securing an obligation owed to, or a claim by, such Person, whether such interest is based on common law, statute or contract, including liens, security interests, pledges, hypothecations, statutory trusts, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Property.

     Lien Waiver: an agreement, in form and substance reasonably satisfactory to Lender, by which (a) for any material Collateral located on leased premises, the lessor waives or subordinates any Lien it may have on the Collateral to the Lien of Lender, and agrees to permit Lender to enter upon the premises and remove the Collateral or to use the premises to store or dispose of the Collateral; (b) for any Collateral held by a warehouseman, processor, shipper, customs broker or freight forwarder, such Person waives or subordinates any Lien it may have on the Collateral to the Lien of Lender, agrees to hold any Documents in its possession relating to the Collateral as agent for Lender, and agrees to deliver the Collateral to Lender upon request; (c) for any Collateral held by a repairman, mechanic or bailee, such Person acknowledges Lender’s Lien, waives or subordinates any Lien it may have on the Collateral to the Lien of Lender, and agrees to deliver the Collateral to Lender upon request; and (d) for any Collateral subject to a Licensor’s Intellectual Property rights, the Licensor grants to Lender the right, vis-à-vis such Licensor, to enforce Lender’s Liens with respect to the Collateral, including the right to dispose of it with the benefit of the Intellectual Property, whether or not a default exists under any applicable License.

     Loan: a Revolver Loan.

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     Loan Account: the loan account established by Lender on its books pursuant to Section 5.7.

     Loan Documents: this Agreement, Other Agreements and Security Documents.

     Loan Year: each calendar year commencing on the Closing Date and on each anniversary of the Closing Date.

     Margin Stock: as defined in Regulation U of the Board of Governors.

     Material Adverse Effect: the effect of any event or circumstance that, taken alone or in conjunction with other events or circumstances, (a) has or could be reasonably expected to have a material adverse effect on the business, operations, Properties, prospects or condition (financial or otherwise) of the Obligors taken as a whole, on the value of any material Collateral, on the enforceability of any Loan Documents, or on the validity or priority of Lender’s Liens on any Collateral; (b) impairs the ability of the Obligors taken as a whole, to perform any material obligations under the Loan Documents, including repayment of any Obligations; or (c) otherwise impairs the ability of Lender to enforce or collect any Obligations or to realize upon any Collateral.

     Material Contract: any agreement or arrangement to which a Borrower or Subsidiary is party (other than the Loan Documents) (a) for which breach, termination, nonperformance or failure to renew could reasonably be expected to have a Material Adverse Effect; or (b) that relates to Subordinated Debt, or Debt in an aggregate amount of $100,000 or more.

     Material Obligor: any Obligor other than Ashworth Store III and Ashworth Store II.

     Moody’s: Moody’s Investors Service, Inc., and its successors.

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

     Net Proceeds: with respect to an Asset Disposition, proceeds (including, when received, any deferred or escrowed payments) received by a Borrower or Subsidiary in cash from such disposition, net of (a) reasonable and customary costs and expenses actually incurred in connection therewith, including legal fees and sales commissions; (b) amounts applied to repayment of Debt secured by a Permitted Lien senior to Lender’s Liens on Collateral sold; (c) transfer or similar taxes; and (d) reserves for indemnities, until such reserves are no longer needed; provided, that “Net Proceeds” shall not include proceeds of or constituting Excluded Assets.

     NOLV Percentage: the net orderly liquidation value of Inventory, expressed as a percentage, expected to be realized at an orderly, negotiated sale held within a reasonable period of time, net of all liquidation expenses, as determined from the most recent appraisal of Borrowers’ Inventory performed by an appraiser and on terms reasonably satisfactory to Lender.

     Notice of Borrowing: a Notice of Borrowing to be provided by Borrower Agent to request a Borrowing of Revolver Loans, in form satisfactory to Lender.

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     Notice of Conversion/Continuation: a Notice of Conversion/Continuation to be provided by Borrower Agent to request a conversion or continuation of any Loans as LIBOR Loans, in form satisfactory to Lender.

     Obligations: all (a) principal of and premium, if any, on the Loans, (b) LC Obligations and other obligations of Obligors with respect to Letters of Credit, (c) interest, expenses, fees and other sums payable by Obligors under Loan Documents, (d) obligations of Obligors under any indemnity for Claims, (e) Extraordinary Expenses, (f) Bank Product Debt, and (g) other Debts, obligations and liabilities of any kind owing by any Obligor to Lender pursuant to the Loan Documents, whether now existing or hereafter arising, whether evidenced by a note or other writing, whether allowed in any Insolvency Proceeding, whether arising from an extension of credit, issuance of a letter of credit, acceptance, loan, guaranty, indemnification or otherwise, and whether direct or indirect, absolute or contingent, due or to become due, primary or secondary, or joint or several; provided, however, that the Obligations shall not include any obligations under the UK Loan Facility.

     Obligor: each Borrower, Guarantor, or other Person that is liable for payment of any Obligations or that has granted a Lien in favor of Lender on its assets to secure any Obligations.

     Operating Cash: cash on hand at Borrowers’ retail locations and held in local cash accounts for such retail locations.

     Organic Documents: with respect to any Person, its charter, certificate or articles of incorporation, bylaws, articles of organization, limited liability agreement, operating agreement, members agreement, shareholders agreement, partnership agreement, certificate of partnership, certificate of formation, voting trust agreement, or similar agreement or instrument governing the formation or operation of such Person.

     OSHA: the Occupational Safety and Hazard Act of 1970.

     Other Agreement: each LC Document; Lien Waiver; Borrowing Base Certificate, Compliance Certificate, the Intercompany Subordination Agreement, financial statement or report delivered hereunder; or other document, instrument or agreement (other than this Agreement or a Security Document) now or hereafter delivered by an Obligor or other Person to Lender in connection with any transactions relating hereto.

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

     Overadvance: as defined in Section 2.1.4.

     Patriot Act: the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (2001).

     Payment Item: each check, draft or other item of payment payable to a Borrower, including those constituting proceeds of any Collateral.

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     PBGC: the Pension Benefit Guaranty Corporation.

     Pension Plan: any employee pension benefit plan (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by any Obligor or ERISA Affiliate or to which the Obligor or ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the preceding five plan years.

     Permitted Acquisition: any transaction for the (a) acquisition of all or substantially all of the property of any Person, or of any business or division of any Person; or (b) acquisition (including by merger or consolidation) of all or substantially all of the Equity Interests of any Person that becomes a Subsidiary after giving effect to such transaction; provided that each of the following conditions shall be met:

     (i) no Default or Event of Default then exists or would result therefrom;

     (ii) after giving effect to such transaction, Availability is at least $5,000,000;

     (iii) no Borrower or Subsidiary shall, in connection with any such transaction, assume or remain liable with respect to any Debt of the related seller, except to the extent permitted under Section 10.2.1;

     (iv) the Person or business to be acquired shall be, or shall be engaged in, a business of the type that Borrowers and the Subsidiaries are permitted to be engaged in under Section 10.2.16 and the property acquired in connection with any such transaction shall be made subject to the Lien of the Security Documents and shall be free and clear of any Liens, other than Permitted Liens;

     (v) the Board of Directors of the Person to be acquired shall not have indicated publicly its opposition to the consummation of such acquisition (which opposition has not been publicly withdrawn);

     (vi) all transactions in connection therewith shall be consummated in all material respects in accordance with all Applicable Law;

     (vii) with respect to any transaction, unless Lender shall otherwise agree, Borrowers shall have provided Lender with (A) historical financial statements for the last three fiscal years (or, if less, the number of years since formation) of the Person or business to be acquired (audited if available without undue cost or delay) and unaudited financial statements thereof for the most recent interim period which are available, (B) reasonably detailed projections for the succeeding five years pertaining to the Person or business to be acquired and updated projections for Parent and the Subsidiaries after giving effect to such transaction, (C) a reasonably detailed description of all material information relating thereto and copies of all material documentation pertaining to such transaction, and (D) all such other information and data relating to such transaction or the person or business to be acquired as may be reasonably requested by Lender;

     (viii) at least 10 Business Days prior to the proposed date of consummation of the transaction, Borrowers shall have delivered to Lender a certificate of a Senior Officer

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certifying that (A) such transaction complies with this definition, and (B) such transaction could not reasonably be expected to result in a Material Adverse Effect;

     (ix) the Acquisition Consideration for such acquisition shall not exceed $5,000,000, and the aggregate amount of the Acquisition Consideration for all Permitted Acquisitions since the Closing Date shall not exceed $25,000,000;

     (x) prior to the date of consummation of the transaction, Lender shall have received and approved all acquisition documents, UCC and lien searches, opinions and other documents as requested by Lender;

     (xi) For proposed Permitted Acquisitions other than those permitted under subsection (xiii), the Fixed Charge Coverage Ratio immediately prior to and after giving effect to such Permitted Acquisition shall be no less than 1.10:1.00;

     (xii) No more than two Permitted Acquisitions shall be entered into or consummated during any Fiscal Year after the first Loan Year;

     (xiii) No more than one Permitted Acquisitions shall be entered into or consummated during the first Loan Year, and in no event shall such Permitted Acquisition in the First Loan Year have a cash portion of any Acquisition Consideration for such acquisition exceed $250,000;

     (xiv) Borrowers have provided Lender with forecasted balance sheets, profit and loss statements, and cash flow statements of the Person or related to the assets to be acquired, all prepared on a basis consistent with such Person’s or assets’ historical financial statements, together with appropriate supporting details and a statement of underlying assumptions for the 3 year period following the date of the proposed acquisition (on a year by year basis, and for the 1 year period following the date of the proposed acquisition, on a month by month basis), in form and substance (including as to scope and underlying assumptions) reasonably satisfactory to Lender;

     (xv) the assets being acquired (other than a de minimis amount of assets in relation to the assets being acquired) are located within the United States or Canada or the Person whose Equity Interest is being acquired is organized in a jurisdiction located within the United States or Canada;

     (xvi) For proposed acquisitions other than those permitted under subsection (xiii), Borrower Agent has provided Lender with written notice of the proposed acquisition at least 30 Business Days prior to the anticipated closing date of the proposed acquisition and, not later than 5 Business Days prior to the anticipated closing date of the proposed acquisition, copies of the acquisition agreement and other material documents relative to the proposed acquisition, which agreement and documents must be reasonably acceptable to Lender; and

     (xvii) the subject assets or Equity Interests, as applicable, are being acquired directly by an Obligor, and (i) in the case of an asset acquisition, such Obligor shall have executed and delivered or authorized, as applicable, any and all documentation reasonably requested by the Lender in order to include the newly acquired assets within the collateral hypothecated under the Loan Documents, and (ii) in the case of an

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acquisition of Equity Interests, such Obligor shall have complied with Section 10.1.9 of the Agreement.

     Notwithstanding the foregoing, the Accounts and Inventory of the Person being acquired or comprising the assets being acquired shall not be considered for inclusion in the Borrowing Base until a field audit or appraisal of such Person or such assets has been completed to the satisfaction of Lender.

     Permitted Asset Disposition: as long as no Default or Event of Default exists and all Net Proceeds are remitted to Lender (if and to the extent required by Section 5.2), an Asset Disposition that is (a) sale of Inventory in the ordinary course of business; (b) a disposition of Inventory or other Property that is obsolete, unmerchantable or otherwise not used or useful in the ordinary course of business; (c) termination of a lease of real or personal Property that is not necessary for the ordinary course of business, could not reasonably be expected to have a Material Adverse Effect; (d) leases of real or personal property in the ordinary course of business; (e) mergers and consolidations in compliance with Section 10.2.9; (f) the unwinding of any Hedging Agreement; (g) any Asset Disposition from any Subsidiary to any Borrower; (h) Investments in compliance with Section 10.2.5; (i) dispositions of Property identified on Schedule P-1; (j) Distributions in compliance with Section 10.2.4; (k) the creation of any Permitted Lien; (l) dispositions of Accounts in connection with the compromise, settlement or collection thereof in the ordinary course of business or in bankruptcy or similar proceedings and exclusive of factoring or similar arrangements; (m) licenses of Intellectual Property granted by Borrowers or any Subsidiary in the ordinary course of business; (n) Investments in compliance with Section 10.2.5; (n) other dispositions that, in the aggregate during any 12 month period, have a fair market or book value (whichever is more) of $750,000 or less; (o) the sale of Inventory by Parent to Ashworth UK in the ordinary course of business and consistent with past practices; or (p) approved in writing by Lender.

     Permitted Capital Leases: (i) Capital Leases of Borrowers and Subsidiaries set forth on Schedule P-2, and (ii) other Capital Leases of Borrowers and Subsidiaries so long as the aggregate amount of such other Capital Leases does not exceed $1,000,000 at any time outstanding.

     Permitted Contingent Obligations: Contingent Obligations (a) arising from endorsements of Payment Items for collection or deposit in the ordinary course of business; (b) arising from Hedging Agreements permitted hereunder; (c) existing on the Closing Date, and any extension or renewal thereof that does not increase the amount of such Contingent Obligation when extended or renewed; (d) incurred in the ordinary course of business with respect to surety, appeal or performance bonds, or other similar obligations; (e) arising from customary indemnification obligations in favor of purchasers in connection with dispositions of Equipment permitted hereunder; (f) arising under the Loan Documents; (g) in respect of a guaranty of Debt or other obligations permitted hereunder; (h) product warranties in the ordinary course of business; or (i) in addition to the foregoing, in an aggregate amount of $100,000 or less at any time.

     Permitted Distributions: (a) any Borrower or Subsidiary may make Distributions to an officer or employee for salary, travel expenses, commissions and similar items in the ordinary course of business; (b) any Borrower or Subsidiary may purchase, redeem or otherwise acquire shares of its common stock or other common equity interests or warrants or options to acquire any such shares with the proceeds received from the substantially concurrent issue of new shares

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of its common stock or other common equity interests; (c) any Borrower or Subsidiary may purchase, redeem or otherwise acquire shares of its common stock or other of its common equity interests or warrants or options to acquire any such shares with the proceeds received from the substantially concurrent issue of new shares of its common stock or other of its common equity interests; (d) Parent may (i) repurchase, redeem, or otherwise acquire for value Equity Interests of Parent held by present or former officers, directors or employees (or their transferees, estates or beneficiaries under their estates) upon their death, disability, retirement, severance or termination of employment or service or pursuant to any management equity plan or stock option plan or any other management or employee benefit plan, agreement or arrangement; provided that the aggregate cash consideration paid for all such repurchases, redemptions and acquisitions shall not exceed, without duplication, in any calendar year, $500,000, (ii) make repurchases of Equity Interests deemed to occur upon the exercise of stock options if the Equity Interests represent a portion of the exercise price thereof, (iii) make cash payments in lieu of the issuance of fractional shares in connection with the exercise of warrants, options or other securities convertible into or exchangeable for Equity Interests of Parent; and (e) any Borrower or Subsidiary may declare and make other Distributions so long as no Default or Event of Default exists before and immediately after declaring and making such Distribution, and after giving effect thereto Availability is at least $8,000,000.

     Permitted Investments: (a) Investments existing on the Closing Date and set forth on Schedule P-3; (b) Cash Equivalents that, in the case of an Obligor, are subject to Lender’s Lien and control, pursuant to documentation in form and substance reasonably satisfactory to Lender; (c) loans and advances permitted under Section 10.2.7; (d) Investments by any Borrower in any other Borrower and Investments by any Subsidiary in any Borrower; (e) Investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers; (f) endorsement of negotiable instruments held for collection in the ordinary course of business; (g) lease, utility and other similar deposits in the ordinary course of business; (h) Investments in Hedging Agreements, (i) Investments made by any Borrower or any Subsidiary as a result of consideration received in connection with a Permitted Asset Disposition made in compliance with Section 10.2.6, (j) Permitted Contingent Obligations; (k) Permitted Acquisitions (and any deposits required in connection therewith); (l) at any time after the First Loan Year, additional Investments which do not exceed $10,000,000.00 in the aggregate at any time provided that at the time of such Investment under this clause (l) no Event of Default exists or would exist after giving effect to such Investment, after giving effect thereto Availability is at least $8,000,000; and (m) deposit accounts that, in the case of an Obligor, are, except as otherwise permitted hereunder, subject to Lender’s Lien and control, pursuant to documentation in form and substance reasonably satisfactory to Lender. The amount of any Investment outstanding at any time pursuant to clause (l) hereunder (x) shall not include any appreciation in the value of any such Investment occurring after the acquisition or making of such Investment and (y) shall be deemed to be reduced upon the disposition or repayment of or return on any such Investment, by an amount equal to the return of capital or principal with respect to such Investment to the applicable Person, less the reasonable cost of the disposition of such Investment and net of taxes.

     Permitted Lien: as defined in Section 10.2.2.

     Permitted Purchase Money Debt: Purchase Money Debt of Borrowers and Subsidiaries that is unsecured or secured only by a Purchase Money Lien, as long as the aggregate amount does not exceed $1,000,000 at any time and its incurrence does not violate Section 10.2.3.

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     Person: any individual, corporation, limited liability company, partnership, joint venture, joint stock company, land trust, business trust, unincorporated organization, Governmental Authority or other entity.

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

     Properly Contested: with respect to any obligation of an Obligor, (a) the obligation is subject to a bona fide dispute regarding amount or the Obligor’s liability to pay; (b) the obligation is being properly contested in good faith by appropriate proceedings promptly instituted and diligently pursued; (c) appropriate reserves have been established in accordance with GAAP; (d) non-payment could not have a Material Adverse Effect, nor result in forfeiture or sale of any assets of the Obligor; (e) no Lien is imposed on assets of the Obligor, unless bonded and stayed to the reasonable satisfaction of Lender; and (f) if the obligation results from entry of a judgment or other order, such judgment or order is stayed pending appeal or other judicial review.

     Property: any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

     Purchase Money Debt: (a) Debt (other than the Obligations) for payment of any of the purchase price of fixed assets; (b) Debt (other than the Obligations) incurred within 180 days before or after acquisition of any fixed assets, for the purpose of financing any of the purchase price thereof; and (c) any renewals, extensions or refinancings (but not increases) thereof.

     Purchase Money Lien: a Lien that secures Purchase Money Debt, encumbering only the fixed assets acquired with such Debt and accessions to, and products and proceeds (including insurance condemnation proceeds) of, such acquired assets.

     RCRA: the Resource Conservation and Recovery Act (42 U.S.C. §§ 6991-6991i).

     Real Estate: all right, title and interest (whether as owner, lessor or lessee) in any real Property or any buildings, structures, parking areas or other improvements thereon.

     Real Estate Term Loan: the “Loan” as defined in that certain Loan Agreement, dated as of April 2, 2004 (as amended, restated, replaced, supplemented or otherwise modified from time to time,), between Bank of America, N.A., a national banking association, having an address at 214 North Tryon Street, Charlotte, North Carolina 28255 and Ashworth EDC, LLC, a Delaware limited liability company having an address at 2765 Loker Avenue West, Carlsbad, California 92008.

     Refinancing Conditions: the following conditions for Refinancing Debt: (a) it is in an aggregate principal amount that does not exceed the principal amount of the Debt being extended, renewed or refinanced (except by an amount equal to a reasonable premium or other reasonable amount paid, and fees and expenses reasonably incurred, in connection with such refinancing, extension or renewal and by an amount equal to any existing commitments unutilized thereunder); (b) it has a final maturity no sooner than the Debt being extended, renewed or refinanced; (c) if applicable, it is subordinated to the Obligations at least to the same

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extent as the Debt being extended, renewed or refinanced; (d) the representations, covenants and defaults applicable to it are, taken as a whole, no less favorable to Borrowers than those applicable to the Debt being extended, renewed or refinanced as determined in good faith by Parent’s board of directors; (e) no additional Property or, if applicable, class of Property is subjected to a Lien to secure it; (f) no additional Person or, if applicable, category of Person is obligated on such Debt (except for Permitted Contingent Obligations arising from the guaranty of such Debt); and (g) upon giving effect to it, no Default or Event of Default exists.

     Refinancing Debt: Borrowed Money that is the result of an extension, renewal or refinancing of Debt permitted under Section 10.2.1(b), (d) ,(f), or (h) .

     Reimbursement Date: as defined in Section 2.3.2.

     Rent and Charges Reserve: the aggregate of (a) all past due rent and other amounts owing by an Obligor to any landlord, warehouseman, processor, repairman, mechanic, shipper, freight forwarder, broker or other Person who possesses any Collateral or could assert a Lien on any Collateral; and (b) a reserve at least equal to three months rent and other charges that could be payable to any such Person, unless it has executed a Lien Waiver; provided, however, that for the first 60 days after the Closing Date, the amount of any Rent and Charges Reserve for any leased location with respect to which the Borrower is still diligently pursuing a Lien Waiver shall be $0.

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

     Reserve Percentage: the reserve percentage (expressed as a decimal, rounded upward to the nearest 1/100th of 1%) applicable to member banks under regulations issued from time to time by the Board of Governors for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as “Eurocurrency liabilities”).

     Restricted Investment: any Investment by a Borrower or Subsidiary that is not a Permitted Investment.

     Revolver Commitment: Lender’s obligation to make Revolver Loans and to issue Letters of Credit in an amount up to $55,000,000.

     Revolver Loan: a loan made pursuant to Section 2.1.

     Revolver Termination Date: January 11, 2012.

     Royalties: all royalties, fees, expense reimbursement and other amounts payable by a Borrower under a License.

     S&P: Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors.

     Seasonal Advance Rate Period: the period (but no more than one period) during any Fiscal Year (a) commencing upon notice from Borrowers to Agent, which notice may only be given on (x) or after January 1 and before May 15 of such Fiscal Year and (y) so long as no

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Default or Event of Default then exists, and (b) continuing until the earliest of (x) 4 months from the giving of such notice, (y) a Default or Event of Default shall occur, or (z) June 1 of such Fiscal Year.

     Secured Parties: Lender and providers of Bank Products.

     Security Documents: the Guaranties, the Deed of Hypothec, the UK Charge over Shares, Deposit Account Control Agreements, and all other documents, instruments and agreements now or hereafter securing (or given with the intent to secure) any Obligations.

     Senior Officer: the president, chief executive officer, chief financial officer, treasurer or assistant treasurer of a Borrower or, if the context requires, an Obligor.

     Slow Moving Inventory Advance Rate: 65% during the first Loan Year; 43% during the second Loan Year; 22% during the third Loan Year; and 0% thereafter.

     Solvent: as to any Person, such Person (a) owns Property whose fair salable value is greater than the amount required to pay all of its debts (including contingent, subordinated, unmatured and unliquidated liabilities); (b) owns Property whose present fair salable value (as defined below) is greater than the probable total liabilities (including contingent, subordinated, unmatured and unliquidated liabilities) of such Person as they become absolute and matured; (c) is able to pay all of its debts as they mature; (d) has capital that is not unreasonably small for its business and is sufficient to carry on its business and transactions and all business and transactions in which it is about to engage; (e) is not “insolvent” within the meaning of Section 101(32) of the Bankruptcy Code; and (f) has not incurred (by way of assumption or otherwise) any obligations or liabilities (contingent or otherwise) under any Loan Documents, or made any conveyance in connection therewith, with actual intent to hinder, delay or defraud either present or future creditors of such Person or any of its Affiliates. “Fair salable value” means the amount that could be obtained for assets within a reasonable time, either through collection or through sale under ordinary selling conditions by a capable and diligent seller to an interested buyer who is willing (but under no compulsion) to purchase.

     Specified Payments: (i) guaranteed earn-out payments to executives of Gekko pursuant to Executive Employment Agreements by and between Gekko as in effect on the date hereof and as previously disclosed to Lender, the total amount of which payments shall not exceed in the aggregate, $3,500,000, and (ii) payments to executives (other than those specified in subsection (i) above) of Gekko pursuant to such Executive Employment Agreements which are based on the performance of such executives.

     Subordinated Debt: Debt incurred by a Borrower that is expressly subordinate and junior in right of payment to Full Payment of all Obligations, and is on terms (including maturity, interest, fees, repayment, covenants and subordination) satisfactory to Lender.

     Subsidiary: any entity more than 50% of whose voting securities or Equity Interests is owned by a Borrower or any combination of Borrowers (including indirect ownership by a Borrower through other entities in which such Borrower directly or indirectly owns more than 50% of the voting securities or Equity Interests).

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

     Trademark Security Agreement: each trademark security agreement pursuant to which an Obligor grants a Lien to Lender on such Obligor’s interests in trademarks, as security for the Obligations.

     Type: any type of a Loan (i.e., Base Rate Loan or LIBOR Loan) that has the same interest option and, in the case of LIBOR Loans, the same Interest Period.

     UCC: the Uniform Commercial Code as in effect in the State of California or, when the laws of any other jurisdiction govern the perfection or enforcement of any Lien, the Uniform Commercial Code or any other applicable law (including the Civil Code of Quebec) of such jurisdiction.

     UK Loan Document: any document, agreement, or instrument evidencing the loans under the UK Loan Facility, or any guaranty or security therefor.

     UK Loan Facility: the loan facility now or in the future provided by Lender to Ashworth UK, including, without limitation, any present or future guarantees thereof provided by any Borrower or Subsidiary.

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

     Upstream Payment: a Distribution by a Subsidiary to any Obligor or any Obligor to another Obligor (and, in the case of a Distribution by a non-wholly-owned Subsidiary, to any Obligor and any Subsidiary and to each other owner of capital stock or other equity interests of such Subsidiary on a pro rata basis based on their relative ownership interests).

     Value: (a) for Inventory, its value determined on the basis of the lower of cost or market, calculated on a first-in, first-out basis, and excluding any portion of cost attributable to intercompany profit among Borrowers and their Affiliates; and (b) for an Account, its face amount, net of any returns, rebates, discounts (calculated on the shortest terms), credits, allowances or Taxes (including sales, excise or other taxes) that have been or could be claimed by the Account Debtor or any other Person.

     1.2 Accounting Terms. Under the Loan Documents (except as otherwise specified herein), all accounting terms shall be interpreted, all accounting determinations shall be made, and all financial statements shall be prepared, in accordance with GAAP applied on a basis consistent with the most recent audited financial statements of Borrowers delivered to Lender before the Closing Date and using the same inventory valuation method as used in such financial statements, except for any change required or permitted by GAAP if Borrowers’ certified public accountants concur in such change, and the change is disclosed to Lender.

     1.3 Uniform Commercial Code. As used herein, the following terms are defined in accordance with the UCC in effect in the State of California from time to time: “Chattel

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Paper,” “Commercial Tort Claim,” “Deposit Account,” “Document,” “Equipment,” “General Intangibles,” “Goods,” “Instrument,” “Investment Property,” “Letter-of-Credit Right” and “Supporting Obligation.”

     1.4 Certain Matters of Construction. The terms “herein,” “hereof,” “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. In the computation of periods of time from a specified date to a later specified date, “from” means “from and including,” and “to” and “until” each mean “to but excluding.” The terms “including” and “include” shall mean “including, without limitation” and, for purposes of each Loan Document, the parties agree that the rule of ejusdem generis shall not be applicable to limit any provision. Section titles appear as a matter of convenience only and shall not affect the interpretation of any Loan Document. All references to (a) laws or statutes include all related rules, regulations, interpretations, amendments and successor provisions; (b) any document, instrument or agreement include any amendments, waivers and other modifications, extensions or renewals (to the extent permitted by the Loan Documents); (c) any section mean, unless the context otherwise requires, a section of this Agreement; (d) any exhibits or schedules mean, unless the context otherwise requires, exhibits and schedules attached hereto, which are hereby incorporated by reference; (e) any Person include successors and assigns; (f) time of day mean time of day at Lender’s notice address under Section 12.3.1; or (g) discretion of Lender mean its reasonable discretion. All calculations of Value, fundings of Loans, issuances of Letters of Credit and payments of Obligations shall be in Dollars and, unless the context otherwise requires, all determinations (including calculations of Borrowing Base and financial covenants) made from time to time under the Loan Documents shall be made in light of the circumstances existing at such time. Borrowing Base calculations shall be consistent with historical methods of valuation and calculation, and otherwise reasonably satisfactory to Lender (and not necessarily calculated in accordance with GAAP). No provision of any Loan Documents shall be construed against any party by reason of such party having, or being deemed to have, drafted the provision. Whenever the phrase “to the best of Borrowers’ knowledge” or words of similar import are used in any Loan Documents, it means actual knowledge of a Senior Officer, or knowledge that a Senior Officer would have obtained if he or she had engaged in good faith and diligent performance of his or her duties, including reasonably specific inquiries of employees or agents and a good faith attempt to ascertain the matter to which such phrase relates.

     For purposes of any Collateral located in the Province of Quebec or charged by any deed of hypothec (or any other Loan Document) and for all other purposes pursuant to which the interpretation or construction of a Loan Document may be subject to the laws of the Province of Quebec or a court or tribunal exercising jurisdiction in the Province of Quebec, (i) ”personal property” shall be deemed to include “movable property”, (ii) ”real property” shall be deemed to include “immovable property” and an “easement” shall be deemed to include a “servitude”, (iii) ”tangible property” shall be deemed to include “corporeal property”, (iv) ”intangible property” shall be deemed to include “incorporeal property”, (v) ”security interest” and “mortgage” shall be deemed to include a “hypothec”, (vi) all references to filing, registering or recording under the UCC shall be deemed to include publication under the Civil Code of Quebec, and all references to releasing any Lien shall be deemed to include a release, discharge and mainlevee of a hypothec, (vii) all references to “perfection” of or “perfected” Liens shall be deemed to include a reference to the “opposability” of such Liens to third parties, (viii) any “right of offset”, “right of setoff” or similar expression shall be deemed to include a “right of

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compensation”, (ix) ”goods” shall be deemed to include “corporeal movable property” other than chattel paper, documents of title, instruments, money and securities, and (x) an “agent” shall be deemed to include a “mandatary”.

SECTION 2 CREDIT FACILITIES

     2.1 Revolver Commitment.

          2.1.1 Revolver Loans. Lender agrees, on the terms set forth herein, to make Revolver Loans to Borrowers in an aggregate amount up to the Revolver Commitment, from time to time through the Commitment Termination Date. The Revolver Loans may be repaid and reborrowed as provided herein. In no event shall Lender have any obligation to honor a request for a Revolver Loan if the unpaid balance of Revolver Loans outstanding at such time (including the requested Loan) would exceed the Borrowing Base.

          2.1.2 Use of Proceeds. The proceeds of Revolver Loans shall be used by Borrowers solely (a) to satisfy existing Debt; (b) to pay fees and transaction expenses associated with the closing of this credit facility; (c) to pay Obligations in accordance with this Agreement; and (d) for working capital and other lawful general corporate purposes of Borrowers, including Permitted Acquisitions.

          2.1.3 Voluntary Reduction or Termination of Revolver Commitment.

          (a) The Revolver Commitment shall terminate on the Revolver Termination Date, unless sooner terminated in accordance with this Agreement. Upon at least 15 days prior written notice to Lender, Borrowers may, at their option, terminate the Revolver Commitment and this credit facility. Any notice of termination given by Borrowers shall be irrevocable; provided that a notice of termination delivered by Borrowers may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by Borrowers (by notice to Lender on or prior to the specified effective date) if such condition is not satisfied. On the termination date, Borrowers shall make Full Payment of all Obligations.

          (b) [Intentionally Deleted].

          (c) Concurrently with any reduction or termination of the Revolver Commitment occurring during the first Loan Year or second Loan Year, for whatever reason (including an Event of Default), Borrowers shall pay to Lender, as liquidated damages for loss of bargain (and not as a penalty), an amount equal to (i) 1% of the Revolver Commitment being reduced or terminated. No termination charge shall be payable if termination occurs on or after the first day of the third Loan Year, or the termination is in connection with the repayment in full of the Obligations with the proceeds of a credit facility provided in full by the commercial banking division of Lender, or with respect to which such division is the sole administrative agent.

          2.1.4 Overadvances. If the aggregate Revolver Loans exceed the Borrowing Base (“Overadvance”) or the Revolver Commitment at any time, the excess amount shall be payable by Borrowers on demand by Lender, but all such Revolver Loans shall nevertheless constitute Obligations secured by the Collateral and entitled to all benefits of the Loan

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Documents. Any funding or sufferance of an Overadvance shall not constitute a waiver of the Event of Default caused thereby.

     2.2 [Intentionally Deleted]

     2.3 Letter of Credit Facility.

          2.3.1 Issuance of Letters of Credit. Lender agrees to issue or extend Letters of Credit (including the Back-Up LC which shall be issued on the Closing Date) from time to time until 20 Business Days prior to the Revolver Termination Date (or until the Commitment Termination Date, if earlier), on the terms set forth herein, including the following:

          (a) Each Borrower acknowledges that Lender’s willingness to issue any Letter of Credit is conditioned upon its receipt of a LC Application with respect to the requested Letter of Credit, as well as such other instruments and agreements as Lender may customarily require for issuance of a letter of credit of similar type and amount. Lender shall have no obligation to issue any Letter of Credit unless (i) it receives a LC Request and LC Application at least three Business Days prior to the requested date of issuance; and (ii) each LC Condition is satisfied.

          (b) Letters of Credit may be requested by a Borrower only (i) to support obligations of such Borrower incurred in the ordinary course of business; or (ii) for other purposes as Lender may approve from time to time in writing. The renewal or extension of any Letter of Credit shall be treated as the issuance of a new Letter of Credit, except that delivery of a new LC Application shall be required at the reasonable discretion of Lender.

          (c) Borrowers assume all risks of the acts, omissions or misuses of any Letter of Credit by the beneficiary. In connection with issuance of any Letter of Credit, Lender shall not be responsible for the existence, character, quality, quantity, condition, packing, value or delivery of any goods purported to be represented by any Documents; any differences or variation in the character, quality, quantity, condition, packing, value or delivery of any goods from that expressed in any Documents; the form, validity, sufficiency, accuracy, genuineness or legal effect of any Documents or of any endorsements thereon; the time, place, manner or order in which shipment of goods is made; partial or incomplete shipment of, or failure to ship, any goods referred to in a Letter of Credit or Documents; any deviation from instructions, delay, default or fraud by any shipper or other Person in connection with any goods, shipment or delivery; any breach of contract between a shipper or vendor and a Borrower; errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, telecopy, e-mail, telephone or otherwise; errors in interpretation of technical terms; the misapplication by a beneficiary of any Letter of Credit or the proceeds thereof; or any consequences arising from causes beyond the control of Lender, including any act or omission of a Governmental Authority. Lender shall be fully subrogated to the rights and remedies of each beneficiary whose claims against Borrowers are discharged with proceeds of any Letter of Credit.

          (d) In connection with its administration of and enforcement of rights or remedies under any Letters of Credit or LC Documents, Lender shall be entitled to act, and shall be fully protected in acting, upon any certification, documentation or communication in whatever form believed by Lender, in good faith, to be genuine and correct and to have been signed, sent or made by a proper Person. Lender may consult with and employ legal counsel, accountants

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and other experts to advise it concerning its obligations, rights and remedies, and shall be entitled to act upon, and shall be fully protected in any action taken in good faith reliance upon, any advice given by such experts. Lender may employ agents and attorneys-in-fact in connection with any matter relating to Letters of Credit or LC Documents, and shall not be liable for the negligence or misconduct of agents and attorneys-in-fact selected with reasonable care.

          (e) If the Borrower Agent so requests in any applicable LC Application, the Lender may, in its sole and absolute discretion, agree to issue a Letter of Credit that has automatic extension provisions (each, an “Auto-Extension Letter of Credit”); provided that any such Auto-Extension Letter of Credit must permit the Lender to prevent any such extension at least once in each twelve-month period (commencing with the date of issuance of such Letter of Credit) by giving prior notice to the beneficiary thereof not later than a day (the “Non-Extension Notice Date”) in each such twelve-month period to be agreed upon at the time such Letter of Credit is issued. Unless otherwise directed by the Lender, the Borrowers shall be required to make request to the Lender for any such extension within 5 Business Days prior to the termination date of such Letter of Credit; provided, however, that the Lender shall not permit any such extension if (A) the Lender has determined that it would not be permitted, or would have no obligation, at such time to issue such Letter of Credit in its revised form (as extended) under the terms hereof, or (B) one or more of the applicable conditions specified in Section 6 is not then satisfied.

          (f) Notwithstanding the provisions of this Section 2 (including without limitation Sections 2.3.1 and 2.3.2), Lender shall not be exonerated from any liability to any Borrower resulting from its gross negligence or willful misconduct.

          2.3.2 Reimbursement. If Lender honors any request for payment under a Letter of Credit, Borrowers shall pay to Lender, without duplication, on the same day (“Reimbursement Date”), the amount paid under such Letter of Credit, together with interest at the interest rate for Base Rate Revolver Loans from the Reimbursement Date until payment by Borrowers. The obligation of Borrowers to reimburse Lender for any payment made under a Letter of Credit shall be absolute, unconditional, irrevocable, and joint and several, and shall be paid without regard to any lack of validity or enforceability of any Letter of Credit or the existence of any claim, setoff, defense or other right that Borrowers may have at any time against the beneficiary. Whether or not Borrower Agent submits a Notice of Borrowing, Borrowers shall be deemed to have requested a Borrowing of Base Rate Revolver Loans in an amount necessary to pay all amounts due on any Reimbursement Date.

          2.3.3 Cash Collateral.

               (i) If any LC Obligations, whether or not then due or payable, shall for any reason be outstanding at any time (a) that an Event of Default exists and is continuing, (b) that Availability is less than zero, or (c) after the Commitment Termination Date, then Borrowers shall, at Lender’s request, Cash Collateralize the stated amount of all outstanding Letters of Credit and pay to Lender the amount of all other LC Obligations. If Borrowers fail to provide Cash Collateral as required herein, Lender may advance, as Revolver Loans, the amount of the Cash Collateral required.

               (ii) If Borrower Agent request that any Letter of Credit be renewed pursuant to Section 2.2.2(e) which causes the expiration date of such Letter of Credit to

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be after the Commitment Termination Date, before such renewal becomes effective, Borrower shall Cash Collateralize the stated amount of such Letter of Credit.

SECTION 3 INTEREST, FEES AND CHARGES

     3.1 Interest.

          3.1.1 Rates and Payment of Interest.

          (a) The Obligations shall bear interest (i) if a Base Rate Loan, at the Base Rate in effect from time to time, plus the Applicable Margin; (ii) if a LIBOR Loan, at LIBOR for the applicable Interest Period, plus the Applicable Margin; and (iii) if any other Obligation (other than the LC Obligations and Bank Product Debt) (including, to the extent permitted by law, interest not paid when due), at the Base Rate in effect from time to time, plus the Applicable Margin for Base Rate Revolver Loans. Interest shall accrue from the date the Loan is advanced or the Obligation is incurred or payable, until paid by Borrowers. If a Loan is repaid on the same day made, one day’s interest shall accrue.

          (b) During an Insolvency Proceeding with respect to any Borrower, or during any other Event of Default if Lender in its discretion so elects, Obligations (other than the LC Obligations and Bank Product Debt) shall bear interest at the Default Rate (whether before or after any judgment). Each Borrower acknowledges that the cost and expense to Lender due to an Event of Default are difficult to ascertain and that the Default Rate is a fair and reasonable estimate to compensate Lender for this.

          (c) Interest accrued on the Loans shall be due and payable in arrears, (i) on the first day of each month; (ii) on any date of prepayment, with respect to the principal amount of Loans being prepaid; and (iii) on the Commitment Termination Date. Interest accrued on any other Obligations shall be due and payable as provided in the Loan Documents and, if no payment date is specified, shall be due and payable on demand. Notwithstanding the foregoing, interest accrued at the Default Rate shall be due and payable on demand.

          3.1.2 Application of LIBOR to Outstanding Loans.

          (a) Borrowers may on any Business Day, subject to delivery of a Notice of Conversion/Continuation, elect to convert any portion of the Base Rate Loans to, or to continue any LIBOR Loan at the end of its Interest Period as, a LIBOR Loan. During any Default or Event of Default, Lender may declare that no Loan may be made, converted or continued as a LIBOR Loan.

          (b) Whenever Borrowers desire to convert or continue Loans as LIBOR Loans, Borrower Agent shall give Lender a Notice of Conversion/Continuation, no later than 11:00 a.m. at least three Business Days before the requested conversion or continuation date. Each Notice of Conversion/Continuation shall be irrevocable, and shall specify the amount of Loans to be converted or continued, the conversion or continuation date (which shall be a Business Day), and the duration of the Interest Period (which shall be deemed to be one month if not specified). If, upon the expiration of any Interest Period in respect of any LIBOR Loans, Borrowers shall have failed to deliver a Notice of Conversion/Continuation, they shall be deemed to have elected to convert such Loans into Base Rate Loans.

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          3.1.3 Interest Periods. In connection with the making, conversion or continuation of any LIBOR Loans, Borrowers shall select an interest period (“Interest Period”) to apply, which interest period shall be one, two, three or six months; provided, however, that:

          (a) the Interest Period shall commence on the date the Loan is made or continued as, or converted into, a LIBOR Loan, and shall expire on the numerically corresponding day in the calendar month at its end;

          (b) if any Interest Period commences on a day for which there is no corresponding day in the calendar month at its end or if such corresponding day falls after the last Business Day of such month, then the Interest Period shall expire on the last Business Day of such month; and if any Interest Period would expire on a day that is not a Business Day, the period shall expire on the next Business Day; and

          (c) no Interest Period shall extend beyond the Revolver Termination Date.

          3.1.4 Interest Rate Not Ascertainable. If Lender shall determine that on any date for determining LIBOR, due to any circumstance affecting the London interbank market, adequate and fair means do not exist for ascertaining such rate on the basis provided herein, then Lender shall immediately notify Borrowers of such determination. Until Lender notifies Borrowers that such circumstance no longer exists, the obligation of Lender to make LIBOR Loans shall be suspended, and no further Loans may be converted into or continued as LIBOR Loans.

     3.2 Fees.

          3.2.1 Unused Line Fee. Borrowers shall pay to Lender a fee equal to 0.25% per annum times the amount by which the Revolver Commitment exceeds the sum of (i) the average actual daily balance of Revolver Loans and stated amount of Letters of Credit during any month, plus (ii) the Availability Block. Such fee shall be payable in arrears, on the first day of each month and on the Commitment Termination Date.

          3.2.2 LC Facility Fees. Borrowers shall pay to Lender (a) a fee equal to the Applicable Margin in effect for LIBOR Revolver Loans times the average actual daily stated amount of Letters of Credit, which fee shall be payable monthly in arrears, on the first day of each month; (b) a fronting fee equal to 0.125% per annum on the stated amount of each Letter of Credit, which fee shall be payable monthly in arrears, on the first day of each month; and (c) all customary charges associated with the issuance, amending, negotiating, payment, processing, transfer and administration of Letters of Credit, which charges shall be paid as and when incurred. During an Event of Default, the fee payable under clause (a) shall be increased by 2% per annum.

          3.2.3 Closing Fee. Borrowers shall pay to Lender a closing fee of $137,500, which shall be paid concurrently with the funding of the initial Loans hereunder.

     3.3 Computation of Interest, Fees, Yield Protection. All interest, as well as fees and other charges calculated on a per annum basis, shall be computed for the actual days elapsed, based on a year of 360 days. Each determination by Lender of any interest, fees or interest rate hereunder shall be final, conclusive and binding for all purposes, absent manifest error. All fees shall be fully earned when due and shall not be subject to rebate, refund or

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proration. All fees payable under Section 3.2 are compensation for services and are not, and shall not be deemed to be, interest or any other charge for the use, forbearance or detention of money. A certificate as to amounts payable by Borrowers under Section 3.4, 3.6, 3.7, 3.9 or 5.8, setting forth the calculation thereof in reasonable detail, submitted to Borrower Agent by Lender shall be final, conclusive and binding for all purposes, absent manifest error, and Borrowers shall pay such amounts to the appropriate party within 10 Business Days following receipt of the certificate.

     3.4 Reimbursement Obligations. Borrowers shall reimburse Lender for all Extraordinary Expenses. Borrowers shall also reimburse Lender for all legal, accounting, appraisal, consulting, and other fees, costs and expenses incurred by it in connection with (a) negotiation and preparation of any Loan Documents, including any amendment or other modification thereof; (b) administration of and actions relating to any Collateral, Loan Documents and transactions contemplated thereby, including any actions taken to perfect or maintain priority of Lender’s Liens on any Collateral, to maintain any insurance required hereunder or to verify Collateral; and (c) subject to the limits of Section 10.1.1(b), each inspection, audit or appraisal with respect to any Obligor or Collateral, whether prepared by Lender’s personnel or a third party. If, for any reason (including inaccurate reporting on financial statements or a Compliance Certificate), it is determined that a higher Applicable Margin should have applied to a period than was actually applied, then the proper margin shall be applied retroactively and Borrowers shall immediately pay to Lender an amount equal to the difference between the amount of interest and fees that would have accrued using the proper margin and the amount actually paid. If it is determined within 30 days after an adjustment in the Applicable Margin that the Applicable Margin should have been adjusted to a lower Applicable Margin, then the proper margin shall be applied retroactively and Lender shall pay to Borrowers an amount equal to the difference between the amount of interest that would have accrued using the proper margin, such adjustment payment shall only be made by Lender if the reason for the application of the incorrect Applicable Margin is a result of calculation mistakes made by Borrowers on a Compliance Certificate (and not mistakes or inaccurate reporting on financial statements), and Borrower notifies Lender of such mistake within 30 days after such incorrect adjustment to the Applicable Margin. All amounts payable by Borrowers under this Section shall be due on demand.

     3.5 Illegality. If Lender determines that any Applicable Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for Lender to make, maintain or fund LIBOR Loans, or to determine or charge interest rates based upon LIBOR, or any Governmental Authority has imposed material restrictions on the authority of Lender to purchase or sell, or to take deposits of, Dollars in the London interbank market, then, on notice thereof by Lender to Borrower Agent, any obligation of Lender to make or continue LIBOR Loans or to convert Base Rate Loans to LIBOR Loans shall be suspended until Lender notifies Borrower Agent that the circumstances giving rise to such determination no longer exist. Upon delivery of such notice, Borrowers shall prepay or, if applicable, convert all LIBOR Loans to Base Rate Loans, either on the last day of the Interest Period therefor, if Lender may lawfully continue to maintain LIBOR Loans to such day, or immediately, if Lender may not lawfully continue to maintain LIBOR Loans. Upon any such prepayment or conversion, Borrowers shall also pay accrued interest on the amount so prepaid or converted.

     3.6 Inability to Determine Rates. If Lender notifies Borrower Agent for any reason in connection with a request for a Borrowing of, conversion to or continuation of, a

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LIBOR Loan that (a) Dollar deposits are not being offered to banks in the London interbank Eurodollar market for the applicable amount and Interest Period of such Loan, (b) adequate and reasonable means do not exist for determining LIBOR for the requested Interest Period, or (c) LIBOR for the requested Interest Period does not adequately and fairly reflect the cost to Lender of funding such Loan, then the obligation of Lender to make or maintain LIBOR Loans shall be suspended until it revokes the notice. Upon receipt of the notice, Borrower Agent may revoke any pending request for a Borrowing of, conversion to or continuation of a LIBOR Loan or, failing that, will be deemed to have submitted a request for a Base Rate Loan.

     3.7 Increased Costs; Capital Adequacy.

          3.7.1 Change in Law. If any Change in Law shall:

          (a) impose modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, Lender (except any reserve requirement reflected in LIBOR);

          (b) subject Lender to any Tax with respect to any Loan, Loan Document or Letter of Credit, or change the basis of taxation of payments to Lender in respect thereof (except for Indemnified Taxes or Other Taxes covered by Section 5.8 and the imposition of, or any change in the rate of, any Excluded Tax payable by Lender); or

          (c) impose on Lender or the London interbank market any other condition, cost or expense affecting any Loan, Loan Document or Letter of Credit; and the result thereof shall be to increase the cost to Lender of making or maintaining any LIBOR Loan (or of maintaining its obligation to make any such Loan), or to increase the cost to Lender of issuing or maintaining any Letter of Credit (or of maintaining its obligation to issue any Letter of Credit), or to reduce the amount of any sum received or receivable by Lender hereunder (whether of principal, interest or any other amount) then, upon request by Lender pursuant to a certificate as set forth in Section 3.3, Borrowers will pay to Lender such additional amount or amounts as will compensate Lender for such additional costs incurred or reduction suffered.

          3.7.2 Capital Adequacy. If Lender determines that any Change in Law affecting Lender or its holding company regarding capital requirements has or would have the effect of reducing the rate of return on Lender’s or such holding company’s capital as a consequence of this Agreement, Commitments, Loans or Letters of Credit to a level below that which Lender or such holding company could have achieved but for such Change in Law (taking into consideration Lender’s and such holding company’s policies with respect to capital adequacy), then from time to time upon request pursuant to a certificate as set forth in Section 3.3 Borrowers will pay to Lender such additional amount or amounts as will compensate it or its holding company for any such reduction suffered.

          3.7.3 Compensation. Failure or delay on the part of Lender to demand compensation pursuant to this Section shall not constitute a waiver of its right to demand such compensation, but Borrowers shall not be required to compensate Lender for any increased costs incurred or reductions suffered more than nine months prior to the date that Lender notifies Borrower Agent of the Change in Law giving rise to such increased costs or reductions and of Lender’s intention to claim compensation therefor (except that, if the Change in Law giving rise

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to such increased costs or reductions is retroactive, then the nine-month period referred to above shall be extended to include the period of retroactive effect thereof).

     3.8 Mitigation. If Lender gives a notice under Section 3.5 or requests compensation under Section 3.7, or if Borrowers are required to pay additional amounts under Section 5.8, then Lender shall use reasonable efforts to designate a different lending office or to assign its rights and obligations hereunder to another of its offices, branches or Affiliates, if, in the judgment of Lender, such designation or assignment (a) would eliminate the need for such notice or reduce amounts payable in the future, as applicable; and (b) would not subject Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to Lender. Borrowers agree to pay all reasonable costs and expenses incurred by Lender in connection with any such designation or assignment.

     3.9 Funding Losses. If for any reason (a) any Borrowing of, or conversion to or continuation of, a LIBOR Loan does not occur on the date specified therefor in a Notice of Borrowing or Notice of Conversion/Continuation (whether or not withdrawn), (b) any repayment or conversion of a LIBOR Loan occurs on a day other than the end of its Interest Period, or (c) Borrowers fail to repay a LIBOR Loan when required hereunder, then Borrowers shall pay to Lender all losses and expenses that it sustains as a consequence thereof, including loss of anticipated profits and any loss or expense arising from liquidation or redeployment of funds or from fees payable to terminate deposits of matching funds. Lender shall not be required to purchase Dollar deposits in the London interbank market or any other offshore Dollar market to fund any LIBOR Loan, but the provisions hereof shall be deemed to apply as if Lender had purchased such deposits to fund its LIBOR Loans.

     3.10 Maximum Interest. Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by Applicable Law (“maximum rate”). If Lender shall receive interest in an amount that exceeds the maximum rate, the excess interest shall be applied to the principal of the Obligations or, if it exceeds such unpaid principal, refunded to Borrowers. In determining whether the interest contracted for, charged or received by Lender exceeds the maximum rate, Lender may, to the extent permitted by Applicable Law, (a) characterize any payment that is not principal as an expense, fee or premium rather than interest; (b) exclude voluntary prepayments and the effects thereof; and (c) amortize, prorate, allocate and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.

SECTION 4 LOAN ADMINISTRATION

     4.1 Manner of Borrowing and Funding Revolver Loans.

          4.1.1 Notice of Borrowing.

          (a) Whenever Borrowers desire funding of a Borrowing of Revolver Loans, Borrower Agent shall give Lender a Notice of Borrowing. Such notice must be received by Lender no later than 11:00 a.m. (i) on the Business Day of the requested funding date, in the case of Base Rate Loans, and (ii) at least three Business Days prior to the requested funding date, in the case of LIBOR Loans. Notices received after 11:00 a.m. shall be deemed received on the next Business Day. Each Notice of Borrowing shall be irrevocable and shall specify (A) the

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amount of the Borrowing, (B) the requested funding date (which must be a Business Day), (C) whether the Borrowing is to be made as Base Rate Loans or LIBOR Loans, and (D) in the case of LIBOR Loans, the duration of the applicable Interest Period (which shall be deemed to be one month if not specified).

          (b) Unless payment is otherwise timely made by Borrowers, the becoming due of any Obligations (whether principal, interest, fees or other charges, including Extraordinary Expenses, LC Obligations, Cash Collateral and Bank Product Debt) shall be deemed to be a request for Base Rate Revolver Loans on the due date, in the amount of such Obligations. The proceeds of such Revolver Loans shall be disbursed as direct payment of the relevant Obligation. In addition, Lender may, at its option, charge such Obligations against any operating, investment or other account of a Borrower maintained with Lender or any of its Affiliates.

          (c) If Borrowers establish a controlled disbursement account with Lender or any of its Affiliates, then the presentation for payment of any check or other item of payment drawn on such account at a time when there are insufficient funds to cover it shall be deemed to be a request for Base Rate Revolver Loans on the date of such presentation, in the amount of the check and items presented for payment. The proceeds of such Revolver Loans may be disbursed directly to the controlled disbursement account or other appropriate account.

          4.1.2 Fundings. Lender shall fund each Borrowing on the applicable funding date and, subject to the terms of this Agreement, shall disburse the proceeds as directed by Borrower Agent.

          4.1.3 Notices. Each Borrower authorizes Lender to extend, convert or continue Loans, effect selections of interest rates, and transfer funds to or on behalf of Borrowers based on (and Lender agrees to honor subject to any conditions set forth herein) telephonic or e-mailed instructions. Borrowers shall confirm each such request by prompt delivery to Lender of a Notice of Borrowing or Notice of Conversion/Continuation, if applicable, but if it differs in any material respect from the action taken by Lender, the records of Lender shall govern. Lender shall not have any liability for any loss suffered by a Borrower as a result of Lender acting upon its understanding of telephonic or e-mailed instructions from a person believed in good faith to be a person authorized to give such instructions on a Borrower’s behalf.

     4.2 Number and Amount of LIBOR Loans; Determination of Rate.

     No more than six Borrowings of LIBOR Loans may be outstanding at any time, and each Borrowing of LIBOR Loans when made shall be in a minimum amount of $500,000, or an increment of $250,000 in excess thereof. Upon determining LIBOR for any Interest Period requested by Borrowers, Lender shall promptly notify Borrowers thereof by telephone or electronically and, if requested by Borrowers, shall confirm any telephonic notice in writing.

     4.3 Borrower Agent. Each Borrower hereby designates Parent (“Borrower Agent”) as its representative and agent for all purposes under the Loan Documents, including requests for Loans and Letters of Credit, designation of interest rates, delivery or receipt of communications, preparation and delivery of Borrowing Base and financial reports, receipt and payment of Obligations, requests for waivers, amendments or other accommodations, actions under the Loan Documents (including in respect of compliance with covenants), and all other

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dealings with Lender. Borrower Agent hereby accepts such appointment. Lender shall be entitled to rely upon, and shall be fully protected in relying upon, any notice or communication (including any notice of borrowing) delivered by Borrower Agent on behalf of any Borrower. Lender may give any notice or communication with a Borrower hereunder to Borrower Agent on behalf of such Borrower. Lender shall have the right, in its discretion, to deal exclusively with Borrower Agent for any or all purposes under the Loan Documents. Each Borrower agrees that any notice, election, communication, representation, agreement or undertaking made on its behalf by Borrower Agent shall be binding upon and enforceable against it.

     4.4 One Obligation. The Loans, LC Obligations and other Obligations shall constitute one general obligation of Borrowers and (unless otherwise expressly provided in any Loan Document) shall be secured by Lender’s Lien upon all Collateral; provided, however, that Lender shall be deemed to be a creditor of, and the holder of a separate claim against, each Borrower to the extent of any Obligations jointly or severally owed by such Borrower.

     4.5 Effect of Termination. On the effective date of any termination of the Revolver Commitment, all outstanding Obligations shall be immediately due and payable, and each Secured Party may terminate its Bank Products. All undertakings of Borrowers contained in the Loan Documents shall survive any termination until Full Payment of the Obligations, and Lender shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents until Full Payment of the Obligations. The provisions of Sections 2.3, 3.4, 3.6, 3.7, 3.9, 5.5, 5.8, 12.2 and this Section, and the obligation of each Obligor with respect to each indemnity given by it in any Loan Document, shall survive Full Payment of the Obligations and any release relating to this credit facility.

SECTION 5 PAYMENTS

     5.1 General Payment Provisions. All payments of Obligations shall be made in Dollars, without offset, counterclaim or defense of any kind, free of (and without deduction for) any Indemnified Taxes or Other Taxes, and in immediately available funds, not later than 12:00 noon on the due date. Any payment after such time shall be deemed made on the next Business Day. If any payment under the Loan Documents shall be stated to be due on a day other than a Business Day, the due date shall be extended to the next Business Day and such extension of time shall be included in any computation of interest and fees. Any payment of a LIBOR Loan prior to the end of its Interest Period shall be accompanied by all amounts due under Section 3.9. Any prepayment of Loans shall be applied first to Base Rate Loans and then to LIBOR Loans; provided, however, that as long as no Event of Default exists, prepayments of LIBOR Loans may, at the option of Borrowers and Lender, be held by Lender as Cash Collateral and applied to such Loans at the end of their Interest Periods.

     5.2 Repayment of Revolver Loans. Revolver Loans shall be due and payable in full on the Revolver Termination Date, unless payment is sooner required hereunder. Revolver Loans may be prepaid from time to time, without penalty or premium. If any Asset Disposition includes the disposition of Accounts or Inventory (other than sales of Inventory in the ordinary course of business), then Net Proceeds equal to the greater of (a) the net book value of such Accounts and Inventory, or (b) the reduction in the Borrowing Base upon giving effect to such disposition, shall be applied to the Revolver Loans. Notwithstanding anything herein to the contrary, if an Overadvance exists, Borrowers shall, on the sooner of Lender’s demand or the first Business Day after any Borrower has knowledge thereof, repay the outstanding Revolver

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Loans in an amount sufficient to reduce the principal balance of Revolver Loans to the Borrowing Base.

     5.3 [Intentionally Deleted].

     5.4 Payment of Other Obligations. Obligations other than Loans, including LC Obligations and Extraordinary Expenses, shall be paid by Borrowers as provided in the Loan Documents or, if no payment date is specified, on demand.

     5.5 Marshaling; Payments Set Aside. Lender shall have no obligation to marshal any assets in favor of any Obligor or against any Obligations. If any payment by or on behalf of Borrowers is made to Lender, or Lender exercises a right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by Lender in its discretion) to be repaid to a trustee, receiver or any other Person, then to the extent of such recovery, the Obligation originally intended to be satisfied, and all Liens, rights and remedies relating thereto, shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred.

     5.6 Application of Payments. At all times commencing on the Closing Date the ledger balance in the main Dominion Account as of the end of a Business Day shall be applied to the Obligations at the beginning of the next Business Day. If, as a result of such application, a credit balance exists, the balance shall not accrue interest in favor of Borrowers and shall be made available to Borrowers as long as no Default or Event of Default exists. Each Borrower irrevocably waives the right to direct the application of any payments or Collateral proceeds, and agrees that Lender shall have the continuing, exclusive right to apply and reapply same against the Obligations, in such manner as Lender deems advisable, notwithstanding any entry by Lender in its records.

     5.7 Loan Account; Account Stated.

          5.7.1 Loan Account. Lender shall maintain in accordance with its usual and customary practices an account or accounts (“Loan Account”) evidencing the Debt of Borrowers resulting from each Loan or issuance of a Letter of Credit from time to time. Any failure of Lender to record anything in the Loan Account, or any error in doing so, shall not limit or otherwise affect the obligation of Borrowers to pay any amount owing hereunder. Lender may maintain a single Loan Account in the name of Borrower Agent, and each Borrower confirms that such arrangement shall have no effect on the joint and several character of its liability for the Obligations.

          5.7.2 Entries Binding. Entries made in the Loan Account shall constitute presumptive evidence of the information contained therein. If any information contained in the Loan Account is provided to or inspected by any Person, then such information shall be conclusive and binding on such Person for all purposes absent manifest error, except to the extent such Person notifies Lender in writing within 30 days after receipt or inspection that specific information is subject to dispute.

     5.8 Taxes.

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          5.8.1 Payments Free of Taxes. Any and all payments by any Obligor on account of any Obligations shall be made free and clear of and without reduction or withholding for any Indemnified Taxes or Other Taxes, provided that if an Obligor shall be required by Applicable Law to deduct any Indemnified Taxes (including any Other Taxes) from such payments, then (a) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) Lender receives an amount equal to the sum it would have received had no such deductions been made; (b) the Obligor shall make such deductions; and (c) Borrowers shall timely pay the full amount deducted to the relevant Governmental Authority in accordance with Applicable Law. Without limiting the foregoing, Borrowers shall timely pay all Other Taxes to the relevant Governmental Authorities if and to the extent required by Applicable Law.

          5.8.2 Payment. Borrowers shall indemnify, hold harmless and reimburse Lender, within 10 days after demand therefor, pursuant to a certificate complying with Section 3.3, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by Lender with respect to any Obligations, Letters of Credit or Loan Documents, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability setting forth the calculation thereof in reasonable detail delivered to Borrower Agent by Lender shall be conclusive absent manifest error. As soon as practicable after any payment of Indemnified Taxes or Other Taxes by a Borrower, Borrower Agent shall deliver to Lender a receipt issued by the Governmental Authority evidencing such payment or other evidence of payment reasonably satisfactory to Lender.

          5.8.3 Refunds. If Lender receives a refund of any Indemnified Taxes or Other Taxes as to which it has been indemnified by any Borrower or with respect to which any Borrower has paid additional amounts hereunder, Lender shall pay to Borrower Agent an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by Borrowers hereunder with respect to the Indemnified Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket costs and expenses of Lender incurred in obtaining such refund, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund).

     5.9 Nature and Extent of Each Borrower’s Liability.

          5.9.1 Joint and Several Liability. Each Borrower agrees that it is jointly and severally liable for, and absolutely and unconditionally guarantees to Lender the prompt payment and performance of, all Obligations and all agreements under the Loan Documents. Each Borrower agrees that its guaranty obligations hereunder constitute a continuing guaranty of payment and performance and not of collection, that such obligations shall not be discharged until Full Payment of the Obligations, and that such obligations are absolute and unconditional, irrespective of (a) the genuineness, validity, regularity, enforceability, subordination or any future modification of, or change in, any Obligations or Loan Document, or any other document, instrument or agreement to which any Obligor is or may become a party or be bound; (b) the absence of any action to enforce this Agreement (including this Section) or any other Loan Document, or any waiver, consent or indulgence of any kind by Lender with respect thereto; (c) the existence, value or condition of, or failure to perfect a Lien or to preserve rights against,

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any security or guaranty for the Obligations or any action, or the absence of any action, by Lender in respect thereof (including the release of any security or guaranty); (d) the insolvency of any Obligor; (e) any election by Lender in an Insolvency Proceeding for the application of Section 1111(b)(2) of the Bankruptcy Code; (f) any borrowing or grant of a Lien by any other Borrower, as debtor-in-possession under Section 364 of the Bankruptcy Code or otherwise; (g) the disallowance of any claims of Lender against any Obligor for the repayment of any Obligations under Section 502 of the Bankruptcy Code or otherwise; or (h) any other action or circumstances that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, except Full Payment of all Obligations.

          5.9.2 Waivers.

          (a) Each Borrower expressly waives all rights that it may have now or in the future under any statute, at common law, in equity or otherwise, to compel Lender to marshal assets or to proceed against any Obligor, other Person or security for the payment or performance of any Obligations before, or as a condition to, proceeding against such Borrower. Each Borrower waives all defenses available to a surety, guarantor or accommodation co-obligor other than Full Payment of all Obligations. It is agreed among each Borrower and Lender that the provisions of this Section 5.9 are of the essence of the transaction contemplated by the Loan Documents and that, but for such provisions, Lender would decline to make Loans and issue Letters of Credit. Each Borrower acknowledges that its guaranty pursuant to this Section is necessary to the conduct and promotion of its business, and can be expected to benefit such business.

          (b) Lender may, in its discretion, pursue such rights and remedies as it deems appropriate, including realization upon Collateral or any Real Estate by judicial foreclosure or non-judicial sale or enforcement, without affecting any rights and remedies under this Section 5.9. If, in taking any action in connection with the exercise of any rights or remedies, Lender shall forfeit any other rights or remedies, including the right to enter a deficiency judgment against any Borrower or other Person, whether because of any Applicable Laws pertaining to “election of remedies” or otherwise, each Borrower consents to such action and waives any claim based upon it, even if the action may result in loss of any rights of subrogation that any Borrower might otherwise have had. Any election of remedies that results in denial or impairment of the right of Lender to seek a deficiency judgment against any Borrower shall not impair any other Borrower’s obligation to pay the full amount of the Obligations. Each Borrower waives all rights and defenses arising out of an election of remedies, such as nonjudicial foreclosure with respect to any security for the Obligations, even though that election of remedies destroys such Borrower’s rights of subrogation against any other Person. Lender may bid all or a portion of the Obligations at any foreclosure or trustee’s sale or at any private sale, and the amount of such bid need not be paid by Lender but shall be credited against the Obligations. The amount of the successful bid at any such sale, whether Lender or any other Person is the successful bidder, shall be conclusively deemed to be the fair market value of the Collateral, and the difference between such bid amount and the remaining balance of the Obligations shall be conclusively deemed to be the amount of the Obligations guaranteed under this Section 5.9, notwithstanding that any present or future law or court decision may have the effect of reducing the amount of any deficiency claim to which Lender might otherwise be entitled but for such bidding at any such sale.

          5.9.3 Extent of Liability; Contribution.

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          (a) Notwithstanding anything herein to the contrary, each Borrower’s liability under this Section 5.9 shall be limited to the greater of (i) all amounts for which such Borrower is primarily liable, as described below, and (ii) such Borrower’s Allocable Amount.

          (b) If any Borrower makes a payment under this Section 5.9 of any Obligations (other than amounts for which such Borrower is primarily liable) (a “Guarantor Payment”) that, taking into account all other Guarantor Payments previously or concurrently made by any other Borrower, exceeds the amount that such Borrower would otherwise have paid if each Borrower had paid the aggregate Obligations satisfied by such Guarantor Payments in the same proportion that such Borrower’s Allocable Amount bore to the total Allocable Amounts of all Borrowers, then such Borrower shall be entitled to receive contribution and indemnification payments from, and to be reimbursed by, each other Borrower for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Guarantor Payment. The “Allocable Amount” for any Borrower shall be the maximum amount that could then be recovered from such Borrower under this Section 5.9 without rendering such payment voidable under Section 548 of the Bankruptcy Code or under any applicable state fraudulent transfer or conveyance act, or similar statute or common law.

          (c) Nothing contained in this Section 5.9 shall limit the liability of any Borrower to pay Loans made directly or indirectly to that Borrower (including Loans advanced to any other Borrower and then re-loaned or otherwise transferred to, or for the benefit of, such Borrower), LC Obligations relating to Letters of Credit issued to support such Borrower’s business, and all accrued interest, fees, expenses and other related Obligations with respect thereto, for which such Borrower shall be primarily liable for all purposes hereunder. Lender shall have the right, at any time during the existence of a Default or Event of Default, in its discretion, to condition Loans and Letters of Credit upon a separate calculation of borrowing availability for each Borrower and to restrict the disbursement and use of such Loans and Letters of Credit to such Borrower.

          5.9.4 Joint Enterprise. Each Borrower has requested that Lender make this credit facility available to Borrowers on a combined basis, in order to finance Borrowers’ business most efficiently and economically. Borrowers’ business is a mutual and collective enterprise, and Borrowers believe that consolidation of their credit facility will enhance the borrowing power of each Borrower and ease the administration of their relationship with Lender, all to the mutual advantage of Borrowers. Borrowers acknowledge and agree that Lender’s willingness to extend credit to Borrowers and to administer the Collateral on a combined basis, as set forth herein, is done solely as an accommodation to Borrowers and at Borrowers’ request.

          5.9.5 Subordination. Each Borrower hereby subordinates any claims, including any rights at law or in equity to payment, subrogation, reimbursement, exoneration, contribution, indemnification or set off, that it may have at any time against any other Obligor, howsoever arising, to the Full Payment of all Obligations.

SECTION 6 CONDITIONS PRECEDENT

     6.1 Conditions Precedent to Initial Loans. In addition to the conditions set forth in Section 6.2, Lender shall not be required to fund any requested Loan, issue any Letter of Credit or otherwise extend credit to Borrowers hereunder, until the date (“Closing Date”) that each of the following conditions has been satisfied or waived in writing by Lender:

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          (a) Each other Loan Document shall have been duly executed and delivered to Lender by each of the signatories thereto, and each Obligor shall be in compliance with all terms thereof.

          (b) Lender shall have received acknowledgments of all filings or recordations necessary to perfect its Liens in the Collateral, as well as UCC and Lien searches and other evidence reasonably satisfactory to Lender that such Liens are the only Liens upon the Collateral, except Permitted Liens.

          (c) [intentionally deleted]

          (d) Lender shall have received duly executed agreements establishing each Dominion Account, controlled disbursement account and related lockbox, in form and substance, and with financial institutions, reasonably satisfactory to Lender.

          (e) Lender shall have received certificates, in form and substance reasonably satisfactory to it, from a knowledgeable Senior Officer of Parent certifying that, after giving effect to the initial Loans and transactions hereunder, (i) Parent together with its Subsidiaries, is Solvent; (ii) no Default or Event of Default exists; (iii) the representations and warranties set forth in Section 9 are true and correct; and (iv) Parent and each other Borrower has complied with all agreements and conditions to be satisfied by it under the Loan Documents.

          (f) Lender shall have received a certificate of a duly authorized officer of each Obligor, certifying (i) that attached copies of such Obligor’s Organic Documents are true and complete, and in full force and effect, without amendment except as shown; (ii) that an attached copy of resolutions authorizing execution and delivery of the Loan Documents is true and complete, and that such resolutions are in full force and effect, were duly adopted, have not been amended, modified or revoked, and constitute all resolutions adopted with respect to this credit facility; and (iii) to the title, name and signature of each Person authorized to sign the Loan Documents. Lender may conclusively rely on this certificate until it is otherwise notified by the applicable Obligor in writing.

          (g) Lender shall have received a written opinion of Gibson, Dunn & Crutcher LLP, as well as Canadian, and any other local counsel to Borrowers or Lender, in form and substance reasonably satisfactory to Lender.

          (h) Lender shall have received copies of the charter documents of each Obligor, certified by the Secretary of State or other appropriate official of such Obligor’s jurisdiction of organization. Lender shall have received good standing certificates for each Obligor, issued by the Secretary of State or other appropriate official of such Obligor’s jurisdiction of organization and each jurisdiction identified on Schedule 6.1(h).

          (i) Lender shall have received copies of policies or certificates of insurance for the insurance policies carried by Borrowers, all in compliance with the Loan Documents.

          (j) Lender shall have completed its business, financial and legal due diligence of Obligors, including a roll-forward of its previous field examination, with results reasonably satisfactory to Lender. No material adverse change in the financial condition of any Obligor or in the quality, quantity or value of any Collateral shall have occurred since October 31, 2006.

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          (k) Borrowers shall have paid all fees and expenses to be paid to Lender on the Closing Date.

          (l) Lender shall have received a Borrowing Base Certificate prepared as of November 30, 2007. Upon giving effect to the initial funding of Loans and issuance of Letters of Credit, and the payment by Borrowers of all fees and expenses incurred in connection herewith as well as any payables stretched beyond their customary payment practices, Availability shall be at least $5,300,000.

     6.2 Conditions Precedent to All Credit Extensions. Lender shall not be required to fund any Loans, issue any Letters of Credit, or grant any other accommodation to or for the benefit of Borrowers, unless the following conditions are satisfied:

          (a) No Default or Event of Default shall exist at the time of, or result from, such funding, issuance or grant;

          (b) The representations and warranties of each Obligor in the Loan Documents shall be true and correct on the date of, and upon giving effect to, such funding, issuance or grant (except for representations and warranties that expressly relate to an earlier date);

          (c) All conditions precedent in any other Loan Document shall be satisfied;

          (d) No event shall have occurred or circumstance exist that has or could reasonably be expected to have a Material Adverse Effect; and

          (e) With respect to issuance of a Letter of Credit, the LC Conditions shall be satisfied.

Each request (or deemed request) by Borrowers for funding of a Loan, issuance of a Letter of Credit or grant of an accommodation shall constitute a representation by Borrowers that the foregoing conditions are satisfied on the date of such request and on the date of such funding, issuance or grant. As an additional condition to any funding, issuance or grant, Lender shall have received such other information, documents, instruments and agreements as it reasonably deems appropriate in connection therewith.

     6.3 Limited Waiver of Conditions Precedent. If Lender funds any Loans, issues any Letters of Credit or grants any other accommodation when any conditions precedent are not satisfied (regardless of whether the lack of satisfaction was known or unknown at the time), it shall not operate as a waiver of (a) the right of Lender to insist upon satisfaction of all conditions precedent with respect to any subsequent funding, issuance or grant; nor (b) any Default or Event of Default due to such failure of conditions or otherwise.

SECTION 7 COLLATERAL

     7.1 Grant of Security Interest. To secure the prompt payment and performance of all Obligations, each Borrower hereby grants to Lender a continuing security interest in and Lien upon all personal Property of such Borrower, including all of the following Property (subject to Section 7.7), whether now owned or hereafter acquired, and wherever located:

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          (a) all Accounts;

          (b) all Chattel Paper, including electronic chattel paper;

          (c) all Commercial Tort Claims;

          (d) all Deposit Accounts;

          (e) all Documents;

          (f) all General Intangibles, including Intellectual Property;

          (g) all Goods, including Inventory, Equipment and fixtures;

          (h) all Instruments;

          (i) all Investment Property;

          (j) all Letter-of-Credit Rights;

          (k) all Supporting Obligations;

          (l) all monies, whether or not in the possession or under the control of Lender, or a bailee or Affiliate of Lender, including any Cash Collateral;

          (m) all accessions to, substitutions for, and all replacements, products, and cash and non-cash proceeds of the foregoing, including proceeds of and unearned premiums with respect to insurance policies, and claims against any Person for loss, damage or destruction of any Collateral; and

          (n) all books and records (including customer lists, files, correspondence, tapes, computer programs, print-outs and computer records) pertaining to the foregoing;

     7.2 Lien on Deposit Accounts; Cash Collateral.

          7.2.1 Deposit Accounts. To further secure the prompt payment and performance of all Obligations, each Borrower hereby grants to Lender a continuing security interest in and Lien upon all amounts (other than Excluded Assets) credited to any Deposit Account of such Borrower, including any sums (other than Excluded Assets) in any blocked or lockbox accounts or in any accounts into which such sums are swept. Each Borrower authorizes and directs each bank or other depository to deliver to Lender, on a daily basis, all balances in each Deposit Account maintained by such Borrower with such depository for application to the Obligations then outstanding. Each Borrower irrevocably appoints Lender as such Borrower’s attorney-in-fact to collect such balances to the extent any such delivery is not so made.

          7.2.2 Cash Collateral. Any Cash Collateral may be invested, at Lender’s discretion, in Cash Equivalents, but Lender shall have no duty to do so, regardless of any agreement or course of dealing with any Borrower, and shall have no responsibility for any investment or loss. Each Borrower hereby grants to Lender a security interest in all Cash Collateral held from time to time and all proceeds thereof, as security for the Obligations, whether such Cash Collateral is held in a Cash Collateral Account or elsewhere. Lender may

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apply Cash Collateral to the payment of any Obligations, in such order as Lender may elect, as they become due and payable. Each Cash Collateral Account and all Cash Collateral shall be under the sole dominion and control of Lender. No Borrower or other Person claiming through or on behalf of any Borrower shall have any right to any Cash Collateral, until Full Payment of all Obligations except that when the conditions giving rise to any requirement for Cash Collateral no longer exist, such Cash Collateral shall be returned to the applicable Borrower.

     7.3 [Intentionally Deleted]

     7.4 Other Collateral.

          7.4.1 Commercial Tort Claims. Borrowers shall promptly notify Lender in writing if any Borrower has a Commercial Tort Claim (other than, as long as no Default or Event of Default exists, a Commercial Tort Claim for less than $250,000) and, upon Lender’s request, shall promptly take such actions as Lender deems appropriate to confer upon Lender a duly perfected, first priority Lien upon such claim.

          7.4.2 Certain After-Acquired Collateral. Borrowers shall promptly notify Lender in writing if, after the Closing Date, any Borrower obtains any interest in any Collateral (which in the aggregate exceeds $100,000) consisting of Deposit Accounts, Chattel Paper, Documents, Instruments, Intellectual Property, Investment Property or Letter-of-Credit Rights and, upon Lender’s request, shall promptly take such actions as Lender deems appropriate to effect Lender’s duly perfected, first priority Lien upon such Collateral, including obtaining any appropriate possession, control agreement or Lien Waiver. If any Collateral is in the possession of a third party, at Lender’s request, Borrowers shall obtain an acknowledgment that such third party holds the Collateral for the benefit of Lender.

     7.5 No Assumption of Liability. The Lien on Collateral granted hereunder is given as security only and shall not subject Lender to, or in any way modify, any obligation or liability of Borrowers relating to any Collateral.

     7.6 Further Assurances; Extent of Liens. Promptly upon request, Borrowers shall deliver such instruments, assignments, title certificates, or other documents or agreements, and shall take such actions, as Lender reasonably deems appropriate under Applicable Law to evidence or perfect its Lien on any Collateral, or otherwise to give effect to the intent of this Agreement. Each Borrower authorizes Lender to file any financing statement that indicates the Collateral as “all assets (other than Excluded Assets)” or “all personal property (other than Excluded Assets)” of such Borrower, or words to similar effect, and ratifies any action taken by Lender before the Closing Date to effect or perfect its Lien on any Collateral. All of Lender’s Liens on Collateral (and all evidences of such Liens), whether effected hereunder or under any other Loan Document, are granted to Lender as agent for the benefit of all Secured Parties.

     7.7 Foreign Subsidiary Stock. Excluded Assets. (i) Notwithstanding Section 7.1, the Collateral shall include only 65% of the voting stock of any Foreign Subsidiary. No security interest is granted with respect to, and no security interest hereunder or any other Loan Document shall attach to, any Excluded Assets.

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SECTION 8 COLLATERAL ADMINISTRATION

     8.1 Borrowing Base Certificates. By the 15th day of each month (or such later time as Lender may approve (via e-mail or otherwise)), Borrowers shall deliver to Lender a Borrowing Base Certificate prepared as of the close of business of the previous month, and at such other times as Lender may request. All calculations of Availability in any Borrowing Base Certificate shall originally be made by Borrowers and certified by a Senior Officer, provided that Lender may from time to time review and adjust any such calculation (a) to reflect its reasonable estimate of declines in value of any Collateral, due to collections received in the Dominion Account or otherwise; (b) reflect changes in dilution in accordance with the Dilution Percentage and the Accounts Formula Amount and (c) to the extent the calculation is not made in accordance with this Agreement or does not accurately reflect the Availability Reserve.

     8.2 Administration of Accounts.

          8.2.1 Records and Schedules of Accounts. Each Borrower shall keep accurate and complete records of its Accounts, including all payments and collections thereon, and shall submit to Lender sales, collection, reconciliation (including a reconciliation from the general ledger to agings) and other reports in form reasonably satisfactory to Lender, on such periodic basis as Lender may request. Each applicable Borrower shall also provide to Lender, on or before the 15th day of each month, a detailed aged trial balance of all Accounts as of the end of the preceding month, specifying each Account’s Account Debtor name and address, amount, invoice date and due date, showing any discount, allowance, credit, authorized return or dispute, and including such proof of delivery, copies of invoices and invoice registers, copies of related documents, repayment histories, status reports and other information as Lender may reasonably request. If Accounts in an aggregate face amount of $200,000 or more cease to be Eligible Accounts, Borrowers shall notify Lender of such occurrence promptly (and in any event within two Business Days) after any Borrower has knowledge thereof.

          8.2.2 Taxes. If an Account of any Borrower includes a charge for any Taxes, Lender is authorized, in its discretion, to pay the amount thereof to the proper taxing authority for the account of such Borrower and to charge Borrowers therefor; provided, however, that Lender shall not be liable for any Taxes that may be due from Borrowers or with respect to any Collateral.

          8.2.3 Account Verification. Whether or not a Default or Event of Default exists, Lender shall have the right at any time, in the name of Lender, any designee of Lender or any Borrower, to verify the validity, amount or any other matter relating to any Accounts of Borrowers by mail, telephone or otherwise. Borrowers shall cooperate fully with Lender in an effort to facilitate and promptly conclude any such verification process.

          8.2.4 Maintenance of Dominion Account. Borrowers shall maintain Dominion Accounts pursuant to lockbox or other arrangements acceptable to Lender. Borrowers shall obtain an agreement (in form and substance reasonably satisfactory to Lender) from each lockbox servicer and Dominion Account bank, establishing Lender’s control over and Lien in the lockbox or Dominion Account, requiring daily deposit of all remittances received in the lockbox to a Dominion Account, and waiving offset rights of such servicer or bank, except for customary administrative charges. If a Dominion Account is not maintained with Lender, Lender may require daily transfer of all funds in such account to a Dominion Account maintained with

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Lender. Lender does not assume any responsibility to Borrowers for any lockbox arrangement or Dominion Account, including any claim of accord and satisfaction or release with respect to any Payment Items accepted by any bank.

          8.2.5 Proceeds of Collateral. Borrowers shall request in writing and otherwise take all commercially reasonable steps to ensure that all payments on Accounts or otherwise relating to Collateral are made directly to a Dominion Account (or a lockbox relating to a Dominion Account). Except as otherwise set forth in Section 8.2.6, if any Borrower or Subsidiary receives cash or Payment Items with respect to any Collateral, it shall hold same in trust for Lender and promptly (not later than the next Business Day) deposit same (other than Operating Cash consisting of cash on hand held at a retail location) into a Dominion Account.

          8.2.6 Excluded Bank Accounts; Operating Cash. Notwithstanding any provision of this Section 8.2 or any other provision of any Loan Document to the contrary, (A) Borrowers and Subsidiaries may maintain accounts used exclusively for workers compensation, payroll, 401(k) and employee health insurance and trust accounts that are not a part of the cash management and control systems described herein (and not subject to a Deposit Account Control Agreement) provided that no Obligor shall accumulate or maintain cash in such accounts as of any date of determination in excess of checks outstanding against such accounts as of that date and amounts necessary to meet minimum balance requirements (B) Obligors may maintain local cash accounts that are not a part of the cash management and control systems described herein (and not subject to a Deposit Account Control Agreement) which individually do not contain funds in excess of $25,000 and, together with all other such local cash accounts, do not contain funds in excess of $500,000; and monies in any such account in excess of such amounts shall be swept within 3 Business Days to a Dominion Account (or a lockbox relating to a dominion account); (C) Obligors may maintain Operating Cash on hand with respect to their retail locations in amounts not to exceed the amounts the Obligors have maintained in the ordinary course of business; (D) Borrowers may maintain the deposit accounts set forth on Schedule 8.2.6 subject only to springing cash management and control systems as reasonably requested by Lender, so long as the balance of any such account does not exceed $250,000 at any time; (E) Ashworth UK may maintain bank accounts in the United Kingdom which shall not be subject to the cash management and control systems described herein; and (F) Borrowers may maintain the Union Bank Cash Collateral Account referred to on Schedule P-3.

     8.3 Administration of Inventory.

          8.3.1 Records and Reports of Inventory. Each Borrower shall keep accurate and complete records of its Inventory, including costs and daily withdrawals and additions, and shall submit to Lender inventory and reconciliation reports (including a reconciliation from the general ledger to the perpetual inventory) in form reasonably satisfactory to Lender, on such periodic basis as Lender may request. Each Borrower shall conduct periodic cycle counts consistent with historical practices, and shall provide to Lender a report based on each such inventory and count promptly upon completion thereof, together with such supporting information as Lender may request.

          8.3.2 Returns of Inventory. No Borrower shall return any Inventory to a supplier, vendor or other Person, whether for cash, credit or otherwise, unless (a) such return is in the ordinary course of business; (b) no Default, Event of Default or Overadvance exists or would result therefrom; (c) Lender is promptly notified if the aggregate Value of all Inventory

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returned in any month exceeds $200,000; and (d) any payment received by a Borrower for a return is promptly remitted to Lender for application to the Obligations.

          8.3.3 Acquisition, Sale and Maintenance. No Borrower shall acquire or accept more than $50,000 at any one time (valued at the applicable Borrower’s cost) of any Inventory on consignment or approval, unless the same is identified to Lender and excluded from the Borrowing Base, and shall take all steps to assure that all Inventory is produced in accordance with Applicable Law, including the FLSA. No Borrower shall sell any Inventory on consignment or approval or any other basis (other than customary rights of return) under which the customer may return or require a Borrower to repurchase such Inventory. Borrowers shall use, store and maintain all Inventory with reasonable care and caution, in accordance with applicable standards of any insurance and in conformity with all Applicable Law, and shall make current rent payments (within applicable grace periods provided for in leases) at all locations where any Collateral is located.

     8.4 Administration of Equipment.

          8.4.1 Records and Schedules of Equipment. Each Borrower shall keep accurate and complete records of its Equipment, including kind, quality, quantity, cost, acquisitions and dispositions thereof, and at any time a Default or Event of Default exists shall submit to Lender, on such periodic basis as Lender may request, a current schedule thereof, in form reasonably satisfactory to Lender. Promptly upon request, Borrowers shall deliver to Lender evidence of their ownership or interests in any Equipment.

          8.4.2 Dispositions of Equipment. No Borrower shall sell, lease or otherwise dispose of any Equipment, without the prior written consent of Lender, other than (a) a Permitted Asset Disposition; and (b) disposal, sale or replacement of Equipment that is worn, damaged or obsolete with Equipment of like function and value, if the replacement Equipment is acquired substantially contemporaneously with such disposition and is free of Liens.

          8.4.3 Condition of Equipment. The Equipment is in good operating condition and repair, and all necessary replacements and repairs have been made so that the value and operating efficiency of the Equipment is preserved at all times, reasonable wear and tear excepted. Each Borrower shall ensure that the Equipment is mechanically and structurally sound, and capable of performing the functions for which it was designed, in accordance with manufacturer specifications. No Borrower shall permit any Equipment to become affixed to real Property unless any landlord or mortgagee delivers a Lien Waiver.

     8.5 Administration of Deposit Accounts. Schedule 8.5 sets forth all Deposit Accounts maintained by Borrowers, including all Dominion Accounts. Each Borrower shall take all actions necessary to establish Lender’s control of each such Deposit Account (except as permitted by Section 8.2.6 and with respect to any account containing not more than $25,000 at any time). Each Borrower shall be the sole account holder of each Deposit Account and shall not allow any other Person (other than Lender) to have control over a Deposit Account or any Property deposited therein. Except as permitted by Section 8.2.6, each Borrower shall promptly notify Lender of any opening or closing of a Deposit Account and, with the consent of Lender, will amend Schedule 8.5 to reflect same.

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     8.6 General Provisions.

          8.6.1 Location of Collateral. All tangible items of Collateral, other than Inventory in transit, shall at all times be kept by Borrowers at the business locations set forth in Schedule 8.6.1, except that Borrowers may (a) make sales or other dispositions of Collateral in accordance with Section 10.2.6; and (b) move Collateral to another location in the United States or Canada other than a location listed on Schedule 8.6.1, so long as Borrowers give 30 Business Days prior written notice to Lender and take all steps necessary pursuant to Section 7.6 to perfect Lender’s security interest in such Collateral prior to it being moved to a new location.

          8.6.2 Insurance of Collateral; Condemnation Proceeds.

          (a) Each Borrower shall maintain insurance with respect to the Collateral, covering casualty, hazard, public liability, theft, malicious mischief, flood (if necessary) and other risks, in amounts, with endorsements and with insurers (with a Best Rating of at least A7, unless otherwise approved by Lender) reasonably satisfactory to Lender. All proceeds under each such policy (other than proceeds constituting Excluded Assets) shall be payable to Lender. From time to time upon request, Borrowers shall deliver to Lender the originals or certified copies of its insurance policies and updated flood plain searches. Unless Lender shall agree otherwise, each policy shall include reasonably satisfactory endorsements (i) showing Lender as sole loss payee or additional insured, as appropriate (except with respect to insurance proceeds constituting Excluded Assets); (ii) requiring 30 days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever; and (iii) specifying that the interest of Lender shall not be impaired or invalidated by any act or neglect of any Borrower or the owner of the Property, nor by the occupation of the premises for purposes more hazardous than are permitted by the policy. If any Borrower fails to provide and pay for any insurance required hereunder or under Section 10.1.7, Lender may, at its option, but shall not be required to, procure the insurance and charge Borrowers therefor. Each Borrower agrees to deliver to Lender, promptly as rendered, copies of all reports made to insurance companies. While no Event of Default exists, Borrowers may settle, adjust or compromise any insurance claim, as long as the proceeds are delivered to Lender. If an Event of Default exists, only Lender shall be authorized to settle, adjust and compromise such claims (except claims in respect of Excluded Assets).

          (b) Any proceeds of insurance (other than proceeds from workers’ compensation or D&O insurance and other than proceeds constituting Excluded Assets) and any awards arising from condemnation of any Collateral shall be paid to Lender. Any such proceeds or awards that relate to Inventory shall be applied to payment of the Revolver Loans, and then to any other Obligations outstanding.

          (c) If requested by Borrowers in writing within 60 days after Lender’s receipt of any insurance proceeds or condemnation awards relating to any loss or destruction of Collateral consisting of Equipment or Real Estate which are to be payable to Lender pursuant to clauses (a) and (b), Borrowers may use such proceeds or awards to repair or replace such Equipment or Real Estate (and until so used, the proceeds shall be held by Lender as Cash Collateral) as long as (i) no Default or Event of Default exists; (ii) such repair or replacement is promptly undertaken and concluded, in accordance with plans reasonably satisfactory to Lender; (iii) replacement buildings are constructed on the sites of the original casualties and are of comparable size, quality and utility to the destroyed buildings; (iv) the repaired or replaced

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Property is free of Liens, other than Permitted Liens; and (v) Borrowers comply with disbursement procedures for such repair or replacement as Lender may reasonably require.

          8.6.3 Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping any Collateral, all Taxes payable with respect to any Collateral (including any sale thereof), and all other payments required to be made by Lender to any Person to realize upon any Collateral, shall be borne and paid by Borrowers. Lender shall not be liable or responsible in any way for the safekeeping of any Collateral, for any loss or damage thereto (except for reasonable care in its custody while Collateral is in Lender’s actual possession), for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency or other Person whatsoever, but the same shall be at Borrowers’ sole risk.

          8.6.4 Defense of Title to Collateral. Each Borrower shall at all times defend its title to Collateral and Lender’s Liens therein against all Persons, claims and demands whatsoever, except Permitted Liens.

     8.7 Power of Attorney. Each Borrower hereby irrevocably constitutes and appoints Lender (and all Persons designated by Lender) as such Borrower’s true and lawful attorney (and agent-in-fact) for the purposes provided in this Section. Lender, or Lender’s designee, may, without notice and in either its or a Borrower’s name, but at the cost and expense of Borrowers:

          (a) Endorse a Borrower’s name on any Payment Item or other proceeds of Collateral (including proceeds of insurance) that come into Lender’s possession or control; and

          (b) During an Event of Default, (i) notify any Account Debtors of the assignment of their Accounts, demand and enforce payment of Accounts, by legal proceedings or otherwise, and generally exercise any rights and remedies with respect to Accounts; (ii) settle, adjust, modify, compromise, discharge or release any Accounts or other Collateral, or any legal proceedings brought to collect Accounts or Collateral; (iii) sell or assign any Accounts and other Collateral upon such terms, for such amounts and at such times as Lender deems advisable; (iv) take control, in any manner, of any proceeds of Collateral; (v) prepare, file and sign a Borrower’s name to a proof of claim or other document in a bankruptcy of an Account Debtor, or to any notice, assignment or satisfaction of Lien or similar document; (vi) receive, open and dispose of mail addressed to a Borrower, and notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (vii) endorse any Chattel Paper, Document, Instrument, invoice, freight bill, bill of lading, or similar document or agreement relating to any Accounts, Inventory or other Collateral; (viii) use a Borrower’s stationery and sign its name to verifications of Accounts and notices to Account Debtors; (ix) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to any Collateral; (x) make and adjust claims under policies of insurance; (xi) take any action as may be necessary or appropriate to obtain payment under any letter of credit or banker’s acceptance for which a Borrower is a beneficiary; and (xii) take all other actions as Lender deems appropriate to fulfill any Borrower’s obligations under the Loan Documents.

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SECTION 9 REPRESENTATIONS AND WARRANTIES

     9.1 General Representations and Warranties. To induce Lender to enter into this Agreement and to make available the Commitments, Loans and Letters of Credit, each Borrower represents and warrants that:

          9.1.1 Organization and Qualification. Each Borrower and Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Each Borrower and Subsidiary is duly qualified, authorized to do business and in good standing as a foreign corporation in each jurisdiction where failure to be so qualified could reasonably be expected to have a Material Adverse Effect.

          9.1.2 Power and Authority. Each Obligor is duly authorized to execute, deliver and perform its Loan Documents. The execution, delivery and performance of the Loan Documents have been duly authorized by all necessary action, and do not (a) require any consent or approval of any holders of Equity Interests of any Obligor, other than those already obtained; (b) contravene the Organic Documents of any Obligor; (c) violate in any material respect or cause a material default under any Applicable Law or Material Contract; or (d) result in or require the imposition of any Lien (other than Permitted Liens) on any Property of any Obligor.

          9.1.3 Enforceability. Each Loan Document is a legal, valid and binding obligation of each Obligor party thereto, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

          9.1.4 Capital Structure. Schedule 9.1.4 shows, for each Borrower and Subsidiary, its name, its jurisdiction of organization, its authorized and issued Equity Interests as of the date hereof (except with respect to Parent), the holders of its Equity Interests as of the date hereof (except with respect to Parent), and to the knowledge of Parent, all agreements as of the date hereof binding on such holders with respect to their Equity Interests. Each Borrower has good title to its Equity Interests in its Subsidiaries, subject only to Lender’s Lien and Permitted Liens, and all such Equity Interests are duly issued, fully paid and non-assessable. As of the date hereof, except as set forth on Schedule 9.1.4, there are no outstanding options to purchase, warrants, subscription rights, agreements to issue or sell, convertible interests, phantom rights or powers of attorney relating to any Equity Interests of any Borrower or Subsidiary.

          9.1.5 Corporate Names; Locations. During the five years preceding the Closing Date, except as shown on Schedule 9.1.5, no Borrower or Subsidiary has been known as or used any corporate, fictitious or trade names, has been the surviving corporation of a merger or combination, or has acquired any substantial part of the assets of any Person. The chief executive offices and other places of business of Borrowers and Subsidiaries are shown on Schedule 8.6.1.

          9.1.6 Title to Properties; Priority of Liens. Each Borrower and Subsidiary has good and marketable title to (or valid leasehold interests in) all of its Real Estate, and good title to valid leasehold interests in, or valid license to use all of its personal Property, including all Property reflected in any financial statements delivered to Lender, in each case free of Liens except Permitted Liens. Each Borrower and Subsidiary has paid and discharged all lawful claims that, if unpaid, could become a Lien on its Properties, other than Permitted Liens. All

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Liens of Lender in the Collateral are duly perfected, first priority Liens, subject only to Permitted Liens that are expressly allowed to have priority over Lender’s Liens under this Agreement or that have priority by operation of Applicable Law.

          9.1.7 Accounts. Lender may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrowers with respect thereto. Borrowers warrant, with respect to each Account at the time it is shown as an Eligible Account in a Borrowing Base Certificate, that:

          (a) it is genuine and in all respects what it purports to be, and is not evidenced by a judgment;

          (b) it arises out of a completed, bona fide sale and delivery of goods or rendition of services in the ordinary course of business, and substantially in accordance with any purchase order, contract or other document relating thereto;

          (c) it is for a sum certain, maturing as stated in the invoice covering such sale or rendition of services, a copy of which has been furnished or is available to Lender on request;

          (d) it is not subject to any offset, Lien (other than Lender’s Lien and Permitted Liens set forth in Section 10.2.2 (c)), deduction, defense, dispute, counterclaim or other adverse condition except as arising in the ordinary course of business and disclosed to Lender; and it is absolutely owing by the Account Debtor, without contingency in any respect;

          (e) no purchase order, agreement, document or Applicable Law restricts assignment of the Account to Lender (regardless of whether, under the UCC, the restriction is ineffective), and the applicable Borrower is the sole payee or remittance party shown on the invoice;

          (f) no extension, compromise, settlement, modification, credit, deduction or return has been authorized with respect to the Account, except discounts or allowances granted in the ordinary course of business for prompt payment that are reflected on the face of the invoice related thereto and in the reports submitted to Lender hereunder; and

          (g) to the best of Borrowers’ knowledge, (i) there are no facts or circumstances that are reasonably likely to impair the enforceability or collectibility of such Account; (ii) the Account Debtor had the capacity to contract when the Account arose, continues to meet the applicable Borrower’s customary credit standards, is Solvent, is not contemplating or subject to an Insolvency Proceeding, and has not failed, or suspended or ceased doing business; and (iii) there are no proceedings or actions threatened or pending against any Account Debtor that could reasonably be expected to have a material adverse effect on the Account Debtor’s financial condition.

          9.1.8 Financial Statements. The consolidated balance sheets, and related statements of operations, cash flow and stockholder’s equity, of Borrowers and Subsidiaries that have been and are hereafter delivered to Lender, are prepared in accordance with GAAP, and fairly present the financial positions and results of operations of Borrowers and Subsidiaries at the dates and for the periods indicated, subject, in the case of unaudited financial statements, to changes resulting from audit and year-end adjustments and the absence of footnotes. All projections delivered from time to time to Lender have been prepared in good faith, based on

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assumptions believed by Borrowers to be reasonable at the time made in light of the circumstances at such time. Since October 31, 2006, there has been no change in the condition, financial or otherwise, of any Borrower or Subsidiary that could reasonably be expected to have a Material Adverse Effect. Material Obligors, taken as a whole, are Solvent.

          9.1.9 Surety Obligations. Except as set forth in Schedule 9.1.9, no Borrower or Subsidiary is obligated as surety or indemnitor under any bond or other contract that assures payment or performance of any obligation of any Person, except as permitted hereunder.

          9.1.10 Taxes. Each Borrower and Subsidiary has filed all federal and all material state and local tax returns and other reports that it is required by law to file, and has paid, or made provision for the payment of, all Taxes upon it, its income and its Properties that are due and payable, except to the extent being Properly Contested or to the extent constituting Immaterial Tax obligations. The provision for Taxes on the books of each Borrower and Subsidiary is adequate for all years not closed by applicable statutes, and for its current Fiscal Year.

          9.1.11 Brokers. There are no brokerage commissions, finder’s fees or investment banking fees payable in connection with any transactions contemplated by the Loan Documents.

          9.1.12 Intellectual Property. Each Borrower and Subsidiary owns or has the lawful right to use all Intellectual Property necessary for the conduct of its business, without conflict with any rights of others. Except as would not reasonably be expected to have a Material Adverse Effect, there is no pending or, to any Borrower’s knowledge, threatened Intellectual Property Claim with respect to any Borrower, any Subsidiary or any of their Property (including any Intellectual Property). Except as disclosed on Schedule 9.1.12 or as otherwise disclosed to Lender in writing, no Borrower or Subsidiary pays or owes any Royalty or other compensation to any Person with respect to any Intellectual Property in excess of $100,000 per year with respect to each such Person. All Intellectual Property owned, used or licensed by, or otherwise subject to any interests of, any Borrower or Subsidiary is shown on Schedule 9.1.12.

          9.1.13 Governmental Approvals. Except as could not reasonably be expected to have a Material Adverse Effect, each Borrower and Subsidiary has, is in compliance with, and is in good standing with respect to, all Governmental Approvals necessary to conduct its business and to own, lease and operate its Properties. All necessary import, export or other licenses, permits or certificates for the import or handling of any goods or other Collateral have been procured and are in effect, and Borrowers and Subsidiaries have complied with all foreign and domestic laws with respect to the shipment and importation of any goods or Collateral, except where noncompliance could not reasonably be expected to have a Material Adverse Effect.

          9.1.14 Compliance with Laws. Each Borrower and Subsidiary has duly complied, and its Properties and business operations are in compliance, in all material respects with all Applicable Law, except where noncompliance could not reasonably be expected to have a Material Adverse Effect. Except as could not reasonably be expected to have a Material Adverse Effect, there have been no citations, notices or orders of noncompliance issued to any Borrower or Subsidiary under any Applicable Law. No Inventory has been produced in violation of the FLSA.

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          9.1.15 Compliance with Environmental Laws. Except as disclosed on Schedule 9.1.15, or as would not reasonably be expected to have a Material Adverse Effect, no Borrower’s or Subsidiary’s past or present operations, Real Estate or other Properties are subject to any federal, state or local investigation to determine whether any remedial action is needed to address any environmental pollution, hazardous material or environmental clean-up. Except as would not reasonably be expected to have a Material Adverse Effect, no Borrower or Subsidiary has received any Environmental Notice. Except as would not reasonably be expected to have a Material Adverse Effect, no Borrower or Subsidiary has any contingent liability with respect to any Environmental Release, environmental pollution or hazardous material on any Real Estate now or previously owned, leased or operated by it.

          9.1.16 Burdensome Contracts. No Borrower or Subsidiary is a party or subject to any contract, agreement or charter restriction that could reasonably be expected to have a Material Adverse Effect.

          9.1.17 Litigation. Except as shown on Schedule 9.1.17, there are no proceedings or investigations pending or, to any Borrower’s knowledge, threatened against any Borrower or Subsidiary, or any of their businesses, operations, Properties, prospects or conditions, that (a) relate to any Loan Documents or transactions contemplated thereby; or (b) could reasonably be expected to have a Material Adverse Effect. No Borrower or Subsidiary is in default with respect to any order, injunction or judgment of any Governmental Authority.

          9.1.18 No Defaults. No event or circumstance has occurred or exists that constitutes a Default or Event of Default.

          9.1.19 ERISA. Except as disclosed on Schedule 9.1.19:

          (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code, and other federal and state laws. Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the knowledge of Borrowers, nothing has occurred which would prevent, or cause the loss of, such qualification. Each Obligor and ERISA Affiliate has made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan.

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

          (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) no Obligor or ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) no Obligor or ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would

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result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) no Obligor or ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA.

          (d) With respect to any Foreign Plan, (i) all employer and employee contributions required by law or by the terms of the Foreign Plan have been made, or, if applicable, accrued, in accordance with normal accounting practices; (ii) the fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded through insurance, or the book reserve established for any Foreign Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations with respect to all current and former participants in such Foreign Plan according to the actuarial assumptions and valuations most recently used to account for such obligations in accordance with applicable generally accepted accounting principles; and (iii) it has been registered as required and has been maintained in good standing with applicable regulatory authorities.

          9.1.20 Trade Relations. There exists no actual or threatened termination, limitation or modification of any business relationship between any Borrower or Subsidiary and any customer or supplier, or any group of customers or suppliers, who individually or in the aggregate could reasonably be expected to have a Material Adverse Effect. There exists no condition or circumstance that could reasonably be expected to impair the ability of any Borrower or Subsidiary to conduct its business at any time hereafter in substantially the same manner as conducted on the Closing Date.

          9.1.21 Labor Relations. Except as set forth on Schedule 9.1.21, no Borrower or Subsidiary is party to or bound by any collective bargaining agreement, management agreement or consulting agreement which Borrowers’ obligations thereunder exceeds $500,000. There are no grievances, disputes or controversies with any union or other organization of any Borrower’s or Subsidiary’s employees, or, to any Borrower’s knowledge, any asserted or threatened strikes, work stoppages or demands for collective bargaining that could individually or in the aggregate reasonably be expected to have a Material Adverse Effect.

          9.1.22 Payable Practices. Except as would not reasonably be expected to have a Material Adverse Effect, no Borrower or Subsidiary has made any material change in its historical accounts payable practices from those in effect on the Closing Date.

          9.1.23 Not a Regulated Entity. No Obligor is (a) an “investment company” or a “person directly or indirectly controlled by or acting on behalf of an investment company” within the meaning of the Investment Company Act of 1940; or (b) subject to regulation under the Federal Power Act, the Interstate Commerce Act, any public utilities code or any other Applicable Law regarding its authority to incur Debt.

          9.1.24 Margin Stock. No Borrower or Subsidiary is engaged, principally or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No Loan proceeds or Letters of Credit will be used by Borrowers to purchase or carry, or to reduce or refinance any Debt incurred to purchase or carry, any Margin Stock or for any related purpose governed by Regulations T, U or X of the Board of Governors.

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     9.2 Complete Disclosure. None of the representations or warranties made by any Borrower in the Loan Documents as of the date such representations and warranties are made or deemed made, considering each of the foregoing in the context in which it was made and together with all other representations, warranties and written statements theretofore furnished by such Obligor to the Lender in connection with the Loan Documents, contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make such representation, warranty or written statement, in light of the circumstances under which it is made, not misleading as of the time when made or delivered; provided that the Borrowers’ representation and warranty as to any forecast, projection or other statement regarding future performance, future financial results or other future development is limited to the fact that such forecast, projection or statement was prepared in good faith on the basis of information and assumptions that the Borrowers believed to be reasonable as of the date such material was prepared (it being understood that the projections are subject to significant uncertainties and contingencies, many of which are beyond the Borrowers’ control, and that no assurance can be given that the projections will be realized).

SECTION 10 COVENANTS AND CONTINUING AGREEMENTS

     10.1 Affirmative Covenants. As long as any Commitment or Obligations are outstanding, each Borrower shall, and shall cause each Subsidiary to:

          10.1.1 Inspections; Appraisals.

          (a) Permit Lender from time to time, subject (except when a Default or Event of Default exists) to reasonable notice and normal business hours, to visit and inspect the Properties of any Borrower or Subsidiary, inspect, audit and make extracts from any Borrower’s or Subsidiary’s books and records, and discuss on a confidential basis with its officers, employees, agents, advisors and independent accountants such Borrower’s or Subsidiary’s business, financial condition, assets, prospects and results of operations. Lender shall not have any duty to any Borrower to make any inspection, nor to share any results of any inspection, appraisal or report with any Borrower. Borrowers acknowledge that all inspections, appraisals and reports are prepared by Lender for its purposes, and Borrowers shall not be entitled to rely upon them.

          (b) Reimburse Lender for all its reasonable charges, costs and expenses in connection with (i) examinations of any Obligor’s books and records or any other financial or Collateral matters as Lender reasonably deems appropriate, up to twice per Loan Year; and (ii) appraisals of Inventory up to one time per Loan Year; provided, however, that if an examination or appraisal is initiated during a Default or Event of Default, all charges, costs and expenses therefor shall be reimbursed by Borrowers without regard to such limits. Subject to and without limiting the foregoing, Borrowers specifically agree to pay Lender’s then standard charges (such standard charges as of the Closing Date are $850 per day per person plus out of pocket expenses) for each day that an employee of Lender or its Affiliates is engaged in any examination activities, and shall pay the standard charges of Lender’s internal appraisal group. This Section shall not be construed to limit Lender’s right to conduct examinations or to obtain appraisals at any time in its reasonable discretion, nor to use third parties for such purposes.

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          10.1.2 Financial and Other Information. Keep adequate records and books of account with respect to its business activities, in which proper entries are made in accordance with GAAP reflecting all financial transactions; and furnish to Lender:

          (a) as soon as available, and in any event within 120 days after the close of each Fiscal Year, consolidated balance sheets of Parent and its Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of operations, cash flow and stockholders’ equity for such Fiscal Year, on a consolidated basis for Borrowers and Subsidiaries, which consolidated statements shall be audited and certified (without qualification as to scope, “going concern” or similar items) by a firm of independent certified public accountants of recognized standing selected by Borrowers and reasonably acceptable to Lender, and shall set forth in comparative form corresponding figures for the preceding Fiscal Year and other information acceptable to Lender (the documents required to be delivered pursuant to this clause (a) shall be deemed to have been delivered on the date on which such documents are posted on the Securities and Exchange Commission’s website at www.sec.gov;

          (b) commencing with the 3rd month of each Fiscal Year, as soon as available, and in any event within 30 days after the end of each month (but within 45 days after the last month in each fiscal quarter and by February 15^th with respect to November and December of the preceding year), unaudited balance sheets as of the end of such month and the related statements of operations and cash flow for such month and for the portion of the Fiscal Year then elapsed, on a consolidated basis for Borrowers and Subsidiaries, setting forth in comparative form corresponding figures for the preceding Fiscal Year and certified by the chief financial officer of Borrower Agent as prepared in accordance with GAAP and fairly presenting the financial position and results of operations for such month and period, subject to normal year-end adjustments and the absence of footnotes (the documents required to be delivered pursuant to this clause (b) shall be deemed to have been delivered on the date on which such documents are posted on the Securities and Exchange Commission’s website at www.sec.gov;

          (c) concurrently with delivery of financial statements under clauses (a) and (b) above, a Compliance Certificate executed by a Senior Officer of Borrower Agent;

          (d) concurrently with delivery of financial statements under clause (a) above, copies of all management letters (if available) and other material reports submitted to Borrowers by their accountants in connection with such financial statements;

          (e) not later than 45 days after the end of each Fiscal Year, projections of Borrowers’ consolidated balance sheets, results of operations, cash flow and Availability for the next Fiscal Year, month by month;

          (f) concurrently with the delivery of Borrowing Base Certificates pursuant to Section 8.1, a listing of each Borrower’s trade payables (excluding the trade payables with respect to the Borrowers’ operations in Canada), specifying the trade creditor and balance due, and a detailed trade payable aging, all in form satisfactory to Lender;

          (g) promptly after the sending or filing thereof, copies of any proxy statements, financial statements or reports that any Borrower has sent to its stockholders; copies of any regular, periodic and special reports or registration statements or prospectuses that any Borrower files with the Securities and Exchange Commission or any other Governmental

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Authority, or any securities exchange; and copies of any press releases or other statements made available by a Borrower to the public concerning material changes to or developments in the business of such Borrower (the documents required to be delivered pursuant to this clause (g) shall be deemed to have been delivered on the date on which such documents are posted on the Securities and Exchange Commission’s website at www.sec.gov;

          (h) promptly after the sending or filing thereof, copies of any annual report to be filed in connection with each Plan or Foreign Plan; and

          (i) such other reports and information (financial or otherwise) as Lender may reasonably request from time to time in connection with any Collateral or any Borrower’s, Subsidiary’s or other Obligor’s financial condition or business.

          10.1.3 Notices. Notify Lender in writing, promptly after a Borrower’s obtaining knowledge thereof, of any of the following that affects an Obligor: (a) the threat or commencement of any proceeding or investigation that would reasonably be expected to have a Material Adverse Effect; (b) any pending or threatened labor dispute, strike or walkout, or the expiration of any material labor contract that could reasonably be expected to have a Material Adverse Effect; (c) any default under or termination of a Material Contract; (d) the existence of any Default or Event of Default; (e) any judgment in an amount exceeding $200,000; (f) the assertion of any Intellectual Property Claim, that could reasonably be expected to have a Material Adverse Effect; (g) any violation or asserted violation by Parent or its Subsidiaries of any Applicable Law (including ERISA, OSHA, FLSA, or any Environmental Laws), that could reasonably be expected to have a Material Adverse Effect; (h) any Environmental Release by an Obligor or on any Property owned, leased or occupied by an Obligor; or receipt of any Environmental Notice that could reasonably be expected to have a Material Adverse Effect; (i) the occurrence of any ERISA Event; (j) the discharge of or any withdrawal or resignation by Borrowers’ independent accountants; or (k) any opening of a new office or place of business where any Borrowers’ Accounts, Inventory or Borrower’s books and records are located, at least 30 days after such opening.

          10.1.4 Landlord and Storage Agreements. Upon request, provide Lender with copies of all existing material agreements, and promptly after execution thereof provide Lender with copies of all future agreements, between an Obligor and any landlord, warehouseman, processor, shipper, bailee or other Person that owns any premises at which any Collateral may be kept or that otherwise may possess or handle any Collateral.

          10.1.5 Compliance with Laws. Comply with all Applicable Laws, including ERISA, Environmental Laws, FLSA, OSHA, Anti-Terrorism Laws, and laws regarding collection and payment of Taxes, and maintain all Governmental Approvals necessary to the ownership of its Properties or conduct of its business, unless failure to comply (other than failure to comply with Anti-Terrorism Laws) or maintain could not reasonably be expected to have a Material Adverse Effect.

          10.1.6 Taxes. Pay and discharge all Taxes prior to the date on which they become delinquent or penalties attach, unless such Taxes are being Properly Contested or constitute Immaterial Taxes.

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          10.1.7 Insurance. In addition to the insurance required hereunder with respect to Collateral, maintain insurance with insurers (with a Best Rating of at least A7, unless otherwise approved by Lender) reasonably satisfactory to Lender, (a) with respect to the Properties and business of Borrowers and Subsidiaries of such type (including product liability, workers’ compensation, larceny, embezzlement, or other criminal misappropriation insurance), in such amounts, and with such coverages and deductibles as are customary for companies similarly situated; and (b) business interruption insurance in an amount not less than $50,000,000, with deductibles and subject to an Insurance Assignment reasonably satisfactory to Lender.

          10.1.8 Licenses. Except as would not reasonably be expected to have a Material Adverse Effect, keep each material License affecting any Collateral (including the manufacture, distribution or disposition of Inventory) or any other material Property of Borrowers and Subsidiaries in full force and effect; promptly notify Lender of any proposed material modification to any such License, or entry into any new material License, in each case at least 30 days prior to its effective date; pay all Royalties when due unless being contested in good faith; and notify Lender of any default or breach asserted by any Person to have occurred under any material License.

          10.1.9 Future Subsidiaries. Promptly notify Lender upon any Person becoming a Subsidiary and, if such Person is not a Foreign Subsidiary, cause it to guaranty the Obligations in a manner satisfactory to Lender, and to execute and deliver such documents, instruments and agreements and to take such other actions as Lender shall reasonably require to evidence and perfect a Lien in favor of Lender on all assets of such Person, including delivery of such legal opinions, in form and substance reasonably satisfactory to Lender, as it shall reasonably deem appropriate.

          10.1.10 Merger of Ashworth Store III. Parent shall cause Ashworth Store III, formally to be merged into Parent within 180 days of the Closing Date. Prior to the date of such merger, Ashworth Store III shall neither hold nor receive any material assets, debt or equity, nor engage in any business other than winding up and merging into Parent (and any activity reasonably related thereto).

          10.1.11 Post-Closing Covenants. Each Borrower shall satisfy each of the covenants set forth in Schedule 10.1.12 within the time periods specified therein.

     10.2 Negative Covenants. As long as any Commitment or Obligations are outstanding, each Borrower shall not, and shall cause each Subsidiary not to:

          10.2.1 Permitted Debt. Create, incur, guarantee or suffer to exist any Debt, except:

          (a) the Obligations;

          (b) Subordinated Debt;

          (c) Permitted Purchase Money Debt and Permitted Capital Leases;

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          (d) Borrowed Money as identified on Schedule 10.2.1(d) (other than the Obligations, Subordinated Debt and Permitted Purchase Money Debt), but only to the extent outstanding on the Closing Date and not satisfied with proceeds of the initial Loans;

          (e) Bank Product Debt;

          (f) Debt that is in existence when a Person becomes a Subsidiary or that is secured by an asset when acquired by a Borrower or Subsidiary, as long as such Debt was not incurred in contemplation of such Person becoming a Subsidiary or such acquisition, and does not exceed $1,000,000 in the aggregate at any time;

          (g) Permitted Contingent Obligations;

          (h) the Real Estate Term Loan in the maximum outstanding amount of up to the principal amount of $11,650,000 and the Debt outstanding under the UK Loan Facility;

          (i) Refinancing Debt as long as each Refinancing Condition is satisfied;

          (j) Investments that are not Restricted Investments;

          (k) Hedging Agreements permitted under Section 10.2.15;

          (l) Debt in respect of (i) workers’ compensation claims or obligations in respect of health, disability or other employee benefits or property, casualty or liability insurance or self-insurance or completion, bid, performance, appeal or surety bonds issued for the account of any Borrower or Subsidiary, bankers acceptances and other similar obligations not constituting Borrowed Money that are incurred in the ordinary course of business, and (ii) guarantees of, or obligations of any Borrower or any Subsidiary with respect to letters of credit supporting, any obligations described in clause (m);

          (m) Debt arising from the honoring by a bank or other financial institution of a check, draft or similar instrument (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Debt is extinguished within five Business Days of incurrence;

          (n) Debt arising in connection with endorsement of instruments for deposit in the ordinary course of business;

          (o) Debt with respect to the deferred purchase price due to the seller for any Permitted Acquisition, provided that such Debt is subordinated to the Obligations on terms reasonably acceptable to Lender;

          (p) Debt arising from agreements of any Borrower or any Subsidiary providing for indemnification, adjustment of purchase price, earn-outs or similar obligations, in each case, incurred or assumed in connection with the disposition or acquisition of any Subsidiary or any other business or assets, other than guarantees of Debt incurred by any Person acquiring all or any portion of such Subsidiary, business or assets for the purpose of financing such acquisition;

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          (q) Unsecured Debt assumed in connection with Permitted Acquisitions in an aggregate amount not to exceed $1,000,000 at any time outstanding;

          (r) Debt that is not included in any of the preceding clauses of this Section, is not secured by a Lien and does not exceed $1,000,000 in the aggregate at any time.

          10.2.2 Permitted Liens. Create or suffer to exist any Lien upon any of its Property, except the following (collectively, “Permitted Liens”):

          (a) Liens granted pursuant to the Security Documents and other Liens in favor of Lender;

          (b) Purchase Money Liens securing Permitted Purchase Money Debt and Capital Lease Liens securing Permitted Capital Leases;

          (c) Liens for Taxes not yet past due or being Properly Contested;

          (d) statutory Liens, such as carriers’, warehousemen’s, materialmen’s, workmen’s, suppliers’, repairmen’s and mechanics’ Liens and other similar Liens (other than Liens for Taxes or imposed under ERISA and Landlord’s and Lessors’ Liens) arising in the ordinary course of business, but only if (i) payment of the obligations secured thereby is not yet due or is being Properly Contested, and (ii) such Liens do not materially impair the value or use of the Property or materially impair operation of the business of any Borrower or Subsidiary;

          (e) (i) Liens incurred or deposits or pledges made in the ordinary course of business to secure the performance of tenders, bids, leases, contracts (except those relating to Borrowed Money), statutory obligations and other similar obligations, or arising as a result of progress payments under government contracts, as long as such Liens are at all times junior to Lender’s Liens, and (ii) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations, other than any Liens for Taxes or imposed by ERISA;

          (f) (i) landlords’ and lessors’ Liens in respect of rent not in default and (ii) Liens arising in the ordinary course of business that are subject to Lien Waivers;

          (g) Liens arising by virtue of a judgment or judicial order against any Borrower or Subsidiary, or any Property of a Borrower or Subsidiary, as long as such Liens are adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment have not been finally terminated or the period within which the proceedings may be initiated has not expired;

          (h) easements, rights-of-way, restrictions (including zoning restrictions), covenants, licenses, encroachments, protrusions or other agreements of record, and other similar charges or encumbrances on Real Estate, that do not secure any Debt and do not interfere with the ordinary course of business;

          (i) normal and customary rights of setoff upon deposits in favor of depository institutions, and Liens of a collecting bank on Payment Items in the course of collection; and

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          (j) existing Liens shown on Schedule 10.2.2 and any Lien granted as a replacement or substitute therefor; provided that any such replacement or substitute Lien (i) except as permitted by Section 10.2.1, does not secure an aggregate amount of Debt, if any, greater than that secured on the Closing Date and (ii) is not expanded beyond the property or categories of property subject thereto on the Closing Date;

          (k) leases or subleases of the properties of any Borrower or Subsidiary granted by such Person to third parties, in each case entered into in the ordinary course of business so long as such leases or subleases do not, individually or in the aggregate, (i) interfere in any material respect with the ordinary conduct of the business of any Borrower or Subsidiary or (ii) materially impair the use (for its intended purposes) or the value of the property subject thereto;

          (l) bankers’ Liens, rights of setoff and other similar Liens existing solely with respect to cash and Cash Equivalents on deposit in one or more accounts maintained by any Borrower or Subsidiary, in each case granted in the ordinary course of business in favor of the bank or banks or security intermediary with which such accounts are maintained, securing amounts owing to such bank or securities intermediary including with respect to cash management and operating account arrangements, including those involving pooled accounts and netting arrangements; provided that, unless such Liens are non-consensual and arise by operation of law, in no case shall any such Liens secure (either directly or indirectly) the repayment of any Debt;

          (m) Liens on fixed assets acquired in connection with a Permitted Acquisition so long as such Liens were existing at the time of such Acquisition by a Borrower or Subsidiary and were not incurred, extended or renewed in contemplation of such Acquisition; provided that (i) the Debt secured by such Lien is permitted under Section 10.2.1, (ii) the Lien shall attach solely to the property acquired, and (iii) at the time of acquisition of such fixed assets, the aggregate amount remaining unpaid on all Debt secured by Liens on such fixed assets whether or not assumed by a Borrower or Subsidiary shall not exceed an amount equal to the fair market value at the time of acquisition of such fixed assets;

          (n) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;

          (o) Liens securing Refinancing Debt permitted sunder Section 10.2.1.

          (p) Liens on property of and Equity Interests in a Foreign Subsidiary securing Debt of such Foreign Subsidiary permitted under Section 10.2.1(h);

          (q) Liens incidental to the conduct of the business or the ownership of the assets of any Borrower or Subsidiary that (x) were not incurred in connection with Borrowed Money, (y) do not in the aggregate materially detract from the value of the assets subject thereto or materially impair the use thereof in the operation of such business and (z) do not secure obligations aggregating in excess of $500,000.

          10.2.3 [Intentionally deleted].

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          10.2.4 Distributions; Upstream Payments. Declare or make any Distributions, except the Borrowers and their Subsidiaries may declare and pay Upstream Payments and Permitted Distributions.

          10.2.5 Restricted Investments. Make any Restricted Investment.

          10.2.6 Disposition of Assets. Make any Asset Disposition, except a Permitted Asset Disposition, a disposition of Equipment under Section 8.4.2, or a transfer of Property by a Subsidiary or Obligor to a Borrower.

          10.2.7 Loans. Make any loans or other advances of money to any Person, except (a) advances to an officer or employee for salary, travel expenses, commissions and similar items in the ordinary course of business; (b) prepaid expenses and extensions of trade credit made in the ordinary course of business; (c) deposits with financial institutions permitted hereunder; (d) as long as no Default or Event of Default exists, intercompany loans by a Subsidiary to a Borrower, (e) Permitted Investments, and (f) a Loan by a Borrower to Ashworth UK, provided that not more than $4,000,000 of such loans may be outstanding at any one time.

          10.2.8 Restrictions on Payment of Certain Debt. (a) Make any payments (whether voluntary or mandatory, or a prepayment, redemption, retirement, defeasance or acquisition) with respect to any Subordinated Debt, except regularly scheduled payments of principal, interest and fees, but only to the extent permitted under any subordination agreement relating to such Debt (and a Senior Officer of Borrower Agent shall certify to Lender, not less than five Business Days prior to the date of payment, that all conditions under such agreement have been satisfied); or (b) if an Event of Default has occurred and is continuing or will result after giving effect thereto, make any voluntary prepayment of Borrowed Money (other than the Obligations or the Debt outstanding under the UK Loan Facility) prior to the due date for any payments under the agreements evidencing such Debt as in effect on the Closing Date (or as amended thereafter with the consent of Lender).

          10.2.9 Fundamental Changes. Merge, combine or consolidate with any Person, or liquidate, wind up its affairs or dissolve itself, in each case whether in a single transaction or in a series of related transactions, except for mergers or consolidations of a wholly-owned Subsidiary into a Borrower or the merger set forth in Section 10.1.11; change its name or conduct business under any fictitious name without giving Lender 30 days advance written notice thereof; change its tax, charter or other organizational identification number; or change its form or state of organization without giving Lender 30 days advance written notice thereof.

          10.2.10 Subsidiaries. Form or acquire any Subsidiary after the Closing Date, except in accordance with Sections 10.1.9 and 10.2.5; or permit any existing Subsidiary to issue any additional Equity Interests except director’s qualifying shares.

          10.2.11 Organic Documents. Amend, modify or otherwise change any of its Organic Documents except for any amendment, modification or other change that does not adversely affect Lender or any duty to pay the Obligations.

          10.2.12 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than Borrowers and Subsidiaries.

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          10.2.13 Accounting Changes. Make any material change in accounting treatment or reporting practices, except as required by GAAP and in accordance with Section 1.2; or change its Fiscal Year.

          10.2.14 [Intentionally Omitted].

          10.2.15 Hedging Agreements. Enter into any Hedging Agreement, except to hedge risks arising in the ordinary course of business and not for speculative purposes.

          10.2.16 Conduct of Business. Engage in any business, other than its business as conducted on the Closing Date and any activities incidental thereto and business reasonably related and/or complementary thereto.

          10.2.17 Affiliate Transactions. Enter into or be party to any transaction with an Affiliate, except (a) transactions contemplated by the Loan Documents; (b) payment of reasonable compensation to officers and employees for services actually rendered (including, without limitation, Specified Payments), and loans and advances permitted by Section 10.2.7; (c) payment of customary directors’ fees and indemnities; (d) transactions solely among Borrowers and/or Borrowers and Ashworth UK as set forth in Section 10.2.7; (e) transactions with Affiliates that were consummated prior to the Closing Date, as shown on Schedule 10.2.17; (f) transactions with Affiliates in the ordinary course of business, upon fair and reasonable terms fully disclosed to Lender and no less favorable than would be obtained in a comparable arm’s-length transaction with a non-Affiliate; (g) Permitted Distributions; (h) Permitted Investments; (i) Permitted Asset Dispositions, (j) payment of administrative or related expenses of Ashworth UK in the ordinary course of business and consistent with past practices, and (k) real property lease payments to EDC with respect to Borrower’s facility located in Oceanside, California.

          10.2.18 Plans. Become party to any Multiemployer Plan or Foreign Plan, other than any in existence on the Closing Date.

          10.2.19 Amendments to Subordinated Debt. Amend, supplement or otherwise modify any document, instrument or agreement relating to any Subordinated Debt, if such modification (a) increases the principal balance of such Debt, or increases any required cash payment payable prior to the Full Payment of all Obligations; (b) accelerates the date on which any installment of principal or any interest is due, or adds any additional redemption, put or prepayment provisions; (c) shortens the final maturity date or otherwise accelerates amortization; (d) increases the interest rate; (e) increases or adds any fees or charges; (f) modifies any covenant in a manner or adds any representation, covenant or default that is more onerous or restrictive in any material respect for any Borrower or Subsidiary, or that is otherwise materially adverse to any Borrower, any Subsidiary or Lender; or (g) results in the Obligations not being fully benefited by the subordination provisions thereof.

          10.2.20 Financial Covenants. [Intentionally Deleted]

SECTION 11 EVENTS OF DEFAULT; REMEDIES ON DEFAULT

          11.1 Events of Default. Each of the following shall be an “Event of Default” hereunder, if the same shall occur for any reason whatsoever, whether voluntary or involuntary, by operation of law or otherwise:

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          (a) A Borrower fails to pay (i) when and as required to be paid hereunder, any amount of principal or interest of any Loan or any reimbursement of any drawing under a Letter of Credit, or (ii) within five Business Days after the same becomes due, any other amount payable hereunder or under any other Loan Document;

          (b) Any representation, warranty or other written statement of an Obligor made in connection with any Loan Documents or transactions contemplated thereby is incorrect or misleading in any material respect when given;

          (c) A Borrower breaches or fail to perform any covenant contained in Sections 2.1.4, 6.3, 7.4, 7.6, 8.1, 8.2.4, 8.2.5, 8.6.2, 10.1.1(a), 10.1.2, or 10.2;

          (d) An Obligor breaches or fails to perform any other covenant contained in any Loan Documents, and such breach or failure is not cured within 30 days after a Senior Officer of such Obligor has knowledge thereof or receives notice thereof from Lender, whichever is sooner;

          (e) A Guarantor repudiates, revokes or attempts to revoke its Guaranty; an Obligor denies or contests the validity or enforceability of any Loan Documents or Obligations, or the perfection or priority of any Lien granted to Lender; or any Loan Document ceases to be in full force or effect for any reason (other than a waiver or release by Lender);

          (f) Any “Event of Default” occurs under the Real Estate Term Loan, any UK Loan Document, or any other document, instrument or agreement to which it is a party or by which it or any of its Properties is bound, relating to any Debt (other than the Obligations) in excess of $500,000, if the maturity of or any payment with respect to such Debt may be accelerated or demanded due to such “Event of Default”;

          (g) Any judgment or order for the payment of money is entered against an Obligor in an amount that exceeds, individually or cumulatively with all unsatisfied judgments or orders against all Obligors, $500,000 (net of any insurance coverage therefor not disputed by the insurer), and the same shall remain undischarged, unvacated or unbonded for a period of 30 consecutive days consecutive days during which execution shall not be effectively stayed, by reason of a pending appeal or otherwise;

          (h) A loss, theft, damage or destruction occurs with respect to any Collateral if the amount not covered by insurance exceeds $500,000;

          (i) Any Material Obligor is enjoined, restrained or in any way prevented by any Governmental Authority from conducting any material part of its business; any Material Obligor suffers the loss, revocation or termination of any material license, permit, lease or agreement necessary to its business; there is a cessation of any material part of any Material Obligor’s business for a material period of time; any material Collateral or Property of the Obligors (taken as a whole) is taken or impaired through condemnation; any Material Obligor agrees to or commences any liquidation, dissolution or winding up of its affairs; or Material Obligors, taken as a whole cease to be Solvent;

          (j) An Insolvency Proceeding is commenced by any Material Obligor; any Material Obligor makes an offer of settlement, extension or composition to its unsecured creditors generally; a trustee is appointed to take possession of any substantial Property of or to

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operate any of the business of any Material Obligor; or an Insolvency Proceeding is commenced against any Material Obligor and: the Obligor consents to institution of the proceeding, the petition commencing the proceeding is not timely controverted by the Obligor, the petition is not dismissed within 30 days after filing, or an order for relief is entered in the proceeding;

          (k) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan that has resulted or could reasonably be expected to result in liability of an Obligor to a Pension Plan, Multiemployer Plan or PBGC, or that constitutes grounds for appointment of a trustee for or termination by the PBGC of any Pension Plan or Multiemployer Plan; an Obligor or ERISA Affiliate fails to pay when due any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan; or any event similar to the foregoing occurs or exists with respect to a Foreign Plan;

          (l) An Obligor or any of its Senior Officers is criminally indicted or convicted for (i) a felony committed in the conduct of the Obligor’s business, or (ii) violating any state or federal law (including the Controlled Substances Act, Money Laundering Control Act of 1986 and Illegal Exportation of War Materials Act) that could lead to forfeiture of any material Property or any material Collateral; or

          (m) A Change of Control occurs; or any event occurs or condition exists that has a Material Adverse Effect.

     11.2 Remedies upon Default. If an Event of Default described in Section 11.1(j) occurs with respect to any Borrower, then to the extent permitted by Applicable Law, all Obligations shall become automatically due and payable and all Commitments shall terminate, without any action by Lender or notice of any kind. In addition, or if any other Event of Default exists, Lender may in its discretion do any one or more of the following from time to time:

          (a) declare any Obligations immediately due and payable, whereupon they shall be due and payable without diligence, presentment, demand, protest or notice of any kind, all of which are hereby waived by Borrowers to the fullest extent permitted by law;

          (b) terminate, reduce or condition any Commitment, or make any adjustment to the Borrowing Base;

          (c) require Obligors to Cash Collateralize the Obligations including the LC Obligations and Obligations in respect of Bank Products but excluding other contingent Obligations such as rights to indemnification as to which no claim has been made, and, if Obligors fail promptly to deposit such Cash Collateral, Lender may advance the required Cash Collateral as Revolver Loans (whether or not an Overadvance exists or is created thereby, or the conditions in Section 6 are satisfied); and

          (d) exercise any other rights or remedies afforded under any agreement, by law, at equity or otherwise, including the rights and remedies of a secured party under the UCC. Such rights and remedies include the rights to (i) take possession of any Collateral; (ii) require Borrowers to assemble Collateral, at Borrowers’ expense, and make it available to Lender at a place designated by Lender; (iii) enter any premises where Collateral is located and store Collateral on such premises until sold (and if the premises are owned or leased by a Borrower, Borrowers agree not to charge for such storage); and (iv) sell or otherwise dispose of any

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Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale, with such notice as may be required by Applicable Law, in lots or in bulk, at such locations, all as Lender, in its discretion, deems advisable. Each Borrower agrees that 10 days notice of any proposed sale or other disposition of Collateral by Lender shall be reasonable. Lender shall have the right to conduct such sales on any Obligor’s premises, without charge, and such sales may be adjourned from time to time in accordance with Applicable Law. Lender shall have the right to sell, lease or otherwise dispose of any Collateral for cash, credit or any combination thereof, and Lender may purchase any Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of the purchase price, may set off the amount of such price against the Obligations.

     11.3 License. Except (i) with respect to Intellectual Property constituting Excluded Assets, or (ii) as prohibited by any agreement (including any License) with respect to any Intellectual Property, Lender is hereby granted an irrevocable, non-exclusive license or other right to use, license or sub-license (without payment of royalty or other compensation to any Person), effective at any time that a Default or Event of Default has occurred and is continuing, any or all Intellectual Property of Borrowers, computer hardware and software, trade secrets, brochures, customer lists, promotional and advertising materials, labels, packaging materials and other Property, in advertising for sale, marketing, selling, collecting, completing manufacture of, or otherwise exercising any rights or remedies with respect to, any Collateral.

     11.4 Setoff. At any time during an Event of Default, Lender and its Affiliates are authorized, to the fullest extent permitted by Applicable Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by Lender or such Affiliate to or for the credit or the account of an Obligor against any Obligations, irrespective of whether or not Lender or such Affiliate shall have made any demand under this Agreement or any other Loan Document and although such Obligations may be contingent or unmatured or are owed to a branch or office of Lender or such Affiliate different from the branch or office holding such deposit or obligated on such indebtedness. The rights of Lender and each such Affiliate under this Section are in addition to other rights and remedies (including other rights of setoff) that such Person may have.

          11.5 Remedies Cumulative; No Waiver.

          11.5.1 Cumulative Rights. All covenants, conditions, provisions, warranties, guaranties, indemnities and other undertakings of Borrowers contained in the Loan Documents are cumulative and not in derogation or substitution of each other. In particular, the rights and remedies of Lender are cumulative, may be exercised at any time and from time to time, concurrently or in any order, and shall not be exclusive of any other rights or remedies that Lender may have, whether under any agreement, by law, at equity or otherwise.

          11.5.2 Waivers. The failure or delay of Lender to require strict performance by Borrowers with any terms of the Loan Documents, or to exercise any rights or remedies with respect to Collateral or otherwise, shall not operate as a waiver thereof nor as establishment of a course of dealing. All rights and remedies shall continue in full force and effect until Full Payment of all Obligations. No modification of any terms of any Loan Documents (including any waiver thereof) shall be effective, unless such modification is specifically provided in a writing directed to Borrowers and executed by Lender, and such modification shall be applicable

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only to the matter specified. No waiver of any Default or Event of Default shall constitute a waiver of any other Default or Event of Default that may exist at such time, unless expressly stated. If Lender accepts performance by any Obligor under any Loan Documents in a manner other than that specified therein, or during any Default or Event of Default, or if Lender shall delay or exercise any right or remedy under any Loan Documents, such acceptance, delay or exercise shall not operate to waive any Default or Event of Default nor to preclude exercise of any other right or remedy.

SECTION 12 MISCELLANEOUS

     12.1 Consents, Amendments and Waivers.

          12.1.1 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Borrowers, Lender, and their respective successors and assigns, except that (i) no Borrower shall have the right to assign its rights or delegate its obligations under any Loan Documents and (ii) no assignment by Lender (other than an assignment to Lender’s Affiliates) of its rights and obligations hereunder shall be effective without the prior written consent of Parent which shall not be unreasonably withheld or delayed and shall be deemed given if no objection is made within 15 Business Days after notice of the proposed assignment by Lender; provided that if a Default or an Event of Default exists, Lender may assign any of its rights and obligations without Parent’s consent.

          12.1.2 Amendments and Other Modifications. No modification of any Loan Document, including any extension or amendment of a Loan Document or any waiver of a Default or Event of Default, shall be effective without the prior written agreement of Lender and each Obligor party to such Loan Document. However, only the consent of the parties to a Bank Product shall be required for any modification of such agreement, and no Affiliate of Lender that is party to a Bank Product agreement shall have any other right to consent to or participate in any manner in modification of any other Loan Document. The funding of any Loans or issuance of any Letters of Credit during a Default or Event of Default shall not be deemed to constitute a waiver of such Default or Event of Default, nor to establish a course of dealing. Any waiver or consent granted by Lender hereunder shall be effective only if in writing, and then only in the specific instance and for the specific purpose for which it is given.

     12.2 Indemnity. EACH BORROWER SHALL INDEMNIFY AND HOLD HARMLESS THE INDEMNITEES AGAINST ANY CLAIMS THAT MAY BE INCURRED BY OR ASSERTED AGAINST ANY INDEMNITEE, INCLUDING CLAIMS ARISING FROM THE NEGLIGENCE OF AN INDEMNITEE. In no event shall any party to a Loan Document have any obligation thereunder to indemnify or hold harmless an Indemnitee with respect to a Claim that is determined in a final, non-appealable judgment by a court of competent jurisdiction to result from the gross negligence or willful misconduct of such Indemnitee.

     12.3 Notices and Communications.

          12.3.1 Notice Address. Subject to Section 4.1.3, all notices and other communications by or to a party hereto shall be in writing and shall be given to any Borrower, at Borrower Agent’s address shown on the signature pages hereof, and to any other Person at its address shown on the signature pages hereof, or at such other address as a party may hereafter

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specify by notice in accordance with this Section 12.3. Each such notice or other communication shall be effective only (a) if given by facsimile transmission, when transmitted to the applicable facsimile number, if confirmation of receipt is received; (b) if given by mail, three Business Days after deposit in the U.S. mail, with first-class postage pre-paid, addressed to the applicable address; or (c) if given by personal delivery, when duly delivered to the notice address with receipt acknowledged; or (d) if given by electronic communication in accordance with Section 12.3.2, as provided in such Section. Notwithstanding the foregoing, no notice to Lender pursuant to Section 2.1.3, 2.3, 3.1.2, or 4.1.1 shall be effective until actually received by the individual to whose attention at Lender such notice is required to be sent. Any written notice or other communication that is not sent in conformity with the foregoing provisions shall nevertheless be effective on the date actually received by the noticed party. Any notice received by Borrower Agent shall be deemed received by all Borrowers.

          12.3.2 Electronic Communications; Voice Mail. Electronic mail and internet websites may be used only for routine communications, such as financial statements, Borrowing Base Certificates and other information required by Section 10.1.2, administrative matters, distribution of Loan Documents for execution, and matters permitted under Section 4.1.3. Lender makes no assurances as to the privacy and security of electronic communications. Voice mail may not be used as effective notice under the Loan Documents. Unless Parent and Lender otherwise agree, (i) notices and other communications sent to an e-mal address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement); provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

          12.3.3 Non-Conforming Communications. Lender may rely upon any notices purportedly given by or on behalf of any Borrower even if such notices were not made in a manner specified herein, were incomplete or were not confirmed, or if the terms thereof, as understood by the recipient, varied from a later confirmation. Each Borrower shall indemnify and hold harmless each Indemnitee from any liabilities, losses, costs and expenses arising from any telephonic communication purportedly given by or on behalf of a Borrower.

     12.4 Performance of Borrowers’ Obligations. Lender may, in its reasonable discretion at any time and from time to time, at Borrowers’ expense, pay any amount or do any act required of a Borrower under any Loan Documents or otherwise lawfully requested by Lender (and, in any such case, not paid or performed by an Obligor within 10 days after written request therefor by Lender) to (a) enforce any Loan Documents or collect any Obligations; (b) protect, insure, maintain or realize upon any Collateral; or (c) defend or maintain the validity or priority of Lender’s Liens in any Collateral, including any payment of a judgment, insurance premium, warehouse charge, finishing or processing charge, or landlord claim, or any discharge of a Lien. All payments, costs and expenses (including Extraordinary Expenses) of Lender under this Section shall be reimbursed by Borrowers, on demand, with interest from the date incurred to the date of payment thereof at the Default Rate applicable to Base Rate Revolver Loans. Any payment made or action taken by Lender under this Section shall be

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without prejudice to any right to assert an Event of Default or to exercise any other rights or remedies under the Loan Documents.

     12.5 Credit Inquiries. Each Borrower hereby authorizes Lender (but it shall have no obligation) to respond to usual and customary credit inquiries from third parties concerning any Borrower or Subsidiary.

     12.6 Severability. Wherever possible, each provision of the Loan Documents shall be interpreted in such manner as to be valid under Applicable Law. If any provision is found to be invalid under Applicable Law, it shall be ineffective only to the extent of such invalidity and the remaining provisions of the Loan Documents shall remain in full force and effect.

     12.7 Cumulative Effect; Conflict of Terms. The provisions of the Loan Documents are cumulative. The parties acknowledge that the Loan Documents may use several limitations, tests or measurements to regulate similar matters, and they agree that these are cumulative and that each must be performed as provided. Except as otherwise provided in another Loan Document (by specific reference to the applicable provision of this Agreement), if any provision contained herein is in direct conflict with any provision in another Loan Document, the provision herein shall govern and control.

     12.8 Counterparts. Any Loan Document may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement shall become effective when Lender has executed it and received counterparts bearing the signatures of all other parties hereto. Delivery of a signature page of any Loan Document by telecopy or electronic communication (e.g., pdf files delivered via email) shall be effective as delivery of a manually executed counterpart of such agreement.

     12.9 Entire Agreement. Time is of the essence of the Loan Documents. The Loan Documents constitute the entire contract among the parties relating to the subject matter hereof, and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof.

     12.10 No Control; No Advisory or Fiduciary Responsibility. Nothing in any Loan Document and no action of Lender pursuant to any Loan Document shall be deemed to constitute control of any Obligor by Lender. In connection with all aspects of each transaction contemplated by any Loan Document, Borrowers acknowledge and agree that (a)(i) this credit facility and all related services by Lender or its Affiliates are arm’s-length commercial transactions between Borrowers and such Person; (ii) Borrowers have consulted their own legal, accounting, regulatory and tax advisors to the extent they have deemed appropriate; and (iii) Borrowers are capable of evaluating and understanding, and do understand and accept, the terms, risks and conditions of the transactions contemplated by the Loan Documents; (b) each of Lender and its Affiliates is and has been acting solely as a principal in connection with this credit facility, is not the financial advisor, agent or fiduciary for Borrowers, any of their Affiliates or any other Person, and has no obligation with respect to the transactions contemplated by the Loan Documents except as expressly set forth therein; and (c) Lender and its Affiliates may be engaged in a broad range of transactions that involve interests that differ from Borrowers and their Affiliates, and have no obligation to disclose any of such interests to Borrowers or their Affiliates. To the fullest extent permitted by Applicable Law, each Borrower hereby waives and releases any claims that it may have against Lender and its

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Affiliates with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any transaction contemplated by a Loan Document.

     12.11 Confidentiality. Lender agrees to maintain the confidentiality of all Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners); (c) to the extent required by Applicable Law or by any subpoena or similar legal process; (d) to any other party hereto; (e) in connection with the exercise of any remedies, the enforcement of any rights, or any action or proceeding relating to any Loan Documents; (f) subject to an agreement containing provisions substantially the same as those of this Section, to any potential or actual transferee of any interest in a Loan Document or any actual or prospective party (or its advisors) to any Bank Product; (g) with the consent of the Borrower; or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to Lender or any of its Affiliates on a nonconfidential basis from a source other than Borrowers. Notwithstanding the foregoing, Lender may issue and disseminate to the public general information describing this credit facility, including the names and addresses of Borrowers and a general description of Borrowers’ businesses, and may use Borrowers’ names in advertising and other promotional materials. For purposes of this Section, “Information” means all information received from an Obligor or Subsidiary relating to it or its business, other than any information that is available to Lender on a nonconfidential basis prior to disclosure by the Obligor or Subsidiary. Lender acknowledges that (i) Information may include material non-public information concerning an Obligor or Subsidiary; (ii) it has developed compliance procedures regarding the use of material non-public information; and (iii) it will handle such material non-public information in accordance with Applicable Law, including federal and state securities laws.

     12.12 [Intentionally Omitted]

     12.13 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, UNLESS OTHERWISE SPECIFIED, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAW PRINCIPLES (BUT GIVING EFFECT TO FEDERAL LAWS RELATING TO NATIONAL BANKS).

     12.14 Consent to Forum; Arbitration.

          12.14.1 Forum. EACH BORROWER HEREBY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL OR STATE COURT SITTING IN OR WITH JURISDICTION OVER LOS ANGELES, CALIFORNIA, IN ANY PROCEEDING OR DISPUTE RELATING IN ANY WAY TO ANY LOAN DOCUMENTS, AND AGREES THAT ANY SUCH PROCEEDING SHALL BE BROUGHT BY IT SOLELY IN ANY SUCH COURT. EACH BORROWER IRREVOCABLY WAIVES ALL CLAIMS, OBJECTIONS AND DEFENSES THAT IT MAY HAVE REGARDING SUCH COURT’S PERSONAL OR SUBJECT MATTER JURISDICTION, VENUE OR INCONVENIENT FORUM. EACH PARTY HERETO

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IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 12.3.1. Nothing herein shall limit the right of Lender to bring proceedings against any Obligor in any other court, nor limit the right of any party to serve process in any other manner permitted by Applicable Law. Nothing in this Agreement shall be deemed to preclude enforcement by Lender of any judgment or order obtained in any forum or jurisdiction.

          12.14.2 Arbitration. Notwithstanding any other provision of this Agreement to the contrary, any controversy or claim among the parties relating in any way to any Obligations or Loan Documents, including any alleged tort, shall at the request of any party hereto be determined by binding arbitration conducted in accordance with the United States Arbitration Act (Title 9 U.S. Code). Arbitration proceedings will be determined in accordance with the Act, the then-current rules and procedures for the arbitration of financial services disputes of the American Arbitration Association (“AAA”), and the terms of this Section. In the event of any inconsistency, the terms of this Section shall control. If AAA is unwilling or unable to serve as the provider of arbitration or to enforce any provision of this Section, Lender may designate another arbitration organization with similar procedures to serve as the provider of arbitration. The arbitration proceedings shall be conducted in Los Angeles, California. The arbitration hearing shall commence within 90 days of the arbitration demand and close within 90 days thereafter. The arbitration award must be issued within 30 days after close of the hearing (subject to extension by the arbitrator for up to 60 days upon a showing of good cause), and shall include a concise written statement of reasons for the award. The arbitrator shall give effect to applicable statutes of limitation in determining any controversy or claim, and for these purposes, service on AAA under applicable AAA rules of a notice of claim is the equivalent of the filing of a lawsuit. Any dispute concerning this Section or whether a controversy or claim is arbitrable shall be determined by the arbitrator. The arbitrator shall have the power to award legal fees to the extent provided by this Agreement. Judgment upon an arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuant to a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. No controversy or claim shall be submitted to arbitration without the consent of all parties if, at the time of the proposed submission, such controversy or claim relates to an obligation secured by Real Estate, but if all parties do not consent to submission of such a controversy or claim to arbitration, it shall be determined as provided in the next sentence. At the request of any party, a controversy or claim that is not submitted to arbitration as provided above shall be determined by judicial reference; and if such an election is made, the parties shall designate to the court a referee or referees selected under the auspices of the AAA in the same manner as arbitrators are selected in AAA sponsored proceedings and the presiding referee of the panel (or the referee if there is a single referee) shall be an active attorney or retired judge; and judgment upon the award rendered by such referee or referees shall be entered in the court in which proceeding was commenced. None of the foregoing provisions of this Section shall limit the right of Lender to exercise self-help remedies, such as setoff, foreclosure or sale of any Collateral or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after or during any arbitration proceeding. The exercise of a remedy does not waive the right of any party to resort to arbitration or reference. At Lender’s option, foreclosure under a real estate mortgage may be accomplished either by exercise of power of sale thereunder or by judicial foreclosure.

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     12.15 Waivers by Borrowers. To the fullest extent permitted by Applicable Law, each Borrower waives (a) the right to trial by jury (which Lender hereby also waives) in any proceeding or dispute of any kind relating in any way to any Loan Documents, Obligations or Collateral; (b) presentment, demand, protest, notice of presentment, default, non-payment, maturity, release, compromise, settlement, extension or renewal of any commercial paper, accounts, documents, instruments, chattel paper and guaranties at any time held by Lender on which a Borrower may in any way be liable, and hereby ratifies anything Lender may do in this regard; (c) notice prior to taking possession or control of any Collateral; (d) any bond or security that might be required by a court prior to allowing Lender to exercise any rights or remedies; (e) the benefit of all valuation, appraisement and exemption laws; (f) any claim against Lender, on any theory of liability, for special, indirect, consequential, exemplary or punitive damages (as opposed to direct or actual damages) in any way relating to any Enforcement Action, Obligations, Loan Documents or transactions relating thereto; and (g) notice of acceptance hereof. Each Borrower acknowledges that the foregoing waivers are a material inducement to Lender entering into this Agreement and that Lender is relying upon the foregoing in its dealings with Borrowers. Each Borrower has reviewed the foregoing waivers with its legal counsel and has knowingly and voluntarily waived its jury trial and other rights following consultation with legal counsel. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.

     12.16 Patriot Act Notice. Lender hereby notifies Borrowers that pursuant to the requirements of the Patriot Act, Lender is required to obtain, verify and record information that identifies each Borrower, including its legal name, address, tax ID number and other information that will allow Lender to identify it in accordance with the Patriot Act. Lender will also require information regarding each personal guarantor, if any, and may require information regarding Borrowers’ management and owners, such as legal name, address, social security number and date of birth.

     12.17 Judgment Currency. If for the purpose of obtaining judgment in any court it is necessary to convert an amount due hereunder in the currency in which it is due (the “Original Currency”) into another currency (the “Second Currency”), the rate of exchange applied shall be that at which, in accordance with normal banking procedures, Lender could purchase in the New York foreign exchange market, the Original Currency with the Second Currency on the date two (2) Business Days preceding that on which judgment is given. Each Obligor agrees that its obligation in respect of any Original Currency due from it hereunder or under any other Loan Document to which it is party shall, notwithstanding any judgment or payment in such other currency, be discharged only to the extent that, on the Business Day following the date Lender receives payment of any sum so adjudged to be due hereunder in the Second Currency, Lender may, in accordance with normal banking procedures, purchase, in the New York foreign exchange market, the Original Currency with the amount of the Second Currency so paid; and if the amount of the Original Currency so purchased or could have been so purchased is less than the amount originally due in the Original Currency, each Obligor agrees as a separate obligation and notwithstanding any such payment or judgment to indemnify Lender and the Lenders against such loss. The term “rate of exchange” in this Section 12.17 means the spot rate at which Lender, in accordance with normal practices, is able on the relevant date to purchase the Original Currency with the Second Currency, and includes any premium and costs of exchange payable in connection with such purchase.

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          IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the date set forth above.

LENDER:
BANK OF AMERICA, N.A.
By:	/s/ John Tolle
Name:	John Tolle
Title:	Vice President
Address:
	Bank of America, N.A.
	55 South Lake Avenue, Suite 900
	Pasadena, CA 91101
	Attn: John Tolle Telecopy: (626) 584-4601
BORROWERS:
ASHWORTH, INC., a Delaware corporation
By:	/s/ Edward J. Fadel
Name:	Edward J. Fadel
Title:	President
Address:
	2765 Loker Avenue West Carlsbad, CA 92010 Attn: Halina Balys Telecopy: (760) 476-8425

ASHWORTH STORE I, INC., a Delaware corporation
By:	/s/ Halina Balys
Name:	Halina Balys
Title:	VP, Corporate Secretary and Compliance Officer
Address:
	Ashworth Store I, Inc., c/o Ashworth, Inc. 2765 Loker Avenue West Carlsbad, CA 92010 Attn: Halina Balys Telecopy: (760) 476-8425
ASHWORTH STORE II, INC., a Delaware corporation
By:	/s/ Halina Balys
Name:	Halina Balys
Title:	VP, Corporate Secretary and Compliance Officer
Address:
	Ashworth Store II, Inc., c/o Ashworth, Inc. 2765 Loker Avenue West Carlsbad, CA 92010 Attn: Halina Balys Telecopy: (760) 476-8425
ASHWORTH ACQUISITION CORP., a Delaware corporation
By:	/s/ Halina Balys
Name:	Halina Balys
Title:	VP, Corporate Secretary and Compliance Officer
Address:
	Ashworth Acquisition Corp., c/o Ashworth, Inc. 2765 Loker Avenue West Carlsbad, CA 92010 Attn: Halina Balys Telecopy: (760) 476-8425

2

GEKKO BRANDS, L.L.C., an Alabama limited liability company
By:	/s/ Halina Balys
Name:	Halina Balys
Title:	Manager
Address:
	Gekko Brands, L.L.C., c/o Ashworth, Inc. 2765 Loker Avenue West Carlsbad, CA 92010 Attn: Halina Balys Telecopy: (760) 476-8425
KUDZU, L.L.C., an Alabama limited liability company
By:	/s/ Halina Balys
Name:	Halina Balys
Title:	Manager
Address:
	Kudzu, L.L.C., c/o Ashworth, Inc. 2765 Loker Avenue West Carlsbad, CA 92010 Attn: Halina Balys Telecopy: (760) 476-8425
THE GAME, LLC, an Alabama limited liability company
By:	/s/ Halina Balys
Name:	Halina Balys
Title:	Manager
Address:
	The Game, LLC, c/o Ashworth, Inc. 2765 Loker Avenue West Carlsbad, CA 92010 Attn: Halina Balys Telecopy: (760) 476-8425

3

EX-21

EXHIBIT 21

ASHWORTH, INC.

SUBSIDIARIES OF THE REGISTRANT.

	State or other jurisdiction
Name of subsidiary	of incorporation or organization
Ashworth Store I, Inc.	Delaware
Ashworth Store II, Inc.	Delaware
Ashworth Store III, Inc.	Delaware
Ashworth EDC, LLC	Delaware
Ashworth Acquisition Corp	Delaware
Gekko Brands, LLC	Alabama
Kudzu, LLC	Alabama
The Game, LLC	Alabama
Ashworth U.K., Ltd.	England

EX-23.1

EXHIBIT 23.1

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONSENT

We consent to the incorporation by reference in the registration statements (Nos. 333-147649, 33-92580, 333-51730, 33-35516, 33-41455, 33-47502, 33-54206 and 33-66040) on Form S-8 of our report dated January 14, 2008, relating to the consolidated balance sheet of Ashworth, Inc. and subsidiaries as of October 31, 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended October 31, 2007, and the related consolidated financial statement schedule, management’s assessment on the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Ashworth, Inc. and subsidiaries for the year ended October 31, 2007.

/s/ Moss Adams LLP
Irvine, California
January 14, 2008

EX-31.1

EXHIBIT 31.1

I, Allan H. Fletcher, certify that:

1.	I have reviewed this report on Form 10-K of Ashworth, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-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 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.

Date: January 14, 2008

/s/ Allan H. Fletcher

Allan H. Fletcher

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

I, Greg W. Slack, certify that:

1.	I have reviewed this report on Form 10-K of Ashworth, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-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 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.

Date: January 14, 2008

/s/ Greg W. Slack

Greg W. Slack

Chief Financial Officer,

Principal Accounting Officer

EX-32.1

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

I, Allan H. Fletcher, in my capacity as Chief Executive Officer of Ashworth, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

     1. the Annual Report of the Registrant on Form 10-K for the year ended October 31, 2007 (the “Report”), to which this certification is attached as an exhibit fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

     2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated:	January 14, 2008	/s/ Allan H. Fletcher
		Allan H. Fletcher
		Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Greg W. Slack, in my capacity as Chief Financial Officer of Ashworth, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

     1. the Annual Report of the Registrant on Form 10-K for the quarter ended October 31, 2007 (the “Report”), to which this certification is attached as an exhibit fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

     2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated:	January 14, 2008	/s/ Greg W. Slack
		Greg W. Slack
		Chief Financial Officer,
		Principal Accounting Officer

A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.